Overview: The German case law on standard-essential patents after Huawei ./. ZTE
Standard-essential patents controlling the access to key technologies have been the subject of debate for several years. In the landmark decision Huawei vs. ZTE, the European Court of Justice (ECJ) established criteria regarding the enforcement of such standard-essential patents. In the case law of the lower German courts, it now becomes apparent how these criteria will be applied in practice.
Standards play a key role in modern technologies such as telecommunication, as they enable the widespread use of such technologies. Patents on mandatory parts of a standard, so-called standard-essential patents, are a double-edged issue. On the one hand, most key technologies are not possible without innovation and investment in research and development and thus inconceivable without patent protection. On the other hand, such patents can prevent the desired and intended widespread use of the technology and especially block the creation of new and innovative products using this technology.
It has not only been the German courts, but also courts worldwide which have been concerned with this conflict, in particular in the field of telecommunication. In terms of economy, users of the technology, being dependent on licences on standard-essential patents, have a weak bargaining position in licence negotiations, particularly if large portfolios are involved. If an agreement cannot be reached, they run the risk of patent enforcement and, consequently, of being excluded from the market before long. On the other hand, certain players in the market have developed a behaviour pattern of consistently ignoring patents, expecting that the patent proprietor cannot or will not enforce his rights, at least not in the short term. Legally speaking, this leads to the question as to when a patent proprietor abuses his market-dominant position by enforcing a standard-essential patent and when he is merely pursuing his legitimate interests.
Considering this situation, the European Court of Justice (ECJ) decided in its decision C-170 / 13 (European Court of Justice C-170 / 13 – Huawei Technologies Co. Ltd ./. ZTE Corp. et al., decision of July 16, 2015, OJ C. 302, 2, German version corrected with decision of December 15, 2015) that the proprietor of a patent essential to a standard established by a standardisation body, which has given an irrevocable undertaking to that body to grant a licence to third parties on fair, reasonable and non-discriminatory (‘FRAND’) terms, does not abuse its dominant position by bringing an action for infringement seeking an injunction prohibiting the infringement of its patent or seeking the recall of products,
- if, prior to bringing that action,
- it has, first, notified the alleged infringer of the infringement complained about by designating that patent and specifying the way in which it has been allegedly infringed,
- and, second, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, presented to that infringer a specific, written offer for a licence on such terms, specifying, in particular, the royalty and the way in which it is to be calculated, and
- where the alleged infringer continues to use the patent in question, the alleged infringer has not diligently responded to that offer, in accordance with recognised commercial practices in the field and in good faith, this being a matter which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics
Following the decision by the ECJ, the German lower courts have dealt several times with the question of how these criteria are to be applied, in particular in cases where a lawsuit was already pending before the decision by the ECJ was handed down. There appears to be widespread agreement that the ECJ decision is effective ex tunc and that the criteria of the ECJ are to be retroactively applied to those cases which were already pending at the time of the decision (Court of Appeal Karlsruhe 6 U 55 / 16, decision of May 31, 2016, No. 25, Court of Appeal Düsseldorf 15 U 66 / 15, decision of November 17, 2016, No. 4). This immediately raises the question of whether the notice of infringement, which was required by the ECJ, but not required under German case law so far can be considered to have already taken place by virtue of the complaint or whether this notice can still be made in a pending lawsuit. The 15th Civil Division of the Court of Appeal Düsseldorf and the 6th Civil Division of the Court of Appeal Karlsruhe are – with different reasons – of the preliminary opinion, that this should be possible. The Court of Appeal Düsseldorf holds that an omission of the obligations of the plaintiff cannot lead to a final loss of rights, and the words “prior to bringing the action” in the ECJ decision are not necessarily to be taken literally (Court of Appeal Düsseldorf 15 U 36 / 16, decision of May 9, 2016, No. 36 und 37, more decidedly in 15 U 66 / 15, decision of November 17, 2016, No. 9), whereas the Court of Appeal Karlsruhe distinguished between the questions of an abuse by bringing a lawsuit and of an abuse by continuing the lawsuit (Court of Appeal Karlsruhe 6 U 55 / 16, decision of May 31, 2016, No. 27). In contrast, the 7th Civil Division of the District Court Mannheim is of the opinion that the intention and the purpose of the ECJ decision is to make sure that the negotiations with a party willing to take a licence take place without the pressure of a pending lawsuit and, accordingly, the licence offer has to happen prior to taking the matter to court (Court of Appeal Mannheim 7 O 209 / 15, decision of July 1, 2016, No. 119, 7 O 19 / 16, decision of November 17, 2016, No. 86). In this context it should be noted that in the corrected German version of its decision the ECJ made it clear that both the notice of infringement and the licence offer by the plaintiff are to take place prior to bringing the action.
The question when an offer meets to the FRAND criteria and how this can be evaluated in civil proceedings has gained particular relevance. The Court of Appeal Düsseldorf already decided at the beginning of last year (Court of Appeal Düsseldorf 15 U 65 / 15, decision of January 13, 2016) that the obligations of the defendant set out in the ECJ decision only apply if the patent proprietor has previously fulfilled his obligations. Accordingly, it is irrelevant whether the offer of a defendant willing to take a licence meets the FRAND criteria, if it cannot be found that a licence at FRAND terms was offered by the patent proprietor. The Court of Appeal Karlsruhe essentially agreed (Court of Appeal Karlsruhe 6 U 55 / 16, decision of May 31, 2016) and in particular emphasised that the finding is not sufficient that the offer of the patent proprietor was not evidently contrary to FRAND (as was held in the first instance, see District Court Mannheim 7 O 96 / 14, decision of March 4, 2016). Accordingly, one may ask what the patent proprietor must submit in order to be on the safe side with regard to a possible allegation of abuse.
In a recent guidance order to the parties (Court of Appeal Düsseldorf 15 U 66 / 15 Sisvel vs. Haier, Guidance Order of November 17, 2016), the 15th Civil Division of the Court of Appeal Düsseldorf has put forward its preliminary viewpoint on this issue in detail.
It emphasises once more that the principles of the Huawei ./. ZTE decision only apply if the patent proprietor has a market-dominant position. This has to be proven by the defendant. The court also assumes that a FRAND declaration submitted to the standardization body will only be submitted in case of a market-dominant position and only applies in this case.
The court did not make high demands on the notice of infringement. It is sufficient if the patent number and the specific act the defendant is accused of are specified.
Similarly, in order to establish the willingness of the defendant to take a licence, it is sufficient if he declares that he wishes to take a licence at FRAND conditions. Much stricter requirements apply for a finding that the defendant in reality does not intend to take a license and only pro forma professes the contrary. The non-willingness to take a license can only be assumed, if one can conclude from the behaviour of the defendant to a serious and final refusal to take a licence.
In contrast, the court placed high demands on the offer to licence by the plaintiff and on the information he has to provide. In this regard, the court is of the opinion that it should not only be assessed whether the offer contains all the terms normally included in a licence in the sector in question and that the offer is evidently not contrary to FRAND. Rather, it has to be established to the satisfaction of the court that the licence offer indeed meets the FRAND criteria and, in particular, that the patent proprietor has offered the potential licensee a licence at conditions comparable to other licensees, or, in case of unequal treatment, that there are good reasons for such unequal treatment. The patent proprietor has to make concrete submissions on all factors which have an impact on the offered licence fee and based on which it can be assessed that the offer in question is neither discriminating nor exploitive.
To this end, according to the preliminary viewpoint of the court, details on the nature and scope of previous licensing activities must be submitted, if the defendant disputes in a substantiated manner that the conditions offered to him meet the FRAND criteria. Especially, in this case at least the significant existing licensees are to be named as well as the conditions which were agreed with them, possibly under an order of confidentiality of the court. If the offer is compared to other licence programmes, it must be explained that – and why – the portfolio of the patent proprietor / plaintiff is comparable to the portfolios of said other licence programmes both in terms of quality and scope.
When offering a portfolio licence, it has to be set out in detail that the patents of the portfolio are actually used by the defendant, e.g. by means of claim charts. If a list of representative patents (so-called proud list) is presented, it has to be clearly explained why these patents were selected. In case the IP portfolio in certain countries is different from that in others and a uniform licence fee is proposed for all countries, it must be submitted in a substantiated matter that such a provision is common in freely negotiated licencing agreements or is in line with the FRAND criteria for other reasons. A revision clause (which is open for both parties) needs to be included in the offered licensing agreement in order to account for any changes in the IP portfolio. Likewise, the court requires a revision clause preventing that the user of the patent(s) will be excessively burdened in case of further legitimate licence demands.
Generally, one has to bear in mind that the case law and the legal discussions on the implications of the Huawei ./. ZTE decision are still developing and no final conclusions have been reached. The aforementioned decisions of the Courts of Appeal Düsseldorf and Karlsruhe were made during the course of execution proceedings or by way of a guidance order and do not prejudice the respective final decisions. Subsequently to the above-mentioned guidance order the Court of Appeal Düsseldorf has meanwhile rendered a final decision denying an injunction to the plaintiff (Court of Appeal Düsseldorf 15 U 66 / 15 Sisvel vs. Haier, decision of March 30, 2017), the reasons of which are not yet public, but otherwise no final decisions by an appeal court have been reported. A decision of the German Federal Court of Justice (Bundesgerichtshof) is not to be expected for some years.
Nevertheless and with all due reservations, it would seem that a paradigm change is emerging. There seems to be widespread agreement that the ECJ decision has not only established a catalogue of formalities which, if applicable, have to be worked off in the infringement proceedings, but that the criteria established by the ECJ imply requirements as to the content both of the plaintiff’s licence offer and of the submissions in the infringement proceedings, which makes higher demands on the plaintiff and ultimately shifts the burden of proof compared to the status quo ante. Whereas it was previously up to the defendant to prove that the offer of the patent proprietor evidently does not meet the FRAND criteria, it is now, as a rule, up to the plaintiff to prove that his offer is neither exploitative nor discriminatory. In this regard the issue is not whether the licence fee which was requested by the patent proprietor is adequate from an economic point of view (The resolution of this issue by a court is regularly considered as problematic, see District Court Mannheim 7 O 66 / 15, decision of January 29, 2016, No. 55). Rather, the court will make a legal assessment of the offer by the plaintiff, especially under aspects of antitrust law, whether it can be considered fair and in particular non-discriminatory in view of the usual licencing practice within the field of business and the specific licencing practice of the patent proprietor.
If independent information on the usual conditions and conventions in the respective field is not available, the patentee / plaintiff has to make comprehensive submissions on existing licensing agreements and, in consequence, disclose his licencing policy. This is not necessarily in his interest and may also contravene contractual agreements. Thus, some patent proprietors may resort to other jurisdictions or to alternative dispute resolution. The order of confidentiality considered by the Court of Appeal Düsseldorf, in principle offers a framework, still to be worked out in detail by the courts (A concrete order was issued recently by the 2nd Civil Division of the Court of Appeal Düsseldorf, see Court of Appeal Düsseldorf 2 U 31 / 16, decision of January 17, 2017), for discussing confidential issues. It will, however, not be possible to keep information secret from the defendant which is relevant for the decision by the court. This is not only a direct consequence of the constitutional right to be heard. For reasons of fairness one has to grant the defendant the right to information which is not available to him and which allow him, independently of the assertions of the patent proprietor, to make his own assessment whether the offer of the plaintiff meets the FRAND criteria.
If it gets generally accepted that the court has to find that the plaintiff’s offer conforms with FRAND in order to grant an injunction or to order a recall of goods, which appears to be the current view of the Court of Appeal Düsseldorf, a further difficulty will arise for the plaintiff. Namely, he needs to explain to the court in a comprehensible way why his offer is fair and non-discriminatory. If he does not succeed in doing so, his claim to an injunction will be rejected. The fact that licensing agreements are frequently difficult to compare and such comparison may sometimes be impossible without involving an expert, works to his disadvantage. This can make the enforcement of the claim to an injunction more difficult and sometimes even impossible.
The trend of the German courts is currently going towards a more generous handling of the formal requirements, but also towards a thorough review of the substance of the case. This is to be welcomed in the interests of both sides. It, however, remains to be seen whether the far-reaching requirements which the Court of Appeal Düsseldorf has now established will be maintained in future decisions. In any case, however, patent proprietors pursuing a transparent licencing policy will be at an advantage, especially if their licensing policy can be explained in a consistent and coherent manner.