A milestone decision: the Court of Justice of the European Union sets new rules for negotiating license agreements under FRAND-terms
By Dr. Markus Gampp
For many years, courts all around the world were faced with the question as to if and when a proprietor of a standard-essential patent (SEP) is considered to be abusing his dominant position in filing an action seeking to prohibit the sales of a product or service because of an alleged infringement of his SEP. In that context, the question arises as to the actual measures the SEP proprietor and/or the alleged infringer must undertake in order to achieve a license agreement under fair, reasonable and non-discriminatory (FRAND) terms. In Europe, in particular the German courts took quite an SEP proprietor-friendly perspective, whereas the European Commission’s recent position tended to favor an alleged SEP infringer.
On July 16, 2015, in a landmark decision (Huawei v. ZTE, case no. C-170/13), the Court of Justice of the European Union (CJEU) decided that it is primarily for the SEP proprietor to initiate license negotiations with the alleged infringer and to seek the conclusion of a license agreement under FRAND terms before resorting to litigation. On the other hand, it is not sufficient for the alleged infringer only to show “willingness” to conclude such an agreement (a point seen as the primary criterion by the European Commission). It is rather necessary that the alleged infringer also actively works towards concluding such an agreement after receiving the license offer from the SEP proprietor. Only after the SEP proprietor’s efforts to conclude a license agreement have failed, the SEP proprietor will not abuse his dominant position in filing a court action seeking the prohibition of the sales of the infringing products or services.
Background: patents as abuse of market power
Standard-essential patents (SEP) are patents essential for implementing a specific industry standard (such as LTE or UMTS for mobile communication, for example) that is mandatorily defined by a standards setting body. It is not possible to manufacture products that comply with a certain standard without making use of the technologies covered by these patents. As manufacturers must therefore rely on the licensed use of these patents, companies owning such SEPs possess significant market power. This market power gives cause for concern from an antitrust perspective if the SEP proprietor uses his market power to monopolize the market or to claim exaggerated royalties. An SEP proprietor is therefore basically required to conclude a license agreement under FRAND terms. Hence, seeking a prohibitory injunction in court is impermissible, as long as the manufacturer is willing to conclude such a FRAND license agreement.
Even on this basis, the specific approaches on which party to burden with the obligation of making a licensing offer and the corresponding rights and obligations that are associated with them differed significantly across European courts and institutions. The German patent infringement courts, having produced the bulk of European case law on these questions in recent years, made it relatively easy for the SEP proprietor. In order to avoid an injunction, German case law has compelled the alleged infringer to initiate license negotiations by requiring the alleged infringer to send a complete offer for a license agreement to the SEP proprietor, and to comply with all terms of the license even before the conclusion of the agreement. Therefore, the licensee was already required to pay the royalties and lost the right to defend against the alleged infringement.
Contrarily, according to two decisions following investigations undertaken against Motorola and Samsung in 2014, the European Commission found it sufficient that the alleged infringer merely demonstrate his “willingness” to conclude a license agreement. Therefore, according to the European Commission, no actions need to be taken, especially no license offer made by the alleged infringer. Such a position arguably opened the door for stalling tactics and made it difficult for the SEP proprietor to enforce his rights.
CJEU: balancing interests
Attempting to find middle ground between these two points of view, the CJEU held that the SEP proprietor should be in a better position to make a reasonable and complete license offer than the alleged infringer, containing all necessary terms and a realistic royalty. Further, as the alleged infringer may not be aware of the usage of an SEP (normally, a massive amount of patents are claimed to be essential to a certain industry standard), as a very first step, the SEP proprietor needs to notify the alleged infringer about the claimed usage of his patent. If the alleged infringer is thereupon willing to conclude a FRAND license agreement, the SEP proprietor will be obliged to send a license offer to the alleged infringer containing all the terms necessary for concluding a license agreement, especially containing the royalty and the manner of their calculation.
The alleged infringer then has to respond to that offer in a diligent manner without any tactical delay and in good faith. If the alleged infringer does not want to accept the SEP proprietor’s offer, he is then obliged to make a counter-offer. Normally, the amount of the royalty is highly disputed between the parties. However, making a counter-offer implicates financial risks to a certain extent for the alleged infringer. That is, if the alleged infringer still uses or wants to use the teaching of the SEP, the alleged infringer has to provide an appropriate security for that usage in case the SEP proprietor rejects the counter-offer. The security can be provided in the form of a bank guarantee, or by placing the necessary amounts on deposit.
If the counter-offer is not acceptable to the SEP proprietor, the parties may agree to have the amount of the royalty determined by an independent third party. Only if the alleged infringer does not respond to the SEP proprietor’s offer in a diligent manner or if an agreement cannot be reached even after the alleged infringer’s counter-offer is made, the SEP proprietor will not be abusing his dominant position in thereafter seeking an injunction in court prohibiting the sales of the products or services in dispute.
Notably, however, the alleged infringer may still defend against the alleged infringement, even after the conclusion of such an agreement. Consequently he may still defend against the usage of the patent, contest the essentiality of the patent or bring an invalidity attack against the patent. In that context, the CJEU pointed out that these rights are essential because of the right to effective judicial protection.
On the basis of this procedure, the decision does in fact achieve a balance between maintaining free competition on the one hand and the requirement of safeguarding the proprietor’s intellectual property rights on the other. This guiding principle was also expressed in the CJEU’s final conclusion. The court held that the SEP proprietor is free to bring an action for infringement seeking (only) the rendering of accounts in relation to or damages with respect to past acts of use. Both claims, as they relate to facts already concluded in the past, do not have a direct impact on products appearing or remaining on the market, either currently or in future. Therefore, the SEP proprietor is not abusing his dominant position in seeking compensation for past acts of use. From a strategic perspective, SEP proprietors may take advantage of this distinction by bringing an action for damages in court immediately, while at the same time making an offer under the procedure set out by the CJEU. If the negotiations fail, the suit can be extended by bringing an injunction claim.
The CJEU decision deviates considerably from recent German case law as well as from the position of the European Commission. It is therefore left to the national courts to adapt their views in order to harmonize European case law on the basis of the CJEU’s guidance.
All that being said, there is still considerable room left for interpretation, as the CJEU did not answer all the questions arising in this context. First of all, the CJEU did not decide whether an SEP proprietor always has a dominant position according to antitrust law solely due to having a patent claimed as essential to a certain industry standard. Further, the CJEU did not give any indications as to when specifically an alleged infringer demonstrates or has demonstrated “willingness” to conclude a license agreement. This question was already left open by the two recent European Commission decisions. Finally, the CJEU also did not outline the requirements for a “diligent” response from the alleged infringer to the SEP proprietor’s offer. Thus it is now left to the national courts to develop guidelines whereon this “willingness” and the diligent response can be determined.
Nevertheless, the CJEU’s decision does constitute a crucial milestone on the path to achieving a uniform European case law on this issue and providing much needed legal certainty at this commercially highly relevant intersection of patent and antitrust laws.