Last week, in response to a request for a preliminary ruling by a German court hearing a patent infringement action brought by Huawei against ZTE, the Court of Justice of the European Union (ECJ) took up the question of whether the assertion of patents that have been declared essential to the practice of a standard (standard-essential patents or SEPs) may run afoul of Article 102 of the Treaty on the Functioning of the European Union (TFEU). Article 102 prohibits companies that enjoy market dominance from abusing their dominant position by, among other means, “limiting production, markets or technical development to the prejudice of consumers.” Article 102(b) TFEU.
The ECJ began its analysis by noting that various provisions of EU law are directed to ensuring that intellectual property (IP) rights are protected and that the owners of IP rights have proper recourse to various legal remedies when those rights, which are fundamentally exclusionary in nature, are infringed. Under EU law, the remedies for infringement of IP rights include not only monetary relief in the form of damages and injunctive relief to prevent future infringement, but also the recall and destruction of infringing goods already on the market. At the same time, both EU and German law prohibit persons from abusing their market dominant position.
Given the long-standing co-existence of the well-established right to exclude others from infringing one’s intellectual property with the prohibition on abusing one’s market dominance, the ECJ observed that the exercise of the statutory right to exclude cannot, in itself, constitute an abuse of market dominance:
It is, in this connection, settled case-law that the exercise of an exclusive right linked to an intellectual-property right — in the case [at hand], namely the right to bring an action for infringement — forms part of the rights of the proprietor of an intellectual-property right, with the result that the exercise of such a right, even if it is the act of an undertaking holding a dominant position, cannot in itself constitute an abuse of a dominant position.
Something more is needed before the assertion of the right to exclude may constitute an abuse of a dominant position. The central question posed by the case before the ECJ is whether the special character of standard-essential patents—that they are contributed to the development of standards in exchange for a commitment by the patent owner to license them on fair, reasonable and non-discriminatory (FRAND) terms—is sufficient to trigger potential abuse. The ECJ’s answer is a conditional “yes.”
The court observed that although owners of SEPs have the statutory right to bring actions seeking injunctive relief or the recall of products, “the fact that that patent has obtained SEP status means that its proprietor can prevent products manufactured by competitors from appearing or remaining on the market and, thereby, reserve to itself the manufacture of the products in question.” Thus, the ECJ reasoned, “[i] those circumstances, and having regard to the fact that an undertaking to grant licences on FRAND terms creates legitimate expectations on the part of third parties that the proprietor of the SEP will in fact grant licences on such terms, a refusal by the proprietor of the SEP to grant a licence on those terms may, in principle, constitute an abuse within the meaning of Article 102 [of the] TFEU.” The ECJ then clarified the conditions under which such abuse may be found.
To the extent the patent holder seeks monetary relief, the assertion of SEPs will not constitute abuse of market dominance. However, to the extent the patent holder seeks injunctive relief to prevent future infringement or seeks the recall of infringing products already on the market, the assertion of SEPs may constitute abuse of market dominance if the patent holder fails to fulfill certain obligations before seeking such relief: first, the patent owner must provide the alleged infringer with notice it is infringing (along with a specification of how it is infringing). Second, “after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms,” the patent owner must present the alleged infringer with a specific offer to license on FRAND terms, along with a description of how the proposed royalty rate was calculated.
The ECJ held that if, after the patent owner has fulfilled these obligations, “the alleged infringer has not diligently [and promptly] responded to that offer” either by accepting it or by making a specific FRAND counter-offer in writing, the patent owner may seek injunctive relief and the recall of infringing goods without abusing its market position.
At the same time, the ECJ held that in the event the patent owner and the accused infringer cannot agree on the terms of the license, and the accused infringer continues to sell products embodying the technology at issue, the accused infringer is required “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. The calculation of that 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.”
The ECJ was careful to note that the parties in this case did not dispute the patent owner’s market dominance. It also appears that the parties did not dispute that the patents in suit were essential to practicing the standard at issue. It remains to be seen how the framework articulated by the ECJ here will be applied in cases in which these predicate facts—whether the patents are standard essential, and whether the SEP holder enjoys market dominance—are disputed, and how the adjudicatory framework will evolve to address these and other, related questions. What is clear is that as long as patent owners in the EU have met their obligations of notice and of offering a license on FRAND terms, they will be permitted to pursue injunctive relief without running afoul of the prohibition against abusing one’s market dominance.
In the meantime, the debate in the United States over whether patent hold up is a real concern in the first instance, who bears the burden of proving the predicate facts supporting a FRAND defense, and whether (and to what extent) reverse patent holdout should also be of concern to law- and policy-makers, continues unabated.