German Federal Supreme Court clarifies the bar for potential patent infringers in FRAND

Europe

With its decision of 5 May 2020 (Case No. KZR 36/17), the German Federal Supreme Court raised the requirements for the conduct of the potential patent infringer for FRAND negotiations.

For the first time since the landmark decision of the European Court of Justice (ECJ) in the Huawei Technologies ./. ZTE case on July 16, 2015 (Case No. C-170/13), the Federal Court of Justice examined the conduct required of the parties involved in FRAND negotiations.

FRAND-compliant conduct of the potential infringer as an objection

If the SEP owner wishes to enforce a claim for injunction, surrender or destruction or recall against the alleged infringer in court, it is his responsibility to conduct a multi-stage procedure within a joint license negotiation. If the patentee fails to comply with this procedure, the opposing party may object to the action on the grounds of conduct contrary to antitrust law under Art. 102 TFEU.

In its decision in the Huawei Technologies ./. ZTE case in 2015, the European Court of Justice set out the structure of a multi-stage procedure for such license negotiations. According to this procedure, the patentee must first serve a detailed notice on the infringer setting out the allegation of infringement. The infringer has to react with the serious intent to obtain a license under fair, reasonable and non-discriminatory (FRAND) conditions. The patentee is then encouraged to make the infringer an offer of a license corresponding to these criteria. This offer must contain a specific license fee. The patentee must also justify why he considers his license offer to be sufficient to meet the FRAND criteria. If the infringer rejects this offer, he must submit a counter-offer, which in turn must meet the FRAND criteria. If the patentee refuses to do so, the infringer must, from this point in time, account for the use of the SEP and provide security for the payment of the license fee in accordance with his offer.

Dissenting rulings in the lower courts

Sisvel, a patent exploitation company, was the claimant in the original case. Together with Haier Deutschland GmbH and Haier Europe Trading SRL, Sisvel sued the German and European distribution company of the Haier Group. The Haier Group is a group based in Qingdao, China, which sells household appliances and consumer electronics products worldwide. Sisvel accused the two subsidiaries of infringing patents EP 08 52 885 (EP'885) and EP 12 64 504 (EP'504) by offering mobile phones on the German company website and at the Internationale Funkausstellung (IFA) 2014 in Berlin. These two patents are claimed to be essential for the GPRS and UMTS mobile phone standard. In the lawsuits, Sisvel sought injunctive relief, information and accounting from the defendants, as well as destruction and recall of the patent-infringing mobile phones.

In the first instance, the Düsseldorf Regional Court upheld the two cases, each of which related to the infringement of a patent (judgements of 3 November 2015, ref. 4a O 144/14 and 4a O 93/14). It ruled the defendants had not fulfilled their conduct obligations in the FRAND negotiations. In particular they had not settled and provided security in due time after the rejection of their counter offer regarding the use of the patents in suit. The Regional Court regarded the failure to meet this requirement in due time as a delaying tactic on the part of the defendants and that they were unwilling to enter into the license.

The court of appeal dismissed the claims for injunction, destruction and recall (judgements of 30.03.2017 Az. I-15 U 65/15 and I-15 U 66/15). It interpreted the ECJ decision to mean the alleged infringer only has to react if the patent proprietor has fully complied with its obligation for the previous stage in the FRAND code of conduct. The owner of an SEP had committed himself to the standardization organization to offer a license on FRAND terms to all interested parties. Therefore, it was his responsibility to make not only a formal offer to the infringer, but also an offer which actually met such criteria.

Following the appeal by the claimant and the defendants, the German Federal Court of Justice considered the requirements for FRAND negotiations.

The German Federal Court of Justice refers to concrete wording of the correspondence

The German Federal Court of Justice in effect reinstated the judgment of the Regional Court regarding the violation of EP'885.

The German Federal Court of Justice stated that an abuse of the SEP owner's dominant position in the market may exist if it prevents products conforming to the standard from entering or remaining available on the market. The patentee's claims for injunction, destruction and recall are therefore abusive if the infringer has made an unconditional offer to conclude a license agreement on FRAND terms. If such an offer has not yet been made, it may nevertheless be deemed unfair to bring an enforcement action if the patentee has not made sufficient effort to conclude a license agreement on reasonable terms with an infringer who is willing to do so.

The German Federal Court of Justice further confirms that in principle the infringer has to present and prove a discriminatory license claim of the patent owner. However, the patentee may be obliged to substantiate his license claims in more detail. This obligation is particularly important if the patentee is not willing to grant a license on the patent in question, but only on his patent portfolio or other property rights. According to the German Federal Court of Justice, subject to the licensee not being obliged to pay for the use of non-essential patents, a combination of the license offer with further property rights is not forbidden under cartel law. Furthermore, the compensation must be calculated in such a way that it does not disadvantage users who wish to develop products for a specific, geographically limited area.

Furthermore, the Federal Court of Justice takes into account that the patentee's conduct obligations do not serve an end in themselves but are intended to make it easier for the infringer to negotiate appropriate licensing conditions. The infringer must therefore declare clearly and unambiguously that he intends to enter into a license agreement with the patent owner on reasonable and non-discriminatory terms. Subsequently, the infringer must seriously and purposefully participate in the license negotiations.

The defendants' arguments remained unsuccessful in the specific case, because in the opinion of the Federal Court of Justice the defendants had not expressed their serious and unconditional intent to enter into a license agreement on FRAND terms. In doing so, the Federal Court of Justice assessed three letters from the correspondence between the parent company of the defendants and the claimant.

In the first letter from the parent company, it merely expressed the hope of entering into formal negotiations with the patent owner. In a further letter, the parent company declared its willingness to take a FRAND license and to pay royalties. However, it made this intend subject to the German courts establishing an infringement and the validity of the two patents in suit. Although the third letter assessed by the Federal Court of Justice contained the statement that it wanted to obtain a FRAND license, it was pointed out at the same time that its own position remained unchanged. Objectively, the defendants' position remained the same as set out in the second letter. In addition, the letter stated that the parent company would insist on the counter-offer that had been made in the meantime and would not amend it until the claimant had explained the infringement of the other patents belonging to the portfolio. The Federal Court of Justice viewed this as a delaying tactic on the part of the defendants. Based on its assessment, the Federal Court of Justice therefore came to the conclusion that the defendants had not been willing licensees.

The Federal Court of Justice lastly stated that the infringer could counter the claim for damages asserted by the patent owner with a claim for damages of his own, based on the non-fulfilment of his claim to conclude a license agreement on FRAND terms. The patentee's claim for damages is therefore limited to the amount he would have received if he had entered into a FRAND license agreement with the damage calculation method of the license analogy serving as a benchmark. In the view of the Federal Court of Justice, however, the infringer's claim for damages can only arise if he demands that the patentee conclude a license agreement on FRAND terms and the latter either unlawfully refuses to conclude a license agreement or does not make an offer on FRAND terms despite the infringer's willingness to license.

Decision on second patent still pending

The Federal Court of Justice did not use this opportunity to clarify some of the open questions regarding the course of negotiations in accordance with the criteria established by the ECJ in Huawei/ZTE and to be able to establish uniform guidelines for the lower courts. References to the Orange Book criteria, which are outdated, create further ambiguities that should be clarified by the ECJ.

Since the infringement of the second patent in suit is still in dispute between the parties, the dispute regarding EP'504 between Sisvel and Haier will continue before the Federal Court of Justice.

Conclusion: Correspondence in FRAND license negotiations must be carefully worded

In the Sisvel ./. Haier case, the Federal Court of Justice once again clarified in principle that patent owners and infringers must make reasonable efforts to conclude a license agreement in the FRAND negotiations. In this respect, the conduct of both parties can have a significant impact on the arguments of the patent owner's claims.

In its decision, the Federal Court of Justice specified the requirements to be met by the infringer in the context of such license negotiations. In light of this, the wording of the correspondence with the patent owner is particularly important. After the infringement notification has been filed, the infringer has to declare clearly and unambiguously that he intends to enter into a license under FRAND conditions. As the Federal Court of Justice states, general wording and the explicit reference to the conclusion of a license agreement subject to the condition of infringement and the validity of the patent in question increase the risk of the infringer being regarded as unwilling to enter into a license. The defence in infringement proceedings or the filing of a nullity complaint as such does not - unsurprisingly - justify an accusation of unwillingness to enter into a license.

Patent owners and infringers should therefore bear in mind that their conduct during the FRAND negotiations should indicate a serious intention to enter into a license agreement.