The SEP minefield in Europe

The Court of Justice of the European Union’s (CJEU) decision in Huawei v ZTE introduced new guidelines on abuse of a dominant position where a prohibitory injunction is sought by a dominant owner of a standard-essential patent (SEP). Although the decision certainly sheds light on what is expected from dominant SEP owners and alleged infringers, many uncertainties remain to be clarified and potential legal challenges are likely to arise for both parties.

The decision, issued on July 16, held that the use of intellectual property rights (such as an SEP) requires a licence and SEP owners have the right to bring actions to enforce their exclusive IP rights against alleged infringers. However, there may be an abuse of a dominant position where a dominant SEP owner refuses to grant licences on fair, reasonable and non-discriminatory (FRAND) terms to its competitors, as competitors need to use the SEP to remain on the market for the relevant products.

The decision also held that an action seeking the rendering of accounts and damages related to past use of the SEP would not infringe article 102 of the Treaty on the Functioning of the European Union (TFEU), as it would not prevent competitors from remaining on the market for the relevant products.

According to the CJEU, a dominant SEP owner that committed to license the SEP on FRAND terms will not infringe article 102 of the TFEU if it notifies the alleged infringer and gives details of the SEP and how it was infringed; if the potential infringer is willing to agree to a licence, the SEP owner presents a written offer for a licence on FRAND terms, specifying royalties and their calculation.

The alleged infringer, on the other hand, must comply with certain obligations during this process if it wishes to use the antitrust defence for SEP infringement. The alleged infringer must diligently respond to the SEP owner’s offer in accordance with recognised commercial practices in the field, as well as good faith—which would be assessed on objective factors.

Specifically, there must be no delaying tactics from the alleged infringer. If the alleged infringer rejects the SEP owner’s offer, it must promptly make a counter-offer also based on FRAND terms. If the counter-offer is rejected, and the alleged infringer wishes to continue to use the SEP, it must provide adequate security in accordance with recognised commercial practices in the field.

The CJEU also set out that the parties may agree to have a third party define the amount of royalties payable for the use of the SEP. Furthermore, the alleged infringer is free to challenge the validity or nature of the SEP during licence negotiations.

Abuse of a dominant position

A remarkable consequence of the CJEU’s decision is that in order to determine whether an injunction brought by a dominant SEP owner is an abuse of a dominant position, a number of factors need to be assessed, such as the notification sent to the alleged infringer, whether an offer under FRAND terms was made, and the alleged infringer’s conduct. On the other hand, criticism has been directed to the fact that SEP owners may be subject to antitrust liability for merely bringing an injunction against alleged infringers of a SEP, which could amount to a restriction on access to justice.

Since Huawei’s dominance in the market was not questioned, the CJEU did not deal with the circumstances in which a SEP owner may be considered to be in a dominant position, which may turn out to be a point of extensive litigation between the parties in cases related to infringement of SEPs and negotiation of SEP licences.

“Another criticism directed at the decision is that it describes a linear process of negotiation comprised by offer and counter-offer only.”

The decision also refrained from giving further guidance on what would constitute an offer on FRAND terms and the mechanism through which a FRAND price can be calculated. This leaves any players with commercial uncertainty. The potentially dominant SEP owner does not know what price or on what terms the licences should be set at in order to be compliant. Likewise, the alleged infringer does not know whether it is in receipt of FRAND terms. Dominant SEP owners and alleged infringers are likely to require specific legal advice to deal with these issues.

The decision is also silent on the situation in which the parties cannot agree on the third party determining the amount of royalties, or on any other matters arising during this process. Other vague terms in the CJEU’s decision leave the parties with little guidance on how to act in the negotiation of SEP licences, particularly from the alleged infringer’s perspective. For example, it is unclear what can be considered a “diligent response”, “delaying tactics” and “adequate security” in respect of the alleged infringer. The terms “commercial practices” and “good faith” are also left undefined. It seems that since these concepts vary in different countries, national courts will have to determine their meaning on a case-by-case basis.

Another criticism directed at the decision is that it describes a linear process of negotiation comprised by offer and counter-offer only. It does not take into account the possibility of non-linear negotiations, such as cross-licensing of IP rights between the SEP owner and the alleged infringer. Likewise, the CJEU’s decision did not discuss other relevant matters, such as whether antitrust liability would apply where alleged infringers do not directly compete with the SEP owner, or where both parties are dominant SEP owners.

Procedural problems may also arise during the negotiation of SEP licences. In the UK, for instance, negotiations conducted on a without prejudice basis in a genuine attempt to settle will generally prevent certain information from being used in court as evidence of admissions against a party. In the event that evidence is limited as a result of negotiations on a without prejudice basis, it remains to be seen how the parties will meet requirements imposed by the CJEU decision, such as proving to have acted in good faith and in accordance with recognised commercial practices.

It also remains to be seen how SEP owners and alleged infringers will deal with the legal uncertainties left by the CJEU’s decision in Huawei. It seems that national courts will be given a great amount of freedom to close the gaps left by the CJEU, particularly in respect of the terms that were not defined in thedecision.

It is expected that matters related to abuse of dominant position by SEP owners will continue to be discussed in future decisions by the CJEU.

Natalia Porto is an associate at  Preiskel & Co. She can be contacted at: nporto@preiskel.com