Standard essential patents (SEPs) are patents for technology which is essential to produce products to a particular technical standard. The question in Huawei Technologies v ZTE was in what circumstances an SEP holder, which has committed to licensing its technology on fair, reasonable and non-discriminatory (FRAND) terms, infringes competition law if it seeks an injunction, or product recall, against a business which is infringing the SEP by making goods to the standard, but is willing to take a licence of the SEP.

In Huawei the European Court of Justice answered that question, largely rejecting the way in which the Orange Book standard of the German Federal Supreme Court had been applied by lower German courts. A German court made the Huawei reference following the Commission’s actions against Samsung and Motorola, which led to decisions in 2014. Broadly endorsing the Commission’s approach, and following the earlier Advocate General’s opinion, the Court has made clear that the onus is on the SEP holder to make the first offer.  

Background

Both owners of SEPs and those using SEP technology have long faced uncertainty as to whether, and if so in what circumstances, the seeking of an injunction by an SEP holder against a user of that patent is an abuse of a dominant position and so infringes competition law. If it does, the party seeking such an injunction faces not only losing those legal proceedings, but also the risk of substantial administrative fines. In addition manufacturers of technology products have faced significant uncertainty as to whether they are able to safely challenge in court the validity or alleged 'essentiality' of patents asserted against them without being subject to an injunction. Decisions taken by the European Commission in 2014 – and especially the Motorola decision – sought to provide some clarity on these points.  The Commission sought to provide a 'safe harbour' within which manufacturers could bring forward defences to allegations of infringement without being subject to the threat of an injunction. Many commentators considered the Commission’s decisions to be controversial – interfering with intellectual property rights and even with access to the judicial process and the right to a fair hearing in court.

The Huawei case came to the Court from the Düsseldorf Regional Court as a request for an interpretative ruling in the context of litigation against ZTE for infringement of a patent which is essential to meet a certain European telecommunications standard. Huawei owned the patent and had given a commitment to the telecommunications standards body ETSI to grant licences on FRAND terms. The parties had been unable to reach agreement on licence terms and Huawei sought an injunction and damages.

ZTE claimed that it was willing to negotiate a licence, and under the approach espoused by the European Commission that would be enough to establish an abuse of a dominant position. Huawei on the other hand pointed to the Orange Book standard case law which requires that, for there to be abuse, ZTE would have had to have made an 'unconditional offer' and also pay licence fees, which it had not done. 

When is seeking an injunction an abuse of a dominant position?

The Court of Justice held as follows:

  • A request for corrective measures (product recall) or an injunction by an SEP holder which has given a commitment to a standardisation body to license on FRAND terms may constitute an abuse of a dominant position.
  • To maintain its right to request corrective measures or seek an injunction, the SEP holder must, before bringing such action:
    • inform the alleged infringer of the alleged infringement, indicating which patent(s) it considers to be infringed and by which activities; and 
    • after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, present to that infringer a specific written offer of a licence on FRAND terms, in accordance with the commitment made to the standardisation body, specifying in particular the royalty and the way in which it is to be calculate
  • Going beyond the Commission’s position, the Court also imposes requirements on the potential licensee:
    • If the potential licensee does not accept the SEP holder’s offer and continues to use the technology, it must promptly and in good faith present the latter with a specific written counter-offer on FRAND terms; if it does not then the SEP-holder may bring an action without being considered to abuse a dominant position.
    • The potential licensee must respond to the offer in good faith and in particular without delay; this responds to the concern often expressed by SEP holders that they are victims of delaying tactics in these circumstances. 
    • If the potential licensee is already using the SEP technology, then from the time its counter-offer is rejected it must provide appropriate security, for example by bank guarantee or deposit. That security must be calculated on the basis of SEP usage, and the alleged infringer must be able to render an account of that usage.
  • If, following the counter-offer, no agreement is reached on the details of the FRAND terms, the parties may agree to ask an independent third party to fix the amount of the royalty. 
  • The alleged infringer may, in parallel to the licence negotiation, challenge the validity, use and essential nature of that patent, or alternatively reserve the right to do so in the future.
  • Legal action to secure the rendering of accounts or bringing a claim for damages does not constitute an abuse of a dominant position.

Open questions

This judgment confirms the fundamental basis of the Commission’s approach that seeking an injunction against a willing licensee of an SEP can be an abuse of a dominant position. However, significant questions remain open in this area.

  • FRAND remains a difficult concept to apply in practice. Although standard-setting bodies  have been asked to do more to clarify the meaning of the FRAND obligation and/or provide a means for determining  FRAND terms it seems very unlikely that they will be able to do so.  Major commercial questions remain unresolved and are the subject of significant current and likely future litigation including:
    • What is the appropriate 'royalty base' for calculating FRAND royalties;
    • How, if at all, should SEP holders take account of the cumulative royalties charged by other contributors to a standard in setting their own FRAND royalty rates;
    • Does competition law or the FRAND obligation affect the manner in which SEP holders sell parts of a patent portfolio to others?
  • Is the proprietor able to receive full compensation or will the claim for damages be limited to the amount of a FRAND licence? If the latter is the case, is there a particular point in time following which only damages on a FRAND basis can be awarded? 
  • This judgment :
    • does not deal with the question of whether a SEP-holder is presumed to hold a dominant position or, if not, the circumstances in which it will be held dominant (the Advocate General had cast some doubt on whether it was appropriate to presume dominance but the Court did not comment on this); and
    • addresses only the situation in which the SEP holder has previously committed to a standardisation body to license its technology on FRAND terms. It is not clear what legal standard applies in the absence of a FRAND commitment, and German courts may continue to apply the Orange Book standards in such cases. 

Outlook

One of the reasons given by the European Commission for investigating Samsung and Motorola was its concern that courts in different jurisdictions were applying different approaches to the award of injunctions.  The new tests laid down by the European Court of Justice – applying to potential licensees as well as SEP owners – provide a common legal framework throughout the EU. The practical significance of the ruling appears likely to be most significant in Germany, whose courts referred the case to the Court. German courts will now take account of the changes required to the former practice under the Orange Book standard.  This appears likely to bring the practice of the German courts more in line with that in other jurisdictions in Europe which have applied stricter standards to consideration of injunctions in SEP cases.  Other features of the German courts, such as the bifurcated validity proceedings are not affected by the ruling.

The decision also appears likely to have an important practical impact for the application of Art 102 to SEPs.  Having confirmed that Art 102 can have far-reaching implications for the licensing behaviour of SEP owners, it can be expected that creative competition law defences will remain an increasing feature of patent litigation in Europe until greater clarity on the requirements of FRAND emerges.