The most significant IP / Competition law crossover case since our last edition of IP Matters is the EU Court of Justice decision in Huawei v ZTE.

The Court prescribed a process for licensing standard-essential patents, and clarified when the patent owner may be guilty of abuse of dominance in applying for an injunction to prevent use of its patent. In this article we summarise the decision but, first, put it into its wider context.

The “Patent Wars”

The Patent Wars have been a phenomenon in the world of mobile telephony over recent years.

Patent owners traditionally use their portfolios to generate revenue from licensing. In the Patent Wars, owners have instead used their patents to exclude competitors through denial of licence. Mobile telephony provides unparalleled incentives for such behaviour because of the enormous demand for smartphones, their high price and the huge number of patents that go into them; both essential ones and those which give a competitive edge.

Companies have engaged in M&A activity to stockpile patents using Cold War logic that fear of retaliation will deter competitors for suing for infringement of their own patents. Google, for instance, acquired Motorola Mobility predominantly for its patent portfolio, as a means to protect the Android operating system.

Standard-Essential Patents (“SEPs”)

SEPs, however, cannot be denied to willing licensees, as it is well established in European law that those who allow their patents to be used in the setting of industry standards are obliged to license those patents on terms that are fair, reasonable and non-discriminatory; so-called “FRAND” terms.

Nowhere are SEPs a hotter topic than in the world of mobile telephony, because of the aforementioned hostility of the competition, and because the speed of invention in the sector has led to a constant stream of new innovations requiring interoperability between devices which can only be delivered by the setting of industry-wide standards by bodies like the European Telecommunications Standards Institute.

It is understandable that, in such an environment, disputes arise between licensors and licensee as to exactly what terms are FRAND. The parties are frequently competitors, and the licensor may be incentivised to push the limits of FRAND in negotiation because there is more benefit in delaying the licensee’s entry into the market than there is in obtaining the licence revenue.

Courts adjudicating such disputes must strike a balance between IP law, designed to protect rights-holders, and Competition law, which is designed to protect consumers but which does incidentally protect would-be licensees.

The Background to Huawei v ZTE

Huawei v ZTE started with proceedings in the Düsseldorf District Court by a SEP holder, Huawei against ZTE, the manufacturer of smartphones.

The Court stayed the proceedings to refer five questions to the Court of Justice of the European Union (the CJEU). These questions (recited at §39 of the judgement) concerned when it might be an abuse of dominance under Article 102 for a SEP holder to seeking an injunction to stop infringement of its patent.

The Düsseldorf court made the referral to the CJEU because of inconsistencies between:

  • the German Courts’ Orange Book approach, summarised in §31 of Advocate General Wathelet’s pre-judgment Opinion in Huawei v ZTE, and
  • the more “licensee-friendly” approach of the European Commission, as indicated for example in;

(a) the Commission’s decision that Motorola infringed Article 102 by seeking an injunction against Apple relating to the GPRS Standard (page C 344/6 here); and

(b) (to avoid a similar fate) Samsung’s commitments to the Commission not to seek an injunction for infringement of its SEPs in the UMTS Standard provided would-be licensees adhered to a Licensing Framework (page C 350/8 here).

The CJEU decision in Huawei v ZTE

The judgement prescribes a process to be followed by the owner and user of the SEP.

  • §61: Before applying for an injunction, the owner must identify the SEP and explain to the user how it is being infringed.
  • §63: If the user expresses a willingness to take out a licence on FRAND terms, the owner must make a specific, written offer, specifying the amount of the royalty and how it is to be calculated.
  • §65: The user must respond to the offer diligently and in good faith, without engaging in delay tactics.
  • §66: If the user rejects the offer, it may claim that any application for an injunction is abusive; but only if it has made a prompt, written, specific counteroffer that corresponds to FRAND terms.
  • §67: If the counteroffer is rejected, the user must give security such as a bank guarantee or paying the offered royalty into a designated holding account. The calculation of that security must set out the number of past SEP uses, and the user must be able to render an account in respect of those uses.
  • §68: Where no agreement is reached following the counteroffer, the parties “may” request that the amount of the royalty be determined by an independent third party.

§68 reflects that there is a limit to how far the Court can go in prescribing a process where both offer and counteroffer are rejected but, on balance, the judgment sides with the user to the extent that, during such an impasse, any attempt at injunction is likely to be abusive so long as the counteroffer was found to be FRAND.

We say “is likely to be” because there is an important caveat to the user’s ability to argue abuse of dominance. The SEP owner may not be dominant. See §57 of the Advocate General’s Opinion, although this issue was ignored in the judgment because the Düsseldorf Court assumed Huawei was dominant so the CJEU did not address the point. A SEP owner frequently will be dominant, but it may not be if alternative standards are available.

Finally, §69 says that, if the body that developed the standard does not check whether patents in the standard are valid or essential, the user “cannot be criticised” if, in parallel with the negotiations, it challenges the patent’s validity or essentiality, or reserve its right to do so. However, it must be a parallel process. §66 and §67 suggest the user cannot only challenge the patent.

What Next?

Whilst the CJEU judgment provides welcome clarity, it is not a decision which precludes further dispute, and nor would it have been reasonable to expect such a decision. Besides the obvious satellite disputes, for example, as to whether a counteroffer was made diligently and in good faith, the Court did not elucidate on how to determine whether or not terms are FRAND.

Also, in her 11 September speech at the 2015 IBA Competition Conference, Margrethe Vestager, the Competition Commissioner noted attempts to outmanoeuvre the judgment by seeking injunctions against companies at other levels of the supply chain, such as telecoms operators selling phones rather than the phone’s manufacturer.