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SEPs and FRAND terms in Europe – is Germany moving towards the approach taken in the UK?

The German Federal Court of Justice (the Supreme Court) recently issued its written decision in the ongoing dispute between Sisvel v Haier (KZR 36/17).  Sisvel manages an LTE and LTE-A (4G) patent pool mainly based on a raft of 4G essential patents acquired from Nokia in 2011/12. 

In this decision the Federal Court of Justice made explicit reference to UK case law by citing Judge Justice Birss (J. Birss) in the decision of Unwired Planet v Huawei [2017] EWHC 711 (Pat), and held that an infringer of a Standards Essential Patent (SEP) bears a responsibility to participate in the licence agreement negotiations in a “target-oriented manner” and that “delay tactics” are not consistent with a willingness to conclude a licence agreement in a target-oriented manner.

The decision also holds that a patentee does not have to offer licences at a “uniform tariff” for them to be considered FRAND, which may well have ramifications for how royalty rates of SEPs are calculated for use in other sectors such as the automotive sector.

Facts of the case

The present case was based on European patent EP 852885, originally filed by Nokia in 1996 which relates to data rate negotiation during call set-up between a mobile station and a mobile communication network.

Haier distributed and offered mobile phones and tablets at the International Electronics Fair in Berlin in September 2014.  Sisvel considered that these mobile phones and tablets supported the GPRS standard which are under the responsibility of the European Telecommunications Standard Institute (ETSI).  In April 2013, Sisvel had made a commitment to ETSI (as they are required to do if they wish to include patents as part of the standard set by ETSI) to licence to Haier the patent on fair, reasonable and non-discriminatory (FRAND) terms, and approached Haier accordingly.

The parties could not agree, so in 2014 Sisvel sued Haier.  Sisvel considered the offer of the mobile phones and tablets to infringe their patent rights and ordered Haier to cease and desist, provide information, render accounts, destroy and recall the goods and to establish their obligation to pay damages.  The German Regional Court in Düsseldorf sentenced Haier accordingly, finding the patent valid and infringed and dismissing a defence from Haier on the grounds that they had delayed negotiations.

However, at appeal, the Higher Regional Court in Düsseldorf, while finding the patent to still be valid and infringed, did not grant an injunction as it considered Sisvel’s offer to Haier not to be FRAND because its offer to Haier was higher than an offer it had made to another party (Hisense, a Chinese phone maker).  In their defence, Sisvel argued that the rate offered to Hisense was below-FRAND due to special circumstances relating to that deal.

Abuse of a dominant position

The decision of the Higher Regional Court in Düsseldorf was appealed to the German Federal Court of Justice, who found that Sisvel as owner of the patent were dominant, in short because the patented technology cannot be substituted by a different technology and still comply with the relevant standard (in continental Europe the issue of SEP disputes is normally decided under the umbrella of competition law, whereas in the UK it is normally under the umbrella of contract law).  Because Sisvel were in a dominant position, the question was therefore whether they had abused this dominant position.

The Federal Court did not agree with the Higher Regional Court that this meant that Sisvel had necessarily abused its dominant position.  Instead, the Federal Court held that (roughly translated into English from German):

“An action brought by a market-dominant patent holder who has undertaken vis-à-vis a standardization organization to grant licences on FRAND terms may constitute an abuse of his dominant position if and to the extent that it is suitable to prevent products conforming to the standard from entering or remaining available on the market.”

The Federal Court noted that while applications for injunctive relief can be abusive, the owner of an SEP is not prohibited from enforcing their patent by requesting injunctive relief.  Instead, an abuse is only found if the infringer is not prepared to take a licence for the SEP on reasonable and non-discriminatory terms, with the Federal Court stating that:

It therefore constitutes an abuse of the dominant position if the patentee asserts claims for injunction, destruction and recall of products although the infringer has made him an unconditional offer to conclude a licence agreement on conditions which the patentee may not refuse without violating the prohibition of abuse or discrimination.

In addition, an action for assertion of such claims may also be considered abusive if the infringer has not (yet) agreed to conclude a licence agreement under certain reasonable conditions, but the patent proprietor bears the responsibility for this as he has not made sufficient efforts to meet the special responsibility associated with the dominant position and to enable an infringer who is in principle willing to licence to conclude a licence agreement under reasonable conditions.”

In short, the patent proprietor bears a special responsibility in light of their dominant position to sufficiently engage in negotiations for a licence agreement under FRAND conditions.

Non-discriminatory

On the question of whether or not the rate offered to Hisense meant that the offer made to Haier was not FRAND, importantly the Federal Court held that:

The dominant patentee is not in principle obliged to grant licences in the manner of a “uniform tariff” which grants equal conditions to all users.”

In short, therefore, a patentee is allowed to accept different contractual terms and licence rates if there is an objective justification for the differentiation – for example if they are the best that can be commercially achieved:

“Since appropriate conditions for a contractual relationship, in particular an appropriate price, are regularly not objectively determined, but can only be determined as the result of (possibly similar) negotiated market processes, the serious and goal-oriented participation of the company seeking a licence in the negotiation of appropriate contractual conditions is of decisive importance.”

Onus on the infringer to be willing

However, the infringer also bears a responsibility to be willing– with the Federal Court noting that:

“the infringer, for his part, must clearly and unequivocally declare his willingness to conclude a licence agreement with the patent proprietor on reasonable and non-discriminatory terms and must also subsequently participate in the licence agreement negotiations in a target-oriented manner”.

The Federal Court then made explicit reference to UK case law and cited the decision of J. Birss in Unwired Planet v Huawei [2017] EWHC 711 (Pat) (read Mathys & Squire’s article on this decision here) where J. Birss stated:

“A willing licensee must be one willing to take a FRAND licence on whatever terms are in fact FRAND.”

The Federal Court made it clear that while an infringer may request sufficient information to make a specific FRAND offer, delay tactics are not consistent with a willingness to conclude a licence agreement in a target-oriented manner.  The Federal Court noted that the Higher Regional Court had incorrectly assumed that Haier had agreed to conclude a licence agreement on FRAND terms and stating that:

The Court of Appeal correctly saw that the defendant’s declaration of 12 December 2013, i.e. more than one year after the first infringement notification, did not meet the requirements for an infringer willing to obtain a licence in terms of time alone. An infringer who remains silent for several months on the infringement notification thus regularly indicates that he is not interested in obtaining a licence.

Conclusion

The Federal Court of Justice therefore found in favour of Sisvel and further awarded damages, holding that they did not in principle constitute an abuse of a dominant position as a patentee can only counter a patentee’s claim for damages with a claim for damages of their own.

UK perspective

While there are differences in how SEP FRAND disputes are handled in the UK and Germany due to the differing application of contract and competition law, the specific references to UK case law in this German Federal Court of Justice decision suggests we are likely to see a more uniform handling of SEP FRAND disputes across Europe.

Furthermore, importantly the finding that a FRAND rate is not set in stone and can vary raises important considerations for other sectors such as the automotive sector.  In the telecoms sector, SEP FRAND royalty rates may be calculated as a % of handset sales price – typically 5% for 3G SEPs and as much as 10% for 4G SEPs.  Such a calculation wouldn’t seem fair in the automotive field where arguably the importance of the telecommunications technology that is the focus of the SEPs is less than it is for a mobile device.  The present decision may therefore pave the way for differing royalty rate calculations depending on the field of use.

German perspective

The Federal Court of Justice follows the steps for FRAND negotiations established by Huawei/ZTE (C-170/13) and the obligations for both parties. It should be noted that the wording used in the communication between the parties could make the difference in assessing if a licence offer or the declaration of willingness to take a licence is in line with the mentioned obligations. Particular care should be taken when such communication is handled on the business side at corporate decision maker level without involvement of the litigation team.

Additionally, the decision mentions the admissibility of portfolio licence deals even if only one patent is part of the infringement litigation. Those potential portfolio licence deals are restricted only that the infringer is not forced to sign up for licence for non-SEPs and that the infringer who plans a product only in a limited geographical area has no disadvantage from such deal. While the geographical restriction is usually less important for telecommunications cases, this may have an impact on how SEP owners have to bundle their patent portfolios.

Key contacts

Andreas Wietzke
Partner
Andrew White
Managing associate
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