Court clarifies FRAND litigation issues in Germany

The court, among other things, confirmed that businesses using SEPs will only be considered to be 'willing' licensees of that technology if they are willing to take a licence from patent holders on whatever terms are deemed to be considered fair, reasonable and non-discriminatory (FRAND). That observation has already been recognised by the Court of Appeal in London.

The Federal Court of Justice's ruling came in a case between Sisvel, a business that manages SEPs relating to communications technology owned by others, and Chinese consumer electronics manufacturer Haier.

The reasons for the judgment, which have only recently been made public following the original announcement of the decision in the case in May 2020, provide clarity on a range of issues around FRAND licensing negotiations that are often the cause of dispute and the interplay with competition law.

What is a standard-essential patent?

Standard-essential patents (SEPs) are patents that protect technology believed to be essential to implementing a standard. Standards are often developed by businesses working together in collaboration under the auspices of standardisation bodies such as the European Telecommunications Standards Institute (ETSI) or the telecommunication standardisation sector of the International Telecommunication Union (ITU-T).

Typically it is a pre-condition that businesses benefiting from that framework of collaboration 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, sometimes referred to as 'RAND' by some standardisation bodies. The FRAND rate is agreed between the parties by commercial negotiation, but sometimes disputes arise as to what constitutes 'FRAND'. If the SEP holder and the technology implementer cannot agree on FRAND licence terms, these will require determination by a tribunal.

FRAND licensing negotiations

There has been a significant body of case law developed in recent years relating to SEP licensing, with the courts in England and Wales, Netherlands and Germany particularly active in ruling over disputes. The national court rulings in recent years have been framed by the Huawei v ZTE ruling of the Court of Justice of the EU (CJEU) in 2015. The case considered the circumstances where an assertion of rights by a patent holder is in breach of EU competition laws.

In its ruling, the CJEU set out the steps both SEP holders and implementer must follow when negotiating FRAND licensing terms.

The CJEU in the Huawei case confirmed that SEP holders must first provide written notification to an implementer of their technology of their alleged infringement of the patents. In response, the implementer must confirm its willingness to take a FRAND licence. The obligation is then on the SEP holder to make a FRAND licensing offer. That offer must either be accepted by the alleged infringer or, if it feels the offer is not in fact FRAND, it must make a counteroffer on FRAND terms. SEP holders that do not accept the counter proposal must justify their own offer as FRAND and in those circumstances the implementer is obliged to agree to deposit an amount requested by the rights holder as security before their dispute is resolved by a tribunal, such as a court.

However, the CJEU's ruling raised additional questions about the precise practical steps that must be taken in licensing negotiations and about some of the concepts raised in the judgment, including that of a 'willing' licensee. National courts across Europe have since come to their own interpretations. The Federal Court of Justice, in the Sisvel and Haier case, is the highest court in Germany and has now provided its view, confirming several points ruled on by the German lower courts in a decision that is overall favourable to rights holders.

Overall findings of the Federal Court of Justice

The Federal Court of Justice confirmed its previous 'Orange-Book-Standard' decision of 2009, according to which a defendant in a patent infringement action may successfully raise an abuse of dominance defence against the grant of an injunction where the asserted patent is a SEP and the implementer has tried to obtain a licence to that SEP patent under certain conditions.

In this case, the Federal Court of Justice held that an SEP holder's behaviour may be deemed abusive from a competition law perspective if they assert the SEP before the implementer has indicated whether or not they are willing to enter into a licence. This is because the SEP holder will be deemed not to have made sufficient effort to properly notify the implementer of the alleged infringement of the SEP and engage in licensing discussions.

The court also addressed several obligations set by the CJEU in the Huawei case.

Notification requirements

Following the CJEU ruling in the Huawei case, the SEP holder must notify the technology implementer of their alleged infringement and that they may need to take a licence.  The court warned against making excessive requests for technical details of the patents in issue as a means to delay matters and said that the implementer should carry out its own assessments, or seek external assistance to do so.

Response to notification by the implementer

The implementer should respond promptly if the information provided was insufficient to assess infringement. It is noteworthy that the notification can be sent to the implementer's parent company.

Making good the offer

Notably, the SEP holder need only submit a licence offer and the basis for the proposed rates after the implementer has adequately declared its willingness to take a FRAND license.

Willingness to take a licence

The concept of a 'willing' licensee of SEPs stems from EU case law and is central to how disputes concerning the negotiation of SEP licenses are viewed by courts and other arbiters. One of the core questions to any SEP litigation has always been how engaged in the negotiations must an implementer be in order to be considered a "willing licensee".

The Federal Court of Justice has set a higher threshold than in past cases. It is not sufficient for the implementer to merely show itself, for example, willing to consider concluding a licence agreement.

Instead, as the courts in England and Wales confirmed in the Unwired Planet v Huawei case, "a willing licensee must be one willing to take a FRAND license on whatever terms are in fact FRAND".

The requirements for a serious and unreserved willingness to accept a licence on FRAND terms was not satisfied by Haier's initial statement which read "We hope to have a formal negotiation with you", nor by any of its subsequent statements.

While the implementer can reserve the right to challenge the alleged infringement and the validity of the patent at issue, it cannot make its willingness to take a licence conditional on this.

Portfolio licences

Offering portfolio licences which include a mix of SEPs and non-essential patents are acceptable provided that the implementer is not required to pay for the use of non-essential patents. Further royalties are to be calculated in a way that does not discriminate against an implementer that only wants to develop a product in a restricted geographic area.

Consistent with recent decisions at appeal courts, negotiations about a worldwide portfolio licenses are common practice and from an efficiency standpoint that would also benefit the implementer.

However if the SEP holder wishes to offer a portfolio licence, it is obliged to provide sufficient information about the portfolio in its infringement notification. The level of detail will depend on the circumstances of the individual case.

Comparable licences: differing licences not necessarily discriminatory

Licensing of SEPs requires a "non-discriminatory" offer to be made. The court dealt with the issue of whether a SEP holder is required to treat all licensees equally and whether it is only the first licence in time, as a default agreement, against which all future licensing proposals must be compared?

The court decided that:

• the patentee is not generally required to grant licences to all users on equal terms;
• what constitutes "reasonable and non-discriminatory" terms usually depends on a variety of factors and they are generally not objectively defined;
• the implementer must engage with the negotiation in accordance with recognised commercial practices;
• there will be circumstances that will justify a patent holder granting a licence under more beneficial terms but that does not mean all licensees will be granted on the same terms.

Damages calculation

Another important point for implementers to be aware of is that SEP holders are entitled to claim for damages that are not limited by the FRAND licence rate and can be based, for example, on lost profits or the implementer's profits instead.

Conclusion

The decision of the German Federal Court of Justice provides some more legal certainty in relation to key questions of SEP litigation in Germany. The court made clear that passive behaviour on the part of the implementer will be viewed as delaying tactics and not as the actions of a 'willing' licensee. The court's comments discussed above in relation to comparable licences will also be of some assistance in future FRAND negotiation and/or litigation in Germany, but not all the open questions around FRAND licensing and litigation have been answered.

It is interesting to see greater convergence between the German and English courts on issues such as non-discrimination. It will be interesting if in future the German courts are willing to determine royalty rates when dealing with FRAND disputes as the English court has done in the Unwired Planet v Huawei case.