Standard-essential patent licensing faces EU ruling and potential reform

Out-Law News | 27 Nov 2020 | 1:57 pm | 5 min. read

The EU's highest court has been asked to rule on whether standard-essential patent (SEP) owners can pick and choose which businesses in a supply chain they pursue for licensing their technology.

The Regional Court of Düsseldorf referred 10 questions to the Court of Justice of the EU (CJEU), seeking clarity on the ongoing SEP dispute between Nokia and Daimler, just a day after the European Commission reiterated its desire to reduce the volume of disputes concerning SEP licensing in the EU.

The Commission's intellectual property (IP) action plan, among other things, called for more stable, efficient and fair rules governing the licensing of SEPs. The Commission said it would consider reforms aimed at easing legal tensions between SEP owners and technology implementers, including the possible introduction of a new independent third party system for assessing the 'essentiality' of patented technology to a technical standard.

Specialists in patent law at Pinsent Masons, the law firm behind Out-Law, said the two developments were of significance in an evolving market where SEP licensing is becoming of increased relevance to a growing number of businesses.

The Commission noted the crucial role SEPs play in the development of 5G and the Internet of Things (IoT), and the role of standards in enabling 'digital integration of objects, devices, sensors, and everyday items, with applications ranging from connected cars, health, energy to smart cities'.

SEPs are patents related to technologies that are incorporated in standards, such as connectivity standards, and these standards facilitate interoperability between devices and systems. Standards are developed by businesses working together under the auspices of standard setting organisations (SSOs), such as the European Telecommunications Standards Institute (ETSI). It is a pre-condition that businesses benefiting from that framework of collaboration under SSOs make the patents they subsequently obtain relating to standardised technologies available to others by way of a licence on fair, reasonable and non-discriminatory (FRAND) terms.

However, SEP owners and technology implementers often disagree on FRAND licensing terms and litigation results. In a notable ruling earlier this year, the UK Supreme Court confirmed that a UK court does have the power to grant an injunction to prevent the infringement of an SEP and, crucially, it can determine the royalty rates and terms of a global FRAND licence. Germany has also seen a number of SEP disputes in recent months impacting the automotive sector

The 26 November development in the Nokia v Daimler case before the Regional Court of Düsseldorf was the latest in a long-running legal battle between the companies that is continuing before a number of courts in Germany.

The disputes arose because Nokia alleges that, broadly speaking, the connectivity modules in the Daimler vehicles infringe their SEP portfolio.  Nokia offered allegedly FRAND licences to Daimler, but Daimler argued that its suppliers should be the ones to take a licence. The suppliers have always indicated their willingness to do so.

In its referral to the CJEU, the Düsseldorf court primarily seeks to determine whether SEP owners are obliged to license their SEPs to suppliers first before seeking any licensing agreement from the main manufacturer. The regional courts of Mannheim and Munich have both stated that they believe the SEP owner is not obliged to license interested parties on all levels of the supply chain. Such an obligation neither arises from EU competition law they say, nor does it follow from patent law or contract law in connection with the SEP holder's contractual obligations to ETSI.

The questions posed by the Düsseldorf court go further than expected, and also raise general issues in relation to the obligations set out in the CJEU’s earlier decision in the case of Huawei v ZTE. In that decision, the CJEU held that an SEP holder that has committed to license its SEP portfolio on FRAND terms may abuse a dominant market position, in breach of EU competition rules, by seeking an injunction against a potential licensee in certain circumstances. The CJEU has therefore also been asked to clarify the obligations of the SEP holder and technology implementer in SEP licensing negotiations. 

The Düsseldorf Court has also asked the CJEU to confirm when a licence holder from an SEP holder is considered to be FRAND compliant.

Proceedings in the Nokia v Daimler case before the Düsseldorf court will be paused pending the outcome of the reference to the CJEU’s, as will a related Huawei v Nokia case in which Huawei wishes to compel Nokia to make a FRAND licensing offer at the component level.

Peter Koch of Pinsent Masons, the law firm behind Out-Law, said: "This is clearly a setback for Nokia in Düsseldorf. This doesn't, however, imply that all further lawsuits have to be suspended." The presiding judge of the Regional Court of Mannheim, Dr Peter Tochtermann, has expressed his view that he would not automatically suspend all FRAND litigation currently pending in Mannheim before the 7th Chamber. Whether the same will apply to the court in Munich, which had been more in line with Mannheim than with Düsseldorf, remains to be seen.

"As more and more sectors, products and solutions become reliant on wireless communications, the CJEU’s ultimate decision is expected to have wide implications for SEP disputes," said Sarah Taylor of Pinsent Masons. "Although the UK is no longer part of the EU, technology-rich industries such as automotive, manufacturing and healthcare, as well as telecommunications are global industries, and therefore the CJEU’s decision will have wider impact and will be watched with interest."

In its IP action plan, the Commission also hinted at interventions it might make in relation to SEP licensing. Talks with industry are planned, while potential reform could also be pursued, it said.

The Commission said: "In the short term, the Commission will facilitate industry-led initiatives to reduce frictions and litigations among players in specific sectors. In parallel, building on [the approach taken by the Commission in guidance it developed on SEP licensing in 2017], the Commission will consider reforms to further clarify and improve the framework governing the declaration, licensing and enforcement of SEPs. The Commission will for instance explore the creation of an independent system of third-party essentiality checks in view of improving legal certainty and reducing litigation costs."

The outcome of a feasibility study into a new independent third party essentiality assessment mechanism was recently published by the Commission.

The study identified a number of benefits in establishing such a system, including the potential to offer greater clarity on whether products are protected by SEPs, scope to enable "smoother and faster SEP licensing negotiations", and reduce the number of "‘unnecessary’ court cases". The researchers also said it could enable for a "better assessment" to be undertaken into the "reasonableness of individual royalty rates", and further provide "data valuable in the context of infringement procedures, especially when dealing with unwilling licensees".

Marfe Mark

Mark Marfe

Legal Director

In the longer term, it may be that more SEP holders look to the English courts to resolve FRAND licensing disputes

Standards that require the use of patented technology are becoming increasingly widespread. The Commission noted the crucial role SEPs play in the development of 5G and the Internet of Things (IoT), and the role of standards in enabling "digital integration of objects, devices, sensors, and everyday items, with applications ranging from connected cars, health, energy to smart cities".

The changing technological landscape and new connected ecosystems mean many more companies, especially SMEs, will be part of future FRAND licence negotiations. The report noted that "maintaining an opaque environment in an increasingly complex and diversified area of technological uptake appears to bear high risks".

Mark Marfé of Pinsent Masons said: "The Commission's proposals will be welcomed by standardised technology implementers, but it is unlikely there will be any substantive changes in the short term. It also remains to be seen whether the UK will also consider similar measures to those proposed by the Commission. In the longer term, it may be that more SEP holders look to the English courts to resolve FRAND licensing disputes now that the UK Supreme Court has confirmed a UK court does have the power to determine the royalty rates and terms of a FRAND licence on a global basis."