Following the decision by the German Federal Court of Justice KZR 36/17 – „FRAND-Einwand” (“FRAND Defense”), one did not have to wait long for new developments. The principles of this decision had been controversially discussed by lawyers and judges alike and it did not come as a surprise when the District Court of Düsseldorf handed down a further referral decision to the Court of Justice of the European Union (CJEU), seeking clarification regarding the criteria for the defendant’s willingness to license. The court also referred to the CJEU the much-debated question CJEUas to whether the producer of an end product can, as a defendant in patent litigation, raise an objection of abusive conduct by the owner of a standard-essential patent if a license on FRAND terms to its suppliers had been requested, but was refused. The decision of the CJEU will have a significant impact on licensing practices not only in the automotive industry, but also in fields like the Internet of Things or autonomous systems.
The FRAND Saga Continues: A Further Referral to the European Court of Justice
The decision KZR 36/17 - “FRAND Defense” of May 5, 2020 (see B&B Bulletin of November 30, 2020) was the second basic decision on standard-essential patents rendered by the German Federal Court of Justice (FCJ). Now the CJEU has got involved again. In the decision 4c O 17/19 of November 26, 2020, the District Court of Düsseldorf referred the question to the CJEU as to whether a company at a downstream production level can rely on a claim of one of its suppliers, under competition law, to a license on FRAND terms as a defense in infringement proceedings. At the same time, it referred further questions to the CJEU seeking a review of principles established by the Federal Court of Justice in its decision KR 36/17. Whereas a referral to the CJEU by a district court is unusual, this decision was not unexpected, considering that even parts of the judiciary had called for a timely resolution of the question of whether the decision of the Federal Court of Justice can be reconciled with the principles of the decision of the CJEU in C 170/13 - Huawei v ZTE of July 16, 2015.
The proceedings before the District Court of Dusseldorf concerned a patent that was essential for the LTE mobile communications standard, which is administered by the European Telecommunications Standards Institute (ETSI). The applicant of the patent had made a so-called FRAND declaration to ETSI, in which it undertook to grant licenses on FRAND (Fair, Reasonable And Non-Discriminatory) terms. A special feature of the case was that the defendant, a German car manufacturer, claimed that its suppliers were entitled to a license which had been denied to them, contrary to the provisions of European competition law. According to the defendant, the granting of such a license would have led to an exhaustion of the rights from the patent with regard to the products supplied to it. Accordingly, as argued by the defendant, seeking an injunction against it constituted an abuse of a dominant position.
The plaintiff had indeed not offered an individual, comprehensive license to the tier 1 suppliers, i.e. those suppliers that deliver directly to the car manufacturer (OEM), but had only offered a license model according to which the OEM is granted a license with the right to have the licensed products manufactured by third parties, to be paid for by the supplier, and according to which the supplier is only granted a limited license of its own, essentially restricted to research and development. The majority of the tier 2 suppliers did not receive a license offer at all. The plaintiff took the position that it was free to license at any level of the production and supply chain, and even considering its dominant position in the market, it was not under an obligation to grant a comprehensive license to suppliers, provided the various tiers in the supply chain were given access to the standardized technology. It furthermore argued that licensing at an upstream production level does not lead to exhaustion at a downstream production level.
The court referred the following questions to the CJEU on this issue:
(1) Can an enterprise that is at a downstream stage in the production process counter a complaint of patent infringement seeking an injunction with the accusation of an abuse of a dominant position within the meaning of Art. 102 TFEU, if the patent is essential for a standard issued by a standard setting organization (SEP), the patent owner has made an irrevocable commitment to this organization to grant a license on FRAND terms to any third party, the standard for which the patent is essential, or parts thereof, is already implemented in an intermediate product acquired by the defendant whose suppliers are willing to take a license, and the patent owner refused to grant an unrestricted license directly to those suppliers for all types of use relevant under patent law on FRAND terms for products implementing the standard?
(2) Does the prohibition of an abuse under competition law require that the supplier be granted an unrestricted license of its own for all types of use relevant under patent law at FRAND terms for products implementing the standard, in the sense that the final distributors (and the upstream purchasers, if applicable) do not require a further separate license of their own from the owner of the SEP in order to avoid patent infringement where the supplied product is used as intended?
(3) If the answer to question 1 is in the negative: Does Art. 102 TFEU impose specific qualitative, quantitative and/or other requirements on a standard-essential patent owner’s decision as to against which potential patent infringers, at different levels of the same production and commercialization chain, it will bring a claim for injunctive relief?
The court added supplementary questions to the first question regarding whether and to what extent it is relevant that, according to common practice in the industry sector concerned, the supplier undertakes to resolve IP issues by taking a license and whether there is an overriding obligation to license with regard to suppliers at each level of the supply chain or only with regard to the tier 1 suppliers.
The District Court of Düsseldorf took the view that the FRAND declaration implies an obligation to grant a license to the standardized technology to any interested party, and therefore also to any suppliers, to such an extent that it enables this party to unrestricted competition on all product markets on which it intends to be active, both at present and in the future. This goal could only be achieved by an independent unrestricted license, but not by means of a limited right derived from a car manufacturer. It acknowledged that an unrestricted license would not necessarily lead to exhaustion outside the European Union or in the case of method claims. Since, however, the purpose of a FRAND declaration is to enable everyone to participate in the commercialization of the standardized technology in the product market, at fair conditions and without any discrimination, in such cases the license on FRAND terms has to be without geographic limitations and, with regard to method claims, has to put the customers in a position to use the product for its intended purpose, thereby de facto providing for exhaustion.
According to the court, a right to a license at the component supplier level does not only correspond to the customary practices in the automotive sector, but is also adequate. It would need considerable efforts of a car manufacturer to determine infringement by e.g. a NAD (Network Access Device), even more by a chip required for a NAD. On the other hand, in order to create innovations independently of the OEMs, the suppliers invest considerable sums in research and development of their own and therefore need economic and legal freedom with regard to such investments.
According to the court, licensing at lower levels of the production chain would also not lead to a disadvantage for the patent owner, since the license fee is not determined by the profit of the respective licensee, but by the profit that is made at the end of the exploitation chain through the sale of an end product according to the patent. Other disadvantages related to licensing at supplier level , as were asserted by the plaintiff, could be addressed by adequate contractual provisions.
In the second set of referred questions, the court sought further clarification of the requirements set out in the decision C 170/13 - Huawei v ZTE of the CJEU. In this regard, the District Court of Düsseldorf submitted the following questions, which it complemented by additional questions related to specific scenarios:
(1) Notwithstanding the fact that the owner of the SEP and the user of the SEP have certain mutual obligations to act prior to the start of court proceedings (notice of infringement, request for a license, offer of a FRAND license, license offer to the supplier to be licensed with priority), is it possible to make up for obligations to act that were not met in the pre-trial phase during the course of court proceedings, so as to preserve the rights of the respective party?
(2) Can a serious request for a license by the patent user only be assumed if, based on a comprehensive assessment of all circumstances of the case, it is clearly and unambiguously apparent that the user of the SEP is willing and ready to conclude a licensing agreement on FRAND terms with the owner of the SEP, independently of what these FRAND terms (which, due to the absence of a license offer at this point in time, are as yet impossible to foresee) may look like?
The first question essentially relates to the issue of whether the declaration of the willingness to take a license by the alleged infringer and a licensing offer compliant with FRAND by the patentee can still be made after the complaint has been brought. The majority opinion at the time of the decision was that this was indeed possible, but this had not yet been finally decided. In its recently published decision KZR 35/17 - FRAND-Einwand II (“FRAND defense II”) of November 24, 2020, the Federal Court of Justice showed a tendency to affirm this as a rule. This question is therefore not likely to be overly controversial.
The second question, however, relates to the requirements regarding the request for a license and the conduct of the party seeking a license following the notice of infringement by the patentee. This means no less than a reassessment of the case law of the Federal Court of Justice on this point under the law of the European Community. In its decision KZR 36/17, the Federal Court of Justice had set very strict requirements in this regard, which essentially imply that from the objective perspective of the plaintiff the unconditional willingness of the alleged infringer to take a license on FRAND terms must be clearly and unambiguously discernable at every stage of the licensing process (cf. B&B Bulletin of November 30, 2020). In particular, the Federal Court of Justice found in this decision that the defendant was not willing to take a license even in view of concrete licensing negotiations between the parties. In contrast, the Düsseldorf courts take the view that the request for a license is not subject to any specific requirements, as long as the will to take a license is clearly apparent. According to the present decision by the District Court of Düsseldorf, one can only conclude a lack of willingness to take a license on FRAND terms if one must reasonably assume that in spite of verbal professions of willingness there is in fact, finally and without any prospect of change, only a willingness to take a license at specific terms that are not negotiable and that are evidently not FRAND. In this regard, the District Court of Düsseldorf distinguishes between the general willingness of the alleged infringer to take a FRAND license and its willingness to accept specific licensing terms that have turned out to be FRAND. According to the District Court of Düsseldorf, this latter, specific willingness will only be at issue after it has been found that the licensing offer of the patentee is FRAND.
These questions have to be considered in light of the fact that the decision KZR 36/17 - FRAND-defense received criticism from the judges of the Düsseldorf courts, especially with regard to the issue of whether this decision can be reconciled with decision C 170/13 - Huawei v ZTE of the CJEU. Referring these questions to the CJEU, the court sought a final clarification of this issue.
Whether the CJEU will address these questions will depend, among other things, on whether it sees a need, in view of decisions KZR 36/17 and KZR 35/17, to further elaborate on the criteria it has established, or whether it considers the questions referred to it as questions of the specific case, which are to be answered by the national courts. In its decision KZR 35/17, which was pronounced prior to the referral decision by the District Court of Düsseldorf, but rendered in written form only later, the Federal Court of Justice explained and set out in detail why its criteria are indeed compliant with decision C 170/13 - Huawei v ZTE, however without changing these criteria from those set out in its prior decision KZR 36/17. It is therefore possible that the CJEU will not take up the issue of the criteria for a willing licensee again, which would mean that the restrictive regime established by the Federal Court of Justice will remain in place for the foreseeable future.
A timely decision by the CJEU on both sets of questions would be beneficial for the further development of the case law. Regarding the first set of questions, it had already been decided in decision 2 O 34/19 of August 18, 2020 by the District Court of Mannheim and in decision 7 O 8818/19 of September 10, 2020 by the District Court of Munich I that a car manufacturer cannot rely on a claim of one of its suppliers to a license on FRAND terms as the basis for asserting an abuse according to Art. 102 TFEU. A decision by the CJEU would bring clarity and legal certainty to these and similar cases. The first set of questions is, however, not independent from the second set of questions. If the suppliers are not found to be willing to take a license according to the strict criteria established by the Federal Court of Justice in its decision KZR 35/17 - FRAND II, the question of whether the car manufacturer can rely on a claim to a license of its suppliers is irrelevant. The willingness to take a license may therefore prove to be the decisive issue. In its decision KZR 35/17, the Federal Court of Justice had once more comprehensively addressed this issue and rejected a request for referral to the CJEU on the grounds that the questions that were raised related to a balance of interests in the individual case, which falls within the jurisdiction of the national courts. As long as there is no clear indication from the CJEU that it considers this question to be of fundamental importance and that it will address this issue in its decision, the German courts are likely to adopt the assessment of the Federal Court of Justice and decide accordingly, unless they concur with the Düsseldorf courts’ line of reasoning. In order to avoid a fait accompli a decision by the CJEU sooner rather than later would be welcome. Defendants can, however, avoid the issue of their willingness to take a license by offering the patent owner the option of determining a reasonable license fee at its discretion, which is subject to review by a court. In a recent decision by the Karlsruhe Court of Appeal (decision 2 U 130/20 of February 12, 2021) it was confirmed that such an offer by the defendant establishes the unconditional willingness of the defendant to take a license at FRAND conditions and thereby meets the criteria established by the CJEU. As this decision was rendered in summary proceedings and the Court of Appeal left the question open as to whether a belated offer of this kind still establishes the willingness of the defendant to take a license at FRAND conditions, defendants will be well advised to make such an offer early.