Huawei vs. ZTE taking effect in Germany

The CJEU's Huwei vs. ZTE judgement came out in the midst of several SEP-related court proceedings in German courts, and indeed as a consequence of one of them. In all these cases, regional courts have typically been faced with requests for injunctive relief based on SEP infringement, and a FRAND defense raised by the infringers.  

In NTT DoCoMo vs. HTC, the Mannheim regional court denied the FRAND defense and allowed an injunction. This was largely based on the infringer's behaviour, including unacceptable delays and non-FRAND counter-offers. 

In Sisvel vs. Haier, the Dusseldorf regional court on very similar grounds also denied the FRAND defense and allowed an injunction. However, in this case the higher regional court of Dusseldorf stayed the injunction due to the lower court not having sufficiently analyzed whether the SEP-holders original offer was FRAND-compliant.

The appeal in Sisvel vs. Haier relates to the exact interpretation of the sequence of "steps" described by the CJEU, including whether the SEP-holder made a FRAND-compliant offer. It seems like the higher regional court of Dusseldorf may have a more strict interpretation than the lower court. But the injunction may very well still be implemented in the end; it depends on the ongoing analysis.

Another interesting case is Saint Lawrence Communications ("SLC") vs Deutsche Telekom where the regional court of Mannheim as in the cases above denied the FRAND defense and granted injunctive relief. However, in this case the infringer is a mobile network operator, which acts as a distributor of ready-to-use phones.  Deutsche Telekom appealed to the higher regional court of Karlsruhe, arguing that if the OEMs were willing to take FRAND licenses, then the downstream distributor can not be subject to an injunction. The appelate court stayed the injunction pending the resolution of that particular question.

There's also a more recent case of interest. In its March 31, 2016 decision in SLC vs. Vodafone, the Dusseldorf regional court again denied the FRAND defense and allowed an injunction against mobile network operator Vodafone and its intervening OEM partner HTC. The grounds were again similar as the other cases. What the CJEU found was the presence of "delay tactics", including late responses to first offers, late counter-offers, counter-offers that did not include a "determined nor determinable" royalty, and counter-offers that were limited to Germany in spite of global product sales and a global offer from the SEP-holder.

It appears as if the court has taken some cues from Sisvel vs. Haier with respect to whether the SEP-holder made a FRAND-compliant original offer.  The court clearly endorsed SLC's other existing license agreements with significant companies in the field as being highly relevant FRAND references illustrating FRAND-compliance. And on the CJEU's "manner of calculation" of royalties, the court stated that there's no requirement to provide a "mathematical derivation" of demanded royalties. It would suffice if the SEP-holder "names the material considerations which establish the FRAND conformity of the license fee being demanded." This could be interpreted as lending further weight to existing relevant agreements and how they can demonstrate royalty rates accepted by competent market participants. 

The fact that the OEM according to the court did not behave in line with the CJEU's requirements as an infringer could indicate that the appeal path used by Deutsche Telekom might be less obvious for Vodafone. And the fact that the court appears to have analyzed SLC's offer quite thoroughly in light of the same court having been corrected on this very point in the Sisvel vs. Haier case indicates that the same could be said about the appeal path used by Haier.

In Huawei vs. ZTE, the CJEU set a standard for what specific behaviour motivates a FRAND defense in the face of a request for injunctive relief for SEP-infringement. It can be seen as an attempt to strike a reasonable balance between SEP-owners and OEMs in light of increasing reverse patent hold-up behaviour by SEP-infringers. The current cases in Germany, and quite possibly the recent SLC vs. Vodafone ruling in particular, have begun to demonstrate the German courts' interpretation of CJEU to this effect, which in turn could also be relevant input for other courts in the EU.

 

CJEU's judgement on SEP and injunctions

On July 16 2015, the Court of Justice of the European Union (CJEU) delivered its response to specific questions from a German court handling a cellular SEP licensing dispute between two Chinese rivals ZTE and Huawei.

The German court basically asked: In what circumstances will a request for an injunction by an owner of a FRAND-committed SEP be regarded as an abuse of dominant position?

The CJEU essentially replied that seeking an injunction would not be considered abusive when:

1) the SEP-holder has presented to the alleged infringer details of the infringement, and
 

2) after the alleged infringer has expressed its willingness to conclude a FRAND license, the SEP-holder has presented to the alleged infringer a FRAND license offer, including explicit royalty terms, and
 
3) the alleged infringer has not diligently responded to that offer, in accordance with recognized commercial practices in the field, in good faith and in particular without delaying tactics, and in case of the alleged infringer not having accepted the offer made to it, has not submitted to the SEP-holder, promptly and in writing, a specific FRAND compliant counter-offer.

The CJEU also noted that if no agreement is reached about FRAND terms after the alleged infringer's response or counter-offer, "the parties may, by common agreement, request that the amount of the royalty be determined by an independent third party, by decision without delay."

In reality, the actions of the SEP-holder in CJEU's points 1) - 3) are not at issue. There's hardly anything in this world that an SEP-holder wishes more than to present infringement details and a FRAND license offer to an infringer of its intellectual property rights. Although infringers may in some cases try to prevent the SEP-holder from doing just that, which I can talk about in another post, providing such information is the first objective of any serious licensing effort. This means that in practice, the main importance of points 1) - 3) is the wording concerning the behaviour of the alleged infringer.  

So what comes across very clearly from the judgement is the strong emphasis on diligence and timeliness on the part of the alleged infringer. I see this as very positive and a strong acknowledgement of the very real and present danger of reverse patent hold-up. 

As discussed in my previous post, competition regulators worldwide have focused on maintaining efficiency in SEP FRAND licensing matters by e.g. requiring bi-lateral negotiation with time limits and in case of no agreement, a single third-party adjudication of global license SEP portfolio royalty terms. While not providing explicit time limits per se, the CJEU judgement also strongly demands timeliness, e.g. with wordings such as "no delaying tactics" and "prompt" responses by the alleged infringer. In case the alleged infringer refuses the offer from the SEP-holder, it has to make a FRAND-compliant counter-offer "promptly and in writing". The parties are also encouraged to seek third-party adjudication - "without delay" no less - in case of no agreement, again in line with competition regulators' measures for licensing efficiency.

The CJEU judgement also generally promotes diligent bi-lateral negotiation as the means to reach a FRAND agreement. In essence the CJEU endorses the principle that the market should ultimately decide the FRAND terms for a given SEP portfolio license. In this sense it's also consistent with case law from other parts of the world that stresses the importance of existing licenses as FRAND references, including e.g. the Ericsson vs. D-Link case. 

With respect to what a FRAND offer may actually be, the CJEU judgement notes that "in the absence of a public standard licensing agreement, and where licensing agreements already concluded with other competitors are not made public, the proprietor of the SEP is better placed to check whether its offer complies with the condition of non-discrimination than is the alleged infringer." The CJEU thus seems to recognize that the SEP-holder's offer is likely closer to the actual FRAND rate than an offer from the alleged infringer, due to the SEP-holder's real concern of non-discrimination. In a sense this is also in harmony with the US ITC's "everybody's watching the SEP-holder" observation in Interdigital vs Nokia/Microsoft.

Overall I see this judgement by CJEU as a step in the right direction in tackling the real-world problem of reverse patent hold-up. It makes it clear to infringers that in order to avoid the risk of injunctions against their products, they need to act promptly, diligently, in good faith and in accordance with recognized commercial practices in the field to obtain necessary SEP FRAND licenses. 

Now, the CJEU judgement was based on a given "normal" scenario of the referring court, and as such it doesn't necessarily capture all possible aspects of contemporary licensing reality. There are in fact some interesting real scenarios that fall outside the scope of the judgement, but under which a request for an injunction must clearly also be non-abusive. However, I'll save those for another post.