Recent developments: FRAND in Germany

In 2015 the European Court of Justice (ECJ) rendered its Huawei v ZTE decision, which laid out the basic principles of the FRAND defence. It was not until 5 May 2020 that the German Federal Court of Justice in Sisvel v Haier (KZR 36/17) had a chance to render a decision on the FRAND defence. For the first time, the court discussed the FRAND defence in view of the Federal Court of Justice’s prior case law and Huawei. Until this point, there was only a small but growing number of first-instance court decisions and a handful of appeal court decisions dealing with the FRAND defence.

In the past year, the case law of the three major first-instance courts hearing patent infringement cases in Germany (ie, Dusseldorf, Mannheim and Munich) and of the Dusseldorf Court of Appeal and Karlsruhe Court of Appeal began to diverge in a number of aspects regarding how Huawei should be applied. While Sisvel brought clarity with respect to certain aspects where the case law of the lower courts diverged, unfortunately some other aspects have not been discussed by the Federal Court of Justice. It therefore remains to be seen whether the case law of the various first-instance and appeal courts will converge in those aspects in the future.

Regardless of these open issues, however, it is clear that Sisvel has strengthened the position of the SEP owner and has increased the pressure on the implementers of SEPs to react swiftly and diligently when they are contacted by an SEP owner. Patent hold-out strategies used by implementers in the past, such as not reacting to licence offers from an SEP owner with the simple argument that the owner’s offer is not FRAND, will – contrary to the previous position in the past – no longer be successful in German courts. Prior to Sisvel the Karlsruhe Court of Appeal and the Munich District Court started to change the approach to the FRAND defence by taking a friendlier position to SEP owners.

This chapter discusses the Federal Court of Justice’s decision in Sisvel v Haier; a Karlsruhe Court of Appeal decision (6 U 183/16, 30 October 2019); the guidelines from the Munich District Court’s handling of the FRAND defence in February 2020; and an informative order issued by the Mannheim District Court in Nokia v Daimler (2 O 34/19, 26 May 2020).

Federal Court of Justice

Sisvel strengthens the position of the SEP owner. In Huawei the ECJ required that the implementer of the standard at issue declare that it is genuinely willing to take a FRAND licence once it has been notified by the SEP owner of the alleged infringement. The German lower courts (particularly Dusseldorf and Mannheim) did not see this obligation as a serious hurdle for the implementer. A simple one-off statement by the implementer was considered sufficient. The result was that implementers merely stated that they were willing to take a licence but did nothing to promote further negotiations, instead resorting to delaying tactics by asking for further technical information and additional details as to why the SEP owner believed its offer would be FRAND – in general, they would simply dispute that an offer made to them was FRAND. The Federal Court of Justice has raised the bar significantly for an implementer to be viewed as a ‘willing licensee’ by requiring it to seriously and proactively drive the licence negotiations. The court cited Mr Justice Birss (as he then was) in Unwired Planet v Huawei (the High Court of England and Wales), who stated that “a willing licensee must be one willing to take a FRAND licence on whatever terms are in fact FRAND”.

Even if an implementer makes a counter-offer, this does not necessarily mean that the implementer must be considered a willing licensee. The overall impression of the reasoning of the decision is that any kind of delaying tactics by implementers must be considered as much more critical by the courts in the future. Even though the Federal Court of Justice’s decision does not make an explicit statement to that effect, it can be concluded that the implementer, as soon as the implementer has a reasonable basis for it, must make a FRAND offer on its own, irrespective of the (quality of) the offer made by the SEP owner. Not doing so could mean that the implementer would not be seen as a willing licensee. Therefore, critical behaviour by implementers should no longer be possible. It would be expected that if the SEP owner has made an offer, the implementer cannot rely on the FRAND defence at all if it does not swiftly make a FRAND counter-offer, render accounts about the infringing acts and place a bond of a sufficiently high amount to cover the royalty payments.

Further, the Federal Court of Justice’s emphasised that the requirement of a serious willingness to take a licence on the part of the implementer, which should also have the following consequence: according to Huawei, the obligation of an SEP owner to make a FRAND offer is subsequent to the declaration of the implementer being willing to take a FRAND licence. Since German courts saw this declaration as a mere formality, the FRAND discussions in Germany usually focused on the FRAND offer of the SEP owner, which bore the risk of having its complaint dismissed if the courts held that the offer was not FRAND or that the SEP owner did not sufficiently explain its FRAND reasoning and did not sufficiently disclose its prior licensing practice. Contrary to this, the focus in litigation is now increasingly likely to be on the implementer’s behaviour right from the beginning, rather than on that of the SEP owner and its offer.

Unfortunately, regarding the disclosure of previous licence agreements, the Federal Court of Justice is vague and offers little guidance. The information requirements that an SEP owner must meet depend on the individual case. However, they cannot be higher than in out-of-court negotiations. Otherwise, those implementers who start using the patented technology without first obtaining a licence would be privileged. Regarding the disclosure requirements, the decisions of the lower courts in Dusseldorf, Mannheim and Munich remain important.

Regarding the non-discrimination aspect of FRAND, the Federal Court of Justice also takes a fairly patentee-friendly position. The court has stated that a market dominant position does not bar the SEP owner from taking care of its own economic interests and, if sufficiently justified by such economic interests, it may charge different prices (the Sisvel decision granted particularly favourable royalties to a Chinese implementer). Regarding non-discrimination, the Federal Court of Justice stresses the objective of freedom of competition. For an implementer to successfully argue discrimination, it should not be sufficient to merely refer to more favourable treatment of its competitors (eg, lower royalties charged). Rather, the implementer would also have to demonstrate that this different treatment has a relevant impact on competition.

Karlsruhe Court of Appeal

The Karlsruhe Court of Appeal decision deals with a significant number of aspects of the FRAND defence. In part, it follows the line of the previous case law of the Mannheim and Dusseldorf first-instance courts, as well as the Dusseldorf Court of Appeal. However, in part, the Karlsruhe Court of Appeal also deviates from this line, in particular diverging from the Dusseldorf Court of Appeal’s position.

Before the Karlsruhe Court of Appeal turned to the specific aspects of the FRAND defence after Huawei, it made some fundamental considerations. It first noted that the ECJ has established certain procedural and substantive obligations in regard to the SEP owner, the existence and scope of which always depend on the circumstances of the individual case. With regard to the European Commission, the Karlsruhe Court of Appeal noted that there is no generally valid answer to the question of what FRAND is, but that FRAND allows room for manoeuvre for the SEP owner. Whether something is FRAND should therefore not be examined too rigidly. It should be recognised that the parties negotiating in good faith are best placed to determine the most appropriate FRAND conditions for their situation. The Karlsruhe Court of Appeal sees FRAND as a result of the negotiating obligations of the parties to conclude a licence on FRAND terms. Such considerations remain applicable in view of Sisvel, where the Federal Court of Justice also stressed the obligations of the parties, especially of the implementer to actively seek a licence.

Of specific interest are the Karlsruhe Court of Appeal’s statements regarding the transparency obligations of an SEP owner when making its FRAND offer, particularly the SEP owner’s obligations of making it clear why an offer is non-discriminatory and non-exploitative. Before Sisvel this was one of the most discussed issues regarding FRAND. The transparency obligation should enable the implementer to deal with the FRAND licence offer in a meaningful way and to make a counter-offer. The Karlsruhe Court of Appeal held that the scope and extent to which the explanations need to be substantiated by the SEP owner should depend on the individual case. In this respect, the most contentious issue is the question of whether (and, if so, to what extent) the SEP owner is obliged to submit already existing licence agreements as evidence of the existing licensing practice. While, so far, the Dusseldorf Court of Appeal requires a detailed explanation of the full content of all existing licence agreements relating to the patent in question and their submission, the Karlsruhe Court of Appeal now expressly deviates from this case law. It emphasises that a lower level of transparency is in line with the FRAND criterion of fairness – it already ensures that FRAND negotiations are in good faith. In contrast, a full disclosure of licence agreements in FRAND negotiations could not be derived from this criterion, and it is not common practice.

According to the Karlsruhe Court of Appeal, the detail that an SEP owner must present to explain its licensing practice depends on the structure of its licensing programme. If the SEP owner uses a standard licence agreement, and this is accepted by third parties, it should suffice to refer to the conformity of the FRAND offer with the standard licence agreement. Only if the SEP owner has concluded licence agreements with different terms, must it regularly submit a sufficiently robust account of the content of the main contractual terms so that an infringer can see whether and, if so, why it is being offered different commercial terms. Even then, this should not necessarily result in an obligation to submit such an account. As the obligation to submit existing licence agreements is usually difficult to fulfil for the SEP owner due to confidentiality obligations, the difference in the case law of the Karlsruhe Court of Appeal and the Dusseldorf Court of Appeal may become relevant to the question of where to litigate. However, the Karlsruhe Court of Appeal judgment does not make clear what it means by a ‘sufficiently detailed amount on the essential contractual terms’. Thus, an SEP owner will still face uncertainty if it does not disclose its existing licence agreements to an implementer. In this respect, the Karlsruhe Court of Appeal merely states that there may be situations in which a disclosure is not necessary for a meaningful assessment of the FRAND character of a licence offer (eg, if discrimination is obviously ruled out from the outset or the two implementers are active on different product markets).

Munich and Mannheim district courts

More recent positions taken by the Munich District Court and the Mannheim District Court show a more friendly approach to SEP owners.

As a prerequisite for a discussion of the FRAND defence, the Munich District Court obliges an implementer to make a counter-offer, to provide security and render accounts, if it has not accepted a licence offer made by the SEP owner and the latter has rejected the implementer’s counter-offer. According to the Munich court, the obligation of the implementer to make a counter-offer should not depend on whether the licence offer is FRAND on closer examination. The SEP owner’s licence offer must not be ‘simply unacceptable’. The same applies to the counter-offer made by the implementer. If an implementer does not submit a counter-offer, it must demonstrate and prove that the SEP owner’s offer is simply unacceptable.

The The Mannheim District Court now takes a similar approach. It requires an implementer to make a FRAND counter-offer if the offer made by the SEP owner is sufficient to start licence negotiations between the parties. Whether the SEP owner’s offer is indeed FRAND is not reviewed by the Mannheim District Court at this point. This is done only if the counter-offer made by the implementer is FRAND in every detail and if it was made within a short time.

Both approaches – as well as Sisvel – have in common that they require the implementer to actively pursue a licence and that the implementer cannot, as has been accepted by German courts in the past, simply argue that the licence offer made by the SEP owner is not FRAND and that the implementer is therefore not obliged to take any steps towards a licence agreement.

Comment

Even though there are still many issues yet to be discussed and decided regarding FRAND in Germany, Sisvel, the recent Karlsruhe Court of Appeal judgment and the positions taken by the district courts of Munich and Mannheim have clearly changed German case law on the FRAND defence to the benefit of SEP owners, especially by requiring implementers to actively and continuously seek the licence that they need.