Anyone for tennis? ECJ ruling calls for more structure in FRAND negotiations

In Huawei v ZTE (Case C-170/13, July 16 2015), the European Court of Justice (ECJ) has tried to strike a balance between the rights holder-friendly practice of the German Orange Book case law and the vague, more infringer-friendly preliminary views of the European Commission in its Samsung and Motorola antitrust investigations, which were based on the concept of the ‘willing licensee’. The ECJ’s latest ruling answers several important questions and provides for some legal certainty. However, as expected, a number of questions remain open.

Back and forth

The key takeaway is that a kind of back-and-forth interaction – which puts one in mind of a tennis rally – must take place between the rights holder and the (alleged) infringer before claims for injunctive relief or corrective measures can be asserted in court. This interaction must follow a set pattern:

• First, the rights holder must alert the infringer by designating the patent in question and specifying the way in which it has been infringed.
• If and when the infringer has expressed its willingness to conclude a licensing agreement on fair, reasonable and non-discriminatory (FRAND) terms, the rights holder must present a specific written offer to the infringer for a licence on such terms, in particular specifying the royalty and how it should be calculated.
• The rights holder’s obligations apply as long as the infringer diligently responds to that offer in accordance with recognised commercial practices in the field and in good faith. Whether the latter is the case must be established on the basis of objective factors and implies, in particular, that no delaying tactics are used. In particular, should the infringer not accept the offer, it must submit a specific counter-offer under FRAND terms, promptly and in writing. Only then can the infringer argue that the rights holder’s licence offer was not on FRAND terms and that its request for an injunction or recall constitutes a violation of antitrust law.
• Where the infringer is using the patent in question before a licence agreement has been concluded, it must provide appropriate security from the point at which its counter-offer is rejected, in accordance with recognised commercial practices in the field (eg, by providing a bank guarantee or by placing the amounts necessary on deposit). The calculation of such security must take into account, among other things, the extent to which the patent in question has been used.

Accounting and damages

Another important finding – relating to the assertion of claims for accounting for past acts of use and respective liability for damages – is as follows. The rights holder is not prohibited from bringing an infringement action seeking accounting in relation to past uses of that patent or an award of damages in respect of those uses.

This finding provides an interesting strategic option for the rights holder – at least under German law. Before or while negotiating with the infringer within the above-described rally, the rights holder can file an infringement action asserting claims for accounting and a finding of liability for (past) damages. Such a lawsuit could later easily be extended by bringing claims for injunctive relief and for further corrective measures, if and when the negotiations fail because of the infringer’s non-diligent behaviour. Such an extension would generally have no negative impact on the timing of the pending infringement lawsuit (ie, a decision on all claims, including injunctive relief, can be expected within about one year of filing of the initial infringement action). This means that the negotiation time does not impair the rights holder’s interest in effective judicial protection.

Further findings

There are a few other interesting potential implications of the ECJ’s decision.

Where no agreement is reached on the details of the FRAND terms following the infringer’s counteroffer, the parties may by common agreement request that the amount of the royalty be determined by an independent third party.

The infringer cannot be criticised for challenging either the validity of those patents, in parallel to the negotiations relating to the grant of licences, or the essential nature of those patents to the standard in which they are included or their actual use, or for reserving the right to do so in the future.

Next steps

The ECJ’s decision leaves a number of open questions, including the following:

• Under what circumstances does ownership of a standard-essential patent result in a market-dominant position?
• What is the law regarding de facto standards?
• What is the law if there is no FRAND commitment? What is the law if there is no FRAND commitment by the rights holder, but only one by a predecessor in title?
• What specifically are the objective factors for assessing whether the infringer has responded “in accordance with recognised commercial practices in the field and in good faith”? When is the threshold of “delaying tactics” crossed?
• Can the infringer require the rights holder to provide a standard-essential patent specific offer and refuse to negotiate a portfolio licence?
• Can the FRAND terms be determined by a court if there is no common agreement of the parties to have a third party decide?