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.

Competition authorities and FRAND

Disputes arising in wireless SEP FRAND licensing are very rare. But when they do occur, parties normally turn to courts for settlement. In certain instances though, national or international government agencies in the form of competition regulators become involved in one way or another. Without getting into too much detail, I'll here briefly examine the net outcomes of some key rulings and settlements of competition agencies in recent years, relating to wireless SEPs and FRAND licensing. 

Starting in the US, in June 2012 the US Federal Trade Commission (FTC) launched an investigation into whether Google, through its then subsidiary Motorola Mobility, breached FRAND commitments by seeking exclusion orders for SEP infringement against "willing licensees". This investigation concluded on July 24, 2013 with a "consent order" where Google accepted certain restrictions on seeking exclusion orders for SEP infringement against US companies. The consent order set out detailed procedures for Google and willing licensees to timely conclude a global SEP-portfolio license. I won’t go into the details here as it’s a bit lengthy, but essentially there's a six month negotiation period followed by – in case of no agreement - a global FRAND determination by a court or a binding arbitration. See also my earlier post where I discuss this order.

Moving on to the EU, the European Commission (EC) on January 31, 2012 opened an investigation into whether Samsung, by seeking injunctive relief against SEP infringers within the EU, breached FRAND commitments and engaged in abuse of a dominant position. On April 29, 2014, the EC concluded its investigation by accepting certain commitments made by Samsung. For a period of five years Samsung committed not to seek injunctions within the EU on SEPs against infringers that agree to the following licensing framework:

· “a negotiation period of up to 12 months; and

· if no agreement is reached, a third party determination of FRAND terms by a court if either party chooses, or by an arbitrator if both parties agree on this.”

Over in China, in May 2013, the National Development and Reform Commission (NDRC) opened an investigation into InterDigital's SEP-licensing practices. The NDRC  suspended its investigation on May 22, 2014 after accepting InterDigital's commitment including:

“Prior to commencing any action against a Chinese Manufacturer in which InterDigital may seek exclusionary or injunctive relief for the infringement of any of its wireless standards-essential patents, InterDigital will offer such Chinese Manufacturer the option to enter into expedited binding arbitration under fair and reasonable procedures to resolve the royalty rate and other terms of a worldwide license under InterDigital's wireless standards-essential patents. If the Chinese Manufacturer accepts InterDigital's binding arbitration offer or otherwise enters into an agreement with InterDigital on a binding arbitration mechanism, InterDigital will, in accordance with the terms of the arbitration agreement and patent license agreement, refrain from seeking exclusionary or injunctive relief against such company.” 

The net outcomes of these cases are in fact quite similar. They provide a "safe haven" for SEP holders to avoid competition concerns and for infringers to timely obtain SEP licenses without the risk of exclusion orders. SEP holders can avoid competition scrutiny by offering infringers the option of “formally” becoming willing licensees by accepting a process that typically includes timely FRAND determination or arbitration of the global patent portfolio value. Importantly, infringers who choose not to accept such processes continue to be susceptible to exclusion orders. 

We can see that an important common concern of these US, EU and Chinese competition authorities has been the availability of exclusion orders for SEP infringement without proper FRAND scrutiny by a court or arbitration panel. However, it's good to note that the authorities have clearly also considered the risk of so-called reverse patent hold-up. Such behaviour, also known as patent hold-out, is nowadays a common problem in SEP portfolio licensing, leading to reduced R&D investment incentives and increased SEP transfers. Importantly, the net outcomes of these cases emphasize timely resolution of global SEP portfolio licenses and keeping exclusion orders on the table for those who decline the process. These are measures that can help mitigate reverse patent hold-up.

What's also clear is the deferral of the FRAND determination issue to courts and arbitration panels. In other words, the competition authorities acknowledge that they are themselves not suited to handle patent and price-setting issues in SEP FRAND matters. This makes perfect sense in my opinion since courts and arbitration panels are arguably more transparent, independent and experienced with such matters.

An interesting scenario in the light of these net outcomes is the case of an SEP holder who seeks an exclusion order for SEP infringement where the infringer refuses to accept the court's FRAND determination for a SEP portfolio. Given that the competition authorities' concern is related to exclusion orders without proper FRAND review, this type of situation would follow the precedent set by the authorities.

Finally, on July 16, 2015, the Court of Justice of the European Union (CJEU) also offered its guidance on under what circumstances a SEP-holder may or may not abuse a dominant position by seeking exclusion orders. It did this by responding to five specific questions put to it by a German court in the matter of Huawei vs. ZTE. On the face of it, the CJEU's decision seems to be consistent with the above-mentioned agency net rulings. But the ruling deserves some scrutiny in terms of real-world licensing, which I will save for a separate post.