On July 16, 2015, the European Court of Justice (ECJ) rendered its seminal decision in Huawei v. ZTE. In its decision, the ECJ provided fundamental guidance for the licensing and enforcement of standard essential patents (SEPs) that are subject to a FRAND licensing commitment (i.e., a commitment by the patent owner to license those patents on fair, reasonable, and nondiscriminatory terms). While Huawei and ZTE have settled the patent dispute that gave rise to the ECJ’s judgment, the decision left it to courts in Germany and other European countries to apply and refine the general principles laid out by the ECJ. The case law on what is known as the “FRAND defense” in injunction proceedings is evolving and remains unsettled in important areas. Since our last update (see First German Decisions Applying the ECJ’s Huawei v. ZTE Framework on Injunctions for Standard Essential Patents), there have been several important decisions in Germany, the United Kingdom, and elsewhere that have applied and interpreted the Huawei v. ZTE guidelines.
I. Overview
In Germany, the Regional Court Düsseldorf articulated specific requirements for a FRAND-compliant license offer in the Sisvel v. Haier proceedings. The court partially followed the UK judgment in Unwired Planet v. Huawei, which marks a milestone in European FRAND case law. In Saint Lawrence Communications v. Vodafone the same Düsseldorf court held that certain Huawei v. ZTE requirements may be met until the end of the oral hearing, instead of having to be fulfilled prior to filing a motion for injunctive relief. Other notable cases include Pioneer v. Acer regarding DVD technology and Philips v. Archos, a decision by Dutch courts regarding UMTS and LTE.
In the UK, the High Court provided comprehensive guidance regarding FRAND-compliant license offers and the determination of FRAND royalty rates for mobile telecommunication SEPs in Unwired Planet v. Huawei. This is the first European decision discussing in detail the substantive terms of a FRAND patent license. As such, Unwired Planet v. Huawei—much like Microsoft v. Motorola in the U.S.1—will be an important point of reference with respect to possible methodologies for determining FRAND royalties.2
Here, we will discuss in more detail guidance by national courts in Europe on the procedural steps required by the ECJ in its Huawei v. ZTE decision in injunction proceedings (II). We will then discuss the standards applied by courts for the determination of whether a license offer is substantively FRAND (III) and conclude with a brief outlook (IV).
II. Refining the ECJ’s FRAND Procedure
In Huawei v. ZTE, the ECJ required that both the SEP owner and the alleged infringer must take specific procedural steps when injunctive relief is sought under FRAND-committed SEPs. The specific requirements and sequence are as follows:
- Before bringing an action for injunctive relief, the SEP holder must give notice to the alleged infringer of the infringement by designating the SEP in question and specifying the way in which it has been infringed.
- The alleged infringer must express its willingness to take a license on FRAND terms.
- The SEP holder must provide a written license offer on FRAND terms, specifying in particular the royalty and how it is to be calculated.
- The alleged infringer must respond diligently to the SEP holder’s offer in accordance with recognized commercial practices in the field and in good faith (and in particular without delaying tactics) by accepting the SEP holder’s offer or making a counter-offer on FRAND terms.
- The alleged infringer must provide appropriate security and be able to render an account of its acts of use.
Only if the SEP holder has followed those steps and the alleged infringer continues to use the SEPs in question, and fails to make a FRAND counter-offer and provide security, may the SEP holder seek an injunction. Otherwise, doing so may constitute an abuse of the SEP holder’s dominant position and give rise to the alleged infringer’s “FRAND defense” in any action for injunctive relief. Note that the requirements do not apply in an action for damages where no injunctive relief is sought.
Several German courts have provided more detailed guidance on the required procedural steps in a number of important decisions since the ECJ’s holding:
1. Notice of Patent Infringement
In Philips v. Archos, the Regional Court Mannheim held that the SEP owner must inform the alleged infringer of the patent at issue, as well as the applicable standard and method of infringement, including the technical functionality of the allegedly infringing embodiment. A mere statement that the allegedly infringing embodiment is standard-compliant is not sufficient, according to the court.3
In Sisvel v. ZTE, the Regional Court Düsseldorf adopted a less-demanding standard, holding that—at this early stage of the FRAND procedure—the SEP owner does not have to provide detailed technical or legal explanations as long as the implementer is able to assess the alleged infringement with the help of technical and legal experts.4 The same court also held in Intellectual Ventures v. Vodafone that the SEP holder need not provide claim charts in connection with the initial notice.5
With respect to timing, both the Regional Court Düsseldorf in Saint Lawrence Communications v. Vodafone and the Higher Regional Court Düsseldorf in Sisvel v. Haier held that the parties may complete most or all of the steps set forth in Huawei v. ZTE after the plaintiff has filed a motion for injunctive relief, and the parties may repeat steps until the end of the last oral hearing.6 However, in its earlier decision, in Sisvel v. ZTE, the Regional Court Düsseldorf noted that the ability to repeat or cure any of the required steps is not unlimited.7 A court could sanction, for example, parties who abuse the opportunity to repeat or cure these steps, e.g., by a rejection of any submission that is deemed late in the court’s discretion.8
However, the court in Saint Lawrence Communications v. Vodafone made clear that the reciprocal requirements in Huawei v. ZTE are sequential in the sense that they must be followed in the specific order laid out by the ECJ. A national court reviewing a FRAND defense must consider the requirements in the same order.9 That means, for example, that an alleged infringer need not make a FRAND-compliant counter-offer until the SEP holder has first made a FRAND-compliant offer.
The Higher Regional Court Düsseldorf also held that the plaintiff may send the notice of infringement to the defendant’s parent company without the need to also send it to the allegedly infringing subsidiary that implements the patented technology in Germany.10
2. Declaration of Willingness to Take a License and Status of a Willing Licensee
Following notice by the patent holder, the SEP implementer must timeley express its willingness to take a patent license. This requirement may be met by an express or implied declaration.11 In Saint Lawrence Communications v. Vodafone, the Regional Court Düsseldorf held that Vodafone did not meet this burden by declaring its willingness to take a license five months after receiving the notice of infringement. The Regional Court Mannheim was even stricter, holding in Saint Lawrence Communications v. Deutsche Telekom that a response after three months would be too late.
The substantive requirements for the declaration of willingness to take a license are not high. In particular, the declaration does not require any details regarding the royalty or other license terms.12
In Philips v. Archos, a case involving mobile telecommunication technologies, the Regional Court Mannheim refused to grant an injunction, finding that Archos had a FRAND defense pursuant to the Huawei v. ZTE principles.13 The Hague District Court reached a different conclusion in the parallel proceeding in Archos v. Philips. Archos claimed that Philips had abused its dominant position during their FRAND negotiations. While Philips offered EUR 0.7 per product sold, Archos made a counter-offer at EUR 0.07 per product. The Dutch court reportedly found that Archos demonstrated its unwillingness to take a license by asking Philips to sue if Philips wanted to receive higher royalty rates. In this respect, the Dutch court’s decision is contrary to the German court’s and shows that the interpretation of the Huawei v. ZTE principles may differ significantly among national courts in different European countries.
The UK Patents Court held in Unwired Planet v. Huawei that the implementer of an SEP must act in good faith in accordance with FRAND principles when negotiating a license. This will not be the case if the implementer makes extreme offers and remains intransigent.
3. Confidentiality and the Obligation to Conclude an NDA
In Sisvel v. Haier, the Higher Regional Court Düsseldorf held that an SEP is required to produce comparable license agreements under an NDA. Alleged confidentiality obligations to third parties do not relieve the SEP holder from its secondary burden of proof regarding comparable license agreements. In Unwired Planet v. Huawei, the same court held that both the plaintiff and defendant are required to sign an NDA. The court stated that it would consider a party’s refusal to sign an NDA in determining the parties’ FRAND compliance: A plaintiff’s refusal may result in a presumption of discriminatory licensing practices; an alleged infringer’s refusal may lead to a determination that the alleged infringer is not a “willing licensee.”14 In Unwired Planet v. Huawei, the court indicated that the following terms in an NDA would be reasonable in an NDA: (i) limiting disclosure to only four employees of the defendant (to be named explicitly), (ii) requiring that confidentiality obligations survive termination of employment agreement, (iii) imposing a contractual penalty of EUR 1 million, and (iv) providing for narrow exceptions to confidentiality obligations with the defendant bearing the burden of proof that those exceptions are met.
In Sisvel v. ZTE, the Regional Court Düsseldorf held that the SEP owner remains obligated to provide a license offer under FRAND terms even if the implementer refuses to sign an NDA. Refusal to sign a confidentiality agreement does not per se mean that the implementer is not a willing licensee.15
4. Claim Charts and a “Proud List”
While claim charts are not required to be provided in connection with the initial infringement notice, the Higher Regional Court Düsseldorf held in Sisvel v. Haier that the SEP owner must provide claim charts to support the FRAND license offer. Furthermore, if customary in the relevant industry, it may be necessary to provide a “proud list” of, e.g., ten to fifteen of the strongest SEPs in the portfolio, including an explanation of those patents’ relevance based on the documentation for the applicable standard and the reasons for selecting the patents on the proud list.
5. Calculation of Royalty Rate
In Sisvel v. Haier, the Higher Regional Court Düsseldorf held that merely providing a standard royalty rate and multiplying that by the number of royalty-bearing devices is not sufficient to meet the ECJ’s requirements for information on how the FRAND royalty is calculated. A calculation of past and future royalties must be more detailed and transparent, and take into account different markets and specific patents. The court found that Sisvel’s license offer was insufficient, because Sisvel did not provide any details on the specific manner in which the royalty rate was calculated, as required by the ECJ in Huawei v ZTE.
Similarly, in Philips v. Archos, the Regional Court Mannheim held that it was insufficient to merely state a royalty rate/multiplication value, finding that Philips failed to explain the reasoning behind its proposed royalty rate of USD 1.00 per device.
6. Providing Security and Rendering Account
It is crucial for an SEP implementer to provide sufficient security when its FRAND counter-offer is rejected. In Saint Lawrence Communications v. Vodafone, the Regional Court Düsseldorf held that the security provided by third-party intervener HTC, after its second counter-offer, was too late and also too low, because it was limited to devices sold in Germany. Hence, to be safe, alleged infringers may need to consider providing a security for a worldwide license that is based on the SEP owner’s FRAND offer. On the other hand, the Higher Regional Court Düsseldorf in Sisvel v. Haier held that requesting a bank guarantee for royalties due in the future is not FRAND-compliant.16
7. Cure of Certain Steps of the FRAND Procedure During Litigation
It remains unsettled whether both the SEP owner and the alleged infringer can make up for or repeat and cure a step required in the ECJ’s FRAND process. In Sisvel v. Haier, the Higher Regional Court Düsseldorf held that German procedural law allows for such a repetition and cure until the end of the oral hearing(s).17 In contrast, the Regional Court Mannheim, pointing to the precise language of the ECJ’s Huawei v. ZTE decision (“Prior to such proceedings”), initially rejected this view. The court subsequently allowed for some flexibility, suggesting that it may be possible to repeat certain steps of the FRAND procedure after filing a patent infringement complaint (but not during litigation). The court made it clear that EU law, including the decision by the ECJ in Huawei v. ZTE, takes precedence over German procedural law. Therefore, the Regional Court Mannheim held that, in order to maintain balanced negotiation positions free from any pressure on the alleged infringer due to pending patent litigation, an SEP owner that wants to repeat a step of the FRAND procedure would first have to file a motion to suspend any pending infringement proceedings.18
III. FRAND License Terms
While German courts have been reluctant to consider in detail what royalty and other license terms are substantively FRAND-compliant, the UK Patents Court thoroughly analyzed this issue in Unwired Planet v. Huawei. UK and German courts differ in their understanding of the appropriate legal standard of review for this issue.
1. Standard of Review
In Sisvel v. Haier, the Higher Regional Court Düsseldorf held that the standard of review when determining whether a license offer is FRAND is not limited to obvious non-compliance (which was the view adopted by the Regional Court Mannheim in some earlier decisions). Instead, according to the court, courts must affirmatively review each license term to determine whether it is FRAND. However, the court emphasized that there may be a range of terms, especially royalty rates, that are FRAND. Similarly, the Higher Regional Court Karlsruhe held on appeal in Pioneer v. Acer that the court’s standard of review must not be limited to a high-level “summary review” or obviousness.19
In practice, however, German courts remain reluctant to opine on the FRAND compliance of specific royalty rates or economic terms. In Philips v. Archos, the Regional Court Mannheim stated specifically that courts applying the Huawei v. ZTE principles should not bear the burden of assessing a specific FRAND royalty, especially since, in Germany, the amount of damages is usually determined in separate proceedings.20 German courts do share the view that there is a range of license terms, including a range of royalties, that can be FRAND.21
In contrast, like their counterparts in the U.S., English courts are not so restrained when it comes to determining specific FRAND royalties or royalty ranges. In Unwired Planet v. Huawei, the UK Patents Court determined specific FRAND royalty rates for Unwired Planet’s SEPs covering various mobile communication standards (2G/3G/4G) and held that there is only one set of license terms that are FRAND in a given set of circumstances. The judgment was upheld on appeal, but the Court of Appeal clarified that there may be a range of FRAND terms, rather than just a single unique set of FRAND terms.22 The circumstances in Unwired Planet were unique, in that Unwired Planet acquired the patents at issue from Ericsson and the court relied (exclusively) on existing Ericsson license agreements as comparable agreements and then discounted the rates based on the relative portion of patents acquired by Unwired Planet as compared to the entire portfolio licensed by Ericsson at the time. As such, the decision may not provide much guidance in other FRAND cases, especially where it is questionable whether other licenses are, in fact, comparable or if they were entered into under circumstances where the SEP owner had the leverage (before the ECJ’s Huawei v. ZTE decision) to impose non-FRAND royalties.
2. Calculating FRAND Royalties – The Benchmark Rate, Comparable Licenses, and the Top-Down Approach
The Regional Court Düsseldorf noted in Saint Lawrence Communications v. Vodafone that six license agreements with other licensees provided by SLC contain royalty rates between USD 0.20 and USD 0.40 per device, and that these license agreements may be used to support the FRAND license offer in dispute. Furthermore, according to the court, the SEP owner provided sufficient reasons and explanations for the method of calculating the requested royalties. The court found a license offer on a per-device basis with royalties within the range of comparable license agreements to be FRAND.
In its earlier Sisvel v. ZTE decision, however, the Regional Court Düsseldorf required that the SEP owner provide all signed patent license agreements relating to the patents in dispute or the relevant patent portfolio in order to establish a proper basis for a comparison and to assess the “non-discriminatory” element of the FRAND requirement.23
In the UK, the Patents Court in Unwired Planet v. Huawei allowed a determination of FRAND royalties based on a benchmark rate established by the value of the SEP owner’s patent portfolio. That rate should not vary based on the size or market share of the licensee. Alternatively, according to the court, a FRAND rate can be determined by using comparable licenses if they are available and have been freely negotiated. Comparable licenses can also be used to determine the benchmark rate. Another method for determining a FRAND royalty is the “top-down approach,” which uses a total aggregate royalty burden for a standard-compliant product and then determines the SEP holder’s portion of that royalty based on its share of all SEPs relevant for the applicable standard. The court characterized the top-down approach as a cross-check rather than the preferred calculation method. The court further noted that, for a licensee with global sales, a worldwide license can be considered FRAND, but the license may need to provide different royalty rates for different regions. In the specific case, the court distinguished between royalty rates in “Major Markets” and “China and Other Markets.”
a. Worldwide License
In Unwired Planet v. Huawei, a case involving mobile telecommunication patents, the UK Patents Court held that a woldwide license was FRAND under the circumstances because the majority of the license agreements reviewed during the trial were worldwide license agreements. Additionally, Unwired Planet’s portfolio was sufficiently large and had a sufficiently wide geographical scope suggesting that a licensor and licensee acting reasonably and on a willing basis would typically agree to a worldwide license.
Similarly, German courts held in Saint Lawrence Communications v. Vodafone and Sisvel v. Haier that the owner of a worldwide patent portfolio can reasonably request a worldwide license under FRAND terms and does not have to license each jurisdiction separately, if such licensing practice is common in the relevant industry.24
b. Adjustment Clauses – Dynamic Patent Portfolios and Royalty Stacking
According to the Higher Regional Court Düsseldorf in Sisvel v. Haier, a FRAND license offer should also include: (i) an adjustment clause for the adjustment of the royalty rates in both directions if the patent portfolio increases or decreases in size (e.g., due to the invalidation or expiration of patents); (ii) an adjustment in cases of patent exhaustion; and (iii) a clause addressing the issue of “royalty stacking,” i.e., the potential need to license other patents when a company wants to market a standard-compliant product.
Similarly, the Regional Court Düsseldorf held in Unwired Planet v. LG that a license offer under FRAND terms must take into account royalty stacking, i.e., the necessity of obtaining several licenses from different SEP owners for the distribution of standard-compliant products (mobile phones in this case).25 In the related proceeding in Unwired Planet v. Samsung, the Regional Court Düsseldorf held that royalty stacking is not unreasonable per se as long as the overall royalty burden is still FRAND.26
5. Other Issues
a. Portfolio Splitting
In Unwired Planet v. Samsung, the Regional Court Düsseldorf held that portfolio splitting, i.e., splitting a patent portfolio containing several SEPs, by sale of patents or otherwise is a legitimate business decision and, as such, does not give rise to antitrust concerns. The new SEP owner is not, according to the court, obligated to continue the previous SEP owner’s licensing practices, as long as the overall combined royalty rate remains FRAND, even if the new SEP owner’s licensees must pay higher royalties than did the previous owner’s licensees.27
b. Selective Enforcement
According to the Higher Regional Court Düsseldorf in Sisvel v. Haier, the selective enforcement of SEPs cannot be considered FRAND if the SEP owner cannot objectively justify the selection. The fact that an SEP owner enforces its SEPs against one implementer but not another may amount to a de facto royalty-free license to the implementer that is not targeted, thus discriminating against the other.
In Intellectual Ventures v. Vodafone the Regional Court Düsseldorf specifically held that the fact that implementers that were not pursued are investors in the SEP owner or clients of the SEP owner’s law firm does not justify selective enforcement. Pursuing other implementers, but not investors or other clients, was held to be discriminatory by the court.28 In the same decision, the court also held that the SEP owner’s refusal to offer a FRAND license to the defendant’s suppliers was discriminatory, and that it was not FRAND to limit the license offer to the defendant’s direct-to-consumer DSL business but excluding the defendant’s wholesale DSL business, which constituted a substantial part of the defendant’s overall business.29
IV. Takeaways and Outlook
The first round of decisions by courts in Europe that have implemented the ECJ’s guidance in Huawei v. ZTE shows that the law is evolving and the approach taken by courts in different countries (and even by different courts in the same country) is far from uniform. Decisions in Germany suggest that obtaining an injunction under SEPs after Huawei v. ZTE is not easy, and requires SEP owners to very carefully consider and meet each step of the ECJ’s FRAND process. Similarly, SEP implementers must be careful to respond in a timely manner. The uncertainty as to what license terms and royalties are substantively FRAND remains challenging for both SEP owners and implementers.
Considering that, more than two years after Huawei v. ZTE, European courts still differ in their approach in implementing the ECJ’s decision, it does not come as a surprise that the legislature in the EU is trying to develop a more coherent and more predictable FRAND licensing framework.
After the European Commission first published its initiative, “Standard Essential Patents for a European digitalised economy,” it released its communication, “Setting out the EU approach to Standard Essential Patents,”30 in which it discusses measures to better evaluate SEPs and create more transparency and predictability. The communication is general in nature, however, and lacks clear guidance on the core questions of FRAND licensing. The discussion at the EU level is bound to continue over the coming years, just as FRAND case law in Europe is bound to evolve further.
Footnote
1 2013 WL 2111217 (D. Wash., April 15, 2013), aff’d 795 F.3d 1024 (9th Cir., July 30, 2015)..
2 UK Patents Court, judgments of April 5, 2017, 2017 EWHC 711 (Pat), and of June 7, 2017, 2017 EWHC 1304 (Pat).
3 Regional Court Mannheim, judgments of July 1, 2016 (7 O 209/15) and November 17, 2016 (7 O 19/16), Philips v. Archos.
4 Regional Court Düsseldorf, judgment of July 13, 2017 (4a O 16/16), Sisvel v. ZTE.
5 Regional Court Düsseldorf, judgment of July 11, 2018 (4c O 81/17), Intellectual Ventures v. Vodafone, at 172.
6 Higher Regional Court Düsseldorf, order of January 17, 2016 (15 U 65/15), Sisvel v. Haier; Regional Court Düsseldorf, judgments of March 31, 2016 (4a O 73/14 and 4a O 126/16, with identical FRAND decisions), Saint Lawrence Communications v. Vodafone.
7 Regional Court Düsseldorf, judgment of July 13, 2017 (4a O 16/16), Sisvel v. ZTE.
8 Higher Regional Court Düsseldorf, orders of May 9, 2016 (15 U 35/16 and 15 U 36/16), Saint Lawrence Communications v. Vodafone.
9 Higher Regional Court Düsseldorf, orders of May 9, 2016 (15 U 35/16 and 15 U 36/16), Saint Lawrence Communications v. Vodafone.
10 Regional Court Düsseldorf, judgments of March 31, 2016 (4a O 73/14 and 4a O 126/16), Saint Lawrence Communications v. Vodafone; confirmed by Higher Regional Court Düsseldorf, orders of May 9, 2016 (15 U 35/16 and 15 U 36/16), Saint Lawrence Communications v. Vodafone.
11 Regional Court Düsseldorf, judgment of July 13, 2017 (4a O 16/16), Sisvel v. ZTE.
12 Regional Court Düsseldorf, judgment of July 11, 2018 (4c O 81/17), Intellectual Ventures v. Vodafone, at 179.
13 Regional Court Mannheim, judgments of July 1, 2016 (7 O 209/15) and November 17, 2016 (7 O 19/16), Philips v. Archos.
14 Higher Regional Court Düsseldorf, decisions of December 14, 2016 and January 17, 2017 (I-2 U 31/16), Unwired Planet v. Huawei.
15 Regional Court Düsseldorf, judgment of July 13, 2017 (4a O 16/16), Sisvel v. ZTE.
16 Regional Court Düsseldorf, order of November 17, 2016 (15 U 66/15), Sisvel v. Haier.
17 Higher Regional Court Düsseldorf, order of November 17, 2016 (I-15 U 66/15), Sisvel v. Haier.
18 Regional Court Mannheim, judgment of November 10, 2017 (7 O 28/16).
19 Higher Regional Court Karlsruhe, judgment of May 31, 2016, Pioneer v. Acer.
20 Regional Court Mannheim, judgments of July 1, 2016 (7 O 209/15) and November 17, 2016 (7 O 19/16), Philips v. Archos.
21 Higher Regional Court Düsseldorf, order of November 17, 2016 (I-15 U 66/15), Sisvel v. Haier; Higher Regional Court Karlsruhe, order of September 8, 2016 (6 U 58/16) – Dekodiervorrichtung.
22 UK Court of Appeal, judgment of October 23, 2018, 2017 EWHC 711 (Pat), Case No. A3/2017/1784, Unwired Planet v. Huawei.
23 Regional Court Düsseldorf, judgment of July 13, 2017 (4a O 16/16), Sisvel v. ZTE; Regional Court Düsseldorf, judgment of July 11, 2018 (4c O 81/17), Intellectual Ventures v. Vodafone, at 219.
24 Higher Regional Court Düsseldorf, order of November 17, 2016 (I-15 U 66/15), Sisvel v. Haier; Regional Court Mannheim, judgment of November 27, 2015 (2 O 106/14), SLC v. Telekom und HTC.
25 Regional Court Düsseldorf, judgment of January 19, 2016 (4b O 157/14), Unwired Planet v. LG.
26 Regional Court Düsseldorf, judgments of January 19, 2016 (4b O 120/14 and 4b O 122/14), Unwired Planet v. Samsung.
27 Regional Court Düsseldorf, judgments of January 19, 2016 (4b O 120/14 and 4b O 122/14), Unwired Planet v. Samsung.
28 Regional Court Düsseldorf, judgment of July 11, 2018 (4c O 81/17), Intellectual Ventures v. Vodafone, at 234.
29 Regional Court Düsseldorf, judgment of July 11, 2018 (4c O 81/17), Intellectual Ventures v. Vodafone, at 264.
30 Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee, COM 2017 (712) final.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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