With a series of decisions of 11 September 2008, the highly regarded Regional Court Düsseldorf has further specified the socalled FRAND defence in an international patent case in the Electronics sector.
For some years, the competent patent infringement chambers of the Regional Court Düsseldorf have accepted the competition law objection as an admissible defence in patent infringement proceedings. According to this standing case law, the defendant in a patent infringement proceeding can defend himself by stating that the enforcement of patent infringement claims would be an abuse of the law pursuant to § 242 BGB (German Civil Code), because the patentee is obliged to grant him a licence to the infringed patent under the rules of competition law (cf. Regional Court Düsseldorf, in: InstGE 7, 70 et seq. – Videosignal-Codierung I). This defence particularly applies to cases where the patentee is required to grant the defendant a fair, reasonable and nondiscriminatory (so-called FRAND) licence on basis of contractual claims (e.g. obligation to grant FRAND licences in standardisation agreements) or the law (e.g. Art. 81, 82 ECA). In its landmark decision Siemens vs. Amoi (Regional Court Düsseldorf, decision of 13 February 2007, 4a O 124/05) the Regional Court Düsseldorf was the first reported court to dismiss a patent infringement action solely for this reason.
In the present case several licensors of the MPEG LA LLC patent pool had sued a Danish DVD replication company and some of its subsidiaries and directors for patent infringement in Germany and Denmark. MPEG LA grants licences for a number of patents that are, according to its own view, essential for the use of the MPEG-2 ISO standard for transmission and storage of video signals. MPEG-2 is a very successful standard that is used e.g. in DVD video systems, set-top-boxes, DVB-T devices, personal computers etc. So far 25 licensors have contributed about 800 patents in 57 countries to the MPEG-2 patent pool. Presently, more than 1,400 licensees are licensed worldwide under the MPEG-2 standard agreement offered by MPEG LA.
The DVD replication company’s group produced DVDs in Denmark and distributed these for the most part in Scandinavia, but also in small numbers in Germany through its German subsidiary. After being sued in Germany by the MPEG LA licensors the company requested a standard licence from MPEG LA, but limited to the territory of Federal Republic of Germany. The German subsidiary had asked for a worldwide standard licence. MPEG LA had refused to grant any regional licences, arguing that this would disregard the major Scandinavian sales. These sales, however, were the subject of a parallel patent infringement action pending in Denmark.
The Defendants raised the competition law licence objection stating, as its reason, that MPEG LA has refused to grant the requested licence for Germany. The Defendants alleged that by an abuse of the German legal system the Claimants were attempting to force Defendants into a worldwide licence for all patents licensed by the MPEG LA, some of which were not subject of the German litigation.
The court found that a patent pool licence offer of the patent owners participating in the standard is, however, per se not a competition law infringement because the European Commission, in its “Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements”, does not articulate any fundamental reservations with respect to technology pools. This is true even if they – de facto or de jure – support an already existing industry standard (paragraphs 210-211).
If the patent owner is in principle willing to grant a licence, there would only be one question under competition law. The question would be whether its licensing practice is discriminatory (because those asking for a licence are treated differently without a substantial reason); or whether it asks for unjustified royalties (so called exploitation abuse). Thus the court concluded that the Claimants could choose whether to offer individual licences or a patent pool licence, as long as they do not categorically refuse to conclude a licence agreement.
In addition to these options the court did not see a reason to adopt the third possible solution of a “territorial pool licence”. Such a licence would perhaps be relevant when a worldwide licence seems unreasonably broad to a customer in view of his sales territory, he might limit himself to obtaining individual licences for the countries of his sales territory. However, this had not been done. The court found that the Defendants acted contradictorily when demanding modifications of the standard-pool licence agreement that could have been realised by means of individual licences.
The court further argued that the Claimants and MPEG LA are not forced to offer a territorial pool licence because the rule of equal treatment forbids Claimants to treat different licensees unequally without any justifying reason. As MPEG LA has not so far granted modifications comparable to those requested, the Defendants could not request such a licence on the basis of discrimination. The court points out that DVDs are “volatile goods” where the export to non-licensed countries has no practical obstacles. Therefore, a territorial licence as requested by the Defendants would involve a hardly controllable risk of abuse. The Claimant would therefore be allowed to generalise when offering a pool licence agreement in order to meet this abstract risk of abuse.
The court went on to state that the Claimants were justified in refusing the specific request of the German subsidiary on the grounds that the Defendant’s group owed a considerable amount of royalties to the MPEG LA because of past patent infringements. The Claimants could not be expected to grant a standard licence agreement – in addition one that is only for a subsidiary of a corporate group – without a provision in the licence agreement specifying the extent to which royalties have to be paid additionally for past patent infringements. Otherwise, the owners of the proprietary rights would be in danger that other (potential) licensees could be motivated to use their technology without obtaining a licence and to then show willingness to take a licence only after the discovery of the infringing activities.
The court found that there is a danger that if the Claimants had an obligation to grant an individual licence to a single subsidiary, corporate groups would be tempted to avoid the obligation to pay royalties for past infringing activities by forming new subsidiaries. Past patent infringements by several companies of a group justify the ambition of the patentees to conclude cumulative licence agreements with all companies belonging to the corporate group that are active in the corresponding field of business with retrospective effect, thereby including any missing royalties of all companies belonging to the corporate group. Last but not least, this request would be justified also with respect to the principle of the obligation to treat all licensees equally; law-abiding licensees would be discriminated against significantly if their competitors were permitted to undercut them in price because they had been economically strengthened by saving past royalties.. In the view of the court this would generate a danger of distortion of competition within the market.
With this decision, the Regional Court Düsseldorf has clearly strengthened the position of owners of standard essential patents as potential licensees are not able anymore to benefit on the one hand from a pool licence and to limit on the other hand territory of the licence. But the decision also shows a generous view of the Court on international licence practice. Interestingly, it allows patentees to force potential infringers into global licences with an action in only one country. Thus, it could avoid costly parallel litigation. The Defendant, however, loses the option to use the many opportunities of the national driven European patent court system. And this system is typically considered and used by patentees when taking action in the appropriate forum.