In May 2020, the German Federal Supreme Court (BGH) issued the first ruling on FRAND rules for standard-essential patents (SEPs) since the landmark Huawei v. ZTE ruling of European Court of Justice (ECJ) of 2015, which is known for the “ping-pong” procedure outlined therein, according to which a SEP holder can only sue for injunctive relief if he has previously offered the alleged patent infringer a license on FRAND terms. The latter must in turn indicate that he is willing to enter into a license agreement.
Sisvel was a non-practising entity and held several SEPs for various mobile telecommunications standards. Purporting to abide by the Huawei/ZTE process, Sisvel notified mobile phone maker Haier that they were infringing one of Sisvel’s SEPs. Haier first reacted to Sisvel’s infringement notice about a year after receiving it by requesting more information on license royalties and a possible discount. Later, Haier expressed its willingness to take a license, but only on the condition that the patents were first found valid and infringed in Court. Sisvel made an initial licensing offer, which Haier rejected, and Haier subsequently made a counteroffer, which Sisvel rejected. The parties exchanged several more proposals, none of which led to an agreement. Sisvel eventually sued Haier for patent infringement in the Regional Court of Düsseldorf, seeking damages for Haier’s past use, an injunction against Haier’s sale of any products practising Sisvel’s patents as well as recall and destruction of such products.
Regional Court of Düsseldorf
In 2015, the Court of the first instance (Regional Court of Düsseldorf) granted Sisvel an injunction against Haier based on the alleged infringement of Sisvel’s SEP and ordered Haier to render accounts and recall and destroy the infringing products. On appeal, the Appellate Court (Higher Regional Court of Düsseldorf) found in 2017 that the injunction was not justified. It did not have to reverse the injunction because the patent had in the meantime expired. The Appellate Court held that the first instance Court erred by failing to assess whether Sisvel’s offer to Haier was FRAND (fair, reasonable, non-discriminatory). It found that Sisvel’s offer to Haier was “discriminatory” and thus not FRAND offer because Sisvel had offered Haier’s competitor Hisense a significantly lower rate. As a result, the court held that Haier was not obliged to respond with a FRAND counteroffer. In that regard, the Appellate Court interpreted the ECJ’s Huawei/ZTE decision as requiring that the SEP holder must first make a FRAND offer before any obligations arise on the implementer’s reaction. Sisvel appealed the case to the BGH.
The Bundesgerichtshof (BGH)’s Ruling
In its judgment, the BGH clarified the parties’ obligations under the FRAND procedure, which the ECJ had previously outlined in the Huawei v ZTE case. That is, first, the patent owner must alert the infringer by designating the patent in question and specifying how it has been infringed. If and when the infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, the patent owner must present to the infringer a specific, written offer for a license on such FRAND terms, specifying, in particular, the royalty and how it is to be calculated. These obligations of the patent owner apply if the infringer diligently responds to that offer, following recognized commercial practices in the field and in good faith. Whether the latter is the case, must be established based on objective factors and implies that there are no delaying tactics. Should the infringer not accept the offer made, it must submit to the patent owner, promptly and in writing, a specific counteroffer under FRAND terms. Only then, the infringer can argue that the patent owner’s license offer was not FRAND and that his request for injunction or recall constitutes an antitrust law violation.
Furthermore, where the infringer was using the patent in question before a license agreement has been concluded, it is for the infringer, from the point at which its counter-offer is rejected, to provide appropriate security, following recognized commercial practices in the field, for example by providing a bank guarantee or by placing the amounts necessary on deposit. The calculation of that security must consider, inter alia, the number of the past acts of use of the patent in question, and the infringer must be able to render an account in respect of those acts of use.
Following the SEP owner’s notice of an infringement, the implementer cannot fulfil its FRAND obligations by merely announcing an abstract willingness to negotiate or by imposing conditions for negotiations. Implementers must make clear they are willing to take a license on “whatever terms are FRAND.” Only if the implementer clearly showed a willingness to take a license is the SEP holder barred from seeking an injunction.
The BGH found that Haier’s delay in responding to the notice of infringement and its condition that it would take a license only once the patent was found valid and infringed in court showed that Haier was an unwilling licensee. Even apart from the delay in Haier’s response to Sisvel’s infringement notice (one year after its receipt), the Court noted that its content did not sufficiently show a clear willingness to take a license. Haier’s initial response was limited to expressing a hope that the parties would have formal negotiations and to asking for more information. In later correspondence, Haier specified that it would be prepared to take a FRAND license once a German Court had rendered a final and binding decision on the validity of the patent and its infringement. The BGH found such “conditioned willingness to license” to be insufficient.
Considering the then-impending lapse of the patent, the Court qualified Haier’s behaviour as delaying tactics. In short, Haier did not timely take the second step in the negotiation process described in the Huawei/ZTE judgment of the ECJ and subjected that second step to an improper condition. The BGH found Haier’s argument that it needed more information to engage in negotiations to be without merit. According to the Court, a patentee must inform an implementer that it is infringing a patent and allow the implementer to signal its willingness to license before the patentee sues for an injunction or other remedies. However, the patentee does not on its initiative need to provide details beyond identifying the patent in question and stating that it is being infringed.
Moreover, the Court stated that while the implementer can request details about the calculation of the proposed license fees from the patentee, it can only do so once it has demonstrated its willingness to take a license. Before that point, the patentee is under no obligation to provide concrete license terms at all. In the oral hearing, the BGH had reportedly stated that an implementer can cure a failure to declare its willingness to take a license but had questioned if and to what extent such a belated declaration of willingness was still possible once the SEP holder had filed for an injunction.
In the written judgment, the BGH deliberately refrained from offering final guidance on this question because it found that Haier’s later correspondence with Sisvel while the first appeal was pending (i.e., after the first instance judgment) still did not show the required unconditional willingness to take a license. Moreover, the BGH found that the better licensing terms Sisvel had offered to Haier’s competitor Hisense were due to political pressure from the Chinese government and were thus not a comparator to determine the FRAND rate. As a result, imposing a higher rate did not constitute discrimination.
Concerning the permissibility of worldwide portfolio licenses, the BGH noted that (i) a SEP owner may insist on a license to all of its relevant SEPs for the standards implemented in the infringing product (i.e., not non-SEPs, unless they are included without additional payment) and that (ii) a SEP owner may insist on a worldwide license, so long as a potential licensee who only develops products for specific geography suffers no disadvantage.
Finally, referring to the EC J’s decision in Huawei/ZTE (para. 74), the BGH stressed that a patentee’s claim for damages does not constitute an abuse of a dominant market position even where SEPs are at issue because a damages claim does not restrict market access. Therefore, contrary to a view previously held by German courts and legal commentators, a patentee’s damages claim is not necessarily limited to the amount of FRAND license fees the patentee could have received; the patentee could also claim damages that go beyond that. In that case, it is up to the implementer to file a counterclaim for damages resulting from the patentee’s failure to comply with its obligation to conclude a license agreement on FRAND terms with the willing licensee.
Here, Haier would not have been able to raise such a counterclaim because –given Haier’s failure to comply with its obligations to signal willingness – Sisvel did not violate its FRAND obligations.
Click here to view the Judgement.
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