Huawei v. ZTE

The long-awaited ruling regarding the circumstances under which the owner of a standard-essential patent (SEP) encumbered by fair, reasonable and non-discriminatory (FRAND) terms may seek injunctive relief has been delivered by the Court of Justice of the European Union, in Huawei v. ZTE, Case No. 170/130 (CJEU). Although the judgment lays down the legal test applicable to injunctions involving standard-essential patents, and significantly clarifies the landscape that had previously been shaped by the European Commission, a number of issues remain unresolved.

Huawei Technologies entered into negotiations with ZTE Corporation over the possibility of concluding a FRAND license agreement regarding Huawei’s SEP that is essential to the 4G standard. Given that negotiations between the companies were unsuccessful, and because Huawei contends that ZTE continued to use its SEP without paying royalties, Huawei brought an infringement action against ZTE, seeking an injunction to stop the sale of certain ZTE products.

In adjudicating the matter, the Regional Court of Düsseldorf considered that the outcome of the litigation largely depended on whether or not the action brought by Huawei constituted an abuse of dominance under EU law. Given this consideration, and the uncertainty surrounding the topic of SEP injunctions, the court made a reference for a preliminary ruling to the CJEU. The court asked in what circumstances a dominant SEP holder who has committed to grant licenses to third parties on FRAND terms can seek an injunction to stop an infringement of that SEP, or to recall products manufactured using the SEP, is to be regarded as committing an abuse contrary to Article 102 of the Treaty on the Functioning of the European Union (TFEU).

The Test for SEP Injunctions

The CJEU decided that the following conditions must be satisfied before a dominant SEP licensor can validly bring an injunction against a party infringing an SEP, without acting contrary to Article 102 TFEU.

Prior to taking any action, a SEP holder that has given an irrevocable undertaking to a standard-setting body to grant a license to third parties on FRAND terms must alert the alleged infringer to the alleged infringement. This prior notice must designate the SEP in question and specify the way in which it has been infringed.

After the alleged infringer has been informed about the infringement, it must (somehow) express its willingness to conclude a licensing agreement on FRAND terms. Presumably, this willingness refers to the alleged infringer agreeing to receive a FRAND offer from the SEP holder.

The SEP holder must present to the alleged infringer a specific, written offer for a license on FRAND terms, in accordance with the undertaking given to the relevant standardization body. In particular, this written offer must specify the amount of the royalty and the way in which that royalty is to be calculated.

Response to FRAND Offer

The alleged infringer must respond to the FRAND offer, in accordance with recognized commercial practices in the field, and in good faith. The alleged infringer must not engage in any delaying tactics.

If the alleged infringer is deemed to be using delaying tactics once a FRAND offer has been presented by the SEP holder, e.g., if the alleged infringer causes any undue delays in the negotiations, this may point towards its “unwillingness” to license and prevent it from using Article 102 TFEU in a counterclaim against the SEP holder. The CJEU judgment also, however, states (albeit in rather loose terms) that the alleged infringer “cannot be criticized” for challenging the validity of the SEP and/or its essential nature.

If the alleged infringer wishes to submit a counter-offer, it must do so promptly and in writing, and in compliance with FRAND terms.

Security

According to the CJEU, if the alleged infringer has already been using the SEP without a license, it must provide appropriate security, e.g., though a bank guarantee or the placing of funds in a deposit account, from the point at which the counter-offer is rejected.

If the parties are unable to agree bilaterally on the details of the FRAND terms following the counter-offer by the alleged infringer, the parties “may” request that the amount of the royalty be determined by an independent third party.

If the alleged infringer continues to use the patent in question and has not diligently responded, either by accepting the FRAND offer or by submitting a FRAND counter-offer, the SEP holder may seek an injunction stopping the infringement or seek the recall of products made using the SEP, without risking Article 102 TFEU scrutiny.

Finally, by making it a condition that the alleged infringer must still be using the patent in question for the SEP holder to seek injunctive relief, the CJEU draws a clear distinction between an injunction based on the alleged infringement of an SEP and proceedings brought with a view to obtaining the rendering of accounts or an award of damages. This means that, notwithstanding the multiple steps and requirements that have to be followed when seeking an injunction, if the SEP holder only intends to pursue an action for damages for the unlicensed use of its SEP, Article 102 TFEU cannot be invoked by the alleged infringer.

Practice Note: The CJEU’s judgment sets out the final, general and legally binding test applicable to injunctions based on an infringement of a FRAND-encumbered SEP sought by a dominant market player.

To a large extent, the ruling reflects the European Commission’s earlier efforts to regulate FRAND licensing. That said, it is difficult to say whether or not the pro-licensee safe harbor envisaged by the European Commission has been fully embraced by the CJEU in its current decision. The number of issues that remain unresolved, e.g., in relation to the existence of dominance on the part of the SEP holder, the definition of “willingness” or the meaning of FRAND, potentially makes the legal test less useful in practice.

Unfortunately, although the CJEU refers to the concept of “willingness” in terms of the alleged infringers responsible to a FRAND offer, it does not address the criteria for determining “willingness,” i.e., does not make clear what the potential licensee should do in order to be treated as “willing.”

Also the CJEU does not elaborate on what a FRAND offer but simply states that the SEP holder may not discriminate between licensees, i.e., the license terms must be comparable with the licensing arrangements the SEP holder has concluded with other competitors. The CJEU therefore places the burden of knowing what is FRAND on the licensor. Regardless of whether or not the licensor is able to discharge this burden, the ruling does not help the licensee, who has no guidance on determining whether or not the license it has been offered is actually FRAND-compliant, particularly as it doesn’t have access to the licensor’s existing agreements.

The requirements for a response by the licensing target might lead to a problem if, for example, the alleged infringer accepts the FRAND offer, but does so on the condition that validity of all the relevant IP rights be confirmed before the courts.

An alleged infringer’s response to a FRAND offer will usually be one of the following:

  • Acceptance of the FRAND offer, in which case the SEP holder cannot seek an injunction, but can claim damages for the unlicensed use of the SEP
  • Rejection of the FRAND offer, which presumably makes the alleged infringer an “unwilling” licensee and therefore enables the SEP holder to seek injunctive relief
  • Submission of a FRAND-compliant counter-offer, to which the SEP holder must respond before taking any further steps.

The requirement for a prompt written counter-offer is implemented, under most national systems, an offer presented in writing will be contractually enforceable by the SEP holder. This may imply that “willingness” is a behavioral condition, i.e., that mere statements by the alleged infringer do not amount to willingness, but a concrete step has to be taken before the alleged infringer can rely on an Article 102 TFEU defense.

This requirement seems to place an even heavier burden on the alleged infringer, for whom it may potentially be a lot more difficult to determine what corresponds to FRAND terms, particularly in light of the inherent information asymmetry between the SEP holder and the potential licensee.

Although a referral to a third party for a determination appears to be reasonable, its application remains unclear. The wording in the judgment suggests that the parties are not obliged to seek third-party determination, but that they “may” do so. It is also not clear what consequences would follow if one of the parties rejected the proposal to have a court or an arbitrator decide on the level of royalties.

Licensors and potential licensees are therefore still advised to take caution when structuring transactions involving SEPs.