Court of Justice of the EU clarifies when an action for infringement by SEP owner may amount to an abuse

By Gabriele Accardo

On July 16, 2015, the Court of Justice of the European Union (“CJEU”) handed down its preliminary ruling following a reference by the Landgericht Düsseldorf (“Düsseldorf Regional Court”) in the context of the dispute between Huawei Technologies (“Huawei”) and ZTE Corp. (“ZTE”) on 4G/Long-Term-Evolution (“LTE”) technologies (see Newsletter 6/2014 p. 16 and Newsletter 2/2013, p. 9, for additional background).

 

Facts of the case

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.

Huawei is the proprietor of, inter alia, a European patent concerning method and apparatus of establishing a synchronization signal in a communication system. The European Telecommunications Standards Institute (“ETSI”), which granted SEP status, as the patent is essential to the LTE standard.

Huawei and ZTE engaged in discussions concerning the alleged infringement of the SEP and the possibility of concluding a licence on FRAND terms in relation to the products that ZTE put on the market and that operate on the basis of the LTE standard, thus using the SEP held by Huawei.

Huawei requested an amount which it considered to be a reasonable royalty, whereas ZTE sought a cross-licensing agreement instead.

Ultimately, no offer relating to a licensing agreement was finalized, whilst ZTE continued to sell its products without paying a royalty to Huawei or rendering an account to Huawei for past use.

Huawei brought an action for infringement against ZTE before the referring court, seeking an injunction prohibiting the infringement, the rendering of accounts, the recall of products and an award of damages.

 

Conflicting precedents

The Düsseldorf Regional Court considered that a preliminary ruling was needed in the circumstances because there are conflicting precedents on the issue at stake, 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 (1) it has made an unconditional offer to conclude a licensing agreement under terms that cannot be rejected by the patent holder without abusing its dominant position, and (2) to the extent that the defendant uses the teaching of the patent before the applicant accepts the unconditional offer, it is compliant with the obligations that will be incumbent on it, for use of the patent, under the future licensing agreement, namely to account for acts of use and to pay the sums resulting therefrom.

Thus, in principle, under the Orange Book case law, the Düsseldorf Regional Court considered that it ought to uphold Huawei’s action for a prohibitory injunction insofar as ZTE’s offers to conclude an agreement could not be regarded as “unconditional” (the offer related only to the products giving rise to the infringement, whereas ZTE did not pay Huawei any royalty).

However, the CJEU noted that in the Samsung case the Commission basically held that, in principle, the abusive nature of a refusal to license a SEP may successfully be raised as a defense where the defendant is “willing to negotiate” a license on FRAND terms. In other words, the referring court wondered whether the bringing of an action for a prohibitory injunction may be deemed as unlawful under Art. 102 of the Treaty on the Functioning of the European Union (“TFEU”), where that action relates to an SEP, the proprietor of that SEP has indicated to a standardization body that it is prepared to grant licenses on FRAND terms and the infringer is itself willing to negotiate such a licence, thus being apparently irrelevant that the parties in question cannot agree on the content of certain clauses in the licensing agreement or, in particular, on the amount of the royalty to be paid.

 

Answer by the CJEU

In essence, the CJEU had to clarify whether, and in what circumstances, a SEP holder abuses its dominant position by requesting injunctive relief against an alleged infringer of its SEP.

As a threshold matter, the CJEU considered that the particular circumstances of the SEP case in the main proceedings distinguished that case from all other cases where a company seeks to exercise its right to defend its intellectual property, as set out in previous EU case-law. Unlike that case law, the case at issue relates to the exercise of an exclusive right linked to a SEP established by a standardization body that has granted such SEP status only in return for the proprietor’s irrevocable undertaking that it is prepared to grant licenses on FRAND terms.

Unlike all other patents, patents that have obtained SEP status allow their proprietors to actually control the market, by preventing products manufactured by competitors from appearing or remaining on the market, if an SEP holder should threat them by seeking an injunction.

Yet, the CJEU made it clear that under Article 102 TFEU, the proprietor of the SEP is obliged only to grant a licence on FRAND terms, and that the proprietor’s irrevocable undertaking to grant licences on FRAND terms does not, in principle, negate the substance of the rights guaranteed to that proprietor by Article 17(2) and Article 47 of the Charter of Fundamental Rights of the European Union, including the right of access to a tribunal.

However, according to the CJEU, such “irrevocable undertaking” nonetheless justifies the imposition on that proprietor of an obligation to comply with specific requirements before bringing an action against an alleged infringer for a prohibitory injunction or for the recall of products. Specifically, the SEP owner would not abuse its dominant position, as long as:

  • First, before bringing such an action, the SEP holder alerts the infringer of the infringement complained about by designating that SEP and specifying the way in which it has been infringed;
  • Second, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, the SEP holder has presented to the alleged infringer a specific, written offer for a license on FRAND terms, specifying, in particular, the amount of the royalty and the way in which that amount is calculated.

In turn, the alleged infringer must respond to that offer in a diligent and serious manner.

Accordingly, if the alleged infringer does not accept the SEP holder’s offer, it must promptly present the latter with a reasonable counter-offer that corresponds to FRAND terms, and has to provide a bank guarantee for the payment of royalties or deposit a provisional sum in respect of its past and future use of the patent, if that counter-offer is rejected. Where no agreement is reached on the details of the FRAND terms following the counter-offer by the alleged infringer, the parties may, by common agreement, request that the amount of the royalty be determined by an independent third party, by decision without delay.

Conversely, if the conduct of the infringer is purely tactical and/or dilatory and/or not serious, an application for corrective measures or for an injunction does not constitute an abuse of a dominant position.

The CJEU thus clarified that the alleged infringer may rely—as a defense—on the abusive nature of an action for a prohibitory injunction or for the recall of products, only if it has submitted a counter-offer.

Also, the alleged infringer cannot be held liable if, during negotiations, it reserves the right to challenge the validity and/or essential nature and/or use of that patent.

Finally, the CJEU held that the SEP holder does not abuse a dominant position 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, and 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.

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