In our May edition we reported a decision by the Federal Court of Justice (KZB 36/17 of May 5, 2020) on the application of the criteria established by the European Court of Justice in its decision C 170/13 - Huawei vs. ZTE, which is likely to set the standards for granting injunctions to owners of standard essential patents in Germany in the coming years. At the time of our report, the reasons of the decision were not yet available. Meanwhile, the court has handed down its decision in writing, which provides more insights into the thinking of the court and the rationale of its decision, as well as subsequent case law by the lower courts.
Federal Court of Justice redefines requirements for injunction in SEP litigation
The question under which conditions the owner of a standard essential patent (SEP) is entitled to an injunction if this owner has made a declaration of its readiness to license the patent at fair, reasonable and non-discriminatory conditions (so-called FRAND declaration) is still an ongoing issue before the courts and far from being settled. In its decision C 170/13 - Huawei vs. ZTE of July 16, 2015, the European Court of Justice (ECJ) held that the owner of a standard essential patent does not abuse its dominant position in the sense of Art. 102 TFEU if there was a clear notification of the infringement issue by the patent owner and, after the alleged infringer had expressed its willingness to conclude a license agreement at FRAND conditions, the patentee made a licensing offer which meets the FRAND criteria, to which the alleged infringer did not respond in a diligent manner. The subsequent case law of the lower courts in Germany dealt with the question how the criteria established by the European Court of Justice are to be applied and in which order and whether certain criteria are to be given priority over others. In its decision 15 U 66/15 (Sisvel vs. Haier) of March 30, 2017, the Court of Appeal Düsseldorf established a fairly low standard both for the notice of infringement by the plaintiff and the declaration of willingness by the alleged infringer. It rather put the focus of its decision on the licensing offer by the SEP owner and established as a precondition for an injunction that there be a positive finding that the licensing offer of the patentee indeed meets the FRAND criteria. Reasoning that the potential licensee usually does not have detailed knowledge about the licensing practice of the patentee, it considered the patentee obliged to provide information about which companies with which share of the relevant market had taken a license at which conditions. Based on the information provided by the patentee on existing license agreements the court found that in the decided case the licensing offer did not meet the FRAND criteria and therefore rejected the request for an injunction as well the request for recall and destruction.
The Federal Court of Justice, which so far had not rendered a decision on the issue of standard essential patents following the decision C 170/13 – Huawei ./. ZTE of the ECJ, set the decision by the Court of Appeal aside by its decision KZR 36/17 of May 5, 2020. It found that the defendant did not have a claim to a license, because, according to the opinion of the court, it did not declare its serious and unconditional willingness to take a license under FRAND conditions. This being the case, it did not matter for the court whether the license offered by the plaintiff indeed met the FRAND criteria.
The Federal Court of Justice initially confirmed the finding of the Court of Appeal that the plaintiff had sufficiently clearly notified the defendant of the alleged infringement. It held it sufficient that the notice of infringement enables the alleged infringer to assess the merits of the allegation of infringement under technical and legal aspects. To this end, the defendant has to be notified of the patent that is allegedly infringed, of the allegedly infringing product or process and of the way in which the patent is allegedly infringed. Claim charts will usually be sufficient, but are not mandatory. The court also held that it was sufficient that the notice of infringement was sent to the parent company of the defendant. The alleged infringer, once having been made aware of a possible infringement, is obliged, according to the court, to clarify the matter and to obtain further information from the patentee in case the notice of infringement is not sufficiently detailed.
The Federal Court of Justice furthermore confirmed that it is not objectionable if the patentee only offers a worldwide license, provided that the defendant will not come under an obligation to pay a royalty for the use of patents which are not essential to the standard or in countries where there is no patent protection.
As to the main findings of the decision, the Federal Court of Justice considered the defendant not to be willing to take a license already because, in the view of the court, one has to assume a lack of willingness to take a license under FRAND conditions, if an alleged infringer does not respond to the notice of infringement for several months. In the decided case, the defendant had only declared its readiness for licensing negotiations more than a year after the notice of infringement.
The Court of Appeal, having seen this point, had held that the defendant could still make up for this deficiency by a later declaration of willingness prior to the complaint to the court. The Federal Court of Justice left this issue undecided, reasoning that none of the consequent declarations rendered by the defendant showed a serious and unconditional willingness to take a FRAND license. In particular, the court did not consider it sufficient that in a first declaration the defendant had uttered the hope of formal licensing negotiations and enquired the specific licensing conditions and possible rebates on the royalties, even in view of the fact that the plaintiff had forwarded further details regarding a possible license on the same day and a personal meeting took place two months later in which the plaintiff provided a specific licensing offer and the defendant promised to provide details on its sales and to make a proposal of its own. The court reasoned that from the objectified view of the plaintiff as the recipient of the declaration by the defendant it was not unambiguously clear that the defendant was prepared to conclude a licensing agreement under FRAND conditions. Further declarations by the defendant were discarded on the grounds that they contained a condition (conclusion of the licensing agreement only after a finding of infringement by the courts) that was deemed to be inadmissible and that a later declaration in which the defendant maintained that it was willing to take a license under FRAND conditions and that its own offer was FRAND compliant could only be considered as maintaining the aforementioned inadmissible condition of a court decision prior to the conclusion of a licensing agreement.
For the decided case, the Federal Court of Justice did not see any obligation of the patentee to indicate how the requested royalties are to be calculated. According to the court, such an obligation only arises when the alleged infringer has declared its unconditional willingness to take a FRAND license. Providing details on how the royalties are to be calculated was one of the criteria of the ECJ for a proper licensing offer by the patentee. It can therefore be assumed that the Federal Court of Justice generally does not recognize any obligation of the patentee to make a specific licensing offer of any kind as long as the unconditional willingness to take a FRAND license has not been declared by the defendant.
Accordingly, it did not matter for the Federal Court of Justice whether the conditions offered by the plaintiff were discriminating. The court nevertheless answered this question in the negative in an obiter dictum. The court in particular reasoned that the fact that a competitor of the defendant had received considerably more favorable licensing conditions could have a justification in that a government agency had exerted pressure on the patentee to privilege this competitor.
In its decision, the Federal Court of Justice also decided that the claim for damages of the owner of an SEP patent is not limited to a reasonable royalty, even if it has abused its dominant position by requesting an injunction. The ECJ had already held that a claim for damages is generally not an abuse of a dominant position in the market. The Federal Court of Justice concluded that this implies that a patentee is generally not limited to a specific way of calculating damages.
Generally, an infringer can counter a claim for damages of the patentee by a claim for damages of its own, which is directed to the unfulfilled claim to a licensing contract at reasonable and non-discriminatory conditions. According to the court, this counterclaim however only arises if in spite of the unconditional willingness of the defendant to take a license under FRAND conditions, the patentee refuses to grant a license or makes an offer that does not meet the FRAND criteria.
According to the decision now rendered by the Federal Court of Justice, it is the alleged infringer that is obliged in the first place to take care that a license comes about. The patentee (only) abuses its dominant position if it obstructs the efforts of the alleged infringer to obtain a license or if it does not undertake sufficient efforts to provide a willing licensee with a license. This consideration is at the bottom of the interpretation of the decision C 170/13 - Huawei vs. ZTE by the Federal Court of Justice. According to the Federal Court of Justice the notice of infringement required by the ECJ is to provide the user of the patented subject matter with an opportunity to seek a license and thus to avert an injunction. Similarly, the licensing offer to which the patentee is obliged, albeit only in the second place, is to enable a willing licensee to assess whether the licensing conditions offered by the patentee constitute an abuse of a dominant position. Otherwise, the court did not recognize any obligation of the patentee to undertake efforts towards a license under FRAND conditions. As the Federal Court of Justice put it, even a patentee with a dominant market position does not have to force a license on people.
The present decision complements the earlier decision by the Federal Court of Justice KZR 39/06 - Orange Book Standard of 2009 and simultaneously brings this decision in line with the decision C 170/13 - Huawei vs. ZTE by the ECJ. In its earlier decision, the Federal Court of Justice had held that the patentee only abuses its dominant position if the defendant made an unconditional and binding offer which the patentee cannot refuse without violating the prohibition of discriminating or obstructing practices. In the present decision, the Federal Court of Justice once more confirmed this requirement as to its principles, but added the finding that a patentee not only abuses its dominant position if it refuses to conclude a licensing agreement under FRAND conditions offered by the alleged infringer, but also where the alleged infringer has declared its willingness to take a FRAND license without having made a specific offer and the patentee does not undertake sufficient efforts to enable the alleged infringer to conclude a licensing agreement.
In contrast, the ECJ based its decision C 170/13 - Huawei vs. ZTE on the notion of an obligation of the patentee to grant licenses under FRAND conditions if it has rendered a FRAND declaration. The ECJ reasoned that a FRAND declaration establishes legitimate expectations of third parties that the patentee will indeed grant licenses under FRAND conditions. Following this line of thought, a refusal of a patentee to grant a license under FRAND conditions can, in principle, constitute an abuse in the sense of Art. 120 TFEU. In order for a request for an injunction, recall or destruction not to be found an abuse, the patentee has to meet certain conditions as established by the ECJ so as to ensure a reasonable balance between the interests of the parties.
This difference in the basic approach leads to different results if both parties did not meet their obligations according to the decision by the ECJ, e.g. if all licensing offers of the patentee did not meet the FRAND criteria and the alleged infringer is playing for time. If one sees the primary obligation to enable a license with the patentee, one will find an abuse of a dominant position, because there was not just a single and isolated offer that did not meet the FRAND criteria, but the entire conduct of the patentee has shown that it does not seriously intend to grant a license under FRAND conditions. If, on the other hand, one sees the primary obligation with the alleged infringer, one will come to the conclusion that the conduct of the patentee does not matter, as did the Federal Court of Justice. Considering this latent inconsistency, it would be desirable if by way of a further referral the ECJ were provided an opportunity to further explain and detail the concepts of the decision C 170/13 - Huawei vs. ZTE.
In its decision the Federal Court of Justice expressly did not decide whether a declaration of willingness to take a license could still avert an injunction after the expiry of the time period during which, according to the court, a willing licensee has to react to a notice of infringement. Reportedly, it became apparent in oral proceedings before the Federal Court of Justice that the court is inclined to consider such a declaration as sufficient to assume a basic willingness to take a license if it is rendered before the complaint is raised with the court. This is, however, only likely to apply to the extent to which the defendant consequently confirms its unconditional intention to take a license under FRAND conditions in word and deed and this unconditional intention cannot be reasonably doubted from the objectified point of view of the patentee.
It is apparent that in the present case the Federal Court of Justice assumed a so-called patent holdout where the defendant had delayed the negotiations to the utmost extent, and indeed the patent had already expired at the time of the decision of the Court of Appeal. To a certain extent, this explains the high requirements on the willingness to license. The Federal Court of Justice requires that from the objectified point of view of the plaintiff the unconditional willingness of the alleged infringer to take a license under FRAND conditions has to be clearly and unambiguously apparent. It is to be expected that this criterion will be used in the case law of the lower courts also in cases where the intention of the defendant to delay the process is less clear or not clear at all. Whereas in the case law of the lower courts the standards applied to a declaration of willingness to take a license were so far equally low as those for the notice of infringement - the Court of Appeal considered a plain and simple declaration to this effect or even only activities consistent with such willingness sufficient - the present decision opens up new ways for the plaintiff to avoid the claim to a license of the defendant by questioning the general willingness of the defendant to take a license. As the point of view of the patentee is decisive, a willingness to take a license will probably only be assumed if the patentee is unable to raise any doubts in this regard.
Subsequent case law
In fact, as of now this is already more than just an anticipation. On August 18, 2020, the District Court Mannheim handed down a subsequent decision (2 O 34/19 – Nokia vs. Daimler) which explicitly referred to the decision KZB 36/17 by the Federal Court of Justice. The court held, based on the principles outlined in the decision by the Federal Court of Justice, that although the parties had been in FRAND license negotiations, the defendant was nevertheless not a willing licensee and for this reason the plaintiff was entitled to an injunction.
A special feature of this case was that the defendant had requested that the license be granted to its suppliers in the first place, in line with common practice in the automotive industry. The parties further disagreed about the basis for the calculation of the license fee. The plaintiff essentially argued that the basis of the calculation should be the end product, i.e. a car, and the licensing fee should be determined on the basis of the additional price customers are willing to pay for connectivity of their car. The defendant essentially argued that the basis for the calculation of the license fee should be the purchase price of the components implementing the technology of the patent. The court held that the request of the defendant to license the suppliers already showed a lack of willingness to take a license under FRAND conditions itself. Agreeing with the plaintiff that the end product should be the basis for the calculation of the licensing fee, the court furthermore held the approach of the defendant to be a priori non-compliant with FRAND. This perceived lack of compliance of the defendant’s approach with FRAND was decisive for the court to find the defendant an unwilling licensee. The court held in this regard that it would have been up to the defendant to demonstrate that the result of its approach could result in a licensing fee that was compliant with what the court perceived as FRAND. The court discarded the consideration that suppliers of the defendant are entitled to a FRAND license, which would result in the components purchased by the defendant to be non-infringing, already on the grounds that the suppliers also based their licensing offers on the price of the components sold to their customers and hence are not willing licensees either. It explicitly left the question undecided whether a claim to a license by suppliers could be invoked by their customers with regard to products supplied to them. The court also rejected the consideration that the alleged additional price customers are willing to pay for connectivity resulted from innovations of the defendant at least to a certain extent. In an obiter dictum, it furthermore held that an initial response to a notice of infringement to the effect that prior to a license it needs to be established whether the asserted patents are actually used by the objected products can be considered as a sign of not being willing to take a license.
In its decision, the District Court Mannheim went beyond the considerations of the Federal Court of Justice. The Federal Court of Justice assumed a lack of willingness of the defendant primarily because of the delay in responding to the notice of infringement and considered later declarations as not sufficient because they were perceived to be tied to the inadmissible condition of a court decision on infringement prior to the conclusion of a licensing agreement. The district court already considered the different approach to the calculation of the licensing fee applied by the defendant as an indication of not being willing to agree to FRAND conditions.
One may conclude from this decision that in the future case law of the lower courts, a defendant may be found not to be a willing licensee not only if its declaration of willingness to take a license under FRAND conditions leaves room for doubt, but also if its licensing offer, made in response to a licensing offer of the patentee, does not a priori appear to be FRAND compliant. In other terms, the offer by the patentee may not be assessed for compliance with the FRAND criteria if a subsequent counter-offer by the defendant is held not to be FRAND compliant. Furthermore, in case of a dispute, the defendant may have to establish to the satisfaction of the court that its offer is FRAND compliant, regardless of whether the offer by the plaintiff meets the FRAND criteria. One may also expect that doubts regarding validity or infringement will be interpreted as an indication of not being willing to take a license. In many regards, this means a return to the principles of the earlier decision KZR 39/06 - Orange Book Standard by the Federal Court of Justice, according to which the defendant had to make a FRAND offer and establish that its offer was indeed FRAND compliant.
Users of a standard essential patent will therefore be well advised to declare their willingness to take a license at FRAND conditions immediately, explicitly and expressly and, if the situation requires, even prior to an internal assessment whether the patent is indeed infringed and valid. According to the decision C 170/13 - Huawei vs. ZTE, which was confirmed by the Federal Court of Justice in this point, an alleged infringer is not prohibited to have a court decide on the question of infringement and/or validity of the patent later on, as long as it has unconditionally declared its willingness to take a license under FRAND conditions and this is not a precondition for a license. If, however, the assessment of the alleged infringement or of the validity of the asserted patent takes too much time, the alleged infringer will run the risk that a later declaration of willingness will be precluded. Worse, if it makes a court decision on infringement and/or on validity a condition for concluding a licensing agreement, and be it only because it is convinced that the allegation of infringement is not justified or the patent is invalid, this will almost certainly be construed as unwillingness to take a license and void its claim to a license.
The Federal Court of Justice did not decide the question whether the counter offer of the defendant in the decided case indeed matched the FRAND criteria and thus also left the question undecided what will happen if both the plaintiff and the defendant make a FRAND offer. There are good reasons to assume that in this case the offer of the plaintiff is decisive. But even if the defendant does not consider the offer of the plaintiff to be compliant with FRAND, it will be well advised not to insist on its own offer. Leaving aside the fact that ultimately the compliance of the patentee’s offer with FRAND will be decided by the infringement court, which may have different views about FRAND conditions, the alleged infringer will run the risk that its willingness to take a license will be doubted, and accordingly the offer of the plaintiff will not be assessed as to whether it actually meets the FRAND criteria. Rather, an injunction will be granted.
The present decision puts the patentee in a clearly better position both in licensing negotiations and in court proceedings, because the defendant runs a higher risk that its declarations and its conduct in licensing negotiations will be construed as a lack of willingness to take a license, which in turn will preclude a claim to a license. A tough stance in negotiations may already be sufficient to trigger this effect. Both declarations and the conduct in negotiations should therefore be assessed by an attorney as to potential consequences in litigation so as not to open up additional lines of attack for the patentee. One may doubt whether this is a wholesome development. It is certainly not needed to prevent a patent holdout, which a patentee can always stop by starting litigation before the courts.