While much of the attention over standard-essential patent litigation focuses on disputes taking place in the United States, the U.S. is not the only venue seeing these showdowns.  SEP-related issues have also arisen in Australia, in Korea, and in Europe (both in the courts and in European Commission investigations).  The courts in Germany — which has recently become a hotbed for patent litigation — have developed a unique procedure for dealing with the assertion of standard essential patents.  Named for a 2009 decision by the Federal Supreme Court of Germany, this is commonly known as the “Orange Book” defense or procedure (or sometimes as the dolo agit or good faith defense).  In this post, we aim to provide a background of this case and some examples of cases where the Orange Book defense has been invoked.

Patent Litigation in Germany

First, a quick explanation about patent litigation in Germany and how it differs from litigation in the U.S.  Under the “principle of separation,” patent litigation proceeds on two tracks — infringement is tried in one proceeding (“infringement action”), and patent validity in another (“nullity action”).  The infringement action typically takes place first, although judges have discretion to stay the infringement action pending the outcome of the nullity action — e.g., if it appears as though the patent might be invalid.  And even in the event a patent infringement plaintiff successfully obtains an injunction, it is typically required to post a bond in order to enforce the injunction pending appeal of the infringement finding and/or the results of the nullity action.

Background of the Orange Book decision

The case that led to the Orange Book decision (No. KZR39/06) involved a patent that was allegedly essential to standards covering recordable compact discs, or CD-Rs.  These technical standards were set forth in a document known as the Orange Book (not to be confused with the Orange Book relating to pharmaceuticals that is maintained by the U.S. Food & Drug Administration).  Philips, the owner of the patent, sued several manufacturers of CD-Rs that had failed to seek out a license from Philips.  Philips sought an injunction — which is almost always granted in Germany upon a finding of infringement — as well as money damages.  One defendant offered a defense that that Philips was abusing a dominant position in the CD-R market by seeking in injunction on its standard-essential patent, thereby violating Article 82 of the European Commission Treaty.

In its decision, the court set forth the parameters of the Orange Book defense, explaining that a defendant facing a claim for an injunction can defend itself by pleading that the plaintiff abuses a dominant position in the market only if:

  1. The defendant unconditionally offers to enter into a license agreement with the plaintiff for the patent at a particular royalty rate or at a rate to be determined by the plaintiff (and reviewed by the court);
  2. The defendant behaves as if it is an actual licensee, and pays royalties into an escrow account.

Thus, any license offer — whether the terms are determined by the plaintiff or the defendant — must be both unconditional and reasonable.  If there are conditions on the defendant entering into a license, the defense will be unavailable.  (In fact, this is exactly what occurred in the 2009 case).  Similarly, if the offered royalties are unreasonably low, the defense will be unavailable.  But if the offered royalties are reasonable for the plaintiff to accept, and the plaintiff does not actually accept the license offer, the court is likely to find that the plaintiff is abusing a dominant position in violation of Article 82.  Finally, in the case where the defendant allows the plaintiff to set the royalty rate, this rate will be examined by the court to determine if it is reasonable for the defendant to accept and adjusted accordingly.  Essentially, the defense is designed to prohibit a good-faith, willing licensee from being subject to an injunction simply because the parties disagree on the appropriate royalty rate.

Two additional points should be made regarding the Orange Book defense.  First, a defendant whose license offer is found to be inadequate is often given multiple chances to revise its offer to make it reasonable and unconditional.  Second, the Orange Book defense is not based on a the patent holder having made an actual RAND licensing promise — it is instead based on European competition law.  Thus, the defense may be invoked even against parties asserting a standard-essential patent for which there is no RAND obligation.

Cases within Germany and elsewhere

Since the Orange Book decision down in 2009, there have been a number of patent infringement cases involving standard-essential patents which the defendant invoked the Orange Book defense at some point (to varying degrees of success):

  • IPCom v. Nokia (involving 3G cellular essential patent)
  • Motorola Mobility v. Apple (involving various cellular-essential patents)
  • Samsung v. Apple (involving 3G/UMTS cellular-essential patents)
  • General Instrument Corp. (Motorola subsidiary) v. Microsoft Corp. (involving H.264-essential patents)

While versions of the Orange Book defense have invoked elsewhere in Europe, other countries have treated this defense differently than the German courts.  For example, in the Philips v. SK Kassetten decision from The Netherlands in 2010, the Court of The Hague declined to apply the reasoning of the German Orange Book case under Dutch law. For more on this case, visit the EPLaw Patent Blog.