On July 16, 2015, the Court of Justice of the European Union (CJEU) handed down its long awaited decision on the competition law implications of asserting patents that read onto elements of industry wide technical standards, so-called Standard-Essential Patents (SEPs) (C-170/13 Huawei/ZTE). Bird & Bird LLP represents Huawei Technologies (Christian Harmsen and Nick Pearson, IP, Joerg Witting and Fabian von Busse, Competition).
Industry standards and SEPs are of crucial importance in the telecoms and IT industry and, increasingly, also in sectors - such as the automotive industry - where IT based solutions are about to change the characteristics of a more traditional product offering dramatically.
The background for today’s decision is a request for preliminary ruling from the Landgericht Düsseldorf. In March 2013, this referring court stayed patent infringement proceedings between two Chinese companies Huawei and ZTE and asked the CJEU under which circumstances the assertion of SEPs might constitute the abuse of a market dominant position in the meaning of Art. 102 TFEU. It is important to note that, at the time of the referral, the EU Commission was also investigating a possible abuse by way of asserting SEPs in two parallel proceedings which in the first half of 2014 resulted in the Commission’s decisions Samsung and Motorola (cases AT 39.939 and AT.39985).
In November 2014, the Advocate General issued his opinion in the CJEU proceedings and essentially concluded that the SEP holder, before seeking an injunction, generally must alert the infringer to the infringement and is obliged to provide a written licence offer on FRAND (Fair, Reasonable And Non-Discriminatory) terms.
The CJEU follows the Advocate General’s opinion quite closely, ruling that an SEP holder which has given an irrevocable commitment to grant a licence on FRAND terms, does not abuse its dominant position by bringing an action for an injunction, as long as:
- prior to bringing that action, the SEP holder has, first, alerted the alleged infringer of the infringement by designating that patent and specifying the way in which it has been infringed, and, secondly, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, presented to that infringer a specific, written offer for a licence on such terms, specifying, in particular, the royalty and the way in which it is to be calculated, and
- where the alleged infringer continues to use the patent in question, the alleged infringer has not diligently responded to that offer, in accordance with recognised commercial practices in the field and in good faith, this being a matter which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.
In its reasoning the CJEU explained that the alleged infringer may maintain the abuse argument against the claim for an injunction only if it has submitted to the SEP holder, promptly and in writing, a specific counter-offer that corresponds to FRAND terms. Furthermore, from the point at which its counter-offer is rejected the alleged infringer has to provide appropriate security, in accordance with recognised commercial practices in the field, for example by providing a bank guarantee or by placing the amounts necessary on deposit. In addition, where no agreement is reached on the details of the FRAND terms following the counter-offer by the alleged infringer, the parties may, by common agreement, request that the amount of the royalty be determined by an independent third party, by decision without delay.
As regards liability for past use the CJEU ruled that Article 102 TFEU does not prohibit an SEP holder bringing an action for infringement and seeking a rendering of accounts or an award of damages in relation to past acts of use of an SEP .
The CJEU’s decision will likely have a significant impact on the way patent owners as well as standard users will approach FRAND-encumbered SEPs in the future. Various important questions have not been addressed by the CJEU, but the core approach that has now been endorsed is that it is the patent owner’s obligation to alert the infringer and to provide a FRAND offer prior to seeking an injunction. This, as well as the standard user’s obligation to react “diligently… in accordance with recognised commercial practices in the field and in good faith”, makes it vital for both patent owners and standard users to consider competition law implications thoroughly, not only during pending patent infringement proceedings, but well in advance of potential litigation.
The guiding principles have now been set by the CJEU but various details of key importance will have to be decided by the national (patent infringement) courts. Primarily, this concerns the Huawei/ZTE case before the Landgericht Düsseldorf but the CJEU decision will also be crucial for a number of other pending patent infringement cases, especially in Germany where various proceedings have been stayed by the courts pending the outcome of the Huawei/ZTE case.
One aspect the CJEU for example did not provide further guidance on is when a licence offer can be considered “FRAND”, be it with regard to the royalty rate or the regional scope of a licence. Also, the CJEU did not specify the circumstances under which ownership in an SEP results in a market dominant position - a crucial precondition for applying Art. 102 TFEU. With regard to this latter aspect of market dominance it is important to note that theLandgericht Düsseldorf had already turned down, in a decision earlier this year, the FRAND defence raised by a standard user as a result of not considering the plaintiff and SEP-owner to be market dominant. On the other hand, the Landgericht Mannheim recently stayed a patent infringement case pending the outcome of the CJEU Huawei/ZTE case, leaving the existence of market dominance open by merely referring to the cartel prohibition of Art. 101 TFEU.
It needs to be seen how the national patent infringement courts throughout the EU will apply the CJEU Huawei/ZTE decision. In any case, both patent owners and standard users will in future have to consider the competition law implications of SEPs even more thoroughly and should closely monitor the development of further case law by national courts.