THE CASE:  Huawei Technologies Co. Ltd v ZTE Corp; ZTE Deutschland GmbH Court of Justice of the European Union 20 November 2014

Advocate General Wathelet has advised the CJEU on the application of competition law to the seeking of injunctions for FRAND-encumbered patents. Pat Treacy and David George report on the detail of the case.

Abstract:  The Huawei v ZTE preliminary reference to the CJEU concerns the question of when, if at all, competition law should constrain the enforcement of standard-essential patents (SEPs) which are subject to declarations to grant licences on Fair Reasonable And Non Discriminatory (FRAND) terms.  The reference concerned the rules on abuse of dominant position under Article 102 TFEU and, in particular, the circumstances under which seeking injunctive relief might breach these rules.

Background

In many high technology industries, including mobile telephony, industry participants work together via standard setting organisations to develop standardised technology to ensure, inter alia, compatibility between devices which implement the relevant standard.  Where technology contributed to a standard is patent protected, the technology may be 'essential' to the standard if it is not possible to implement the standard without infringing the relevant patent.

During the standard setting process, patent holders are asked to give declarations to license their patented technology on Fair, Reasonable And Non-Discriminatory (FRAND) terms in the event that their technology is selected for incorporation in the standard.  Procedures exist to seek alternative technologies if a patent holder is unwilling to give a FRAND licensing declaration.  Thus, standard-essential patents (SEPs) are often subject to FRAND declarations.   

Disputes may arise if a SEP-holder and a manufacturer of devices implementing the standard cannot agree upon licence terms for the relevant technology.  The SEP-holder may consider that it has proposed FRAND terms which the implementer has refused to accept and vice versa. If the negotiations are without success the SEP-holder may wish to rely on its SEP to obtain injunctive relief preventing the implementer from implementing (infringing) its technology without licence. Given the essential character of the technology protected by the SEP, an injunction could potentially totally exclude the implementer from the market.  The implementer may allege that the conduct of the SEP holder in seeking an injunction and using the prospect of market exclusion to extract terms which may be non-FRAND constitutes an abuse of dominant position contrary to Article 102 TFEU.

The dispute

The proceedings leading to the CJEU proceedings began in April 2011. Huawei sued ZTE before the German Regional Court in Düsseldorf (Landgericht Düsseldorf) on a patent relating to base stations implementing the LTE (Long Term Evolution) mobile telephony standard, a fourth generation (4G) technology developed through the European Telecommunications Standards Institute (ETSI). 

Huawei declared the patent essential to the LTE standard and gave a FRAND declaration.  Between November 2010 and March 2011 Huawei and ZTE engaged in negotiations relating, among others, to the patent.  Huawei named a royalty which it considered to be reasonable.  ZTE sought a cross-licence arrangement.  In January 2013, ZTE proposed a cross-licence arrangement under which it would pay a royalty of €50 to Huawei.  ZTE did not pay this sum to Huawei nor did it deposit the sum into the German court.

In the infringement proceedings Huawei sought an injunction, the rendering of accounts, the recall of products and the assessment of damages.  ZTE contested infringement.  The German court established that the patent was essential to the LTE standard and was infringed by ZTE. 

By way of defence to injunction, ZTE alleged that Huawei had abused a dominant position contrary to Article 102 TFEU by seeking injunctive and other relief in respect of a FRAND-encumbered SEP. 

The German court ruled, applying the case law of the German Federal Supreme Court (Bundesgerichtshof), known as the Orange Book Standard,that ZTE had failed to establish that  defence.  Under the Orange Book Standard, an alleged infringer must (in summary): (a) make an unconditional offer to conclude a licence; (b) and, if implementing the patent, meet the obligations incumbent upon it under the offer, in particular by rendering accounts of use and by paying the patentee (or depositing into court) the relevant royalty.  ZTE had failed to comply with either condition.

The German court observed that a European Commission (Commission) press release concerning its (then live) investigation into Samsung Electronics2 stated that the Commission had reached the preliminary view that bringing an action for an injunction was unlawful under Article 102 TFEU, where the case concerned an SEP; the SEP-holder had given a FRAND declaration; and the alleged infringer was willing to negotiate such a licence.  The German court concluded that, if the approach set out in the Commission’s press release were correct, the action for an injunction would have to be dismissed as an abuse.

Given the apparent conflict between the Orange Book Standard case and the Commission approach, the German court stayed the proceedings and asked the CJEU for guidance on the correct approach. 

The opinion

Advocate General Wathelet (the AG) observed that the CJEU needed to determine, in the light of competition law, the framework within which the licensing of a SEP on FRAND terms is to be negotiated.  Tte he AG distinguished the Orange Book Standard because that case concerned a de facto standard where the SEP-holder had not given a FRAND declaration. Applying Orange Book Standard to an SEP-holder who had given a FRAND declaration would result in the over-protection of the SEP-holder’s interests.  On the other hand, following the line apparently contemplated in the Commission press release which might prevent a SEP-holder from seeking an injunction where the infringer had simply expressed a vague and non-binding ‘willingness to negotiation’, would result in the under-protection of the SEP-holder’s interests.  The AG therefore sought to identify a middle path.

The AG observed that the CJEU should strike a balance between the SEP-holder’s right to intellectual property and his right of access to the courts on the one hand and the implementer’s freedom to conduct business and undistorted competition on the other.  The AG remarked that Huawei did not waive its right to seek an injunction through its FRAND declaration and that seeking an injunction cannot in itself constitute an abuse of dominance.  However, he also noted that the right to intellectual property is not absolute and must be reconciled with the rules on competition.  Huawei had accepted that a royalty on FRAND terms was sufficient compensation for use of its technology and the AG likened its commitment to grant licences on FRAND to a ‘licence of right’.  Nonetheless, access to the courts could be circumscribed only in exceptional circumstances.

The opinion states that the CJEU’s previous case law on refusal to licence intellectual property is only partially applicable where a FRAND declaration has been given.3  Huawei’s notification of the patent to ETSI and FRAND declaration had had an impact on the content of the LTE standard itself.  This created a relationship of technological, and therefore economic, dependence between the SEP-holder (Huawei) and implementers of the LTE standard.  He considered that the CJEU’s case law holds that the exploitation of such dependence by a dominant undertaking using methods different to those governing normal competition is abusive under Article 102 TFEU.  Further, it is an abuse for a SEP-holder to exploit economic dependence by “acting at variance with its commitment to grant licences on FRAND terms, towards an infringer which has shown itself to be objectively ready, willing and able to conclude such a licensing agreement” (emphasis added) by seeking an injunction in such circumstances.4  In consequence the AG felt that it is only possible to establish an abuse of dominance after examining the conduct of both the SEP-holder and the implementer.

The AG suggested “guidelines” to assist the German court in applying Article 102 TFEU.  The SEP-holder should: (1) alert the implementer in writing, with reasons, specifying the alleged infringement of the relevant SEP before commencing proceedings; and (2) present the implementer with a written licence offer on FRAND terms, specifying all relevant terms including the royalty.  In return, the implementer “must respond in a diligent and serious manner” to the offer and, if it disagrees with the offer, must “promptly” submit a reasonable counter-offer.  Conduct which was “purely tactical and/or dilatory and/or not serious” would be insufficient5.  As usual in a reference procedure, it was for the German court to assess whether the conduct of Huawei and ZTE complied with these guidelines.

Importantly, the AG suggested that an implementer’s conduct could not be considered dilatory if it asks for court or arbitral determination of FRAND terms, rather than concluding negotiations.  However, in that event, it is appropriate for the SEP-holder to seek a bank guarantee for the payment of royalties or to request that the implementer deposit a provisional sum into court.  The implementer must also be free to reserve the right, after conclusion of a licence, to challenge the validity and infringement of the SEP6.

Finally, the AG opined that the above opinion should apply mutatis mutandis to the other forms of relief similar to injunctive relief.  However, Article 102 TFEU did not preclude a SEP-holder seeking the rendering of accounts nor damages for past infringement of a SEP.

Comment

Following the reference by the German court, but before the opinion was handed down, the Commission concluded its Samsung investigation, accepting formal commitments; it also concluded its Motorola investigation via an infringement decision7. The opinion is broadly in line with these two decisions, but arguably places greater weight on the conduct of implementers.  It also suggests: that a SEP-holder may request payment of a guarantee; and that infringement/validity proceedings should not delay licence setting proceedings.  The opinion leaves certain practical issues unanswered. For example, whether or how a party can ‘remedy’ past non-FRAND behaviour.  It also lacks substance on key questions such as the nature of the counteroffer to be made by the implementer, and what delay may be acceptable in negotiations, leaving this to the national court reviewing the facts. The CJEU is also yet to rule on the substance of the FRAND commitment, but overall the opinion begins to clarify at least some ‘procedural’ aspects of FRAND negotiations. The CJEU’s reaction will be interesting.

This article was first published in Intellectual Property Magazine, February 2015.