The recent decision of the Court of Justice of the European Union in Huawei v ZTE clarified the circumstances under which the owner of a standard essential patent (SEP), that has a dominant position and has undertaken to grant licences on fair, reasonable and non-discriminatory (FRAND) terms, can bring legal proceedings seeking an injunction, recall of products and damages/account of profits against a potential infringer.
The preliminary ruling in this case was requested by a German court that stayed the patent infringement proceedings brought by Huawei Technologies against ZTE in Germany. Huawei brought the proceedings seeking: (i) an injunction, (ii) recall of products; and (iii) rendering of accounts or damages. The parties had failed to agree on licensing terms in respect of a patent that Huawei had declared essential to the LTE standard under the European Telecommunications Standards Institute policy and for which Huawei had undertaken to grant licences on FRAND terms. The German court stayed the action and asked the CJEU to clarify whether a proprietor of an SEP could be precluded from enforcing its SEP and claiming the relief on the ground that it might amount to an abuse of its dominant position. It was accepted by the German court that Huawei has a dominant position in the German market.
The Court held that where: (i) a patent is declared essential; (ii) the patent owner has given an undertaking to grant licences on FRAND terms; and (iii) the patent owner has a dominant position in the market, the proceedings for an injunction or the recall of products cannot be commenced without notice or prior consultation with an alleged infringer. The SEP owner must notify the alleged infringer of the SEP and specify the way in which it has been infringed. Once the alleged infringer has expressed his willingness to take a licence on FRAND terms, the SEP owner must present a written offer for a licence on FRAND terms, specifying the amount of royalty and the way in which it is to be calculated.
Once an offer is made, the alleged infringer must respond diligently (without any delay tactics) in accordance with recognised commercial practices in the field and in good faith (based on objective facts). If he does not accept the offer, he must make a counter offer that corresponds to FRAND terms before he can rely upon the abusive nature of an injunction or the recall of products as a defence. If the alleged infringer is using the SEP-protected technology before a licence has been concluded, he must also provide appropriate security from the point its counter-offer is rejected. The security must be provided in accordance with recognised commercial practices in the field, for example by providing a bank guarantee or by placing the necessary amount in an account. The calculation of security must include, inter alia, the number of the past acts of use of the SEP, and the alleged infringer must be able to render an account in respect of those acts of use.
As for the relief of damages or an account of profits for past acts of infringement, the Court held that an action by an SEP owner for such relief without notice or prior consultation does not amount to an abuse of dominant position.
The Court also held that where the parties cannot agree on the details of the FRAND terms following the counter-offer by the alleged infringer, they may agree that the royalty rate be determined by an independent third party without delay. The Court also acknowledged an alleged infringer’s right to challenge the validity, infringement and essential nature of the patents during negotiations and its right to do so in the future.
The decision strikes a balance between the effective enforcement of SEPs subject to FRAND obligations and legitimate expectations of the users by imposing obligations on both SEP owners and users of technology protected by the SEPs. It also sets out a framework for the parties to conduct negotiations relating to FRAND licences. It will be interesting to see how the national courts, including the German Court, which made the initial reference, will apply this decision. This is particularly so as the Court did not provide any guidance on, for example, issues such as when a licence is said to be offered on FRAND terms; how to calculate the royalty rates and when an alleged infringer is said to have responded diligently.