Introduction

Standard-essential patents (SEPs) and antitrust are a high-risk poker game. For licensors, injunctive relief is essential to IP protection. Without recourse to injunctive relief for licensors, infringers can act with impunity and fight any damages claim, or its quantum, through the courts at their leisure. As an SEP holder will be de facto dominant (since the industry standard forces manufacturers to infringe), infringers can easily claim that it is abusing its dominant position by seeking injunctive relief. Since SEP holders make a fair, reasonable and non-discriminatory (FRAND) promise to secure the technology's position in the standard, damages make for an adequate remedy. The only discussion is about quantum; and to answer this question, an SEP holder does not need an injunction.

The legal response from courts and authorities has been contradictory. In Orange Book, the Dusseldorf District Court stated (in a non-SEP case) that abuse of dominance claims will defeat injunctive relief, but only under stringent conditions. To succeed, the alleged infringer must show(1) that it is a "willing licensee":

  • The licensee must unconditionally offer to enter into a licence agreement at a reasonable royalty rate.
  • The licensee must act as if it were already a licensee and start to make an account of royalties, paid securely into an escrow account to the benefit of the patent holder.

In its Motorola and Samsung decisions, the European Commission applied a more favourable test for 'willing licensees', allowing abuse of dominant claims by infringers of an SEP to succeed more easily. The commission(2) considered it abusive to seek an injunction in relation to SEPs where:

  • a FRAND commitment has been pledged; and
  • the potential licensee is a willing licensee.

A willing licensee must:

  • be willing to negotiate a FRAND licence within a 12-month period; and
  • demonstrate its willingness to agree to a third-party determination of FRAND terms by negotiation or, if that fails, by court or arbitration proceedings.(3)

Thus, under Motorola and Samsung – and unlike under Orange Book – the licensee is not required to unconditionally offer a reasonable royalty rate; it must merely be 'willing' to negotiate a FRAND licence.

The tension between the approach applied in Orange Book and the commission's Motorola andSamsung decisions prompted the Dusseldorf District Court to seek clarity from the European Court of Justice (ECJ) on the appropriate standard to be applied in the case before it (Huawei Technologies Co Ltd v ZTE Corp).

Facts

Huawei owns a European patent, which it notified to the European Telecommunications Standards Institute (ETSI) as a patent essential to the long-term evolution standard (a standard adopted as an access part of the evolved packet system, used for mobile broadband). Under ETSI rules, the owner of an IP right that is essential to a standard must give an irrevocable FRAND licensing undertaking.

Huawei and ZTE discussed a FRAND licence to cover ZTE's products using the standard. Huawei indicated a reasonable royalty amount, but made no offer of a licensing agreement. ZTE continued to market products using Huawei's SEP without paying royalties. Huawei sued ZTE before the Dusseldorf District Court, seeking:

  • injunctive relief;
  • the rendering of accounts;
  • the recall of products; and
  • an award of damages.

The German court sought guidance from the ECJ to reconcile Orange Book andSamsung/Motorola.

Decision

Analysis of prior case law

On the basis of the Orange Book judgment, the Dusseldorf District Court considered that it should uphold Huawei's action for injunction. ZTE's offer was not unconditional, as it was limited in scope and no escrow payments were made for the products that ZTE marketed.

However, ZTE was a willing licensee by the lower standard of Motorola and Samsung. On that basis, the district court considered that it should dismiss Huawei's request for an injunction as abuse.

In Motorola the commission noted the tension between Motorola and Orange Book, distinguishing Orange Book as follows:

"[t]he Orange Book judgment related to specifications that had become a de factostandard and not to specifications agreed under the auspices of a standard-setting organisation. Moreover, the holders of the patent rights over the de facto standard had not made any commitment to license their patent rights under FRAND terms and conditions."(4)

ECJ decision

The ECJ set out the circumstances in which an SEP holder will be held to abuse its dominant position when seeking an injunction.

The court found that where an SEP holder has committed to a standardisation body to grant a licence to third parties on FRAND terms, it does not abuse its dominant position by bringing an action for infringement as long as:

  • it has informed the alleged infringer of the infringement before bringing the action. The SEP holder must thereby designate the patent that is allegedly being infringed and specify the way in which it has been infringed; and
  • after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, the SEP holder must present a specific, written offer for a licence on such terms. When doing so, it must specify the royalty and the way in which it is to be calculated.

After the SEP holder has complied with all these conditions, the ball is in the alleged infringer's court. In this case, the ECJ required the alleged infringer to diligently respond to the offer made by the SEP holder "in accordance with recognised commercial practices in the field and in good faith".(5) The court added that this implied that there were no delaying tactics by the alleged infringer.

However, the ECJ did not imply that an alleged infringer is obliged to accept the SEP holder's offer. The ECJ considered that if the alleged infringer does not accept the offer, it can still claim that the SEP holder has abused its dominant position. In order for an alleged infringer to rely on such a claim, it must promptly submit a specific written counteroffer, corresponding to FRAND terms, to the SEP holder.

If the counteroffer is rejected, held the ECJ, the parties can, by common agreement, request an independent third party to calculate the royalty amount.

The ECJ referred to another obligation incumbent on the alleged infringer. If the alleged infringer was already using the SEP before the conclusion of a licensing agreement and the counteroffer is rejected, the alleged infringer must provide appropriate security in accordance with recognised commercial practices.

The ECJ gave some guidance as to what it considers to be 'appropriate security' – for example, providing a bank guarantee or placing the amounts necessary on deposit. As to the calculation of that security, the court considered that it must include, among other things, the number of past instances of use of the SEP, and the alleged infringer must be able to render an account relating to those instances of uses.

Finally, the ECJ gave some important guidance on the validity of no-challenge clauses. It considered that alleged infringers may not be prevented from challenging the validity of a patent or the essential nature of a patent, either in parallel to licensing negotiations or in the future. The ECJ's view on no-challenge clauses is in line with Motorola, in which the commission found it anti-competitive to require a willing licensee to waive the right to "challenge the validity, infringement and essentiality of the SEPs in question".(6) This is another difference betweenMotorola and Orange Book.

Comment

The ECJ laid down a licensee-friendly test. The only obligation incumbent on a licensee is to express its willingness to conclude a licensing agreement on FRAND terms. If it is then presented with a licensing offer, it is free to decline the SEP holder's offer and submit its own FRAND counteroffer. It also prohibits no-challenge clauses, allowing the licensee both to resist an injunction and to seek to invalidate the patent without risk of invalidating its licence.

The ECJ has been careful to articulate that these rules apply only to SEP holders. It pointed out that only in a standard-setting context will patent holders give FRAND promises to license technology. Holding a patent outside the standard-setting context does not give rise to the same obligation. But it may be questioned why the result is different from a situation such as Orange Book, where the patent holder had a dominant position, even though no standard setting process was involved. If the patent is still essential to compete in the market, why do similar obligations not apply? This will undoubtedly be left to future litigation and references to the ECJ.

For further information on this topic please contact Bill Batchelor or Hannelore Wiame at Baker & McKenzie by telephone (+32 2 639 36 11) or email (bill.batchelor@bakermckenzie.com or hannelore.wiame@bakermckenzie.com). The Baker & McKenzie website can be accessed at www.bakermckenzie.com.

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