On 26 November 2014, EU Advocate General (AG) Wathelet delivered his opinion in the closely followed Huawei v ZTE patent dispute. Although the opinion is not binding, the European Court of Justice (ECJ) follows the AG’s opinion in around 80% of cases. The AG tries to steer a middle course of balancing the interests of both patent holder and putative licensee but he ultimately sides with the rights of the licensee in such battles. The opinion almost rules out the ability of a SEP holder to protect the unlawful use of their patent through the grant of an injunction except in the most egregious circumstances.

This case is the latest chapter in a series of cases commonly referred to as “Patent Wars”. In these cases the holders of Standard Essential patents (SEP) have sought to enforce their patents through injunctive proceedings against companies which had offered to pay royalties for their use but had not agreed to the patent holder’s terms. The EU Commission had previously taken actions against Samsung and Motorola for an abuse of a dominant position and had also concluding its proceedings against the companies in a Commission Decision under Article 9 of Council Regulation No. 1/2003 (“the Regulation”).

The Huawei case is significant because this is the first time the issue has appeared before the European Court of Justice being a dispute referred from a German court in relation to the interpretation of EU law. The Court’s judgement will provide the ECJ’s final interpretation of the application of EU competition law to SEP disputes. It will be binding on the EU Commission and will dictate future application of Article 102 to such disputes in the EU for the foreseeable future.

SEPs are patents governed by the European ETSI institute as important for the general growth and use of technology in a particular area. They are of such importance that they cannot be treated in the same proprietary fashion as regular IP rights. Once a patent is considered a SEP, the holder will give commitments to ETSI to grant licenses to that patent on fair, reasonable and non-discriminatory terms (FRAND).

The current court action was bought by Huawei in Germany, against its fellow Chinese competitor, ZTE. Huawei wished to be granted an injunction against ZTE’s use of its SEP as the parties had failed to agree on the FRAND terms for its use. For the purposes of the AG’s assessment, Huawei were considered to be in a dominant position.

AG Wathelet has now ruled in favour of ZTE and his opinion can be broken down as follows:

  1. If the parties cannot agree on acceptable licence terms, the SEP holder must set out its detailed offer of the terms it is proposing including royalties to the licensee before it can take any further action against a licensee. These terms must be based on FRAND principles, normal market terms and specify the calculation of royalties relating to that SEP.
  2. Any application to the Court for corrective measures including injunctive relief will not be an abuse of dominance if the licensee is behaving in a “tactical or non-serious fashion”. In other words the SEP patent holder would need to have fairly strong evidence that the licensee does not have a genuine desire to negotiate reasonable terms to safely take court action without running the risk of regulatory action or facing an Article 102 defence.
  3. If the parties cannot agree FRAND terms, the conduct of the applicant/infringer of the SEP cannot be regarded as non-cooperative if they request that the FRAND terms be either fixed by a court or an arbitration tribunal. This therefore allows a mechanism for resolution between the parties without the SEP holder simply being granted an injunction due to a failure to agree FRAND terms between the parties.
  4. The fourth aspect of the opinion, and again in favour of ZTE, is that the licensee will not be considered unreasonable if they do not accept FRAND terms that curtail their ability to challenge the validity of the patent. This is an important issue and came up as an aggravating factor in the Commission’s Motorola Decision. The AG also take the view that licensees also deserve protection from such over assertive behaviour of dominant SEP holders.
  5. In a concession to the legitimate rights of SEP holders, the AG states that when the parties apply for third party adjudication, the patent holder may ask for a bank guarantee or deposit at the relevant court or tribunal in respect of the past or future use of the patent. Such an action would not be an abuse of a dominant position under Article 102 TFEU. Furthermore, a claim for past infringements by the SEP holder is also not an abuse of dominance.

The AG’s opinion is an attempt to walk a fine line between the respective interests of the parties but ultimately comes down in favour of access to SEP patents by making the seeking of an injunction an abuse of dominance in most situations except if there is obvious bad faith on the part of the licensee to agree reasonable terms. When faced with any disagreement, the licensee is perfectly within its rights to apply to a court or tribunal for adjudication and continue to enjoy the use of that patent until the court date.

The ECJ’s final judgment is expected before summer 2015.

The AG’s opinion can be found here in full.