German Court Explains Long-Awaited SEP Ruling, Holding that Portfolio Licenses Can Be FRAND
- July 11, 2020
Category: Top Insight
In early May, the German Federal Court of Justice (Bundesgerichtshof) announced a long-awaited decision in a fair, reasonable, and nondiscriminatory (FRAND) patent licensing dispute between patent pool administrator Sisvel International S.A. and Haier. The court has now explained its ruling by publishing its written opinion in that case, restoring a lower court’s ruling in favor of Sisvel and establishing a series of criteria concerning the conduct expected of patentees and implementers during negotiations in disputes over the licensing of standard essential patent (SEPs). This ruling confirms initial reports that the court had imposed a higher bar for accused infringers hoping to show that their prior licensing behavior had been FRAND-compliant, with the court explaining that defendants must go well beyond merely stating their willingness to take a FRAND license. The written opinion also lays out additional requirements and guidelines for patent owners—in part, stating that portfolio licenses do not violate antitrust law, under certain conditions, and can be global in scope.
As RPX has previously reported, Sisvel filed the underlying infringement litigation against Haier in late 2014 following a series of licensing negotiations over two patents (EP 1 264 504, EP 0 852 885) allegedly essential to the UMTS and GPRS cellular networking standards. During the pendency of the litigation, the CJEU issued its decision in Huawei v. ZTE, holding that “SEP holders may not seek injunctions against users willing to enter into a licence on FRAND terms” and addressing how courts may determine whether or not a potential licensee has shown the requisite willingness to do so. The decision also laid out the criteria for a FRAND defense, which arises under antitrust law and is available in part when the SEP-holder has a market-dominant position and the accused infringer has made a FRAND counter-offer, has provided an accounting of past sales, and has provided payment for past royalties (through, for example, a security). To rely on the defense, under Huawei v. ZTE, an alleged infringer must have negotiated in good faith and without undue delay.
The Regional Court of Düsseldorf found that Haier was not entitled to the FRAND defense because it did not submit sales data for the accused devices or provide a bond until just before the oral hearing in September 2015. Finding that Sisvel had complied with its requirements as the SEP holder, the court held that Haier’s conduct constituted improper delay under Huawei v. ZTE, thereby obligating Haier to respond to Sisvel’s offer without delay because it had refused the NPE’s original licensing offer. However, that decision was reversed in March 2017 by the Higher Regional Court of Düsseldorf, which held that Sisvel’s offers had not been FRAND because they were discriminatory against Haier compared to agreements with other licensees—and found that Sisvel had not met its burden of proof to show that there was an objective reason for the highlighted differences. The court declined to reinstate injunctive relief but ordered Haier to pay damages and provide an accounting of specific sales information.
The Federal Court of Justice then announced its ruling on appeal on May 5, the same day that it heard the case, and released its opinion in early July. The analysis that follows is based on an unofficial English translation of the German-language decision released by law firm Arnold Reuss. That translation omits the portion of the opinion related to infringement, which affirmed the lower court’s infringement ruling.
In the portion of its opinion relating to FRAND licensing, the court established a variety of rules concerning conduct expected of patent owners and accused infringers. As an initial matter, the court confirmed that the owner of a SEP is not absolutely prohibited from enforcing the patent by seeking an injunction, as there is no means for even a market-dominant patent owner to impose a license on anyone. However, the court ruled that a SEP owner’s request for an injunction may be deemed abusive conduct in certain circumstances. Those scenarios include (1) when an alleged infringer makes “an unconditional offer to conclude a license agreement on conditions which the patentee may not refuse without violating the prohibition of abuse or discrimination” (citing the Federal Court of Justice’s 2009 Orange Book decision, a seminal ruling concerning a de facto standard that was superseded by Huawei v. ZTE) and (2) when an alleged infringer is willing to take a license but the patent owner fails to take certain steps needed to establish FRAND conditions as specified in Huawei v. ZTE. Notably, those required steps include notifying the alleged infringer of their infringement if the infringer is unaware of that infringement and providing the alleged infringer with sufficient explanation and justification for the proposed, allegedly FRAND licensing conditions.
Additionally, the court held that portfolio licenses do not run afoul of antitrust law as long as they do not require license payments for non-essential patents, and as long as implementers creating products for a “specific, geographically limited area are not disadvantaged”. The court further clarified that a patent owner is not obligated to license only the specific patents-in-suit, stating instead that worldwide portfolio licenses are “common practice” and are the most efficient option for implementers.
The court also held that the information the patentee must disclose to an alleged infringer varies in the required amount, level of detail, and timing of disclosure based on the facts of each specific case. These infringement allegations may be laid out in claim charts, which are “regularly sufficient, but not mandatory”.
Furthermore, with respect to what constitutes “reasonable and non-discriminatory” license terms, the court held that a SEP owner is not required to offer a “‘uniform tariff’ that grants equal conditions to all users. Rather, since appropriate conditions are typically negotiated under “(possibly similar) market processes”, the “serious and goal-oriented participation” of the accused infringer in the negotiation process is of “decisive importance”. This requirement is especially so in the context of disputes over whether the patent owner offered FRAND license terms, explained the court, because an accused infringer is economically incentivized to delay until the asserted patent expires (i.e., to engage in hold-out), thereby obviating the possibility of injunctive relief (citing Huawei v. ZTE). As such, it is not enough that the infringer merely state a willingness to take a FRAND license or enter into negotiations. “Rather, the infringer, for his part, must clearly and unequivocally declare his willingness to conclude a licence agreement with the patent proprietor on reasonable and non-discriminatory terms and must also subsequently participate in the licence agreement negotiations in a target oriented manner” (emphasis added). On this point, the Federal Court of Justice quoted Justice Colin Birss of the UK High Court of Justice, who wrote in the latter court’s Unwired Planet decision that “a willing licensee must be one willing to take a FRAND licence on whatever terms are in fact FRAND”.
Applying the factors outlined above, the court then determined that, for two reasons, the Higher Regional Court had erred by finding that Sisvel had abused its dominant position. First, the Federal Court of Justice found that the appeals court was wrong to assume that the defendant had agreed to enter into a FRAND license based on the timing of its conduct. While the Higher Regional Court noted that the defendant did not declare that it was open to taking a license until a year after being notified of infringement, it nonetheless found that this sufficiently conveyed a willingness to take a FRAND license because it nonetheless occurred before the lawsuit was filed, thereby obligating Sisvel to make another offer on FRAND terms. Addressing the relevant facts de novo, the Federal Court of Justice declined to decide whether Haier’s delayed statements of willingness reestablished any obligations on Sisvel’s part. However, the court also found that Haier’s statements did not “satisfy the requirements for a serious and unconditional willingness to take a licence on FRAND terms”, finding that certain letters at issue merely conveyed a hope to enter into a formal negotiation while asking for certain information on discounts.
However, the Court of Justice held that the appeals court was correct in determining that another letter from Haier—expressing a willingness to license only in the event that courts issued judgments of infringement and validity for certain patents at issue—amounted to a “conditional declaration of willingness” and were therefore “insufficient” to establish the defendant’s willingness to license on FRAND terms. Furthermore, the Court of Justice found that by refusing to depart from the aforementioned “inadmissible condition” in subsequent communications, and by insisting on unwarranted detail regarding infringement, Haier had engaged in “delay tactics”. “Detailed technical or legal explanations on the use of the respective patent are not required”, the court held, explaining that “the infringer only needs to be enabled to assess the infringement allegation - if necessary with expert assistance or by obtaining legal advice”.
Second, the Court of Justice held that the Higher Regional Court had reached the wrong conclusion on the issue of Sisvel’s abuse of its dominant position by holding that it had offered discriminatory license terms to Haier. In particular, the Court of Justice faulted the appeals court for failing to consider whether the record showed that Sisvel had been forced to grant “preferential conditions” to a third party based on “intimidation or pressure from a foreign authority”. As a result, the Higher Regional Court “erred in law in assuming that this could not in itself constitute an objective justification for the unequal treatment”.
In general, the Court of Justice held, the question of whether there is an “objective justification for different prices has to be answered on the basis of a weighing of all interests involved”, in consideration of the antitrust objective of ensuring freedom of competition. Merely acting from a dominant position does not preclude a patent owner from “protecting its own commercial interests” as long as those actions do not serve to enhance the patent owner’s dominant position or constitute abuse, the court explained. With this in mind, if a patent owner were to have previously accepted an “inadequate” offer from a third party due to the “lack of realistic possibilities for judicial enforcement of its claims” and various “threats by state bodies”, this may serve as an “objective reason” to instead “adhere to its usual conditions vis-à-vis other enterprises”—so long as those conditions are otherwise appropriate and do not impair competition.
The court’s decision has been touted as providing some much-needed standardization in this area of FRAND law, as German courts have struggled to uniformly apply the Huawei v. ZTE factors—diverging on the appropriate procedural and substantive requirements for determining FRAND compliance. As noted by multiple stakeholders (see, e.g., here), the decision is also notable for its holding that the discrimination prong of FRAND is not hard-edged; meaning, charging licensees different rates is not necessary discriminatory. On that issue, the Sisvel v. Haier opinion aligns with the UK perspective, as articulated in Unwired Planet v. Huawei.