The Munich Higher Regional Court has adopted a controversial new approach to standard essential patent (SEP) disputes. That framework, first detailed in a preliminary opinion released last October, places greater emphasis on the security that the implementer must pay to demonstrate willingness as required under EU caselaw: The decision established that a court will only make a full FRAND determination for the patent owner’s last offer if the implementer provides a security equal to the amount of that offer, that the court will otherwise decline to evaluate the FRANDness of that offer, and that this security is required for the implementer to be deemed “willing”. Since defendant HMD had not provided such a security to plaintiff VoiceAge EVS GmbH & Co. KG, the court held on March 20 that HMD’s FRAND defense had failed—and greenlit an appeal to Germany’s Federal Court of Justice.

Courts within the EU that evaluate FRAND disputes must follow the Court of Justice of the European Union’s (CJEU’s) 2015 decision in Huawei v. ZTE, which lays out a series of steps parties must adhere to during FRAND negotiations to be found compliant with their respective obligations. However, German courts have since adopted a restrictive interpretation of Huawei in the wake of the Federal Court of Justice’s two landmark decisions in Sisvel v. Haier (Sisvel I, 2020; and Sisvel II, 2021). Under Sisvel, courts have ruled that parties can later remedy non-compliance with the negotiation steps laid out by Huawei, essentially allowing their application out of order. Sisvel also imposes stringent requirements on implementers hoping to make a showing of willfulness, mandating that they “clearly and unambiguously” demonstrate their willingness consistently and continuously throughout negotiations. The result, according to JUVE Patent, is that the implementer is “almost always considered unwilling”, especially in the Munich Regional Court (from which the present appeal originated).

The European Commission pushed back against this approach this past April, taking the rare step of filing an amicus brief in that appeal in which it argued that the less rigid application of Huawei followed by German courts since Sisvel does not comply with EU law. In particular, the Commission’s brief argued that allowing parties to satisfy the steps out of order would undermine the balance of interests established by Huawei by incentivizing patent owners to immediately seek injunctions and implementers to allege abuse of dominance without negotiating. As such, the Commission asserted that the steps must be followed in strict sequence.

The Munich Higher Regional court reportedly acknowledged some of the key issues with post-Sisvel caselaw in an October 31, 2024 hearing in the VoiceAge EVS v. HMD appeal—one day after it issued the aforementioned preliminary opinion laying out a new approach in response.

In that opinion (reviewed here, and quoted throughout, based on a machine translation from its original German), the appellate court rejected the Commission’s view that the Huawei steps must be applied sequentially. For instance, with respect to the second step—under which the implementer must respond to the patent owner’s notice of infringement (required under step one) with a declaration of willingness to take a FRAND license—the court expressed the opinion that the defendant’s FRAND objection should not “automatically” fail if it does not initially provide such a declaration as long as the parties subsequently enter into negotiations. More broadly, the court read the Sisvel decisions to “generally assume[] that omissions can be made up for by subsequent greater efforts and that the user does not permanently lose the FRAND objection due to a one-time failure”.

The court also held that the patent owner’s first offer (as contemplated under Huawei step three) does not have to be FRAND or evaluated by the court for FRANDness, rejecting the Commission’s contrary position (as paraphrased by the court) that the FRAND defense should always succeed if that offer is non-FRAND. Rather, the court underscored that a non-FRAND first offer is not an abuse of dominance because it “is only the starting point of the negotiations” during which a FRAND offer “is to be developed”. The court also read Huawei step four, wherein the implementer makes a counteroffer, as assuming that the patent owner’s offer being responded to was non-FRAND (as the implementer would have otherwise accepted the offer). As a result, the court held that it “is questionable whether this step is always absolutely necessary, or whether the user may ‘skip’ it and immediately proceed” to Huawei step five, under which the implementer must provide an “appropriate security, in accordance with recognised commercial practices in the field”.

Most significant was the Higher Regional Court’s approach to that fifth step. Here, it held that the implementer cannot be found to be a willing licensee without providing an appropriate security, but conversely that if it does provide such a security after having submitted a counteroffer, it will both be deemed willing and will have “cured” any delay committed during negotiations. Moreover, the appellate court disagreed with the lower court that the amount of an appropriate security should cover just the use of the patents-in-suit and acts of use in Germany, ruling instead that it should be based on the patent owner’s last offer, including an offer for a worldwide license, and not be “downscaled” to just the asserted patents and infringement in Germany. The reason, per the court, is that the security covers the license fee the plaintiff could seek from an agreement on FRAND terms rather than damages.

Additionally, the Higher Regional Court held that the implementer must give a binding declaration that if the offer is proved to be FRAND-compliant and infringement is affirmed, the patent owner will receive the security. Here, the court acknowledged that this is not explicitly mandated by Huawei but determined that it can be inferred from the requirement of an “appropriate security”, since it would defeat the purpose of a security if the implementer could “change [its] mind” and later waive its FRAND defense, accept an injunction, and get the security back, thus enabling a “pure delaying tactic”.

Should the implementer provide such a security, the court concluded, “the way is open for the actual FRAND examination of the plaintiff’s offer”.

Both parties reportedly expressed concerns about this approach at the hearing held the day after the opinion’s release. The defendant argued that this could encourage patent owners to make outsized demands, banking on the implementer’s inability to provide a commensurately large deposit, and warned that this problem would be compounded if multiple members of a pool each filed litigation and made supra-FRAND demands. The plaintiff, for its part, countered that this system could incentivize implementers to decline an otherwise FRAND offer and pay a deposit to delay a dispute’s resolution.

While the Higher Regional Court’s March 20 decision on appeal has not been published in full, public comments from the court indicate that it was unmoved by those concerns, or those raised by the Commission: The court stated to IP Fray that “[p]ursuant its advisory legal opinion of October 30, 2024”, because HMD had not provided sufficient collateral, its FRAND defense had thus failed, and it had “not sufficiently demonstrate its willingness to take a license on FRAND terms” (unofficial translation from IP Fray article). As a result, the court did not conduct an analysis of whether the patent owner’s offer was FRAND.

Finally, since its holding with respect to the security requirement had “not yet been decided by a court of final appeal”, the Higher Regional Court granted permission to appeal with respect to HMD’s FRAND defense to the Federal Court of Justice, “recognizing the fundamental importance of these questions”.

In the meantime, uncertainty could hang over the SEP landscape in Germany as that likely appeal proceeds—particularly in the event that the case is referred to the CJEU.