Today, a European Union high court issued a ruling that provides guidance on what steps the owner of a FRAND-encumbered patent that may be essential to a standard should take before seeking injunctive relief. The court also ruled that a willing licensee should act without delay, provide a counter-offer, and actively pay royalties (in trust or otherwise) for past and on-going use of the patent while the parties negotiate toward a FRAND license. The court further ruled that there was no specific pre-filing steps needed for the owner of a FRAND-encumbered patent to file suit seeking solely an accounting and monetary relief for past infringement (i.e., not injunctive).
The case involves patent owner (“proprietor”) Huawei asserting a European patent alleged essential to the Long Term Evolution (LTE) standard against alleged infringer ZTE. That patent was subject to a commitment to license the patent on fair, reasonable and non-discriminatory terms (FRAND) made to the European Telecommunications Standards Insitute (ETSI).
ETSI has intellectual property right (IPR) policies that concern patents that are essential to ETSI standards. A patent is essential to the standard where it is not possible on technical grounds to make equipment that complies with the standard without infringing the patent. ETSI’s IPR policy provides that patent owners should be adequeately and fairly rewarded for the use of their patented technology, but also seeks to guard against such patents making standardized technology unavailable. Thus ETSI seeks a balance between the needs of standardization for public use and the rights of patent owners.
To this end, ETSI participants are required to timely disclose their patents that are essential to an ETSI standard. In response to such disclosure, ETSI will ask the patent owner to give an irrevocable FRAND commitment. ETSI is supposed to determine whether to suspend work on adopting the standard until such a commitment is received. ETSI does not check whether the patent actually is essential or valid. Further, ETSI does not define what would be a “license on FRAND terms.”
In April 2011, patent owner Huawei brought an action in German court against ZTE for infringing the LTE patent following failed negotiations. The parties had been in negotiations from November 2010 until end of March 2011. Huawei offered what it considered a FRAND royalty and ZTE responded with a cross-license offer. No agreement was reached, though ZTE continued to sell LTE devices. In its lawsuit, Huawei sought both injunctive and monetary relief.
The German court stayed its proceedings and referred specific issues to this European Union high court dealing with competition issues, based on the following questions:
(1) Does the proprietor of [an SEP] which informs a standardisation body that it is willing to grant any third party a license 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 license? 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 license 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 dischared, if necessary, by depositing a security?
(5) Do the conditions under which the abuse of a dominant positoin 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?
Article 102 of the Treaty on the Functioning of the European Union (TFEU), referenced above, states as follows:
Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.
Such abuse may, in particular, consist in:
(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
(b) limiting production, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
The European high court answered the questions above as follows:
1. 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 an 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 [i.e., the stayed German action], 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 licenses 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.
The court started by noting the balance it must strike between “maintaining free competition” based on “Article 102 TFEU prohibit[ing] abuses of a dominate position” and “the requirement to safeguard th[e] proprietor’s intellectual-property rights and its right to judicial protection.” The court further noted the limits of its ruling, stating that, in this case, “the existence of a dominant position has not been contested” and the questions to be addressed “relate only to the existence of an abuse”, thus “the analysis must be confined to the latter criterion.”
FRAND-Encumber SEPs Differ From Other Patents. The court stated that filing a lawsuit for patent infringement “forms part of the rights of the proprietor of an intellectual-property right” and normally is not an abuse of a dominant position. But there are “exceptional circumstances” when it may be an abuse. This case presents two distinguishing features from most patents. First, it involves a standard essential patent (SEP) that, unlike other patents, can preclude competitors from making standard compliant products. Second, the patent “obtained SEP status only in return for the proprietor’s irrevocable undertaking … that it is prepared to grant licences on FRAND terms.” Thus, a refusal to grant such a license “may, in principle, constitute an abuse within the meaning of Article 102 TFEU.”
Balance High Level of Protection Given Patent Rights. The court noted that applicable law “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.” This counsels not hindering a patent owner’s right to seek judicial relief and requiring a user to obtain a license before using the patented technology:
This need for a high level of protection for intellectual-property rights means that, in principle, the proprietor may not be deprived of the right to have recourse to legal proceedings to ensure effective enforcement of his exclusive rights, and that, in principle, the user of those rights, if he is not the proprietor, is required to obtain a licence prior to any use.
This is balanced with considerations for FRAND-encumbered SEPs, which “justif[ies] the imposition … of an obligation to comply with specific requirements when bringing actions against alleged infringers for a prohibitory injunction.”
First Step – Prior Notice to Infringer. The court thus ruled that, before bringing suit for injunctive relief, an SEP owner must “first … alert the alleged infringer of the infringement complained about by designating that SEP and specifying the way in which it has been infringed.” One reason for this is that, because there are a large number of patents that may be essential to a standard, the accused infringer may not “necessarily be aware that it is using the teaching of an SEP that is both valid and essential to a standard.”
Second Step – Written FRAND Terms. If, after notice, the alleged infringer “expressed its willingness to conclude” a FRAND license, the SEP owner must then provide “a specific, written offer for a licence on FRAND terms … specifying, in particular, the amount of the royalty and the way in which that royalty is to be calculated.” The court explained it was proper to have the SEP owner make such an offer, who may have nonpublic agreements with other licensees, since the patent owner “is better placed to check whether its offer complies with the condition of non-discrimination than is the alleged infringer.”
Accused Infringer’s Obligation. An accused infringer has its own obligations before it can take advantage of a FRAND defense.
First, if an accused infringer objects to the proferred license offer, it must submit, “promptly and in writing, a specific counter-offer that corresponds to FRAND terms.” This response must be in “good faith” with “no delaying tactics”:
[I]t is for the alleged infringer diligently to respond to that offer, in accordance with recognised commercial practices in the field and in good faith, a point which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.
Second, if its counter-offer is rejected, an accused infringer who already has been selling or otherwise using the technology before a license is entered must provide “appropriate security” for the past use of the technology and render an account of same:
The calculation of that security must include, inter alia, the number of the past acts of use of the SEP, and the alleged infringer must be able to render an account in respect of those acts of use.
Third-Party Royalty Determination. If the parties do not reach agreement, they can seek a “royalty determined by an independent third party, by decision without delay.”
Can Challenge Patent. The court ruled that, because the standard setting body did not determine essentiality or validity, the accused infringer should be allowed to challenge whether the patent is infringed, essential or valid during the negotiations or to reserve the right to do so in the future.
No Abuse If Seeking Past Money Damages. The court ruled that “seeking the rendering of accounts in relation to past acts of use of [an] SEP or an award of damages in respect of those acts” are not an abuse of dominance, because such actions “do not have a direct impact on products complying with the standard … appearing or remaining on the market.”