The state of play for SEPs in Europe's major jurisdictions

The European FRAND/SEP landscape is developing dynamically after a recent series of major FRAND-related decisions in Germany, the United Kingdom, France and the Netherlands. The question is whether a pattern is emerging where some jurisdictions are more favourable to SEP owners than others and what actions rights holders and licensees should take as a result. Moreover, how are things likely to develop next?

While the European Court of Justice’s (ECJ) landmark decision in Huawei v ZTE set critical rules for European SEP enforcement actions involving a request for injunctive relief, the core question of what ‘FRAND’ actually means remains a subject of debate in the national courts. The ECJ decision can be seen as providing a kind of checklist for the permission to request an injunction based on an SEP – although recent case law suggests that the Dutch courts disagree even on this basic understanding.

Consequently, Europe still lacks a harmonised approach as to the meaning of ‘FRAND’. The ongoing discussion was spiced up earlier this year when it became clear that the UK courts and the Dusseldorf Court of Appeal were taking a fundamentally different approach as to what the non-discriminatory (ND) limb of FRAND means. This article analyses these different approaches and their practical implications for upcoming portfolio transactions, licensing negotiations and litigation.

Compared to the ND limb of the discussion, the question of what a fair and reasonable (FR) licensing rate is appears less controversial. That said, this limb has the potential to call for a more fundamental economic analysis of the effects of the patent system in general and in particular with respect to SEPs. At least in litigation, this Pandora’s box has fortunately remained closed so far. Broadly speaking, there seems to be a consensus that the FR limb must be decided by the so-called ‘double approach’, which comprises the top-down approach and the comparable market/licence concept.

The top-down approach essentially marks an absolute threshold for royalties to be FR, while the comparable market/licence concept aims to compare licensing conditions offered by the patentee with existing, comparable licensing agreements. The main controversy with respect to the latter approach is whether such a comparison must involve an exact calculation of a base royalty rate for each SEP, founded on existing comparable licensing agreements, or whether comparability should be assessed by discretionary review.

To help this analysis, it is worth drilling down into the climate of each of Europe’s major jurisdictions.

Figure 1. The FRAND state of play in European courts

Germany

The German courts have issued by far the highest number of FRAND/SEP-related decisions. The result is a wealth of rulings – unmatched in any other jurisdiction – on many detailed FRAND questions. However, the courts have so far shied away from independently calculating a FRAND rate for a given SEP. Instead, their focus has been on the ND limb of FRAND, reflecting a strong belief that a FR licensing rate is not a fixed, mathematically calculated rate, but rather an acceptable range.

Under German practice, the patentee must show the FR-ness of a licence via a sound economic analysis, essentially applying the comparable market/licence concept and/or the top-down approach (some courts combine the two into a cumulative double approach). Provided that the patentee can present conclusive reasons as to why a certain licensing rate qualifies as FR, the court will turn to the analysis of the ND limb, rather than start its own calculation of FR.

One of the main open questions in the ND discussion is whether a patentee that has acquired an SEP from another owner is bound by any licensing activity of that owner, especially its FRAND commitment made during standardisation. This question has been heavily debated since the early FRAND battles between Nokia and Qualcomm.

Against this background, the Dusseldorf Court of Appeal’s decision on 22 March 2019 in Unwired Planet v Huawei (2 U 31/16) has provided a somewhat radical solution, which comes in two parts.

The starting point of the landmark decision is the basic idea that a FRAND commitment made by the patent owner is not merely a contractual act (or even less) towards the respective standard-setting organisation, but rather has an effect in rem on the patent itself. Similar to a partial waiver of rights, the FRAND commitment irrevocably modifies the ability to seek injunctive relief based on the patent in question. This means that no subsequent transaction involving this patent will ever separate it from its FRAND commitment.

While many people may agree with this, the second part of the court’s conclusion has struck the FRAND/SEP landscape like a hurricane; the ND limb means that the first licence granted involving the patent in question sets the benchmark for non-discrimination, unless any of the subsequent licences provide a more favourable rate. Therefore, it is the duty of the current patent owner to produce all prior licences in order to enable the potential licensee to assess the ND nature of the licensing offer. If the patentee is unable or unwilling to do so, no injunctive relief is available. Within the portfolio of existing relevant licences, the lowest granted rate sets the standard for ND, even if that rate is the result of sloppy or unprofessional negotiations. In a nutshell: ND is super hard-edged.

The decision of the Dusseldorf Court of Appeal has been appealed to the German Federal Supreme Court, proceedings before which normally take 18 months. However, given the far-reaching effect of the issue at stake, there is a high likelihood that the Federal Supreme Court will refer these questions to the ECJ for a preliminary ruling.

What is more, the decision is not a binding precedent (ie, the lower courts – in particular, the courts of Mannheim and Munich – are free to disagree). While it can be expected, as a practical matter, that the Dusseldorf District Court will give deference to its Court of Appeal, other German courts are unlikely to follow this doctrine for the time being, given its extreme and impractical nature.

United Kingdom

Since April 2017, the UK courts have surprised the global patent community with their willingness to determine an actual FRAND licensing rate on a global basis. With regard to determining the FR limb, the courts have developed a five-part algorithm. While the final calculation looks like part of an impressive high-school maths exam, the core of the endeavour is the double approach – that is, a combination of the comparable market/licence concept and top-down approach.

Further – and very much contrary to the above-mentioned ruling of the Dusseldorf Court of Appeal – the UK courts do not view the ND limb as a most-favoured-nation requirement (ie, a hard-edged requirement). Instead, ND defines a maximum royalty, which must not be exceeded (in other words, a ceiling). Patentees may grant lower royalty fees than the maximum rate, without being locked into this lower rate for future licences.

In late October the UK Supreme Court heard Huawei’s appeal against the Court of Appeal’s decision in Unwired Planet v Huawei – the case that began it all in the United Kingdom. The court also heard the appeal in the parallel case of Conversant v Huawei, ZTE.

Depending on how long the United Kingdom stays in the European Union, it seems unlikely that the Supreme Court will refer these cases to the ECJ for a preliminary ruling.

The Netherlands

Many European scholars regard the patentee’s FRAND obligations as a comprehensive and cumulative list of duties (ie, failure to fulfil one of the multiple obligations results in overall non-FRAND behaviour). However, the Hague Court of Appeal has held in Philips v Asus, Asustek (7 May 2019, Case 200.221.250/01) that the opposite rule applies; unless the defendant can be considered a “willing licensee” (as was the case with the litigation in question), then it does not matter whether the patentee fulfilled any of its FRAND obligations. In other words, the patentee’s FRAND obligations are not considered to be a checklist that must be completed before an injunction becomes available.

France

While the French courts have been silent on FRAND/SEP for a while, the Paris Court of Appeal’s recent decision in Conversant v LG (16 April 2019, Decision 061/2019) touches on an important side-aspect of the debate – namely, the confidentiality regime protecting the disclosure of existing licences to show the FRAND-ness of the offer made to the defendant. To protect confidentiality, the court applied the EU Trade Secrets Directive (2016/943) and its implementation into French law. Resulting access to the courtroom was restricted to the parties’ counsel and some representatives of the parties bound by strict confidentiality obligations.

Is a pattern – or gold standard – emerging?

There seems to be an emerging consensus in Europe that the FR limb of FRAND should be determined based on the double approach (ie, a combination of the comparable market/licence concept and top-down approach). However, there is a fundamental disagreement over whether this approach can be programmed into some kind of mathematical algorithm, which – at least in theory – would enable a court to calculate a FRAND licensing rate.

Figure 2. Non-discrimination: United Kingdom versus Germany

Some market players view the absence of number acrobatics to determine a royalty rate in German FRAND/SEP proceedings as problematic, making proceedings in Germany considerably less attractive. On the other hand, many concede that the German approach is highly efficient, both in terms of time and cost. In particular, in cases where the SEP owner publishes and consistently maintains its FRAND licensing terms, Germany remains the most patentee-friendly jurisdiction, as the track record of the MPEG LA cases demonstrates.

One may regard the identification of a comparable licence agreement entered into by the owner of the SEPs or third parties as mathematically precise as the Hogwarts’ world of science, in that the overall FRAND calculation contains at least one highly subjective element. However, it must be conceded that the UK courts have done a great job of promoting the FRAND calculation offering as a go-to solution for critical FRAND disputes, albeit accompanied by a heavy price tag and a serious risk of losing the patent in an invalidity counterclaim.

On balance, it seems high time for the German courts to find the courage to rule that a given licensing rate is positively FR, applying the double approach, in order to catch up with the developing FRAND debate. However, courts (in particular, UK ones) should admit that this is not a mathematically precise method. Judges are trained to professionally exercise discretion as their statutory task and there is nothing wrong with also applying this skill when it comes to FRAND. Therefore, there is no reason to crouch behind a monument of numbers when judges rule on a FRAND rate – based on discretion.

With regard to the ND limb, case law is drifting apart. Reaching a consensus would require clear directions either from the ECJ or by a legislative act from the European Union. However, given the uncertainty surrounding Brexit, Europe may end up with a UK approach and a rest-of-Europe approach, unless the UK Supreme Court injects some wisdom into the pending appeals in Unwired Planet and Conversant.

Under the soft-edged ND approach adopted by the UK courts, powerful licensees can typically get better licensing deals than small and medium-sized companies, which have a weaker market position. Preventing such discrimination is the core of the FRAND doctrine under Article 102 of the Treaty on the Functioning of the European Union and the UK method seems to be a toothless tiger in that respect.

However, the ND approach taken by the Dusseldorf Court of Appeal gives every impression of being conceived in the ivory tower of theoretical antitrust law, as it puts an impractical burden on the patentee and/or seriously hampers any asset transaction involving SEPs. From a legal perspective, the court has converted the “abuse of market dominance” requirement of Article 102 into an abstract requirement totally detached from the abilities of the current SEP owner, which seems to be a wrong interpretation of the law. Given the patentee’s burden envisaged by the Dusseldorf court, the value of SEP portfolios would likely drop significantly, making larger restructuring projects (eg, the carve-out of lighting company Osram from Siemens) difficult or even impossible, and thus destroying valuable assets instead of promoting competition.

The recent French decision may set a new European trend. The procedural instrument of protective orders does not exist in most EU civil law jurisdictions, while the EU Trade Secret Directive is now implemented in almost all EU member states. Therefore, the creative approach taken by the French court could be copied in other jurisdictions – in particular, Germany.

The recent Dutch decision admittedly creates a very favourable forum for SEP owners in the Netherlands, possibly bringing more SEP litigation activity to the country. However, looking into the crystal ball, the revelry may come to a sudden end when a Dutch court files references for a preliminary ruling with the ECJ and that court aligns Dutch practice with the checklist approach taken by other EU jurisdictions.

Actions SEP owners and licensees should take now

Given the general importance of the double approach and the (low to medium) risk that the ND doctrine of the Dusseldorf Court of Appeal could become the European rule of play, access to existing licensing terms should become a key provision in future asset purchase agreements involving SEPs. SEP owners should also try to revise or renegotiate existing asset purchase agreements to ensure compliance with upcoming disclosure obligations.

With regard to litigation strategy, the recent developments in the Netherlands add an interesting option when dealing with notoriously unwilling licensees, as the court will not expect the plaintiff to argue FRAND as long as the defendant remains unwilling. This may save significant costs. However, as explained previously, it remains to be seen for how long this option will be available.

In contrast, the ruling of the Dusseldorf Court of Appeal has transformed an extremely popular jurisdiction into a no-go area for SEP owners. Those currently engaged in litigation before the Dusseldorf District Court should expect deference to be given to the appeal court’s doctrine, although it is not technically binding. This may boost the popularity of the equally competent courts of Mannheim and Munich for the time being.

From a licensee’s perspective, the Dusseldorf Court of Appeal’s ruling is great news and every implementer presently involved in litigation and/or negotiations should vigorously plead this doctrine. However, given how extreme it is, it may not have a long lifespan. Hopefully, it will soon be replaced by a more balanced and practical approach.