In what circumstances can the owner of a Standard Essential Patent (“SEP”) seek an injunction against an unlicensed implementer of the technical standard? This is the vexed question, which has been debated globally in recent years. In C-170/13 Huawei Technologies Co. Ltd v ZTE Corp., ZTE Deutschland GmbH, it was the turn of the Court of Justice of the European Union (“the CJEU”) to give its answer. In its decision of 16 July 2015, it provides guidance on the circumstances in which a SEP-owner in a dominant position can nevertheless seek injunction without incurring liability under Article 102 of the Treat on the Functioning of the EU for abuse of dominance.
Huawei Technologies Co. Limited (“Huawei”) is the owner of a SEP, which it has declared to the European Telecommunications Standards Institute (“ETSI”) as essential to the LTE (4G) telecoms standard. This is one of 4700 patents which have been declared as essential to that standard.
As a member of ETSI, Huawei is bound by a commitment to licence its SEP to third parties on fair, reasonable and non-discriminatory (“FRAND”) terms for a reasonable royalty rate.
ZTE Deutschland GmbH (“ZTE”) implemented the LTE standard in Germany by marketing LTE-compliant base stations there. Huawei alleged that by doing this ZTE were using its SEP without paying a royalty. Between November 2010 and the end of March 2011, Huawei and ZTE tried to conclude a licence for the use of the SEP. Huawei proposed a specific royalty, but ZTE preferred to discuss a cross-licence. Negotiations broke down and the license was never completed.
This resulted in Huawei bringing action in the Düsseldorf Regional Court for a prohibitory injunction, damages and a product recall order, on the grounds of patent infringement. ZTE protested that it was wiling to take a license on FRAND terms, and hence the seeking of an injunction was an abuse of a dominant position.
German law on this issue was set out in the well-known decision of the Bundesgerichtshof (Federal Court of Justice, Germany) of 6 May 2009 in Orange-Book-Standard (KZR 39/06, “Orange-Book-Standard”). This case law establishes that seeking an injunction will only amount to an abuse in strictly limited circumstance, and places the burden on the unlicensed implementer to demonstrate that these circumstances apply. It is a heavy burden, and hence it has been hard in practice for an unlicensed implementer to resist the grant of an injunction in the Germany Courts.
Conversely, the European Commission has taken a different approach. In its preliminary assessment in its proceedings against Samsung Electronics and Others (COMP/C‑3/39.939), it suggested that the bringing of an action for a prohibitory injunction was unlawful in the light of Article 102 TFEU, given that the case concerned an SEP, that the patent holder had given a FRAND undertaking and that the infringer was itself willing to negotiate such a licence. This preliminary assessment was confirmed in its formal Motorola and Samsung decisions of 29 April 2014.
In light of the divergence between the Orange-Book Standard line of cases, and the approach of the European Commission, the Düsseldorf Regional Court referred the matter to the CJEU.
It was common ground between the parties that Huawei was in a dominant position, so the CJEU only needed to consider the existence of an abuse.
The CJEU established certain steps that the SEP owner who brings an infringement action seeking an injunction or an order for product recall must follow in order to avoid liability under Article 102 TFEU for abuse of dominance. These are:
- Prior to bringing the infringement action, the SEP owner must notify the alleged infringer of the infringement complained of.
- Following this, if the alleged infringer confirms that it is willing to take a licence, the SEP owner must make a specific, written offer of a licence on FRAND terms. The CJEU was clear that this offer must specify the royalty rate and how the royalty is to be calculated.
- It is then for the alleged infringer to “respond diligently to the SEP owner, in accordance with the recognised commercial practices in the field and good faith”. In particular, the alleged infringer must not use delaying tactics.
- In the event the alleged infringer refuses to accept the offer, it must promptly submit a counter offer, in writing, based on FRAND terms.
- If the SEP owner rejects the counter offer and the alleged infringer is still using the SEP, the alleged infringer must provide a form of security, for example a bank guarantee or deposit. The calculation of this is to be based on the past acts of use of the SEP by the alleged infringer.
- Finally and by common agreement, the alleged infringer and the SEP owner may request that the royalty rate is calculated by an independent third party, to be established without delay.
The Court also clarified that seeking an action seeking a payment of damages, but not seeking injunctive relief, will not amount to an abuse.
It should be noted that the CJEU confirmed that the alleged infringer cannot be criticised for challenging in parallel with the licensing negotiations the validity, essentiality or infringement of the SEP, or reserving its right to do so.
The decision sheds some useful light on this vexed issue. In particular, the CJEU decision is a clear departure from the Orange Book Standard case law, and creates a more balanced approach in which the actions of both the SEP owner and the unlicensed implementer are scrutinised.
However, significant uncertainty remains. For example:
- The decision does not address the circumstances in which ownership of a SEP confers dominance.
- How are “recognised commercial practices in the field and good faith” and “delaying tactics” to be identified?
- The CJEU decision gives no guidance on how specific FRAND terms should be determined, in particular the royalty rate or royalty base.
- The decision of the CJEU refers in various places to the impact of seeking an injunction on “products complying with the standard in question manufactured by competitors from appearing or remaining on the market.” This appears to have been an important criterion for the CJEU in its analysis. This calls into question the extent to which the case is applicable to infringement proceedings brought by a Non-producing entity, rather than a competitor of the unlicensed implementer. It also calls into question the extent to which the case applies to infringement proceedings brought against entities downstream from the manufacturer. Indeed, in her speech on 11 September at the 2015 IBA Competition Conference in Florence, Margarthe Vestager, the Competition Commissioner, noted and deprecated attempts to “outmanouevre” the judgment by seeking injunctions against companies at other levels of the supply chain, such as telecoms network operators selling phones, rather than handset manufacturers.
- Given the emphasis in the reasoning of the CJEU on the express FRAND declaration made by a SEP-owner to a Standards Setting Organization, it is unclear to what extent the judgment applies to de facto standards.
Given the importance of these issues, further disputes are inevitable.
Whilst the CJEU referred to its well-established Magill case law on refusals to licence, it made no mention of its decision in Case T-111/96, ITT Promedia v Commission, which established that only in “wholly exceptional circumstances” will the bringing of legal proceedings amount to an abuse of a dominant position. This omission is curious.
Finally, it is striking that this case was fought between two Chinese entities, first in the German courts and then the CJEU. In 2G or 3G telecoms, such disputes would generally have involved a US or European entity. Times are changing. Both ZTE and Huawei are reported to be making significant R&D investment in developing technology for 4G and 5G telecoms, and hence to strengthen their SEP portfolios for these technical standards.