Ruling by Düsseldorf court offers businesses guidance on the licensing of standard-essential patents, says expert

Out-Law Analysis | 27 Sep 2017 | 11:44 am | 6 min. read

ANALYSIS: New guidance on how businesses should go about negotiating the terms of licence agreements for standard-essential patents has been provided by the Düsseldorf Appeals Court in a recently published ruling.

The judgment builds on principles established in case law by the EU's highest court, and also highlights a major difference of opinion within the German court system over the level of detail in which 'first instance' courts should examine licensing offers made by standard-essential patent owners to prospective licensees.

Standard essential patent licensing

A standard essential patent (SEP) is a patent for technology that has been developed as industry standard and where it is impossible for other businesses to make products that adhere to that standard without using the patented technology.

Because of the lack of availability of alternative technology, there are restrictions on the way in which owners of SEPs can exercise and enforce their rights in those patents. EU competition rules prohibit businesses in a dominant market position from abusing that position of dominance. SEP owners are therefore obliged to licence their technology on fair, reasonable and non-discriminatory (FRAND) terms.

Principles established by the Court of Justice of the EU on FRAND licensing

In 2015, the Court of Justice of the EU (CJEU) considered the protocols that SEP owners must follow when seeking to enforce their patent rights against alleged infringers. It concluded that an SEP holder abuses its dominant position when it seeks an injunction against a willing licensee.

The CJEU established a five step process for FRAND negotiations after determining that an enforcer of a SEP cannot bring an action for an injunction against alleged infringers before it has made a written FRAND licensing offer to those companies.

The CJEU's five step process and the Düsseldorf Appeals Court's clarifications

In its ruling, the CJEU confirmed that SEP owners are obliged to notify the alleged infringer of the fact that they believe they are acting in infringement of their patent rights before seeking an injunction against that company. However, the EU court's judgment contained limited detail of what those notices should say.

In Germany the district courts in both Düsseldorf and Mannheim have previously provided some of the missing detail, and their recommended practices have now been endorsed by the Düsseldorf Appeals Court.

It confirmed that letters alleging infringement must specifically identify the SEPs and number of the patents that they believe have been infringed, as well as inform the alleged infringer what particular acts of infringement they are alleged to have engaged in. The information provided must enable the alleged infringer to properly assess the veracity of the claims made.

The Düsseldorf Appeals Court confirmed that it is acceptable  for SEP owners to serve these notices on the parent company of the alleged infringer and that the notices do not need to be technically or legally detailed about the nature of the alleged infringement. Claim charts, which are common in the industry, can be used by SEP owners to meet the notice requirements.

In response to such notices, the CJEU established that alleged infringers must state their willingness to agree a licensing agreement with the owner of the SEP.

On this point, the Düsseldorf Appeals Court said the prospective licensee does not, at this stage, have to state the terms on which it is willing to reach a licensing agreement. However, it made clear that a licensee's willingness may not be subject to the SEPs in question being proven to be valid.

The German court also addressed the length of time that it will accept for prospective licensees to respond to the letter alleging infringement. It said that there is no set deadline for response, but that prospective licensees will need to respond faster where the letter contains sufficient detail for them to assess the claims of infringement properly than in cases where information is lacking or the claims are complex. Taking three months to respond will, typically, be too long, it said.

Where alleged infringers have stated their willingness to enter into a licensing agreement, the onus is then on the SEP owner to make a FRAND offer. If the offer is rejected, the prospective licensee must make a counter offer.

The question most relevant in this regard is whether a first instance court will need to assess whether the initial offer is FRAND or whether it is not obviously not FRAND. Subject to the answer to this question, an alleged infringer may rely on claiming that the initial offer was not FRAND, without being required to propose a counter-FRAND offer. While this may not be the safest strategy for any alleged infringer, because it bears the risk that the initial offer is in fact FRAND, it places the burden on first instance courts to assess and answer the key question: what is really FRAND?

In its latest ruling on the issue, the Appeals Court of Düsseldorf confirmed the approach it had taken in a previous case when asked to stay the enforcement of the injunction granted against Haier.  

This position taken by the Düsseldorf courts is contrary to that of the district court of Mannheim.  The Mannheim court has taken the position that first instance courts do not need to make a definitive finding of whether an offer is FRAND, unless it obviously is not. The Düsseldorf courts have said they do have to make that finding. The distinction is important as it serves to dictate what steps prospective licensees have to take in response.

However, Düsseldorf left it open to SEP owners how they can demonstrate to prospective licensees, and the courts, that their licensing proposals are FRAND. In this respect, SEP owners should look to set out their proposals in a draft licence agreement. That agreement should address all the relevant aspects of FRAND licensing, from the proposed royalty rates and the way that they would be structured, to the duration of the agreement and the scope and jurisdictions which it covers.

Other German courts have suggested that FRAND offers should contain adjustment clauses to account for how royalty rates should change where one or more of the patents in the portfolio being licensed are invalidated, for example. The Düsseldorf Appeals Court was not specific about which clauses should be included, but appeared to endorse industry best practice and said that it is up to SEP owners how they wish to structure royalty payment arrangements.

In its ruling, the Düsseldorf Appeals Court considered factors which might render licensing offers made by SEP owners non-discriminatory and in breach of FRAND requirements, and confirmed that SEP owners that offer a prospective licensee different terms from those agreed with other licensees would need to be able to justify the differences to meet their obligations on FRAND.

Providing it can be justified, SEP owners can offer discounts to one licensee and not another, the court said. It said offering discounts to a reference customer as a basis for future licensing agreements is fine in principle, but it said that a SEP owner that was looking to impose royalty rates 10 times greater than those previously agreed with a reference customer could not justify such discrimination.

The safest approach is therefore for SEP owners to licence their patents on the same terms to each licensee. However, where there are good reasons for offering different terms, they will need to be able to justify this difference.

The Düsseldorf Appeals Court has left it up to SEP owners and their advisers how they wish to prove that their licensing offers are FRAND. It may prove challenging for those businesses to share the terms of the licensing agreements they have put in place previously as they will likely be confidential.

The final stages in the CJEU's five step principles was not addressed in detail by the Düsseldorf court. That requires prospective licensees to make a FRAND counter offer and present their accounts for payment of the royalties under the FRAND licensing agreement and for SEP owners to provide securities to the licensee in the event the patents being licensed are later invalidated.

The case has been appealed to the Federal Supreme Court in Germany which, if the case does not settle before then, is set to rule on only its second ever FRAND dispute. It is likely that it will be a couple of years before the Supreme Court issues a ruling.

Munich-based Peter Koch is an expert in resolving patent disputes in the technology sector at Pinsent Masons, the law firm behind Out-Law.com.