Guidance from the EU-level for multi-component device SEP litigation?

The Dusseldorf Regional Court decided on November 26, 2020 to refer several hotly-disputed questions relating to FRAND licensing of SEPs, especially with a view to the involvement of suppliers, to the Court of Justice of the European Union (CJEU). Expectations are high for this upcoming EU-wide decision on SEP/FRAND litigation, following the CJEU’s landmark decision in Huawei v. ZTE (decision of May 16, 2015, docket no. C-170/13). Against the backdrop of numerous multi-component device patent law-suits fought out in front of different Regional Courts in Germany who are applying diverging legal standards to SEP/FRAND licensing, the CJEU's decision could turn out to be a game-changer.

In addition, the EU Commission cited bringing more transparency to SEP licensing, especially in the automotive industry and other multi-component industries, as one of the key challenges in its “Action Plan on Intellectual Property”, issued the previous day.

Referral of questions on SEP licensing on FRAND terms to CJEU

In one of a series of patent infringement cases brought by Nokia against Daimler, the Dusseldorf Regional Court now referred several questions to the CJEU in relation to (1) the role of an implementer’s suppliers in SEP licensing and litigation, as well as (2) clarifications as to the basic FRAND licensing negotiation regime to be followed by SEP owners and implementers laid out in Huawei v. ZTE by the CJEU in 2015.

This referral follows a letter from the President of the German Federal Cartel Office submitted to the courts in several (then-)pending “connected car” SEP infringement procedures. The Federal Cartel Office encouraged the Regional Courts to refer certain questions on SEP licensing on FRAND terms flowing from European antitrust law (i.e. the prohibition of abuse of a domination market position under article 102 TFEU) to the CJEU.

In prior recent decisions, both the Mannheim and the Munich Regional Courts rejected this non-binding recommendation. Instead, they issued (appealable) judgments, including enforceable injunction orders against sales of the accused devices in Germany. In contrast, the Dusseldorf Regional Court’s referral to the CJEU is hoped to bring some clarification and unification in several respects to all involved stake-holders. The core aspects of the questions referred to the CJEU concerning in particular the implementer’s FRAND defense in multi-component product SEP litigation, can be summarized as follows:

(1) Role of suppliers in SEP/FRAND licensing and litigation

An issue at the heart of the on-going multi-component product patent litigations concerns the existence of a right of the SEP implementer’s suppliers to be granted direct own licenses to an SEP (portfolio). Closely linked to this fundamental topic is the procedural question whether an SEP implementer in its role as defendant in a patent infringement action can mount a successful FRAND defense based on the fact that the SEP owner is unwilling to grant a license to the implementer’s supplier(s).

The Dusseldorf Regional Court as well as the Karlsruhe Higher Regional Court in previous decisions acknowledged the implementer’s right to raise a FRAND defense when its supplier(s) are refused a li-cense. Insofar, the Dusseldorf Regional Court holds the view that an SEP owner gives up its liberty to grant licenses at will as a price to pay for its patent being included in a technical standard and the dominant market position that comes with that. In order to efficiently prevent abuse of dominant market positions (Art. 102 TFEU), it is therefore necessary to also consider the refusal of the SEP owner to license on supplier level even though the Defendant of the proceedings is the distributor only. Similarly, the Karlsruhe Higher Regional Court came to the conclusion that the refusal of the SEP owner to license on supplier level must be considered since a motion for injunctive relief puts a great amount of pressure on the manufacturer in light of legitimate concerns that its customer will rather switch to another supplier than undergo lengthy and costly litigation.

In contrast, both benches of the Munich Regional Court and the Mannheim Regional Court’s 2nd bench opposed this view in several decisions earlier this year, emphasizing that the supplier was not a Defendant of those proceedings and that therefore the SEP owner’s behavior in relation to those cannot be of the essence in proceedings against the distributor only.

Especially the Munich Regional Court held in favor of an “access to all – no license to all” policy stating that the SEP owners’ FRAND declaration merely grants every market player the right to access a market controlled by the SEP. This access is sufficiently ensured if SEP owners grant a license on any level of the supply chain as long as respective “have made” rights under SEPs for the manufacturer and wholesale level further up the supply chain are included in the license. The Mannheim Regional Court decided (contrary to what the Dusseldorf Regional Court held) that an SEP owner, despite its FRAND declaration, is still in principle free to grant or abstain from granting a license on any level of the supply chain it wishes to. Bringing an action for injunctive relief against an implementer at the distribution level can however be deemed discriminatory practice if the SEP owner used to license manufacturers only and if there is no objective reason for changing its former business practice.

(2) Applying the CJEU’s “Huawei v. ZTE ” licensing negotiations framework

In the wake of the German Federal Court of Justice’s (FCJ) May 2020 decision in Sisvel v. Haier, the second step of the Huawei v. ZTE framework – the implementer indicating its willingness to take a license on FRAND terms – has recently taken center stage in German patent litigation. In this decision, the FCJ put a strong emphasis on the importance of the implementer being a truly “willing licensee”, not merely posturing as one while in reality dragging their feet to gain time until the lapse of the SEP in question (“patent hold out”). Some Regional Courts have taken this as an impulse for applying a very strict standard as to the requirement of implementer’s willingness, applying a much stricter view than taken in their previous case law before that decision of the FCJ.

One striking aspect of these most recent decisions, which was picked up now by the questions of the Dusseldorf Regional Court, was that the mere fact of an SEP implementer making a non-FRAND counter-offer for a license to the SEP owner is treated as evidence of the SEP implementer’s lack of willingness to license. The rule is to apply regardless of the SEP owner’s first license offer being FRAND-compliant, upending the order of negotiating steps laid out in ZTE v. Huawei. Given that, according to the FCJ’s decision, it cannot be objectively determined whether an offer is FRAND, some clarification of the CJEU is needed whether the FRAND compliance of the implementer’s counter offer can indeed be considered without having reviewed the offer of the SEP owner at all.

With regard to the criterion of a “willing licensee” the Dusseldorf Regional Court now i.a. raised the question whether mutual FRAND-related pre-litigation obligations of the SEP owners and implementers might also still be complied with during a court proceeding if missed to be complied with pre-litigation. In this context the court also addressed various aspects regarding the threshold of the seriousness of a license request.

(3) Status Quo and next steps in German SEP litigation

The answers sought from the CJEU on the Dusseldorf Regional Court’s questions (please see the Annex for the full list) are expected to bring much needed guidance in order to develop a clear, balanced and uniform approach. As that will take some time, it remains to be seen what happens in the near term to the still pending cases before other courts. As these cases are progressing to the appellate courts and new cases will be pending before the Regional Courts, while there is no guarantee that these courts will follow suit, the likelihood of such cases also being stayed pending the CJEU’s response certainly increased.

European Commission´s Communication entitled “Action Plan on IP”

Another EU-level impulse in support of standardized multi-component product industries, was foreshadowed in the Commission’s “IP Action Plan to support the EU’s recovery and resilience”, published November 25, 2020. The initiative follows the New EU Industrial Strategy adopted on March 10, 2020 which acknowledged the need for the EU Intellectual Property policy to help uphold and strengthen Europe’s tech sovereignty. It basically aims at supporting SMEs to fully benefit from IP rights by establishing five key areas of future action, being (i.) improving the protection of IP, (ii.) boosting the uptake of IP by SMEs, (iii.) facilitating the access to and sharing of IP, (iv.) fighting counterfeiting and (v.) promoting a global level playing field.

With regard to the easier access to and sharing of IP-protected assets, the EU Commission underlines the crucial role of SEPs and the need for stable, efficient and fair rules governing the licensing of such rights. Against this background and despite the guidance provided in its SEPs Communication of 2017 (EU Commission communication - Setting out the EU approach to Standard Essential Patents, COM(2017) 712 final, 29 November 2017), the EU Commission expresses particularly two goals in this instance:

• Facilitating industry-led initiatives in the short term to reduce frictions as well as legal disputes among the involved stakeholders; and
• Considering reforms regarding the framework for SEP declaration, licensing and enforcement, e.g. by exploring the creation of an "independent system of third-party essentiality checks in view of improving legal certainty and reducing litigation costs".

In this respect the EU Commission also refers to a recently completed pilot study which investigates the technical and institutional feasibility of a system that ensures better essentiality scrutiny for SEPs, which eventually recommends policy makers “to pursue the development and implementation of a system for essentiality assessment”.

Conclusion

While it remains to be seen which specific regulatory steps will follow after the EU Commission’s Communication, the Dusseldorf Regional Court’s referral to the CJEU is expected to lead to its first decision concerning SEP licensing since ZTE v. Huawei. In the process, the CJEU will be consulting the EU Commission on its opinion concerning the questions at hand. These developments will be closely followed by all involved stakeholders, having direct consequences on EU-wide SEP/FRAND licensing negotiations and related patent litigation.

Annex: Questions referred to the CJEU by the Regional Court of Dusseldorf (unofficial translation):

A. Is there a duty to grant licenses on a priority basis to suppliers?

1. Can an undertaking on a downstream economic level assert in opposition to a patent infringement action seeking a prohibitory injunction brought by the holder of a patent that is essential for a standard regulated by a standardization organization (SEP) and that has irrevocably undertaken towards this organization to grant a license under FRAND conditions to any third party that it constitutes a breach of a dominant position within the meaning of Article 102 TFEU if the standard for which the patent actioned is essential, or any parts thereof, is already being implemented in an input product purchased by the defendant in the infringement proceedings, to the supplier of which, notwithstanding that it wishes to take out a license, the holder of the patent has refused to grant an unlimited license for all forms of use relevant under patent law under FRAND conditions in respect of the products implementing the standard?
   
   
   
   1. Is this the case in particular if it is a standard practice within the relevant sector of the distributor of the end product that the position regarding industrial property rights with regard to the patents used by the supplier parts is clarified by the taking out of licenses by suppliers?
   
   
   2. Is there priority in relation to licensing for suppliers at every level of the chain or only for the supplier that is situated directly above the distributor of the end product at the end of the value chain? Is this matter also resolved with reference to standard business practice?
2. Does the competition law prohibition on abuse require that the supplier be granted its own, unlimited license over all forms of use relevant under patent law under FRAND conditions for products that implement the standard such that the end distributors (and as the case may be the buyers before it) no longer need to obtain their own separate license from the SEP holder in order to avoid infringing a patent, where the supplier part concerned is used in accordance with its intended usage?


3. If the first question referred for a preliminary ruling is answered in the negative: Does Article 102 TFEU stipulate any particular qualitative, quantitative and/or other requirements for the criteria according to which the holder of a standard-essential patent must decide against which potential patent infringers on different levels of the same production and value chain it will launch a patent infringement action for a prohibitory injunction?

B. Clarification of the requirements under the decision of the Court of Justice in Huawei v. ZTE (judgment of 16 July 2015, Case C-170/13):

1. Aside from the fact that the duties as to conduct that must be complied with towards each other by the SEP holder and the SEP user (infringement notice, license request, FRAND li-cense offer; license offer to suppliers to be licensed on a priority basis) must be complied with in advance of court action, it is possible to become compliant during the course of court action, so as to ensure that rights are maintained, with duties as to conduct that were not complied with in advance of court action?


2. Can a license request by the user of the patent only be deemed to be substantial if, based on an overall assessment of all attendant circumstances, the SEP user is clearly and unequivocally willing and ready to conclude a license agreement with the SEP holder under FRAND conditions, regardless of the terms of these FRAND conditions (which, since no license offer has been formulated at this stage, are not foreseeable at all)?
   
   
   
   1. Does an infringer that fails to respond for several months to the infringement notice generally thereby indicate that it is not interested in obtaining a li-cense, with the result that – notwithstanding that a license has been requested orally – such a license is lacking, with the consequence that the action for a prohibitory injunction brought by the SEP holder must be allowed?
   
   
   2. Can it be concluded from license terms proposed by the SEP user in a counteroffer that no license has been requested, with the consequence that the action for a prohibitory injunction brought by the SEP holder must be al-lowed without any further examination as to whether the license offer made by the SEP holder (which is a prerequisite for the counteroffer of the SEP user) is at all compliant with FRAND conditions?
   
   
   3. Is such a conclusion precluded under all circumstances if the license terms contained in the counteroffer, from which it may be inferred that no license request was made, are such that it is not readily apparent, and has not been confirmed by the highest courts, that they are not compatible with FRAND conditions?