Italian Courts are increasingly being asked to adjudicate on essential patents and their legal regime. The arguments relating to injunctions and damages are still being made and are very interesting for essential patent owners and potential infringers alike.
When a patent claims a technology that is deemed to be essential for the operability of a standard, its holder has an indirect monopoly on the market that has to be somehow balanced. Essential patents contain one or more claims that are necessarily infringed by the implementation of a standard for which they are essential.
A standard is defined by ECMA (European Computer Manufacturer Association) as every "document, established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines of characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context".
These recognized bodies are created precisely with the aim of developing and managing standards through the creation of teams composed by members of the same association, usually representative of the main enterprises active in the field, working together and sharing their knowledge.
In Europe, for example, in the telecommunication field there is ETSI (European Telecommunications Standards Institute) and in the communication systems field, ECMA (European Computer Manufacturer Association).
Standards are of crucial importance since they create, by agreement, a common platform where devices can interoperate independently from their brand. Their development has to be looked at positively, since consumers can count on the interoperability between devices and enterprises can save time and money not developing or choosing their own.
Given these advantages of adopting a standard, companies work together in teams created within the recognized associations, such as ETSI or ECMA, having the specific purpose of standardization. To improve the standards, companies are constantly developing technologies, often protected by patents. If these patents became necessary for the operability of the standards, they are "essential patents".
How are essential patents different?
Being essential, these patents could be a barrier to entry for enterprises other than the patent owner, since access to the standard would not be possible without using the patent, i.e. in the absence of a license granted by the patentee.
This sort of monopoly on the access to the standard would render its development pointless. Therefore, it is usual the case that when a company becomes member of a recognized association for standardization, it undertakes to declare when it has an essential patent for that standard, and to grant licences to whoever requests them on Fair, Reasonable and Non-Discriminatory (FRAND) terms.
What are the pros and cons of holding an essential patent?
Every company wishing to operate in the market must ask for a license and arguably has the right to obtain it (albeit at a price to be determined). As a result, the owner earns royalties but at conditions that could have been more lucrative if the patent was not essential. But this is not all: essential patents could be considered, in a way, weak.
The Advocate General (Case C-7/97 Oscar Bronner) highlights, in fact, that "a dominant undertaking must not merely refrain from anti-competitive action but must actively promote competition by allowing potential competitors access to the facilities which it has developed".
Italian Courts have recently dealt with all these issues and expressed their opinion on essential patents.
Ericsson v ZTE
Ericsson is the owner of various patents said to cover aspects of technologies such as GSM and EDGE. Ericsson considers these to be essential in the field, according to the declaration it made to the international association 3GPP (3rd Generation Partnership Project). Ericsson has licensed some of these patents to some of the main companies producing mobile phones.
ZTE Italy is an Italian corporation associated with ZTE Corp., a Chinese mobile phone company. ZTE Corp. was negotiating with Ericsson for a license to use the "essential patents", but it was not agreed at the time of the trial, since the parties could not agree on the structure of the licence and its conditions.
During negotiations, Ericsson began interim injunction proceeding against ZTE Italy before the Court of Rome seeking an injunction against production, importation and dealing with products infringing its patents, the seizure of the products and the discovery and seizure of all the documents related to the alleged infringement.
The Court of Rome, both at first instance and on appeal denied all Ericsson's request.
ZTE challenged the presumption of essentiality of the patents, since it must not be forgotten that standardization organisations do not check the accuracy of any declarations of essentiality of patents. However, more importantly, the Court maintained that, even assuming the patents are valid and essential to the standard, there would be merely pecuniary damage, of easy quantification in an ordinary proceeding, and therefore there was no justification in granting a preliminary injunction.
The Court ruled that if patents are essential, licenses have to be granted at FRAND conditions which have to be shaped on the basis of the royalties earned from analogous licences. It did not consider the harm to be irreparable if there is no choice for the patentee other than granting a licence at conditions already set. This decision adheres to case law according to which pecuniary damage alone is not irreparable harm. The ruling applies this theory to the case of essential patents, where, thanks to the existence of licenses and FRAND conditions, it is easier to determine the harm, which the Court argued was just pecuniary. Additionally, on appeal, the Court of Rome dismissed Ericsson's arguments that it needed to institute urgent proceedings to avoid the patents at issue losing commercial value due to the alleged infringement ruling that the patent owner could act on the merits to defend its rights.
Is the owner of an essential patent therefore weak?
Due to the fact that, according to the Court of Rome, the owner of an essential patent has no way of avoiding licensing parties (even former infringers), this means that he will always lack the irreparable harm necessary to seek protection at interim proceedings.
It would appear that a company could rely on this decision to start producing, importing and dealing products after having started negotiating with the patentee a licence that shall be granted at FRAND conditions. Equally, this decision could be useful if a company becomes the target of a patent troll. In that case, in fact, infringer could avoid paying damages at an interim proceeding level, and has more chance of defending its position on the merits, for example challenging the validity of the patents.
A different decision
Should essential patent holders therefore just give up? Not at all. A couple of years ago another Court ended up with an opposite ruling.
This time, the trial saw Philips, the holder of essential patents for the production of CD-RW, against three companies that were producing, importing and commercializing CD-RW in the absence of licenses.
The Court of Genova granted Philips the seizure of all products and an injunction against the companies presenting any further commercialization and production, including importing, exporting and the advertisement of infringing CD-RW.
In this case, the Court came to a completely different decision because it said that the obligation to grant licenses could not be violated if no request for a licence was made.
Therefore, according to this judgment, there is no obligation to grant a licence in absence of a specific offer by the interested party. In such cases, there could not be any violation of the obligation to grant licences.
What does this mean for essential patent holders?
Essential patent holders may be relieved: enterprises willing to use the patent have an obligation to apply for a license and the terms have to be agreed.
The Court of Genova expressively applies the essential facilities doctrine to this case. According to this theory, essential patents could be considered equal to essential facilities, since competitors wanting to access the standard require a licence. Hence the essential facilities doctrine being called into play. According to this doctrine "a company which has a dominant position in the provision of facilities which are essential for the supply or services on another market abuses its dominant position, without objective justification, it refuses access to those facilities".
The essential patent holder conduct would be considered abusive if the licence is denied in absence of a valid reason. Being a past infringer is (so far) not considered by the Court a justification for denial.
According to the Court, if the patent owner does not comply with the rules established by the Association he is part of, for example by not granting the licence or imposing unfair conditions, or ignoring the licence petition, his conduct may result in an abuse.
However, it has to be proved that the patent holder holds a dominant position in the relevant market, which means (as it is summarized in the ruling), that: (i) he controls the essential facility, (ii) the third party does not have any practical alternative to the essential facility, (iii) he has denied to the third party the access in absence of a valid reason, (iv) the access to the facility is realizable.
In conclusion, the news is not too bad for the essential patent holder: he is obliged to grant a license only if the above conditions are met, in order not to commit an abuse, and if infringers do not ask to be granted a license, he can seek justice through an interim proceeding.
However, the debate before the Italian Courts is far from settled and essential patents holders should indeed keep a careful eye on it.