In Huawei v ZTE, the Court of Justice of the European Union (CJEU) has provided guidance which limits the circumstances in which it is an abuse of a dominant position for the owner of a standard essential patent (SEP) to seek injunctive relief, delivery-up and damages.
The court has taken a softer approach than the European Commission in Motorola and adopted elements of German Orange Book practice (see KZR 39/06). This is likely to be welcome news to owners of SEPs as it redresses the balance between such owners and users of their technology.
In 2009, Huawei notified the European Telecommunications Standards Institute (ETSI) that its patent, EP 2,090,050 B1, was essential or potentially essential to the standard for Long Term Evolution (LTE). At the same time, it undertook to grant licences to third parties on fair reasonable and non-discriminatory terms (FRAND).
Between November 2010 and the end of March 2011, Huawei approached ZTE and sought to license, among other patents, the '050 patent. ZTE engaged, to a degree, in the licensing discussions, with both parties making offers and counter-offers, including offers of cross-licences. However, no licence was concluded.
Following these negotiations, in April 2011, Huawei brought proceedings against ZTE for patent infringement before the Landgericht Düsseldorf in Germany. In doing so, it sought an injunction, delivery-up and damages. In its defence, ZTE asserted, among other things, that Huawei, in pursuing the relief sought, was abusing its dominant position contrary to Art. 102 of the Treaty of the European Union.
The court held that the patent was essential to the standard and, therefore, was infringed by ZTE. Given the inconsistent approaches, however, by the German courts in the Orange Book and the European Commission in Motorola and Samsung the court referred certain questions to the CJEU. In November 2014, Advocate General Wathelet gave his opinion.
To contextualise the CJEU's decision, it is useful to revisit the decisions in Orange Book and Motorola.
In the former, Philips owned a patent which had become de facto essential to the "Orange Book", a de facto standard which formed part of a series of technical specifications called the "Rainbow Books" for Compact Discs.
Importantly, because there was no intellectual property policy to this effect, the patent was not notified as essential/potentially essential, nor had Philips given an undertaking to license the patent on FRAND terms. It had, however, granted several licences for the patent to third parties on the basis of a standard licence agreement.
Philips brought a claim against a third party manufacturer of Compact Discs, which was found to infringe the patent. The defendant, in turn, raised a number of competition law defences, which fell to be determined by the Bundegerichtshof (Federal Court of Justice) in Germany.
While on the facts the defence was not available to the defendant, the Bundegerichtshof held that the owner of a de facto essential patent, if in a dominant position, would abuse it in the following circumstances:
- The defendant had made an unconditional offer for a licence on reasonable terms;
- The patentee had refused the offer and, in doing so, had "unfairly impeded" or discriminated against the defendant; and
- The defendant had made a payment on account of the royalties that would have been payable.
In Motorola, Motorola had notified its patent as essential/potentially essential to the GPRS standard and committed to license it on FRAND terms. Following Apple's entry into the market, in April 2011 Motorola brought patent infringement proceedings against Apple in Germany. Apple, in response, made six successive offers to take a licence from Motorola.
In its second offer, Apple proposed to enter into a licence which would have given Motorola the right to set the royalties according to its equitable discretion and according to FRAND principles. The offer also allowed for a full judicial review of the amount of FRAND royalties, whereby Motorola and Apple could submit their own evaluations, calculations and reasoning for consideration to the court. Motorola, however, rejected that offer and continued the proceedings.
In 2011, the German courts held that the patent was infringed and granted an injunction. In January 2012, when Motorola decided to enforce the injunction, Apple made its sixth offer of a licence. In this offer, Apple accepted a clause whereby Motorola would be entitled to terminate the agreement if Apple challenged the validity of any of the licensed SEPs. Further, it explicitly acknowledged the infringement of the licensed SEPs by all of its phones on the market at the time. Based on this, the German courts stayed temporarily the enforcement of the injunction.
Following complaints from, among others, Apple, the European Commission opened an investigation. The European Commission concluded that Motorola was in a dominant position because it had an SEP for a standard to which the industry was "locked-in". Having given a declaration to license the SEP on FRAND terms, the European Commission found that to seek injunctive relief without objective justification was an abuse of that dominant position. Further, on the facts the European Commission held that there was no objective justification because Apple could not be said to be an "unwilling" licensee. As such, there was an abuse of a dominant position.
The CJEU in Huawei v ZTE declined to address directly whether ownership of an SEP automatically results in the proprietor being in a dominant position. However, the judgment appears to make clear that for there to be abuse of a dominant position something more will be required, such as the patentee refusing to offer a licence in circumstances where it has previously made a FRAND declaration.
However, the court went on to describe a framework for determining abuse more indicative of the Orange Book. It held that:
- The patentee must notify the prospective licensee of the infringement by designating that SEP and specifying the way in which it has been infringed;
- After the prospective licensee has indicated its willingness to conclude a licence on FRAND terms, it is incumbent on the patentee to make a written offer of a licence on those FRAND terms. The CJEU has ruled that this offer should specify the amount and method of calculation of the royalties;
- The prospective licensee should respond to the offer. Here the court emphasised that the prospective licensee should "diligently" respond to the offer, in accordance with "recognised commercial practices in the field and in good faith" (which implies that there should not be any "delaying tactics");
- Should the prospective licensee not accept the offer, it should "promptly" make a counter-offer; and
- Crucially, if the prospective licensee is using the teachings of the SEP, it should 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" (emphasis added).
In implementing this approach, the court emphasised that it should always remain open for the prospective licensee to challenge the validity or essentiality of the patent and for the parties to remit the issue of FRAND to an independent third party. It also drew a distinction between seeking injunctive relief or delivery-up (which could result in an abuse of a dominant positon) and damages (which could not).
The decision is to be welcomed as it appears to redress the imbalance between the patentee and prospective licensee resulting from the decision in Motorola and, by virtue of requiring the payment of security, has helped to clarify what constitutes an "unwilling" licensee. It also provides the parties with improved guidance as to the way that negotiations should be conducted.
While much of the detail remains to be determined, and in particular the key question of what actually will constitute FRAND terms, the court's decision should assist willing parties to progress licensing negotiations towards a swifter conclusion, while preserving the rights of SEP holders to seek redress where, as is so often the case, a prospective licensee engages in delaying tactics.