Competition Law Patent

Breaking News: ECJ on SEP licensing – Huawei v. ZTE


HvZ-ECJ

SEP holders with huge portfolios many patents (SEPs) may find it exceedingly difficult (at least in Europe) to take legal action against parties for patent infringement after the European Court of Justice put the onus on them to offer fair licensing deals.  Given the multitude of wayward decisions in Indian courts on SEPs and FRAND, I am not sure whether there would be any impact of the decision.  However, it is my sincere hope that it does.

Readers would remember my last post where I tried to show the extra territorial reach of SEPs when used in portfolio licensing and tried to make a case against it.  The ECJ decision does discuss this issue briefly – albeit in a different context.  Because this is breaking news, I am not making a detailed analysis of the judgment – that will come later – key are parts e extracted below.  My few comments:

SEP owners must provide specific details to prospective licensees on each SEP:

The ECJ’s decision supports a prospective licensee’s right to know the specific infringement allegations of the SEP owner, i.e. a blanket portfolio demand can’t be raised.  The demand must be quantifiable.  And an injunction is expressly ruled out if a SEP owner has not previously provided specific infringement information about the SEP, and also a FRAND license proposal for that SEP.  – it is a patent by patent discussion.

The judgment requires that the SEP owner give specific infringement information (by way of proper claim chart).  In this case as well, the court notes that neither invalidity or infringement has been established for the SEP in question, and it is open for a licensee to challenge such SEP on these grounds.

Accordingly, the proprietor of an SEP which considers that that SEP is the subject of an infringement cannot, without infringing Article 102 TFEU, bring an action for a prohibitory injunction or for the recall of products against the alleged infringer without notice or prior consultation with the alleged infringer, even if the SEP has already been used by the alleged infringer.

Prior to such proceedings, it is thus for the proprietor of the SEP in question, first, to alert the alleged infringer of the infringement complained about by designating that SEP and specifying the way in which it has been infringed.

Facts and issues present to the full court

Huawei Technologies, a multinational company active in the telecommunications sector, is the proprietor of, inter alia, the European patent registered under the reference EP 2 090 050 B 1, bearing the title ‘Method and apparatus of establishing a synchronisation signal in a communication system’, granted by the Federal Republic of Germany, a Contracting State of the EPC (‘patent EP 2 090 050 B 1’).  That patent was notified to ETSI on 4 March 2009 by Huawei Technologies as a patent essential to the ‘Long Term Evolution’ standard. At the same time, Huawei Technologies undertook to grant licences to third parties on FRAND terms.  The referring court states, in the order for reference, that that patent is essential to that standard, which means that anyone using the ‘Long Term Evolution’ standard inevitably uses the teaching of that patent.  Between November 2010 and the end of March 2011, Huawei Technologies and ZTE Corp., a company belonging to a multinational group active in the telecommunications sector and which markets, in Germany, products equipped with software linked to that standard, engaged in discussions concerning, inter alia, the infringement of patent EP 2 090 050 B 1 and the possibility of concluding a licence on FRAND terms in relation to those products.  Huawei Technologies indicated the amount which it considered to be a reasonable royalty. For its part, ZTE Corp. sought a cross-licensing agreement. However, no offer relating to a licensing agreement was finalised.  None the less, ZTE markets products that operate on the basis of the ‘Long Term Evolution’ standard, thus using patent EP 2 090 050 B 1, without paying a royalty to Huawei Technologies or exhaustively rendering an account to Huawei Technologies in respect of past acts of use.  On 28 April 2011, on the basis of Article 64 of the EPC and Paragraph 139 et seq. of the German Law on Patents, as amended most recently by Paragraph 13 of the Law of 24 November 2011, Huawei Technologies brought an action for infringement against ZTE before the referring court, seeking an injunction prohibiting the infringement, the rendering of accounts, the recall of products and an award of damages.

…..Thus, the referring court considers that the positions of the proprietor of an SEP and of the infringer ought not to make it possible for them to obtain excessively high royalties (a ‘hold-up’ situation) or excessively low royalties (a ‘reverse hold-up’ situation), respectively. For that reason, but also on the grounds of equality of treatment between the beneficiaries of licences for, and the infringers in relation to, a given product, the proprietor of the SEP ought to be able to bring an action for a prohibitory injunction. Indeed, the exercise of a statutory right cannot, in itself, constitute an abuse of a dominant position, for characterisation as such requires other criteria to be satisfied. For that reason, it is not satisfactory to adopt, as a criterion of such an abuse, the notion of the infringer’s ‘willingness to negotiate’, since this may give rise to numerous interpretations and provide the infringer with too wide a freedom of action. In any event, if such a notion is to be held to be relevant, certain qualitative and time requirements must be imposed in order to ensure that the applicant for the licence is acting in good faith. Accordingly, a properly formulated, acceptable, ‘unconditional’ request for a licence, containing all the provisions normally found in a licensing agreement, ought to be required to be submitted before the patent concerned is used. As regards, in particular, requests for a licence from operators which have already placed products using an SEP on the market, those operators must immediately comply with the obligations to render an account of use of that SEP and to pay the corresponding royalty. In addition, the referring court considers that an infringer ought, initially, to be able to provide security instead of paying the royalty directly to the proprietor of the SEP in question. The possibility of the applicant for a licence leaving the determination of a fair royalty amount to the proprietor must also be envisaged…………..

In those circumstances, the Landgericht Düsseldorf decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:

{1)      Does the proprietor of [an SEP] which informs a standardisation body that it is willing to grant any third party a licence on [FRAND] terms abuse its dominant market position if it brings an action for an injunction against a patent infringer even though the infringer has declared that it is willing to negotiate concerning such a licence?  or 

Is an abuse of the dominant market position to be presumed only where the infringer has submitted to the proprietor of the [SEP] an acceptable, unconditional offer to conclude a licensing agreement which the patentee cannot refuse without unfairly impeding the infringer or breaching the prohibition of discrimination, and the infringer fulfils its contractual obligations for acts of use already performed in anticipation of the licence to be granted?

(2)      If abuse of a dominant market position is already to be presumed as a consequence of the infringer’s willingness to negotiate:

Does Article 102 TFEU lay down particular qualitative and/or time requirements in relation to the willingness to negotiate? In particular, can willingness to negotiate be presumed where the patent infringer has merely stated (orally) in a general way that it is prepared to enter into negotiations, or must the infringer already have entered into negotiations by, for example, submitting specific conditions upon which it is prepared to conclude a licensing agreement?

(3)      If the submission of an acceptable, unconditional offer to conclude a licensing agreement is a prerequisite for abuse of a dominant market position:

Does Article 102 TFEU lay down particular qualitative and/or time requirements in relation to that offer? Must the offer contain all the provisions which are normally included in licensing agreements in the field of technology in question? In particular, may the offer be made subject to the condition that the [SEP] is actually used and/or is shown to be valid?

(4)      If the fulfilment of the infringer’s obligations arising from the licence that is to be granted is a prerequisite for the abuse of a dominant market position:

Does Article 102 TFEU lay down particular requirements with regard to those acts of fulfilment? Is the infringer particularly required to render an account for past acts of use and/or to pay royalties? May an obligation to pay royalties be discharged, if necessary, by depositing a security?

(5)      Do the conditions under which the abuse of a dominant position by the proprietor of a[n SEP] is to be presumed apply also to an action on the ground of other claims (for rendering of accounts, recall of products, damages) arising from a patent infringement?’

……

  It is characterised, first, as the referring court has observed, by the fact that the patent at issue is essential to a standard established by a standardisation body, rendering its use indispensable to all competitors which envisage manufacturing products that comply with the standard to which it is linked.   That feature distinguishes SEPs from patents that are not essential to a standard and which normally allow third parties to manufacture competing products without recourse to the patent concerned and without compromising the essential functions of the product in question.

Secondly, the case in the main proceedings may be distinguished by the fact, as is apparent from paragraphs 15 to 17 and 22 of the present judgment, that the patent at issue obtained SEP status only in return for the proprietor’s irrevocable undertaking, given to the standardisation body in question, that it is prepared to grant licences on FRAND terms.

Although the proprietor of the essential patent at issue has the right to bring an action for a prohibitory injunction or for the recall of products, the fact that that patent has obtained SEP status means that its proprietor can prevent products manufactured by competitors from appearing or remaining on the market and, thereby, reserve to itself the manufacture of the products in question.

In those circumstances, and having regard to the fact that an undertaking to grant licences on FRAND terms creates legitimate expectations on the part of third parties that the proprietor of the SEP will in fact grant licences on such terms, a refusal by the proprietor of the SEP to grant a licence on those terms may, in principle, constitute an abuse within the meaning of Article 102 TFEU.

It follows that, having regard to the legitimate expectations created, the abusive nature of such a refusal may, in principle, be raised in defence to actions for a prohibitory injunction or for the recall of products. However, under Article 102 TFEU, the proprietor of the patent is obliged only to grant a licence on FRAND terms. In the case in the main proceedings, the parties are not in agreement as to what is required by FRAND terms in the circumstances of that case.

In such a situation, in order to prevent an action for a prohibitory injunction or for the recall of products from being regarded as abusive, the proprietor of an SEP must comply with conditions which seek to ensure a fair balance between the interests concerned.

In this connection, due account must be taken of the specific legal and factual circumstances in the case (see, to that effect, judgment in Post Danmark, C‑209/10, EU:C:2012:172, paragraph 26 and the case-law cited).

Thus, the need to enforce intellectual-property rights, covered by, inter alia, Directive 2004/48, which — in accordance with Article 17(2) of the Charter — provides for a range of legal remedies aimed at ensuring a high level of protection for intellectual-property rights in the internal market, and the right to effective judicial protection guaranteed by Article 47 of the Charter, comprising various elements, including the right of access to a tribunal, must be taken into consideration (see, to that effect, judgment in Otis and Others, C‑199/11, EU:C:2012:684, paragraph 48).

HOLDING / RULING

Article 102 TFEU must be interpreted as meaning that the proprietor of a patent essential to a standard established by a standardisation body, which has given an irrevocable undertaking to that body to grant a licence to third parties on fair, reasonable and non-discriminatory (‘FRAND’) terms, does not abuse its dominant position, within the meaning of that article, by bringing an action for infringement seeking an injunction prohibiting the infringement of its patent or seeking the recall of products for the manufacture of which that patent has been used, as long as:

–        prior to bringing that action, the proprietor has, first, alerted the alleged infringer of the infringement complained about by designating that patent and specifying the way in which it has been infringed, and, secondly, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, presented to that infringer a specific, written offer for a licence on such terms, specifying, in particular, the royalty and the way in which it is to be calculated, and

–        where the alleged infringer continues to use the patent in question, the alleged infringer has not diligently responded to that offer, in accordance with recognised commercial practices in the field and in good faith, this being a matter which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.

2.      Article 102 TFEU must be interpreted as not prohibiting, in circumstances such as those in the main proceedings, an undertaking in a dominant position and holding a patent essential to a standard established by a standardisation body, which has given an undertaking to the standardisation body to grant licences for that patent on FRAND terms, from bringing an action for infringement against the alleged infringer of its patent and seeking the rendering of accounts in relation to past acts of use of that patent or an award of damages in respect of those acts of use.

 

 

 

Rajiv Kr. Choudhry

Rajiv Kr. Choudhry

Rajiv did his engineering from Nagpur University in 2000 in electronics design technology. He has completed his LL.B. from Delhi University, Law Center II in 2006, while working as an engineer at ST Microelectronics in NOIDA. After his LL.B., he went on to The George Washington Univeristy, Washington DC to do his LL.M. in 2007. After his LL.M., he has worked in the US at a prestigious IP law firm based out of Philadelphia. Till 2014, he was Of-Counsel to a Noida based IP law firm where he specialized in advising clients on wireless, telecommunication, and high technology. Rajiv is the founder of Tech Law Associates, a New Delhi based law firm specializing in IP law, with a focus on high - technology, and patent law. His core IP interest areas are the intersection of technology and IP, Indian IP policy, innovation, and telecommunications patents. He is also an inventor with pending applications in machine-to-machine communications domain (WO2015029061).

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