Advocate General hands down opinion on Huawei’s alleged SEP abuse

By Gabriele Accardo

On 20 November 2014 Advocate General Wathelet delivered a much-awaited opinion in the case concerning a reference for a preliminary ruling by the Landgericht Düsseldorf (“Düsseldorf Regional Court”) in the context of the dispute between Huawei and ZTE on 4G/Long-Term-Evolution (“LTE”) technologies (see Newsletter 2/2013, p. 9, for additional background).

The issues at stake in the main case concerned the conditions of the compulsory license defense in standard-essential patents (“SEPs”) disputes, or, conversely, on the availability of remedies to the SEPs’ holder who has pledged to license them on Fair, Reasonable and Non-Discriminatory (“FRAND”) terms.

The Düsseldorf Regional Court considered that a preliminary ruling was needed in the circumstances because there are conflicting legal opinions on this issue, notably the German Supreme Court decision in the Orange-Book-Standard case (see Newsletter 3/2009, p. 4 for more background) and the case brought by the European Commission against Samsung (The case was recently closed with a commitment decision. See Newsletter 2/2014, p. 14 and Newsletter 6/2012, p. 11 for more background).

In the Orange-Book-Standard case, the German Supreme Court held that a defendant in a patent infringement case may successfully raise an antitrust defense against the issue of an injunction provided that i) it has made an unconditional offer to license under terms that cannot be rejected by the patent holder without abusing its dominant position, and ii) it actually acted as if it had entered into a valid patent license (thus in very broad terms, when a user pays or deposits a reasonable license fee).

On the other hand in the Samsung case the Commission basically held that for such a defense to be successful it suffices that the defendant is “willing to negotiate” a license on FRAND terms.

Incidentally, it is recalled that the Commission recently found that Motorola Mobility’s seeking and enforcement of an injunction against Apple before a German court on the basis of a smartphone SEP constituted an abuse of a dominant position in breach of Article 102 TFEU (see Newsletter 2/2014, p. 12 and Newsletter 2/2013, p. 14 for more background). In particular, the Commission held that seeking of injunctions may be abusive when two conditions are met: i) a SEP holder has given a commitment to license on FRAND terms during standard-setting, and ii) the potential licensee is willing to enter into a licence on FRAND terms, i.e. the potential licensee has agreed to a determination of FRAND terms by a court or arbitrators and also agreed to be bound by such a determination in case of dispute.

Accordingly, the CJEU has been asked by the German Supreme Court to clarify five questions as to whether, and in what circumstances, a SEP holder abuses its dominant position by requesting injunctive relief, even if the infringer is willing to negotiate a license on FRAND terms, or whether the infringer is further required to comply with the contractual obligations that would exist under a FRAND license.

In his Opinion, Advocate General Wathelet first points out that the fact that a company owns an SEP does not necessarily mean that it holds a dominant position and that it is for the national court to determine, on a case-by-case basis, whether that is the case.

That said, Advocate General Wathelet opined that it constitutes an abuse of a dominant position for a SEP holder to request corrective measures or to seek an injunction against a company that has infringed the SEP (“the infringer”) where it is shown that the SEP holder has not honored its commitment even though the offending company has shown itself to be objectively ready, willing and able to enter into such a licensing agreement.

In particular, the SEP-holder must, given the importance of what is at stake, take certain specific steps before bringing an action for a prohibitory injunction in order to honor its commitment and discharge its special responsibility under Article 102 TFEU:

First, unless it has been established that the alleged infringer is fully aware of the infringement, the SEP holder must, before making a request for corrective measures or seeking an injunction, alert the infringer to the infringement at issue in writing, giving reasons, and specifying the SEP concerned and the way in which it has been infringed by that company.

Secondly, the SEP holder must, in any event, present the alleged infringer with a written offer of a license on FRAND terms and that offer must contain all the terms normally included in a license in the sector in question, including the precise amount of the royalty and the way in which that amount is calculated.

What are the obligations of the infringer?

The infringer must respond to that offer in a diligent and serious manner. If it does not accept the SEP holder’s offer, it must promptly present the latter with a reasonable counter-offer, in writing, in relation to the clauses with which it disagrees. An application for corrective measures or for an injunction does not constitute an abuse of a dominant position if the conduct of the infringer is purely tactical and/or dilatory and/or not serious.

According to Advocate General Wathelet, the timeframe for the exchange of offers and counter-offers and the duration of the negotiations must be assessed in the light of the “commercial window of opportunity” available to the SEP-holder for securing a return on its patent in the sector in question.

Yet, if negotiations are not commenced or are unsuccessful, the conduct of the alleged infringer cannot be regarded as dilatory or as not serious if it requests that FRAND terms be fixed either by a court or by an arbitration tribunal. In that event, it is legitimate for the SEP holder to ask the infringer to either provide a bank guarantee for the payment of royalties or deposit a provisional sum with the court or arbitration tribunal in respect of its past and future use of the patent.

The same would apply if, during negotiations, the alleged infringer reserves the right, after entering into an agreement for such a license, to challenge before a court or arbitration tribunal the validity, use and essential nature of that patent. Such a possibility is, according to Advocate General, in the public interest because the wrongful issue of a patent may constitute an obstacle to the legitimate pursuit of an economic activity. Moreover, if undertakings supplying standard-compliant products and services cannot call into question the validity of a patent declared to be essential to that standard, it could prove effectively impossible to verify the validity of that patent because other undertakings would have no interest in bringing proceedings in that regard.

Advocate General Wathelet further considered that in taking legal action to secure the rendering of accounts in order to determine what use the infringer has made of the teaching of an SEP with a view to obtaining a FRAND royalty under that patent, the SEP holder does not abuse a dominant position.

Similarly, in bringing a claim for damages in respect of past use of the patent, for the sole purpose of obtaining compensation for previous infringements of its patent, the SEP holder does not abuse a dominant position.