On 20 November 2014 the Advocate General (AG) delivered his opinion when and to what extent exercising FRAND committed SEPs can constitute an abusive behaviour. Albeit the AG’s opinion is only advisory, the CJEU regularly follows the AG in its opinion.
With the decision of the CJEU expected soon it seems a good time to review the AG’s opinion once more in view of what can be expected in dealing with future FRAND cases given the CJEU does follow the AG in his opinion. The below comment focuses, therefore, on practical aspects and problems which might, in particular, result from the presented framework. As it will become clear the suggested framework of the AG might be a start for dealing with future FRAND cases but it also lacks considerably in details.
The case at hand is a referral from the Dusseldorf Regional Court, which submitted five questions in April 2013 for a preliminary ruling.
The referral had been triggered by a press release of the European Commission from which could be drawn that the European Commission differs considerably in its assessment from what German courts regarded so far as requirements for abusive behaviour in the enforcement of FRAND committed SEPs.
The AG's Opinion
Due to the fact that the individual questions referred to alternative scenarios, the AG answered only three of the five submitted questions. In particular he found:
- Provided the SEP conveys dominant market power the holder of a FRAND committed SEP abuses its dominant position when bringing an action for a prohibitory injunction against an infringer where it is shown that the SEP-holder has not honoured its commitment even though the infringer has shown itself to be objectively ready, willing and able to conclude such a licensing.
- Prior to seeking corrective measures or bringing an action for a prohibitory injunction, the SEP-holder must - unless it has been established that the alleged infringer is fully aware of the infringement - inform the alleged infringer in writing about the infringement in detail.
- In any event, the SEP-holder must present to the alleged infringer a written offer of a licence on FRAND terms which contains all terms normally included in a licence in the sector in question, in particular the precise amount of the royalty and the way in which that amount is calculated.
- On the other side, the infringer must respond to that offer in a diligent and serious manner. If it does not accept the SEP-holder’s offer, it must promptly present to the latter, in writing, a reasonable counter-offer relating to the clauses with which it disagrees.
- The SEP-holder does not abuse its dominant market position if the infringer’s conduct is purely tactical and/or dilatory and/or not serious.
- However, it cannot be regarded as dilatory if the infringer requests that FRAND terms be fixed either by a court or by an arbitration tribunal. In that case the SEP-holder can ask for security, in particular a bank guarantee for the payment of royalties or to deposit a provisional sum at the court or arbitration tribunal in respect of its past and future use of the patent.
- Furthermore, the infringer – after concluding a license – must be free to challenge the validity of that patent, the alleged infringement of the patent and the essential nature of the SEP in question.
- No abuse can be seen in establishing claims for rendering of accounts or compensation, in particular damages.
The AG’s opinion focuses on a framework with obligations for the SEP-holder as well as for the infringer based on which the abusive behaviour is to be determined. At least with regard to the infringer certain conduct is explicitly regarded as acceptable, e.g. to request the determination of FRAND terms by court or arbitration body. In principle, the AG follows here the idea of a "safe harbour" as proposed by the European Commission, albeit not calling it that way. Besides this framework the AG denies the need for the infringer to act as if the license has been already granted accepting only that the SEP-holder might demand e.g. a bank guarantee as security. Notwithstanding the assessment of injunctive relief in the individual case the AG considers claims for rendering of accounts and damages as possible, even unproblematic. Of course, all considerations only apply in a case where the SEP actually conveys dominant market power to the SEP-holder.
The AG’s starting point is the overall consideration to find a middle path between the German case law and the opinion of the European Commission (par. 52). While the European Commission – in particular in its first statements – tended to set only very low requirements for denying the SEP-holder’s claim for injunctive relief, the German case law which developed after the Orange Book decision in 2009 tended to ask for requirements which proved difficult to fulfil in practice. Insofar the AG starts with emphasizing that Orange Bookhas never been meant to be applicable in cases of FRAND committed SEPs as well. Albeit it is true, that Orange Book has been, indeed, concerned with a de facto standard, this view comes a bit as a surprise as the application of Orange Book to FRAND cases has not been seriously doubted in Germany until the submission of the Dusseldorf Regional Court.
In any case, the opinion of the AG seems tending more to the European Commission’s point of view. Thus, the AG proposes that essentially the SEP-holder is obliged not only to take the first step and inform the infringer, but also to give detailed assessment of the infringement etc. as well as to make a concrete offer. That reflects for sure a dogmatic shift as in the past it had been assumed that the infringer needs to legalize its actions and ask for a license.
Albeit it is often stressed as general disadvantage, that the SEP-holder has to take the first step, the real downside lies in the obligation to specify why this offer and in particular the offered royalty rate is FRAND. In principle, a SEP-holder has already an incentive to offer a royalty rate as he is interested to set the negotiating basis. But the SEP-holder is regularly not interested to disclose its calculation or prior license agreements, particularly if they were concluded at low royalty rates e.g. as part of a settlement.
Of course, it is also part of the presented framework that the infringer has to comply with obligations of its own. This might be, however, the most problematic part of the AG’s opinion, as the conception behind the stated obligations is not clear. It must be certainly given that a further specification of the infringer’s obligations beyond "diligent/serious/prompt" or "purely tactical/dilatory/not serious" is difficult for the AG and perhaps cannot be dealt with on an abstract level by the AG or the CJEU. But the AG does not present any explanation how the obligations of the SEP-holder and the infringer are related to another. Of course, it could be pointed out that in the German version of the opinion it is noted that the infringer has obligations "in return" ("im Gegenzug") to the obligations of the SEP-holder (par. 87). However, the English version on the other hand does not comprise such a reference and neither does the French, in which the opinion has been originally written. The English "once those steps have been taken" as well as the French introduction "Une fois ces démarches accomplies" rather suggest that the SEP-holder’s obligation must be fulfilled first whereas the German translation conveys the notion that the obligations are interdependent.
Against this background it is particularly interesting what the AG has to say about the case at hand (par. 90 ff.) as it perhaps best shows what the AG might have in mind. Here the AG refers in equal measure to the conduct of both parties and their offers. This suggests that determination of an abuse by the SEP-holder is to be assessed based on to what extend both parties fulfilled their obligations. That would also be in line with the discussion in the oral hearing where the need to look onto the conduct of the SEP-holder as well as the conduct of the infringer was discussed lively with the result that most contributors made the point that the conduct of the SEP-holder could not be assessed without regarding the conduct of the infringer.
Unfortunately, this point of view is nowhere explicitly explained, let alone how such an assessment should be done in practice. In particular, it remains unclear what results from failure of one party to comply with its obligations – or if both parties fail in that. For example it cannot be said for sure what the infringers obligation would be if the SEP-holder offered a license but failed to fully disclose why the offered royalty rate is FRAND. The infringer might be obliged to make a counter offer, nonetheless, as he is required to respond. Moreover, the infringer is also obliged to submit a counter-offer in relation to clauses it disagrees. But how should the infringer specify a concrete counter offer? What is reasonable in light of the failure of the SEP-holder in this example? In the end, it may all come down to what is appropriate on a case-by-case basis which might be, in fact, what the AG had in mind. However, such a solution would suffer seriously from a lack of legal certainty.
How much uncertainty can be caused by this framework can be illustrated by further examples. Namely, it is also not clear what happens, when both parties do comply with their obligations and propose FRAND offers which just vary from each other in some details. Or what about details from which it is not clear whether these are FRAND? Is the infringer e.g. required to accept a license for several European countries or is the infringer entitled to a license only for Germany? Does the SEP-holder have to accept a certain venue the infringer offers to determine FRAND terms by court ruling, e.g. Italy or China? Here, it would be most helpful if there had been stated at least some principles from which could be drawn more clearly which terms the parties have to accept and which they might be able to contest. Instead the AG leaves such issues to be decided by the national courts. Of course, the national courts are very well capable to decide on those issues. It might be e.g. considered by the national courts that the infringer has to comply with the conditions suggested by the patentee in case that they are FRAND. However, by leaving those questions to the national courts the risk remains that this will likely lead to another submission to the CJEU. Thus, some years from now we might still be discussing essentially the same problems.
The AG offers at least a "safe harbour" for infringers if they refer the decision about what is FRAND to a court or arbitration body. But curiously, the SEP-holder does not seem to have such an option. This might be another point more guidance would be helpful. Hopefully the CJEU will substantiate the suggested framework so that the principles for determining the abuse of a dominant market position in FRAND cases become clear and applicable.
In any case, the SEP-holder might be able to ask for security like e.g. a bank guarantee (par. 98). Here, the AG takes a step towards the German court decisions in which the security against the risk of insolvency is emphasised. In principle, this is a necessary adjustment as the SEP-holder might have to wait for compensation from the license agreement quite some time, in particular, if the infringer demands determination of FRAND terms by court or arbitration body. However, without further guidance the notion that a bank guarantee can be demanded will most likely result in further problems as it can be contested which sum is adequate. Here, it might cause problems that – with regard to negotiations – the infringer is not obliged to render accounts. Furthermore, the AG puts forward the notion that a bank guarantee has to comprise not only security for infringements in the past but also for expected infringements in the future. Naturally, this notion makes it more difficult as it is not even said for which time in the future the estimation has to be made, i.e. it might either be interpreted as the time until the patent expires or until the court proceedings on the FRAND determination are finished. At least the AG specifies that reference for the security should be an adequate license fee. Therefore, other calculation methods like the infringer’s profit can be neglected.
Besides the discussion about the right framework for adopting a license one can easily forget that the fifth question of the Dusseldorf Regional Court makes reference to claims other than injunctive relief. As the claim to destruction as well as the recall the infringing goods serve the same purpose as injunctive relief no different assessment can be applied here. However, according to the AG something else can be said about the claims for damages and rendering of accounts. In particular, claims of damages are regarded by the AG "in no way problematic" (par. 102). This is a surprising statement as the suggestion can be found that also damages are limited by competition law. The argumentation which inter alia is noted in an older decision of the German FCJ from 2004 (KZR 40/02 – Standard Spundfass) is that resulting from the obligation to give a license to everyone the SEP-holder is not entitled to more profit than an adequate license fee. Furthermore, it could also be assumed that the dogmatic shift according to which the patentee has first to notify the infringer and furnish it with information leads to the notion that until this time regularly no infringing use can be assumed.
Yet, the AG is more concerned about the question that no inadequate license agreement results from the exercise of the SEP. In this regard past sales are – in principle – of no consequence. However, a pending damage claim which is not restricted to paying an adequate license fee might result in a higher incentive for the infringer to adopt a license early so that he is only obliged to pay the royalty rate which is – at least in Germany – usually considerably lower than infringer’s profit. In this regard it could be argued that the AG considers only damage claims as unproblematic which have the sole purpose of giving compensation for past infringements. However, infringers profit is only a way to calculate the compensation and no kind of "punitive damage". So, infringer’s profit is also explicitly noted in Art. 13 of the European Directive 2004/48 as adequate compensation for the SEP-holder – which, by the way, the AG cites in par. 20 as legal basis of the opinion.
A closer look on the AG’s opinion reveals that the AG left some questions unanswered though there is actually no reason not to give some more details, in particular with regard to the proposed framework. Besides the question whether the presented concept might be favouring the infringer or the SEP-holder it is the lack of clarity and of legal certainty which might cause considerable concern. FRAND negotiations and, eventually, court or arbitration proceedings on FRAND determination can last for several years. Against this background, the value of legal certainty should not be underestimated. As much as a "safe harbour" for infringers is a first step to some legal certainty such a "safe harbour" should be offered SEP-holders as well to ensure that they can propose an offer which is definitively FRAND.
In any case, the AG states quite clear that competition law does not affect the claims of rendering of accounts and damages. Thus, these claims remain enforceable. Against this background it might be advisable for a SEP-holder to submit court action for damages and rendering of accounts in parallel to sending the infringement notification and license offer to the infringer. In doing so the SEP-holder might be able to speed up negotiations and, furthermore, choose the litigation forum right away. Injunctive relief might then be sought at a later stage, if necessary, e.g. by extension of the pending court action.