Conflicting interests: refusing NDAs in FRAND negotiations
This is an Insight article, written by a selected partner as part of GCR's co-published content. Read more on Insight
|Case name and reference|
4a O 35/16 (Düsseldorf Regional Court)
2 U 23/17 (Düsseldorf Higher Regional Court)
Düsseldorf Regional CourtDüsseldorf Higher Regional Court
|Cause of action||Action for infringement of an SEP claiming injunctive relief, destruction, recall, damages and rendering of accounts|
As a rule, FRAND-licence negotiations only commence after the SEP holder and implementer have entered into a non-disclosure agreement (NDA). An SEP holder typically presents a draft NDA immediately after its infringement notice and asks that it be signed.
Both parties generally have an interest in their business secrets being kept confidential. However, implementers tend to see the necessity of discussing licensing offers made with third parties, such as suppliers. While SEP holders often insist that the terms of their offers qualify as confidential information, end-product manufacturers may be dependent on their suppliers to advise them on whether the patents offered for licensing, as well as the terms and conditions offered, are standard-essential and FRAND compliant. Moreover, there is often a need to be able to pursue remedies against suppliers, which is hindered when the terms and conditions required by the patent holder cannot be disclosed.
Problems when NDA negotiations fail
If the parties cannot agree on an NDA (eg, the implementer requests an exception from confidentiality, which the SEP holder deems inacceptable) or the execution of an NDA is completely refused by the implementer, the question arises of what the consequences are under German law.
This question has not yet been dealt with by the highest German court – the Federal Court of Justice. However, Düsseldorf Regional Court and Higher Regional Court provide guidance in this regard (Düsseldorf Regional Court 13 July 2017 – 4a O 35/16; Düsseldorf Higher Regional Court 18 July 2017 – 2 U 23/17). Their views are both convincing and supported in legal literature.
Significance of an NDA and its failure for FRAND negotiations
Obligation to conclude an NDA
The Düsseldorf courts consider the implementer to be obliged, in principle, to conclude an NDA. Such an agreement is also customary in so-called ‘free’ licensing negotiations. Since the implementer is required to advance FRAND negotiations, it also has an obligation to play a constructive role in these and not to block the conclusion of an NDA. In an NDA, the implementer must endeavour to maintain secrecy, as well as to use any confidential information shared with it only to check for compliance with FRAND terms and for litigation purposes.
Consequences of a failure
If the parties cannot agree on an NDA’s terms and conditions, or if the implementer rejects such an agreement altogether, the implementer cannot be regarded as being unwilling to license based on those facts alone. According to the fundamental Huawei v ZTE decision of the European Court of Justice, after declaring its willingness to take a licence, the implementer does not have a duty to cooperate before the offer on FRAND terms is made by the SEP holder (judgment of 16 July 2015, case C-170/13). It cannot be seen as delaying anything in the phase prior to receipt of the FRAND offer.
If the implementer denies the SEP holder the protection of an NDA, the latter must still present a FRAND-compliant offer as a next step. However, the SEP holder is not obliged to disclose its business secrets in making the offer and ensuing negotiations, even if this places the implementer at a disadvantage. The SEP holder is allowed to leave out or anonymise confidential information, such as about already concluded agreements with third parties or information about the manner of the calculation of the terms offered. However, the SEP holder can only withhold relevant information on which it has a legitimate interest in keeping secret.
Do licence offers have to be kept confidential?
According to the Düsseldorf courts, an SEP holder thus does not have any effective means of forcing an implementer to conclude an NDA. While it is allowed to withhold its business secrets in the subsequent proceedings, the SEP holder must still make a FRAND offer. In this case, the terms and conditions of such an offer (in the absence of an NDA) do not have to be kept confidential. The question therefore arises of whether a licensing offer’s terms and conditions as such can constitute information that an SEP holder has a legitimate interest in keeping confidential.
In practice, SEP holders demand, as a rule, that implementers keep the required licensing terms and conditions confidential. If an NDA sets forth such confidentiality obligations, the implementer must, of course, comply. From our perspective, however, it is doubtful whether an SEP holder can make this demand. If the implementer refuses to do so, and an NDA is not concluded solely for this reason, this cannot – in our view – mean that the SEP holder can avail itself of the aforementioned relief. Even though it has a legitimate interest in its business secrets being kept (and it can also withhold these as long as an NDA is not concluded), it must in any case make a FRAND offer and thereby disclose contractual terms and conditions even without an NDA.
In our view, the obligation to submit a FRAND offer militates against the notion that the SEP holder can actually have a legitimate interest in the terms and conditions being kept confidential. Of course, the assessment must be made on a case-by-case basis. It cannot be ruled out that cases of antitrust-related sensitivity may exist that do justify a need for confidentiality, even of the terms of the FRAND offer.