The Court of Justice of the European Union has today issued its much-anticipated decision inHuawei v ZTE in relation to the question of whether it is an abuse of a dominant position to seek an injunction for infringement of a standards-essential patent (SEP).

The Court’s decision largely confirms the approach of Advocate General Wathelet in his Opinion in November 2014. There are, however, some differences which we highlight below. The Court has provided very clear guidelines for SEP holders as to how they should behave and what they must do in order to avoid anti-competitive conduct under Article 102 of the Treaty on the Functioning of the European Union (TFEU), and also for SEP users.

The case, a referral from the Düsseldorf District Court, centres on a SEP (the Patent) which is essential to the Long Term Evolution (LTE) standard developed by the European Telecommunications Standards Institute (ETSI).

Huawei had notified the Patent to ETSI as essential to the standard and gave its commitment to grant licences to third parties on FRAND (fair, reasonable and non-discriminatory) terms. Following failed negotiations with ZTE, however, Huawei brought proceedings in the German courts seeking an injunction against ZTE, as well as financial relief.   ZTE argued that the seeking of an injunction was an abuse of a dominant position contrary to Article 102. It argued that, given its willingness to negotiate a licence of the Patent, there should be no injunction.

The Düsseldorf court, recognising that there was a conflict between the existing German approach and that of the European Commission in recent years, referred questions to the CJEU to clarify the circumstances in which it would be anti-competitive to seek an injunction in relation to a SEP.

The Court has today ruled as follows:

  • The SEP holder must alert the alleged infringer of the infringement by designating the patent in question and specifying the way in which it has been infringed.
  • The alleged infringer must indicate that it is willing to conclude a licence agreement at FRAND terms but can reserve the right to invalidate the patent and challenge the alleged infringement. If the alleged infringer does not indicate its willingness to take a licence, the SEP holder will not abuse its dominant position by seeking an injunction.
  • If the alleged infringer has indicated its willingness to take a FRAND licence, the SEP holder must present to the infringer a licence offer on FRAND terms that includes, in particular, the royalty and the way in which the royalty is calculated.
  • The alleged infringer must respond diligently to that offer and in accordance with recognised commercial practices in the field and in good faith. If the alleged infringer does not reply in such a manner, the SEP holder will not abuse its dominance by seeking an injunction.
  • Further, the Court points out that if the alleged infringer’s counter offer is rejected by the SEP owner, the infringer must deposit an adequate security.

In relation to the determination of FRAND rates, the Court states that the parties may have such terms determined by a third party, i.e., by a court or an arbitral tribunal. The Court also points out, however, that this determination must be made without delay. What this means and how such proceedings have to be conducted remains to be seen. It could well be that this requires some sort of expedited proceedings which are, for example, provided for under certain arbitration rules.

An important difference from the Advocate General’s Opinion, is that the SEP holder does not need to present a FRAND licence offer “in any event”, as suggested by Advocate General Wathelet, but only “after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms”.

Further, the requirement to deposit an appropriate security is an important difference from the Opinion of the Advocate General, who suggested that such security should only be provided where the infringer has asked for a determination of the FRAND terms by a court or by arbitration.

Today’s decision is another milestone in relation to the challenge of balancing the interests of protecting innovation and freedom of competition. The Court, however, has made it very clear that its decision applies to the specific situation of SEPs only. What the Court has not addressed – in contrast to Advocate General Wathelet – is the question of whether and under what circumstances holding a SEP amounts to a dominant position of its owner. This question, therefore, will doubtless be argued in the future.

Background to today’s decision

The Commission’s approach

In April 2014, the Commission issued two binding decisions in relation to Samsung and Motorola. Whilst stressing that an injunction is generally a legitimate remedy for a patent owner in cases of patent infringement, the Commission indicated that an application for an injunction in relation to a SEP will not be an abuse of dominance where:

  • the patent is standard essential;
  • the patent owner has issued a FRAND licensing declaration for the patent, i.e., it has voluntarily committed to license its SEPs on FRAND terms; and
  • the defendant is a ‘willing licensee’, i.e., it is willing to take a licence on FRAND terms

The Commission also implemented a ‘safe harbour’ for users who are willing to take a licence on FRAND terms, providing that they can demonstrate they are a willing licensee by agreeing to a framework allowing a Court or mutually agreed arbitrator to adjudicate the FRAND terms if agreement cannot be reached.

The Commission also confirmed that potential licensees of SEPs should be able, following conclusion of the licence arrangement, to challenge the validity, essentiality or infringement of a SEP (it would otherwise be anti-competitive).

The German ‘Orange Book’ approach

The German courts had, to date, taken a much more stringent approach to this question, following the 2009 decision of the German Federal Court of Justice in Orange Book (although it is important to note that this decision does not specifically relate to SEPs). Under the Orange Book rules, an application for an injunction will only be considered abusive where:

  • the defendant has made an unconditional offer to conclude a licence contract; and
  • it has actually acted as if it had entered into a valid patent licence (i.e., it would need to render accounts and pay the due FRAND licence fees or put a corresponding FRAND licence fee in escrow).

Alternatively, a defendant could merely submit a licence offer and accept that the amount of the licence fee will be determined by the patent owner in line with principles of good faith: if the licence fee specified did not meet FRAND standards, the defendant could request a competent court to determine the licence fee.

Under the Orange Book regime, the patent owner can require the Defendant not to challenge the validity, infringement and essentiality of the SEPs in question, a requirement which the Commission confirmed in its Motorola decision is anti-competitive. Rather, the Defendant was required to submit an unconditional licence offer, i.e. not conditioned on the court’s finding of validity, infringement and essentiality.

The dispute between Huawei and ZTE presented an opportunity for the CJEU to consider for the first time the correct approach to this difficult question, requiring a careful analysis of the interplay between free market principles and the need to reward inventors appropriately by granting exclusive powers on the basis of their IP rights.