In its recent decision in Huawei v ZTE C 170/130, the Court of Justice of the European Union (CJEU) has set forth the legal test applicable to injunctions involving standard-essential patents (SEP).
The case developed as Huawei Technologies and ZTE Corporation were unsuccessful in negotiating a license agreement covering Huawei’s declared essential patents related to the 4G standard on fair, reasonable, and non-discriminatory (FRAND) terms. When ZTE allegedly continued to use the SEP without paying royalties, Huawei brought an infringement action against ZTE, seeking an injunction against the sale of certain ZTE products.
The CJEU addressed the circumstances in which a dominant SEP holder, who has committed to grant licenses on FRAND terms, can seek an injunction or recall of infringing products to stop an infringement of that SEP, and when that injunction is regarded as an abuse of dominance contrary to Article 102 of the Treaty on the Functioning of the European Union (TFEU). The CJEU decided that the following conditions must be satisfied before a dominant SEP licensor can validly bring an injunction action without acting contrary to Article 102 TFEU:
- The SEP holder must notify the alleged infringer of the alleged infringement.
- The alleged infringer must then express its willingness to conclude a licensing agreement on FRAND terms. Unfortunately, the CJEU did not address how to determine “willingness.”
- The SEP holder must present a specific, written offer for a license on FRAND terms, specifying the amount of the royalty, and the way in which that royalty is to be calculated.
- The alleged infringer must respond to the FRAND offer. Delay may signal “unwillingness,” and prevent the alleged infringer from countering that the SEP holder is violating Article 102 of the TFEU.
- If the alleged infringer wishes to submit a counter-offer, it must do so promptly, in writing and in compliance with FRAND terms.
- If the alleged infringer has been using the SEP without a license, it must provide appropriate security, e.g., a bank guarantee, from the point at which the counter- offer is rejected.
- If the parties ultimately are unable to agree on the details of the FRAND terms, they may request an independent third party to determine the amount of the royalty.
- 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 against the infringement or seek the recall of products made using the SEP without risking Article 102 TFEU scrutiny.
There are a number of issues that remain unresolved, e.g., the definition of “willingness,” and the interpretation of FRAND in this context, that potentially make the legal test less useful in practice. Licensors and potential licensees are therefore still advised to take caution when structuring transactions involving SEPs.