SEP and FRAND 2016: Interpretation and application of Huawei by German courts

In the past few years, it has become increasingly clear that a fundamental conflict exists between patent law and antitrust law regarding standard-essential patents (SEPs). Patent law provides a patent holder with an exclusive right which can be used to prevent other parties from using its patented invention. However, antitrust law prohibits the abuse of a dominant position (eg, Article 102 of the Treaty on the Functioning of the European Union), which arguably can be the case if an SEP holder can prevent an SEP user from implementing an entire industry standard by requesting injunctive relief based on the SEP.

In more practical terms, the conflict of interest between an SEP holder and an SEP user can be summarised as follows:

• If a party uses a patent without having obtained a licence, the patent holder can usually claim injunctive relief to prevent such use.
• However, an SEP holder is obligated to grant any third party a licence on fair, reasonable and non-discriminatory (FRAND) terms under its commitment to the standard-setting organisation.
• Further, since the respective standard cannot be implemented without using the SEP, the SEP holder could use its position to force the SEP user to accept any conditions it requests.
• Consequently, if the SEP user claims that it is willing to conclude a licence on FRAND terms, a claim for injunctive relief could be seen as an abuse of a dominant position.
• However, if the SEP user delays the licence negotiations or proves unwilling to conclude a licence, the SEP holder at some point must rely on injunctive relief, as this is its only effective means of preventing the unauthorised use of its SEP.

The core question is thus under what circumstances a claim for injunctive relief can be seen as an abuse of a dominant position.

After years of uncertainty and conflicting opinions between the German Federal Court of Justice (BGH) in its Orange Book Standard judgment (BGH, May 6 2009, KZR 39/06) and the European Commission in its investigations into Samsung (Case AT.39939) and Motorola (Case AT.39985), on July 16 2015 the European Court of Justice (ECJ) finally issued an opinion on this question in Huawei v ZTE (C-170/13).

In an attempt to balance the parties’ conflicting interests, the ECJ introduced a framework for licence negotiations between SEP holders and SEP users with successive obligations for both parties. If the SEP holder does not fulfil its obligations as introduced by the ECJ, a claim for injunctive relief and recall would be abusive and would thus be rejected. If the SEP user does not fulfil its obligation, it cannot argue that an SEP holder’s request for injunctive relief and recall constitutes an abuse of a dominant position.

At first glance, the framework appears to provide a clear guideline for both parties on how to act during negotiations. However, when trying to apply the framework in practice, it becomes clear that many crucial details within each individual obligation have yet to be clarified. This report summarises the problems that have come up in German proceedings that applied the ECJ judgment and how they were handled by the German courts.

Alerting of SEP user

Paragraph 61 of the Huawei decision states that the SEP holder must alert the SEP user of the alleged infringement and specify how the SEP has been infringed.

Concerning the SEP holder’s initial obligation, the ECJ provided no further guidelines on how detailed the specification of the infringement needs to be. In one case where this was disputed, the Mannheim District Court found that the alert must at least include:

• the number of the patent in suit;
• a statement that the patent has been declared standard essential; and
• information regarding which technical features of the challenged embodiments make use of the invention.

In any case the submission of claim charts is sufficient (Mannheim District Court, January 29 2016, 7 O 66/15).

The Dusseldorf District Court followed this interpretation (March 31 2016, 4a O 73/14), which also appears to be in line with the opinion of Justices Kühnen and Maimann of the Dusseldorf Higher Regional Court, who in a November 20 2015 presentation held that no further explanation of the alleged infringement was necessary and may therefore apply even less strict requirements in future rulings. In another case, the Mannheim District Court found it sufficient for the SEP user to have gained knowledge or even had the possibility of gaining knowledge of the alleged infringement through means other than the SEP holder’s alert (November 27 2015, 2 O 106/14).

Regardless of the rather low requirements in the existing judgments, an SEP holder should still include at least the core information concerning the specific SEP and the infringement in the alert – and possibly even provide claim charts for the SEP that might later be asserted.

Willingness to conclude a licensing agreement

Paragraph 63 of the Huawei decision states that the SEP user must express its willingness to conclude a licensing agreement on FRAND terms.

The speed at which the willingness must be expressed remains open to dispute. The Mannheim District Court found that an SEP user that waits more than three months after gaining knowledge of the alleged infringement cannot argue that the claim for injunctive relief is abusive, since it should not take this long for the SEP user to decide in general whether it is willing to take a licence (November 27 2015, 2 O 106/14). Similarly, the Dusseldorf District Court found a delay of five months to be too long (March 31 2016, 4a O 73/14).

Since the general willingness of the SEP user to obtain a licence is the foundation of the argument of abuse, SEP users should express this willingness in principle without delay.

Specific written offer

Paragraph 63 of the Huawei decision also states that the SEP holder must present a specific, written offer for a licence on FRAND terms, specifying – in particular – the amount of the royalty and how it will be calculated.

Up to this point, most arguments about the ECJ judgment have related to the SEP holder’s initial offer. They relate to several different issues.

FRAND terms

One fundamental question is whether the initial offer must be on FRAND terms. The Dusseldorf District Court initially denied this, finding that the SEP user must provide a counteroffer even if the initial offer was not FRAND (November 3 2015, 4a O 144/14). At the Mannheim District Court, one patent chamber followed this opinion (November 27 2015, 2 O 106/14), while the other patent chamber required the initial offer at least not to contradict FRAND terms on summary assessment (January 29 2016, 7 O 66/15). However, the Dusseldorf Higher Regional Court held that the initial offer must comply with FRAND terms and that a claim for injunctive relief will be denied if the SEP holder does not comply with this obligation, regardless of the reaction by the SEP user (January 13 2016, I-15 U 65/15). The same opinion was held by Kühnen and Maimann in their 2015 presentation.

All three interpretations have arguments in their favour. The interpretation by the Dusseldorf Higher Regional Court can claim to be in line with the wording used by the ECJ (ie, “written offer for a licence on FRAND terms”). However, the question of whether the initial offer is FRAND is usually at the core of the dispute. The Dusseldorf Higher Regional Court’s interpretation therefore creates the risk of negotiations ending after the initial offer, due to the SEP user arguing that the offer is not FRAND compliant, which would force the parties to ask a court to decide whether the initial offer is FRAND compliant at this point. This contradicts the ECJ’s intention to keep the determination of FRAND terms out of the infringement proceedings.

The district courts’ interpretation appears to support the general idea of finding an amicable solution by way of negotiation; further, the Mannheim District Court found a way to be in line with the wording of the ECJ judgment as well.

In the most recent SEP judgment, the Dusseldorf District Court accepted that the initial offer must be FRAND and assessed its FRAND conformity by comparing it to the SEP holder’s licensing practice and the conditions of patent pools relating to the same technology (March 31 2016, 4a O 73/14).

Based on the latest judgments, the safest way for an SEP holder to protect its claim for injunctive relief is to provide the initial offer on FRAND terms and provide sufficient details regarding comparable licence conditions – ideally including existing licence agreements – in order to support the argument that the terms are FRAND.

The Dusseldorf District Court introduced an additional way for an SEP holder to assure the FRAND compliance of its offer: if the SEP holder combines its offer with the option for the requested royalties to be reviewed by a court in accordance with Section 315, Paragraph 3 of the Civil Code, abusive royalties will be prevented and the SEP holder will fulfil its obligations under antitrust law (March 31 2016, 4a O 73/14).

Scope

Another issue is whether the licence offer must be for the patent in suit only or whether it can include the SEP holder’s entire SEP portfolio for the concerned standard. Similarly, there have been disputes regarding the territorial scope of the offered licence (ie, whether the SEP holder can request a worldwide licence).

In the cases that have been decided by German courts so far, both the Dusseldorf District Court (March 31 2016, 4a O 73/14) and the Mannheim District Court (November 27 2015, 2 O 106/14) found that a worldwide licence could be economically reasonable and thus permitted. The same applies to portfolio licences.

Ultimately, this determination comes down to the common licensing practices of the SEP holder. If the SEP holder generally concludes worldwide licences for its entire SEP portfolio, the SEP user should not be able to argue that such offer is not FRAND. However, if the SEP holder uses its SEPs for leverage and forces the SEP user to obtain licences for other standards or even non-SEPs, its behaviour is more likely to be found abusive.

Diligent response to initial offer

Paragraph 65 of the Huawei decision states that the SEP user must diligently respond to the initial offer, in accordance with recognised commercial practices in the field and in good faith, and must refrain from delaying tactics. Paragraph 66 states that if the SEP user does not accept the offer, it must submit, promptly and in writing, a specific counteroffer that corresponds to FRAND terms.

The initial offer by the SEP user and the counteroffer by the SEP holder are closely linked, as the questions discussed above similarly apply to the counteroffer.

Counteroffer requirement

The main question is under which circumstances the SEP user must provide a counteroffer. As already mentioned, in many cases the SEP user will reject the initial offer and dispute that it complies with FRAND terms. However, this is irrelevant to the Mannheim and Dusseldorf District Courts, since both require the SEP user to provide a counteroffer regardless of whether the initial offer is indeed FRAND. In contrast, the Dusseldorf Higher Regional Court requires the SEP user to provide a counteroffer only if the initial offer is FRAND (January 13 2016, I-15 U 65/15). The assumed hope of the Dusseldorf Higher Regional Court is that the uncertainty about the actual FRAND terms will:

• force the SEP holder to consider its initial offer carefully and make sure that it is FRAND; and
• force the SEP user to provide a counteroffer even if it doubts the FRAND conformity of the initial offer.

So while under the Dusseldorf Higher Regional Court judgment an SEP user could refuse to provide a counteroffer and gamble that a court will confirm that the initial offer is not FRAND and consequently deny the claim for injunctive relief, an SEP user should provide a counteroffer in any case, to protect its rights in case it is later found that the SEP holder’s initial offer was indeed FRAND.

Timeframe

Another question open for interpretation is how quickly the counteroffer must be provided. Although there have been no borderline cases in Germany yet, the Mannheim District Court found that a counteroffer provided 18 months after the initial offer was certainly too late (January 29 2016, 7 O 66/15). The Dusseldorf District Court even deemed a counteroffer made after six months to be too late (March 31 2016, 4a O 73/14).

SEP users should therefore diligently review the initial offer and provide a counteroffer as soon as possible in order to protect the argument that the SEP holder’s claim for injunctive relief is abusive.

Security

Paragraph 67 of the Huawei decision states that if the SEP user is using the teachings of the SEP before a licensing agreement has been concluded, it must provide appropriate security from the point at which its counteroffer is rejected.

The ECJ did not provide all the details of an SEP user’s obligation to provide security (eg, the amount). Whether the security must be based on the SEP holder’s initial offer or the SEP user’s counteroffer is therefore disputed.

In the first judgment following Huawei, the Second Chamber of the Mannheim District Court found that the benchmark for the security was at least the SEP user’s counteroffer (November 27 2015, 2 O 106/15). Similarly, the Seventh Chamber of the Mannheim District Court found that if the subject of the negotiations between the parties – including the SEP user’s counteroffer – was a worldwide portfolio licence, then a security that covered only sales in Germany was insufficient (February 19 2016, 7 O 99/15). The Dusseldorf District Court followed this opinion (March 31 2016, 4a O 73/14), also finding that a late security provision by the SEP user is a breach of its obligations that cannot be remedied. However, the Mannheim District Court might view this issue differently, based on remarks in recent hearings. Further, German legal literature also contains the opinion that the security should be based on the SEP holder’s offer (Palzer, EuZW 2015, 702).

Given the current uncertainty, an SEP user’s safest option is to calculate the security based on the initial offer by the SEP holder – and possibly even include a surcharge, in case the SEP holder argues that future sales should be covered by the security as well.

Conclusion

The ECJ’s Huawei decision leaves much room for interpretation – and thus for conflict. However, the proceedings presently pending in Germany all started before the Huawei decision was issued; therefore, the parties of these proceedings could not orientate their tactics to the obligations introduced by the ECJ. Although it remains to be seen whether conflicts between an SEP holder and an SEP user can be avoided if both parties fulfil their respective obligations under the ECJ judgment, each party can now at least optimise its arguments in case of a dispute.

Peter Chrocziel
Attorney at law
[email protected]

With more than 25 years’ experience in all aspects of IP work, Peter Chrocziel is a much-sought-after adviser to major international companies in dynamic sectors such as technology and pharmaceuticals.

Regularly cited in top lawyers’ listings, Dr Chrocziel is an acknowledged expert on the IP and antitrust interface. Clients appreciate his experience and knowledge of US law, as well as his ability to bridge differences between different jurisdictions.

Dr Chrocziel is a professor at the University of Erlangen-Nuremberg, where he teaches patent, trademark and competition law. In 2006 he served as president of the Licensing Executives Society International.

Jan Bösing
Attorney at law
[email protected]

Jan Bösing has been a member of the Freshfields IP and IT team in Munich since December 2011, first as a legal assistant and since March 2013 as an associate. He studied law at the Universities of Tuebingen (Germany) and St Gallen (Switzerland) and received his doctorate from the University of Marburg (Germany) in 2014. Dr Bösing specialises in patent law, competition law and trademark law and is particularly experienced in patent litigation.