On July 16, 2015, the Court of Justice for the European Union (“CJEU”) issued a long-awaited opinion regarding the Fair, Reasonable, and Non-Discriminatory (“FRAND”) licensing of standards-essential patents (SEPs) in Europe. More specifically, the CJEU opined on the circumstances when an SEP-owner’s seeking of injunctive relief constitutes an abuse of the dominant position in violation of Article 102 of the Treaty on the Functioning of the European Union (“TFEU”).1 Although the decision of the CJEU provided European courts with a framework for deciding cases where such an issue is presented, the decision has resulted in various national court interpretations due to the absence of precise direction.
Standard Essential Patents
Generally, Standards Setting Organizations (SSOs) are responsible for developing technical standards for an industry. Such standards are imperative because they facilitate the wide adoption of technology within a marketplace. Implementation of a technical standard may necessitate the use of patented technology owned by one or more members of an SSO. For this reason, it is common for SSOs to have a patent policy in place.
As an example, the patent policy of an SSO may require members to disclose any relevant information to the SSO, including information about relevant patents or patent applications. Generally, patent policies require a patent owner to commit to license its patent on FRAND terms if the patent is deemed essential to the standard. This quid pro quo concept is intended to assuage the competing interests of the SSO members and that of the SSO. Generally, SSOs deem patents to be essential without evaluating the validity or scope of the associated patents. Accordingly, patent policies may precipitate a host of contentious issues.
Over the past few years, there has been a push to prevent SEP-holders from obtaining injunctive relief because SEP-holders may use the threat of injunction to extract unreasonably high royalties from alleged infringers — even though the SEP-owner committed to license on FRAND terms. On the other hand, barring an SEP-owner from seeking an injunction may encourage alleged infringers to draw out licensing negotiations without fear of retribution. This dichotomy was presented in Huawei v. ZTE2 when an SEP-owner brought an infringement lawsuit against an alleged infringer after the parties failed to negotiate a license on FRAND terms.
The CJEU’s decision in Huawei is important because it (at least partially) resolved an issue that was hotly-contested in Europe. Article 102 of the TFEU states: “Any abuse by one or more undertaking of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between member states . . ..” Before the CJEU’s decision in Huawei, there was no binding authority regarding whether it was an abuse of the dominant position for a FRAND-encumbered SEP-owner to obtain injunctive relief. As is often the case when controlling law does not exist, the national courts developed different responses to this question. For example, the European Commission’s decisions regarding Apple-related competition investigations3 were seemingly at-odds with the German Courts’ “Orange Book” Standard.4
The “Orange Book” Standard refers to a 2009 German case that addressed a defendants’ 102 TFEU defense. In the Orange Book case, Philips was the owner of a patent related to compact-disc recordable (“CD-R”) technology. Although Philips was not an owner of an SEP, its patent was deemed a de facto standard because it achieved dominant position by public acceptance or market forces and was incorporated as a technical standard in a document known as the Orange Book. Philips sought injunctive relief against CD-R manufacturers that had not secured a license from Philips, and, in defense, the manufacturers asserted 102 TFEU. Specifically, the CD-R manufacturers asserted that Philips was abusing its dominant position by seeking injunctive relief after refusing to license its patent on FRAND terms. The Federal Supreme Court of Germany held that a defendant may raise 102 TFEU as a defense to a patent infringement suit if the defendant made an unconditional offer to the patent holder and the defendant behaved as though a license was in place. According to the court, this meant that the alleged infringer must provide security and could not challenge the validity of the patent). Although the Orange Book case did not involve an SEP, and therefore an underlying FRAND obligation, German courts subsequently applied the Orange Book ruling to SEP cases.
The European Commission decisions were related to formal competition investigations instituted against Samsung and Motorola in April 2014. These investigations were initiated after Samsung and Motorola separately brought SEP-related infringement suits against Apple following failed licensing negotiations of SEPs. Although the outcomes of the investigations were different, both EC decisions are clear that an SEP-owner abuses the dominant position in violation of 102 TFEU if it institutes an infringement action against a willing licensee.
The diverging conclusions of the national European courts made the 102 TFEU defense issue ripe for review by the CJEU. Prior to being reviewed by the CJEU, the EU court process provides for an Advocate General to issue a preliminary ruling on the issues presented to the court. In the Huawei case, Advocate General Melchior Wathelet rendered the opinion (“AG Opinion”) and noted that Orange Book was not factually analogous to the facts in Huawei because Orange Book did not involve an SEP or a FRAND-encumbered SEP-owner.5 After criticizing the Orange Book decision for being too patentee-friendly and the EC decisions as being too licensee-friendly, the opinion then set forth a framework for deciding whether an SEP-owner abuses its dominant position.
Although the AG opinion was not binding, the CJEU adopted most of the opinion. Specifically, the CJEU established a framework for deciding the circumstances in which an SEP-owner violates 102 TFEU. The framework imposes various obligations on both the SEP-owner and the alleged infringer.
The CJEU ruled that an SEP-owner has both a notice obligation and an offer obligation.6 To satisfy the notice obligation, the SEP-owner should alert the alleged infringer of infringement and designate the SEP and specify how the SEP is infringed.7 For the offer obligation, the SEP-owner should present a written offer to license its SEP on FRAND terms that specifies a royalty and includes a calculation method.8 Failure of the SEP-owner to fulfill each of these obligations constitutes a ground for finding that the SEP-owner abused its dominant position.
Based on the SEP-owners obligations, the alleged infringer should respond in a certain way. In response to the SEP-owner’s notice obligation, the alleged-infringer must indicate its willingness to license the SEP on FRAND terms.9 In response to the SEP-owner’s offer, the alleged infringer may accept the SEP-owner’s offer or submit a specific, written FRAND counter-offer.10 If countering, the alleged infringer must render an accounting and provide security for past acts of infringement if the SEP-owner rejects the counter offer.11
The CJEU made other FRAND-related determinations in its decision. For example, the opinion provided for a third-party to determine the royalty rate if the parties could not agree on a rate.12 Importantly, the CJEU also ruled that an alleged infringer may challenge the validity or essentiality of the asserted SEP during negotiations or in the future.13
In summary, the CJEU found that 102 TFEU is not an absolute bar that prohibits an SEP-owner from seeking injunctive relief against an alleged infringer. Rather, an alleged infringer may rely on 102 TFEU as a defense when an SEP-owner does not fulfill the obligations as set forth in the Court’s opinion. In other words, an SEP-owner abuses its dominant position when it fails to fulfill its notice and offer obligations. On the other hand, an alleged infringer may not rely on 102 TFEU as a defense unless it fulfills its obligations as set forth in the CJEU opinion.
The CJEU remanded the case to the referring court (Landgericht Düsseldorf in Germany) to analyze whether the SEP-holder abused its dominant position in light of the ruling. Although a decision from the referring German court is not expected until December 2016, European courts have since applied the Huawei framework in other cases.
Since the Huawei decision was rendered, the ruling has been applied in a number of cases in Germany at both the trial and the appellate levels. Interestingly, no court has yet found that an SEP-owner abused the dominant position in violation of 102 TFEU. However, this may change given that some trial court decisions have already been overturned on appeal. In addition to summarizing the courts’ analyses in finding the 102 TFEU defense inapplicable, the remainder of the paper also provides insight into other notable FRAND-related topics. For example, some courts have decided that the Huawei analysis applies ex tunc,14 at least one court has determined that the notice obligation has specific content requirements,15 and at least one court has determined that an SEP-owner may fulfill its notice obligation by sending notice to the parent company of an alleged infringer.16
1. Sisvel v. Haier
Sisvel v. Haier was the first case to analyze the 102 TFEU defense issue after the CJEU’s decision.17 Ironically, the same court that decided Sisvel will decide Huawei v. ZTE later in 2016.18 In Sisvel, SEP-owner Sisvel brought an infringement action seeking injunctive relief against Qingdao Haier Group and its parent-company Haier after license negotiations failed.19 Sisvel is the owner of more than 350 patents deemed essential to a cellular standard governed by European Telecommunication Standard Institute (ETSI). and Qingdao sells devices in Germany that implement the cellular standard.20 Negotiations began after Sisvel informed Haier of its patent licensing program in 2012, and negotiations ended in 2014 with all offers and counter-offers being rejected by the parties.21 Haier made a first counter-offer on October 13, 2014 and throughout the pendency of the court proceedings, Sisvel continued to offer licenses that were rejected by Haier.22 Haier proposed a second counter-offer on September 22, 2015. At an oral hearing on September 29, 2015,23 Haier for the first time provided security and rendered an accounting.24
In granting Sisvel’s motion for injunctive relief, the court found that Sisvel did not abuse its dominant position because Haier did not fulfill its obligations as set forth in Huawei.25 More particularly, the court ruled that Haier could not assert the 102 TFEU defense because it did not provide security immediately after the rejection of its first counter-offer.26
This case was appealed to Oberlandesgericht Düsseldorf and the appellate court rendered its decision to overturn the lower court’s ruling on January 13, 2016.27 In its decision, the appellate court found that the lower court made a legal error by failing to assess whether Sisvel’s offers were made on FRAND terms.28 According to the appellate court, the obligations of the parties are sequential such that an obligation of the alleged infringer is triggered by the fulfillment of the SEP-owner’s related-obligation.29 The court ruled that Haier’s obligation to provide security is prompted by Sisvel’s fulfillment of its obligation to offer a license on FRAND terms.30 The case was remanded to the lower court for a determination of whether Sisvel’s offers were FRAND and for a sequential analysis based on the Huawei framework.31
2. Saint Lawrence v. Deutsche Telekom
In Saint Lawrence v. Deutsche Telekom (hereinafter Deutsche Telekom), SEP-owner Saint Lawrence sued Deutsche Telekom and HTC and sought injunctive relief for the alleged infringement of Saint Lawrence’s SEP related to the Adaptive Mult-Rate-Wideband (AMR-WB) standard.32 After filing its action for infringement, Saint Lawrence sent a letter to Deutsche Telekom offering a worldwide license on FRAND terms.33 Deutsche Telekom refused to take a license and informed HTC of the offer letter.34 Subsequently, HTC submitted a counter-offer to Saint Lawrence offering to take a license, limited to Germany, on FRAND terms, with royalties to be determined by the High Court of England.35 HTC also provided security and rendered an accounting.36
The Mannheim Court issued an injunction in favor of Saint Lawrence after finding that Saint Lawrence did not abuse its dominant position.37 The Court rejected Deutsche Telekom’s 102 TFEU defense because Deutche Telekom failed to express its willingness to take a license on FRAND terms.38 As for HTC, the Court ruled that HTC’s counter-offer was insufficient to support a 102 TFEU defense because it was not “specific” as required pursuant to Huawei.39 The Court noted that a counter-offer should at least include a specific royalty amount and this obligation cannot be met by unilaterally deferring the determination of the royalty amount to a third party.
The Mannheim Court’s decision in Deutsche Telekom appears to be inconsistent with the Düsseldorf appellate decision in Sisvel. In particular, the Court did not insist that the obligations of the parties were sequential. Instead, the Court’s decision was based on the failures of the alleged infringers to fulfill their obligations without analyzing whether the SEP-owner fulfilled its obligations. This case has been appealed and a decision is forthcoming.
3. NTT DoCoMo v. HTC Germany
In NTT DoCoMo, NTT DoCoMO asserted its patents deemed essential for the Universal Mobile Telecommunication System (UMTS) standard against HTC Germany, which allegedly incorporated the patented technology in its products.40 Prior to bringing the action, NTT DoCoMo offered HTC a regional license and specified royalty rates for a term of three years.41 HTC ultimately rejected the offer by submitting a counter-offer eighteen months after the initial offer was presented (six months after NTT DoCoMo sued HTC).42 Additionally, HTC did not provide security at any time following NTT DoCoMo’s rejection of the counter-offer.43
The Mannheim Court found that NTT DoCoMo did not abuse its dominant position and granted the injunction.44 The Court held that HTC failed to fulfill its obligations to present a prompt counter-offer and to provide security.45 More specifically, the court found that HTC waited too long to submit its counter-offer and that eighteen months did not qualify as “prompt.”46 The Court also found that HTC’s failure to provide security was another basis for dismissing HTC’s 102 TFEU defense.47 In reaching its decision, the Court did not assess whether NTT DoCoMo’s initial offer was FRAND.48 Instead, the Court ruled that an offer is sufficient as long as it is not evidently in breach of FRAND requirements by stipulating the royalty rate and the basis for calculation.49
4. Saint Lawrence v. Vodaphone
The appellate rulings of Oberlandesgericht Düsseldorf50 were applied in the case of Saint Lawrence Communications v. Vodaphone (hereinafter Vodaphone).51 In Vodaphone, SEP-holder Saint Lawrence sought injunctive relief against network operator Vodaphone for offering for sale and selling HTC phones that implemented AMR-WB standards covered by Saint Lawrence-owned patents.52 Because HTC manufactured and delivered the phones to Vodaphone, HTC intervened in the proceedings.53 In applying the Huawei analysis, the Court first analyzed whether Saint Lawrence had satisfied its notice obligation.54 Because this case was filed before the CJEU’s decision in Huawei, the Court ruled that Saint Lawrence was exempted from the requirement to notify Vodaphone prior to bringing the infringement suit.55 The Court noted that Vodaphone was put on notice at the latest in early August 2014 when service was executed56 and ruled that Vodaphone waited too long to express its willingness to take a license by first responding to Saint Lawrence’s contentions on January 12, 2015.57 Although satisfied that Vodaphone’s failure to declare its willingness to take a FRAND-license was grounds to dismiss Vodaphone’s 102 TFEU defense, the Court also ruled that Vodaphone failed to comply with other Huawei-imposed obligations. Specifically, the Court ruled that Vodaphone failed to submit a FRAND counter-offer, failed to render an accounting and failed to provide security.58
The Vodaphone case is the first post-Huawei case that includes a substantive analysis of what constitutes a FRAND offer.59 In Vodaphone, Saint Lawrence offered Vodaphone and HTC a global license to its entire AMR-WB patent portfolio that provided for a $0.26 royalty for each mobile phone implementing the AMR-WB standard.60 To support its contention that its offer was FRAND, Saint Lawrence provided the Court with anonymized licensing agreements of six mobile telecommunication companies.61 The Court noted that comparable licensing agreements are an important indicator of the adequacy of license terms offered by a patent owner and that the industry practice is relevant to determining whether a portfolio license complies with the FRAND requirement.62 In finding Saint Lawrence’s offer to be FRAND, the Court relied on the fact that “a significant number of other large market participants that represent a large part of the mobile devices market took a license” and consequently ruled that it could not be established that “the license agreements concluded are unsuited to justify the FRAND conformity with the license agreement presently being offered.”63
Outstanding Questions Post-Huawei
Although the CJEU provided necessary guidance for determining whether an SEP-owner is abusing its dominant position when it seeks injunctive relief against an alleged infringer, the Huawei opinion triggered a number of questions. For example, it is still unclear how to determine whether an SEP-owner is dominant.64 Because the Huawei framework is only applicable in cases when the SEP-owner is dominant, it seems inevitable that courts will require guidance on this issue.
Another outstanding question is whether the imposed obligations must occur sequentially. This question is at the forefront of many of the post-Huawei cases including the Sisvel case and the Deutsche Telekom case. As discussed above, the lower courts have ruled that there is no requirement for sequential execution of the obligations. However, according to the appellate court in Sisvel, a party’s obligation is triggered by the other party’s fulfillment of a previous obligation.
Additionally, the CJEU did not provide specific guidance regarding the timing of the alleged infringer’s obligations. For example, the CJEU did not set specify how long an alleged infringer has to respond to an SEP-owner’s notice or offer. As another example, the CJEU did not specify how long an alleged infringer has to provide security after the SEP-owner rejects its counter-offer. Questions regarding the time limits have been addressed in some of the post-Huawei cases.65
One of the most important questions that was not addressed by the CJEU involves determining whether an offer is FRAND.66 For example, the CJEU did not provide guidance on how to calculate a reasonable royalty. The CJEU also did not discuss whether a FRAND license may include a portfolio of patents or whether a FRAND license can be limited to a specific territory.
A decision is expected in the remanded Huawei v. ZTE case later in 2016 and decisions are also forthcoming in post-Huawei cases such as the remanded Sisvel v. Haier case and in the appealed case of Saint Lawrence v. Deutsche Telekom.
Even though the CJEU has established this framework, there are several outstanding questions. This area of the law is burgeoning with activity and a number of forthcoming decisions should provide additional guidance on outstanding questions. Although this article highlights some of the outstanding questions post-Huawei, the most important question for practitioners and businesses alike is: how does the Huawei ruling change my current practice? An allegedly infringing party should respond to an SEP-owner’s notice letter and offer letter as quickly as possible to avoid a possible determination by the court that it waited too long to respond.67 Additionally, if rejecting the SEP-owner’s offer, the alleged infringing party should ensure that any counter-offer is made on FRAND terms. Although it is still unclear how to determine whether an offer is FRAND, the Vodaphone opinion explained that comparable licensing agreements and industry practice are important indications and considerations of a FRAND offer.68 Further, to avoid a court determination that the alleged-infringer failed to comply with its obligation to provide security and to render an accounting, it is recommended that the alleged infringer prepare and present the security and accounting simultaneously with the counter-offer. Following this guidance may provide the alleged infringer with a better position if asserting the 102 TFEU defense.
While following the Huawei framework, an alleged infringer may challenge the validity and essentiality of the asserted SEPs while negotiations are ongoing.69 As such, it is recommended that the allegedly infringing party analyze, and potentially challenge, the asserted SEPs for both validity and essentiality before agreeing to license the asserted technology.