Recent developments: update on FRAND in Germany
In the past 12 months, the case law of German courts regarding the FRAND defence has developed significantly and strengthened the position of SEP owners in the wake the of the first Sisvel v Haier (KZR 36/17) Federal Court of Justice judgment on 5 May 2020. The court confirmed this judgment with its second Sisvel v Haier (KZR 35/17) decision on 24 November 2020. In both judgments, the Federal Court of Justice rejected the rather formal approach that the German courts of first and second instance took in applying the European Court of Justice’s (ECJ) Huawei v ZTE decision.
Following the first Sisvel v Haier judgment of May 2020, the Mannheim and Munich District Courts rendered against Daimler in August and September 2020, injunctions in the proceedings Nokia v Daimler and Sharp v Daimler. Both courts rejected Daimler ’s FRAND defence after applying the Sisvel v Haier judgment from May 2020, holding that Daimler did not act how a willing licensee should have acted. These were the first post-Sisvel judgments in Germany in which that Federal Court of Justice decision was applied.
Later, in November and December 2020, the Karlsruhe Court of Appeals issued two judgments rendering injunctions against the defendants (6 U 104/18 and 6 U 103/19, the latter being published) and thereby issued the first judgments at the appeal court level applying the first Sisvel v Haier judgment.
However, in the past 12 months German case law on SEP disputes has not only developed with respect to the application of Huawei v ZTE, but also with respect to the availability of anti-anti-suit injunctions following the judgment Interdigital v Xiaomi of the Munich District Court (7 O 14276/20, 25 February 2021). Following this judgment, a number of anti-anti-suit injunctions were granted by the Munich District Court and it seems that anti-anti-suit injunctions are now becoming part of the standard toolbox of SEP litigation in Germany.
This chapter will discuss the FRAND defence in view of the key findings in the two Sisvel v Haier judgments of the Federal Court of Justice and the two judgments of the Karlsruhe Court of Appeals. It will also explore the circumstances under which the Munich District Court will usually grant an anti-anti-suit injunction in preliminary injunction proceedings. Finally, it will assess what impact – if any – the changes to the German Patent Act will have on the ‘automatic injunction’ regime if infringement is affirmed.
The key issues in German proceedings when discussing the FRAND defence are:
- the defendant’s willingness to license;
- the FRAND character of the SEP owner’s licence offer; and
- the FRAND character of the defendant’s counter-offer.
Before reviewing these issues in detail, it is important to understand in which order the German courts will review these issues and which party must first fulfil its obligation before a corresponding obligation of the other party is triggered. Prior to the first Sisvel v Haier judgment, most German courts placed little emphasis on willingness to license. The courts held that this obligation was met once an implementer merely stated that it was willing to take a licence under FRAND terms. After a corresponding declaration of an implementer, the SEP owner was – in order to overcome a FRAND defence – obliged to make a FRAND licence offer and give a detailed explanation as to why its licence offer was FRAND. The courts reviewed the offer and the explanation given in detail, and nearly all instances held that the SEP owner did not sufficiently explain why it was supposed to be FRAND. In view of this case law, many defendants never made a counter-offer, arguing that they would be obliged to do so only if the SEP owner’s offer was FRAND and sufficiently explained.
The first Sisvel v Haier judgment fundamentally changed this approach by requiring an implementer/defendant to actively participate in negotiations for, and to purposefully seek, a FRAND licence. The Federal Court of Justice emphasised the necessity of a detailed review regarding whether a defendant is indeed a willing licensee. In addition, the Federal Court of Justice held that the initial licence offer of the SEP owner would not have to be FRAND, since a FRAND licence agreement would always have to be the result of negotiations between two parties, and that from an objective viewpoint the implementer/defendant could not assume that the SEP owner would be unwilling to license on FRAND terms. Concerning the FRAND character of the implementer/defendant’s counter-offer, the Federal Court of Justice is not entirely clear in the two Sisvel judgments. However, the Karlsruhe Court of Appeals held that a defendant can rely on the FRAND defence if it made a FRAND counter-offer; consequently, the defendant’s counter-offer is reviewed first, and only if it is found that the defendant has made a FRAND counter-offer will the SEP owner’s offer be reviewed. This sequence of review is also applied by the Munich and Mannheim District Courts. Since the defendant bears the burden of proof that its counter-offer is FRAND, having the defendant’s counter-offer reviewed first is a substantial risk for the defendant.
Being a willing licensee
The Federal Court of Justice substantially increased the requirements that a defendant must meet to be considered a willing licensee. A defendant must make a clear and unambiguous statement that it intends to enter into a licence agreement with the SEP owner on reasonable and non-discriminatory terms and conditions, a condition that should be relatively easy to fulfil. However, in addition, the Federal Court of Justice requires a continued target-oriented participation in licensing negotiations. In this respect, the first Sisvel v Haier decision the court cited Justice Birss from Unwired Planet v Huawei: “a willing licensee must be one willing to take a FRAND licence on whatever terms are in fact FRAND.”
The Federal Court of Justice pointed out that the FRAND defence is unavailable to a defendant that seemingly engages in licence negotiations but strategically delays reaching an agreement. This includes where the defendant must review the SEP owner’s licence offer and voice its criticism without holding back arguments for use in later litigation. Also, if a defendant delays negotiations, it must make a special effort to promote the licence negotiations if it wants to resolve the delay. The mere fact that a defendant has taken licences from other SEP owners does not imply that the defendant is a willing licensee.
In that regard, the Karlsruhe Court of Appeals has offered a number of examples that indicate a lack of willingness to license on FRAND terms. An indication that a defendant is not a willing licensee is, for example, if the defendant only becomes active in the negotiations in parallel to deadlines ending in pending litigation. Also, if the defendant fails to react swiftly, holds back criticism and counter-arguments for later use in litigation, or only makes a counter-offer and provides security shortly before an oral hearing, it implies a lack willingness to license on FRAND terms. Repeated requests for claim charts or protracted technical discussions also indicate a lack of willingness.
The impact of the two Sisvel v Haier decisions on the assessment of the FRAND defence in SEP litigation is probably best demonstrated by the fact that, since these decisions, most SEP cases with FRAND defences in the various German district courts found that the defendants were unwilling licensees.
In Nokia v Daimler, one chamber handling patent litigation at the Dusseldorf District Court referred a number of questions regarding the application of Huawei v ZTE by the German Federal Court of Justice to the ECJ. However, with the settlement between Nokia and Daimler announced in June 2021, all pending cases between the parties were terminated, therefore the referral of their proceeding to the ECJ was also terminated. According to recent statements of a presiding judge of a chamber handling patent litigation at the Dusseldorf District Court, the judges there will not refer such questions to the ECJ again. It therefore seems that the Dusseldorf District Court has now accepted the approach laid down by the Federal Court of Justice.
FRAND offer by the SEP owner
Under Sisvel v Haier, as well as the Karlsruhe Court of Appeals judgments, it is no longer necessary that the SEP owner’s offer must be FRAND in each and every detail. It is only necessary that it cannot be inferred from the offer that the SEP owner is in fact unwilling after negotiations between the parties to grant a licence on FRAND terms. The Karlsruhe Court of Appeals held that the existence of two comparable licence agreements was sufficient to indicate that an offer was FRAND, and especially that it was not abusive. This clearly strengthens the position of an SEP owner who has already concluded comparable licence agreements.
Both the Federal Court of Justice and the Karlsruhe Court of Appeals agree that the parties are best situated to determine FRAND terms in good-faith negotiations. This once again emphasises the need for negotiations and why the Federal Court of Justice highlights the willingness of the licensee to take a licence and to actively participate in negotiations.
Under German case law, the implementer must make a specific counter-offer, within a short time frame, in writing and in line with industry practice that is (arguably) FRAND. The second Sisvel v Haier decision is ambiguous regarding whether the counter-offer must be FRAND. However, the Karlsruhe Court of Appeals is clear in this respect and requires that the counter-offer be FRAND and made in due time if the defendant wants to successfully rely on the FRAND defence. This position is also taken by the Mannheim and Munich District Courts. The Karlsruhe Court of Appeals has implied that even a FRAND offer would be insufficient for a successful FRAND defence if it is made too late.
According to the Federal Court of Justice in its second Sisvel v Haier judgment, the counter-offer must show that the defendant has considered the SEP owner’s offer and that the offer must be such that the SEP implementer could assume that it contributes, appropriately to the situation and the time of submission, to bringing about a licence agreement on FRAND terms. This again underlines the obligation of a defendant/implementer to purposefully engage in licensing discussions with the aim of concluding a licence agreement.
Availability of an anti-anti-suit injunction
The availability of anti-anti-suit injunctions to be rendered by the Munich courts was established in Nokia v Continental (6 u 5042/19 and 6 U 5689/19), a Munich Court of Appeals judgment of 12 December 2019. The anti-anti-suit injunction was granted in reaction to an anti-suit-injunction request by Continental in the United States. Further developing this case law, in Interdigital v Xiaomi the Munich District Court established that an anti-anti-suit injunction can also be requested in ex parte preliminary injunction proceedings (ie, without the respondent being heard, if the respondent has given cause to assume that it may seek an anti-suit injunction against the SEP owner to enjoin them from enforcing its patents in Germany. Following Interdigital v Xiaomi, the two chambers handling patent infringement matters at the Munich District Court have repeatedly issued a number of pre-emptive anti-anti-suit injunctions where the respondent had not yet filed for an anti-suit injunction.
The Munich District Court stipulated the following scenarios under which an anti-anti-suit injunction could be granted:
- the SEP implementer has threatened to file or has filed a request for an anti-suit injunction against the SEP owner;
- the SEP implementer has filed or threatened to file a FRAND rate-setting proceeding in a jurisdiction that generally provides anti-suit injunctions for securing such rate-setting proceedings;
- the SEP implementer has threatened to seek or has obtained an anti-suit injunction against other SEP owners and there is no evidence for the SEP owner in question that the SEP implementer has renounced this practice for the future, at least in relation to the SEP owner in question; and
- the SEP implementer has not declared in writing and within a short time limit set by the SEP owner (eg, in the context of the first infringement notice) that it will not file a request for an anti-suit injunction.
Of these situations the third scenario is probably the most interesting, since it makes an anti-anti-suit injunction pre-emptively available, potentially even in a situation where the implementer was not even contacted by the SEP owner, provided that the implementer has used anti-suit injunctions against other SEP owners in the past.
However, the SEP owner must act swiftly. Since anti-anti-suit injunctions are granted in preliminary injunction proceedings, the urgency requirement must be met (ie, the SEP owner must, in general, seek an anti-anti-suit injunction within one month of obtaining the knowledge of the facts that justify seeking an anti-anti-suit injunction)
No changes to automatic injunction regime expected
The German Parliament recently passed a bill introducing a proportionality criterion into the wording of the statute that sets forth the injunction claim of a patent owner. However, a proportionality test is a fundamental principle of German common law and therefore already existed, with respect to an injunction claim, before this amendment. In Heat Exchanger in 2016, the Federal Court of Justice had already applied a proportionality test (but in that case had granted the injunction nevertheless). It is the express intent of Parliament to merely codify the Federal Court of Justice’s existing case law and not to limit the availability of injunctions if patent infringement is found.
In view of this and the wording of the amendment regarding the respective provision of the Patent Act (Section 139), it is the general expectation – confirmed by statements from judges of the various relevant courts – that granting an injunction if infringement is found will remain the rule. With respect to SEP litigation, the amendment of the statute will be even less relevant, since a case where granting an injunction would be disproportionate even though the defendant was unwilling to take a licence on FRAND terms is difficult to imagine.
The changes and developments in German case law concerning the FRAND defence favour the SEP owner and have shifted the balance to the disadvantage of defendants in SEP cases. Defendants that engage in hold-out tactics will have a difficult time successfully relying on the FRAND defence in German litigation.
German courts will not set a FRAND rate in the course of patent infringement proceedings. The courts will only assess whether the parties have complied with their respective obligations under cartel law – that is, whether on the one hand the SEP owner gave sufficient prior infringement notice and is willing to license on FRAND terms, and on the other hand whether the defendant is a willing licensee who purposefully, and with targeted focus, participated in licensing negotiations and made a (FRAND) licence counter-offer (which, if that is industry practice, must be worldwide in scope) in the course of negotiations.