The Court of Justice of the European Union (CJEU) has handed down its preliminary ruling on the long-running Huawei / ZTE patent dispute before a court in Germany. In the specific context of standard-essential patents (SEPs), where the patent holder has made a commitment to a standard-setting body (here in the telecoms industry) to grant licences on fair, reasonable and non-discriminatory (FRAND) terms, the CJEU has laid down a detailed set of criteria that must be satisfied before the SEP holder can be considered to be abusing a dominant position in violation of EU competition law rules by instituting infringement proceedings against the infringer.
These criteria must now be applied by the German court in determining the dispute between the two parties. Whilst they may be helpful to the German court, it is interesting the CJEU has been prepared to set down such detailed criteria in a ruling on the application of the EU prohibition on abuse of dominance. Arguably, general competition law prohibitions are not the appropriate legal framework within which to regulate the sort of very specific situation that has arisen in this case.
The dispute concerns Huawei’s European standard-essential patent (SEP), titled ‘Method and apparatus of establishing a synchronisation signal in a communication system’ (reference EP 2 090 050 B 1), which Huawei notified to the European Telecommunication Standards Institute (ETSI) as being essential to the ‘Long Term Evolution’ standard in March 2009.
Between November 2010 and the end of March 2011, Huawei and ZTE Corp., (ZTE) a close competitor of Huawei, were engaged in discussions concerning, inter alia, the infringement of that SEP patent and the possibility of concluding a licence on FRAND terms in relation to products ZTE was selling that were equipped with software linked to that standard.
According to the referring German court, Huawei had indicated the amount which it considered to be a reasonable royalty and ZTE had sought a cross-licensing agreement. However, no offer relating to a licensing agreement was finalised and ZTE continued to market the products without paying a royalty to Huawei.
In April 2011, Huawei brought an action for infringement against ZTE before the referring court, seeking an injunction prohibiting the infringement, the rendering of accounts, the recall of products and an award of damages.
The referring court considers that the decision on the substance in those proceedings turns on whether the action brought by Huawei constitutes an abuse of a dominant position, and therefore referred a series of questions to the CJEU for a preliminary ruling.
The judgment largely confirms the opinion of the Advocate General issued in November last year, and sets down a series of steps the holder of an SEP must take before resorting to injunctive proceedings for patent infringement. In the specific context of SEPs, where the patent holder has given a commitment to a standards-setting body to license essential patents on FRAND terms, the CJEU laid down the test to be applied as to whether such injunctive proceedings could properly be considered to amount to an abuse of a dominant market position by the patent holder, in violation of Article 102 of the Treaty on the Functioning of the EU (TFEU).
At paragraphs 61 to 69 of the judgment the CJEU sets out the specific ‘criteria’ both parties must be seen to have satisfied before any infringement proceedings could be considered to amount to an abuse.
These can be summarised as follows:
- Prior to such proceedings, the SEP holder must alert the alleged infringer of the infringement, identifying the SEP and specifying the way in which it has been infringed;
- After the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, it is for the SEP holder to present to that alleged infringer ‘a specific, written offer’ for a licence on FRAND terms, in accordance with the undertaking given to the standardisation body, specifying, in particular, the amount of the royalty and the way in which that royalty is to be calculated;
- By contrast, it is for the alleged infringer ‘diligently to respond to that offer, in accordance with recognised commercial practices in the field and in good faith, a point which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics’;
- Should the alleged infringer not accept the offer made to it, it may rely on the abusive nature of an action for a prohibitory injunction or for the recall of products only if it has submitted to the SEP holder, promptly and in writing, ‘a specific counter-offer that corresponds to FRAND terms’;
- Where the alleged infringer is using the SEP before a licensing agreement has been concluded, it is for that alleged infringer, from the point at which its counter-offer is rejected, to provide appropriate security, in accordance with recognised commercial practices in the field, for example by providing a bank guarantee or by placing the amounts necessary on deposit;
- Where no agreement is reached on the details of the FRAND terms following the counter-offer by the alleged infringer, the parties may, by common agreement, request that the amount of the royalty be determined by an independent third party;
- Lastly, having regard, first, to the fact that a standardisation body such as that which developed the standard at issue in the main proceedings does not check whether patents are valid or essential to the standard in which they are included during the standardisation procedure, and, secondly, to the right to effective judicial protection guaranteed by Article 47 of the Charter of Fundamental Rights of the European Union (the safeguard of a proprietor’s intellectual-property rights), an alleged infringer cannot be criticised either for challenging, in parallel to the negotiations relating to the grant of licences, the validity of those patents and/or the essential nature of those patents to the standard in which they are included and/or their actual use, or for reserving the right to do so in the future by decision without delay.
It is now for the referring court to determine whether the criteria are satisfied in the present case, in so far as they are relevant, in the circumstances, for the purpose of resolving the dispute in the main proceedings. Whilst the criteria do provide fairly clear, useful guidelines for how a SEP user and holder should behave, any finding of abuse of dominance will have to be very fact and circumstance specific.
There is also a potential concern as to the appropriateness of setting criteria of this nature, in the very specific context of SEPs, within the framework of Article 102 TFEU and the right of a SEP holder to seek injunctive relief for patent infringement. In the specific context of SEPs and other IP rights, where the holder of the right has committed to licensing third parties on FRAND terms, it would arguably be more appropriate for the behaviour of the parties to be regulated by a specific set of (ex ante) rules set by the standard setting body that provided a proper mechanism for determining whether any alleged refusal to licence on FRAND terms breaches the commitment made by the patent holder?
The full judgment can be read here.