Germany: SEPs and FRAND – litigation, policy and latest developments
This is an insight article whose content has not been written by the GCR editorial team, but which has been proofed and edited to run in accordance with the GCR style guide.
In the past decade, no issue in patent law has been more salient and controversial than standard essential patents (SEPs) and their licensing at fair, reasonable and non-discriminatory (FRAND) conditions. This hardly comes as a surprise, given the economic importance of this high-tech battleground. Today, most industry sectors rely directly or indirectly on the standardised interaction of electronic devices in many forms. Given the ubiquity of standards such as WiFi, Bluetooth, GSM, 3G, 4G or 5G and their importance across virtually all modern industries, owners of SEPs pertaining to these standards are in a position which potentially allows them to control markets that are dependent on the implementation of the standards.
The market power of SEP holders resulting from their gatekeeper position for standard-reliant markets often gives rise to dominant positions for SEP holders that are subject to special scrutiny under EU and German antitrust laws. These dominant positions effectively result from the standard-setting process itself – a process involving agreements among competitors that may give rise to antitrust concerns, in particular if it is not ensured that all market players are able to gain effective access to the standard and the underlying technologies. To allow for such access, standard-setting organisations (SSOs) typically require SEP holders participating in the standard to commit to grant licences to their technologies at FRAND conditions. However, the precise scope and content of this obligation can diverge among different standard-setting organisations. Moreover, there is no clear definition of the meaning of the various elements of the ‘FRAND’ concept. As a result, the markets for licensing SEPs do not work as well as they should – they notoriously suffer from high transaction costs and a lack of transparency and thus frequently give rise to disputes and litigation.
Below is a brief overview of the German legal and policy framework for SEPs and FRAND licensing and disputes. We will then focus on the perspective of German case law and its efforts to deal with the emerging conflicts between SEP holders and standard implementers. Finally, we will set out how German courts approach the interpretation of the FRAND concept and the implications of this approach on licensing negotiations.
The legal framework
Like other patents, SEPs are, by their very nature, exclusive national rights which confer to their owner the right to prohibit any third party from using the invention protected by the patent concerned. Provisions governing patents and their enforcement are to be found in various federal statutes and regulations, as well as in a number of European regulations and international treaties. The most important German statute is the Patent Act containing, among others, all relevant statutory provisions on requirements, scope and infringement of patents.
In case of a patent infringement, the patentee may obtain various forms of legal relief (cf sec 139 et seq Patent Act), such as injunctive relief, destruction of infringing goods, rendering of accounts (including disclosure of detailed information such as sales, costs and profits), damages, recall and definitive removal of infringing products from the channels of commerce.
Among the available legal remedies, injunctions are the most severe. In case of a finding of infringement of a patent (SEPs and non-SEPs alike), German courts, as a rule, grant an injunction. While an amendment of the Patent Act in 2021 introduced a proportionality requirement, German courts continue to apply a very strict test, which almost never results in an injunction being denied due to concerns that the injunction might impose an undue burden on the implementer. It is unlikely that German courts will change their patentee-friendly stance in SEP/FRAND disputes and deny injunctions to SEP owners based on the proportionality test. Hence, as will be explained below, the only realistic way for implementers to avoid the grant of an injunction is to use their best efforts to try to obtain a licence right from the outset.
German courts provide a favourable forum for patentees not only because of the quasi-automatic availability of injunctions. The other main advantage for patentees is the bifurcation of patent litigation in Germany (split system), which means that the issue of (non-)infringement of the asserted patent is dealt with separately and in different proceedings from the issue of (in)validity of the asserted patent. The split system can lead to an ‘injunction gap’: the infringement proceeding is, as a rule, faster than the separate proceeding dealing with invalidity, resulting in the issuance of an injunction that can be enforced even before the conclusion of the separate invalidity proceedings (ie, during the ‘gap period’).
Germany is a popular forum for patent litigation also for other reasons, which include: (i) relatively moderate costs of patent litigation; (ii) speed of the infringement proceedings (about eight to 14 months from filing of the action until issuance of the first instance judgment); (iii) the tendency of German infringement courts to apply a patentee-friendly patent interpretation; and (iv) the predictability of court decisions due to an elaborated body of case law and comprehensive experience of the patent judges due to the specialisation of judges – being the result of a high number of patent infringement cases, that is, more than 700 new cases per year.
For these reasons, German courts have been elected by many SEP owners as preferred venues and have thus been at the forefront of SEP litigation for more than 15 years.
The legal basis of the FRAND defence
There are no particular statutory provisions under German law that specifically deal with SEPs. However, defendants sued for SEP infringements can under certain circumstances avoid an injunction by raising the FRAND defence – that is, by showing that they are willing and have a right to obtain a FRAND licence from the claimant and that the claimant has not respected this right. Under these circumstances, the SEP owner’s seeking an injunction can be considered bad faith behaviour, given that the SEP owner would actually be obliged to grant a licence to the defendant, and given that the defendant is also willing to take such a licence.
The FRAND defence can be based on the following two legal sources:
- First, defendants may be able to invoke the FRAND commitment the SEP owner submitted to the relevant SSO. This FRAND commitment can directly confer a right to a FRAND licence to a standard implementer.
- Second, implementers may be able to claim that an SEP owner’s behaviour constitutes an abuse of a dominant position under European and German antitrust laws (article 102 of the TFEU and section 19 German Act against Restraints of Competition (GWB). The abuse may consist of an SEP owner’s refusal to grant a licence at FRAND terms, the attempt to seek excessive, unreasonable or discriminatory licensing terms, or the SEP owner’s claim for injunctive relief without offering a licence in violation of its FRAND commitment. While a precondition of this antitrust-based FRAND defence is the establishment of a dominant position of the SEP owner on a relevant antitrust market, such a dominant position is generally deemed to exist in case of SEPs pertaining to an established standard that must be used to compete effectively on a relevant product market and cannot be circumvented or substituted by other solutions. In such a scenario, German courts consider that there is a separate licensing market for the relevant SEPs on which the SEP owner effectively holds a monopoly position.
The guidance from the German Federal Court of Justice
While the German lower-instance courts developed a substantial body of case law over the past two decades, the Federal Court of Justice (FCJ) so far has set only four important precedents:
As early as 2004, the FCJ addressed the core issue of SEP licensing in the seminal decision Standard-Spundfass (judgment of 13 July 2004, docket No. KZR 40/02). This case concerned a patent pertaining to a de facto standard on a barrel with a bung commonly accepted in the chemical industry. The patent owner had granted licences to some manufacturers while it excluded others by refusing licences (including the claimant). The FCJ held that the patent owner’s arbitrary and discriminatory refusal to grant a licence to the claimant constituted an abuse of a dominant position.
…to compact discs…
The next landmark decision concerned the Orange-Book-Standard (judgment of 6 May 2009, docket No. KZR 39/06) for rewriteable compact discs. In this decision, the FCJ for the first time accepted the concept of a ‘FRAND defence’. The court held that the refusal to grant a licence at FRAND terms as such may constitute an abuse of a dominant position, and that such an abuse can under certain circumstances be used as a defence against a patent holder’s request for an injunction against a willing licensee. However, the FCJ made clear that the availability of such a defence is subject to strict criteria that the defendant must fulfil to be considered a willing licensee. Most importantly, the defendant could only rely on this defence if the defendant itself had made an offer for the conclusion of a FRAND licensing contract to the patent owner that the latter could not refuse without discriminating or impeding the defendant in violation of article 102 of the TFEU or section 19 of the GWB. While this criterion for the defence has to some extent been overruled by the CJEU in its landmark decision Huawei v ZTE (Case C-170/13), Orange-Book-Standard remains a landmark case as it established that an abusive refusal to license a patent by a dominant SEP holder may also ‘taint’ and ultimately block the enforcement action of the patentee under certain circumstances. Moreover, the decision remains relevant for cases in which the SEP holder has not submitted a FRAND commitment (eg, in case of de facto standards).
Subsequent to the FCJ’s Orange-Book-Standard decision, the further development of the case law regarding SEP was particularly driven forward by EU-level impulses. In late 2012, the European Commission issued a statement of objections against Motorola for abuse of a dominant position by reason of the enforcement of SEPs in the mobile phone sector. In an accompanying press release on the matter (IP/12/1448), the Commission stated that recourse to injunctions for SEPs subject to a FRAND commitment may harm competition since injunctions generally involve a prohibition of the sale of the patent-infringing product, which entails the risk of excluding products from the market without justification. Accordingly, this may distort licensing negotiations unduly in the favour of the SEP holder.
Given that the Commission seemed to apply less strict criteria for assuming abusive conduct under article 102 of the TFEU than those established by the FCJ in Orange-Book-Standard, the District Court of Düsseldorf brought a preliminary reference to the CJEU under article 267 of the TFEU in a pending SEP infringement case (decision of 21 March 2013, docket No. 4b O 104/12, LTE-Standard) that led to the landmark CJEU decision Huawei v ZTE (judgment of 16 July 2015, docket No. C-170/13).
In its judgment, the CJEU ruled that an SEP holder’s action for infringement of an SEP seeking an injunction or the recall of infringing products may, under certain conditions, constitute the abuse of a dominant position in cases where the proprietor of the SEP has given a FRAND commitment to an SSO. Like most other prior courts, the CJEU left open the key question of how to determine FRAND conditions. Instead, the court established a detailed step-by-step framework for licence negotiations between SEP holders and implementers (the ‘Huawei dance’). For the SEP owner, compliance with the framework set out in the CJEU judgment ensures that its claim for injunctive relief or recall cannot be considered to constitute an infringement of article 102 of the TFEU. On the side of the implementer, compliance with the CJEU’s framework is required to maintain the entitlement to the FRAND defence in infringement proceedings.
Taking the CJEU’s Huawei v ZTE decision as a reference point, the German courts have been striving since then to flesh out the framework established by the CJEU with detailed case law on the various steps of the ‘Huawei dance’. The first SEP cases reaching the FCJ after the adoption of the CJEU’s Huawei v ZTE decision were decided in 2020 (judgments of 5 May 2020, docket No. KZR 36/17, FRAND-Einwand and of 24 November 2020, docket No. KZR 35/17, FRAND-Einwand II). These important decisions established further detailed requirements as to how to conduct FRAND negotiations. The most significant ones of these requirements are outlined below.
What qualifies as FRAND?
While German courts have, in principle, the power to decide exactly what terms qualify as FRAND, so far they have avoided doing so. They rather consider themselves as being in a position of a referee reviewing whether the parties followed a process of ongoing and serious mutual commitment to reach a licence agreement on FRAND terms. German courts assume that parties following the FRAND process will reach an agreement comparable to (hypothetical) negotiations for a patent licence on a free market, that is, an agreement which is FRAND.
FRAND terms – still a black box in Germany
There have been attempts by German courts to provide guidance on FRAND terms. For instance, the District Court of Düsseldorf (judgment of 18 June 2020, docket No. 4b O 91/18) summarised FRAND as follows:
- Fair and reasonable contract terms are those that do not constitute an exploitative abuse of a dominant position. Accordingly, an offer by the SEP holder may prove unfair or unreasonable in particular if royalties are demanded that significantly exceeds the hypothetical price that would have been asked in the event of effective competition on the dominated market, unless there is an economic justification for the pricing.
- The requirement that terms be non-discriminatory are seen as an obligation on the market-dominant SEP holder to treat implementers in the same position equally by granting them essentially the same prices and terms and conditions. Existing licence agreements have become the benchmark for the terms and conditions of new licence agreements. Given that only circumstances which are also comparable are to be included in the equal treatment requirement, the door has been left open for market-dominant SEP holders to react in a differentiated manner if this is objectively justified.
The FCJ, however, has somewhat impeded such attempts to define FRAND terms. According to the FCJ, there is not one specific licence rate or one specific set of licence terms that qualify as FRAND, but a range of licence rates and contract terms. As mentioned above, the FCJ understands the requirement of FRAND conditions as a guiding principle for the process of licensing negotiations, rather than for the actual terms and conditions of a licence agreement. The negotiations must be conducted on the basis of mutual willingness with the intent to enter into a fair, reasonable and non-discriminatory licence agreement. If this is the case, then the outcome of the process is in principle deemed to be FRAND. This guiding principle was articulated by the FCJ, for example, in its judgment of 24 November 2020 (docket No. KZR 35/17, FRAND-Einwand II):
The (mutual) willingness to license is not only of fundamental importance because the patent proprietor only must grant a FRAND licence to a user of the invention who is willing to do so and can only grant such a licence at all. It is also indispensable because an appropriate result balancing the conflicting interests of both parties can usually only be achieved as the result of a negotiation process in which these interests are articulated and discussed to achieve a fair and appropriate balance of interests desired by both parties. The requirements for the conduct of the patent proprietor and the conduct of the user of the invention are mutually dependent. The standard of review is what a reasonable party interested in the successful conclusion of the negotiations, in a manner that is in the interest of both parties, would do to promote this goal at a particular stage of the negotiations; hence, the individual requirements to be met cannot be defined in general terms.
It follows from this reluctance to provide general definitions for FRAND terms and conditions that it is not possible to define a categorisation of contract clauses based on whether they are accepted as FRAND or not. German courts could consider the essentially same clause to be compliant or incompliant with FRAND requirements depending on the specific circumstances in the negotiation process under which the respective licensing offer was submitted.
Requirements to be met when negotiating FRAND terms
As mentioned above, recent German case law on SEP/FRAND cases shows the tendency of German courts to focus on the course of the negotiations as such. Based on the framework defined by the CJEU in its Huawei case in 2015 (docket No. C-170/13) and in line with the FCJ’s guidance in its two 2020 judgments, German courts have been specifying the requirements of how to negotiate FRAND terms rather than reviewing the terms of the offer of the SEP owner and of the counteroffer of the implementer in detail. This development is ongoing and many questions are still discussed controversially in the lower courts. The following summary gives an impression of the status quo.
SEP holder: notice of infringement
Prior to bringing suit against the implementer, the SEP holder is generally required to give the implementer written notice of the alleged infringement by designating the SEP and specifying the way in which it has been allegedly infringed. Only very exceptionally, where the implementer is already aware of the infringement, may such notice not be required.
The notice must specifically refer to the SEP at issue (usually by publication number) and inform about the violation (in particular, the contested embodiments and the acts of infringement). Beyond this factual information, the notice does not have to contain detailed legal explanations as to why the SEP is allegedly infringed. While claim charts may be helpful, German courts do not consider them mandatory.
In Germany, the FRAND defence can only be invoked to avoid an injunction as well as orders for recall or destruction. The SEP holder may thus be awarded damages for past infringements and an order for rendering of accounts in every case – that is, also in the absence of such prior notice of infringement. The action for damages for past infringements or rendering of accounts is considered to qualify as sufficient notice of infringement, thereby triggering the implementer to react.
SEP implementer: willingness to take a licence
In response to the SEP holder’s notice of infringement, the implementer must express its willingness to conclude a licensing agreement for the SEP on FRAND terms in due time. This response has become the core aspect in German case law on SEP/FRAND. Implementers must show a genuine and continuous willingness to take a licence at FRAND terms and to ensure that such a licence can be negotiated and concluded without any undue delay. Otherwise, the implementer is deemed to be an ‘unwilling licensee’ and thus loses its FRAND defence, with the result that, among others, an injunction can be granted without the court verifying whether the licensing offer of the patent holder indeed complied with FRAND requirements.
The implementer must declare its willingness unambiguously and unconditionally. The FCJ (judgment of 5 May 2020, docket No. KZR 36/17, FRAND-Einwand) explicitly follows and even quotes the approach of the High Court of Justice of England and Wales in its Unwired Planet v Huawei decision of 5 April 2017 ( EWHC 711 (Pat)) according to which ‘a willing licensee must be one willing to take a FRAND licence on whatever terms are in fact FRAND.’ A response not reflecting such clear commitment already results, the High Court argues, in a forfeiture of the FRAND defence. The implementer may not, for example, merely give a positive feedback and agree to ‘think about’ taking a licence – it must make a declaration about its own willingness (ie, not refer to its suppliers’ willingness to take a licence).
The implementer’s response does not yet have to contain details on the licensing terms and conditions. Such further details could even be risky if they can be considered as a limitation to the implementer’s willingness to take a licence on ‘whatever terms are in fact FRAND’. For example, the implementer may not make its willingness to take a licence subject to the condition of a positive court decision on the patent’s validity. The implementer may however reserve the right to challenge the validity of the patent. The implementer may also argue that the patent is not used, for example, because the patent is actually not essential to the standard in which it is included, without losing the FRAND defence (which may indeed often be part of the defence strategy) as long as the implementer’s willingness to take a licence on FRAND terms is and remains unambiguous and unconditional.
While the FCJ has not fixed a timeline for the negotiations, it has stressed that the implementer must respond without undue delay. The FCJ made a finding of undue delay where the implementer waited a year before responding to the notice of infringement. Lower courts have repeatedly held that responding to a licensing offer after two months is too late; however, in a case with several patents at issue and 17 claim charts provided by the SEP holder, even four months was accepted. Implementers should be aware that the SEP holder does not have to set a deadline for response in its notice of infringement, but may remain silent and file an infringement action in the absence of a timely response by the implementer.
German courts diverge on the question of whether the implementer is free to apply for an anti-suit injunction against the SEP holder in a foreign country (provided that such injunction is permissible under the law of that country, which is not the case in Germany) during negotiations with the SEP holder without being considered an unwilling licensee. The District Court of Munich held that an implementer that applies for an anti-suit injunction would be an unwilling licensee, thereby losing the FRAND defence (judgment of 25 February 2021, docket No. 7 O 14276/20). But according to the District Court of Düsseldorf (judgment of 21 December 2021, docket No. 4c O 42/20), an application for an anti-suit injunction does not stand in the way of a successful FRAND defence as long as the implementer shows willingness to take a licence unambiguously and unconditionally and takes serious efforts to obtain a licence on FRAND terms.
SEP holder: offer for a licence agreement
After receiving the implementer’s declaration of its willingness to conclude a licence agreement (and subject to the implementer’s ongoing willingness), the SEP holder must present a specific, written offer for a licence agreement on FRAND terms. This offer must specify, in particular, the amount of the royalties and the way in which they are to be calculated.
The SEP holder does not have to provide its first offer as a final offer. It is sufficient if the offer is a serious initial offer subject to further negotiations. This results from the understanding of the FRAND requirement as a process of ongoing mutual commitment to reach a licence agreement, rather than a single-stage process where the SEP holder is required to immediately offer a licence agreement on FRAND terms that can be accepted by the implementer without further negotiations or modifications.
German courts do not require SEP holders to offer licences only for a single SEP. SEP holders are free to offer portfolio licences, provided, however, that the implementer is not required to pay a royalty for (i) patents that are not standard essential; or (ii) patents that are actually not used (eg, where their use is optional in the standard and not implemented). The defendant is even required to take a global portfolio licence for the claimant’s entire SEP portfolio if the defendant is offering standard-implementing products on a worldwide basis. Whether the portfolio licences must include an adjustment clause to cater for a potential subsequent nullification or lapse of one or more SEPs, has been controversially discussed and decided by German courts.
Patent portfolios can include patents for which the implementer (or its supplier) already holds a licence (eg, due to bilateral licence agreements with members of the patent pool). Such double licensing does not per se stand in the way of a pool licence agreement, but the licence agreement must include provisions (eg, adjustment clauses) to avoid double-dipping, in particular where the number of already licensed patents is not insignificant. The procedure for avoiding double-dipping must be defined a priori and on an objective basis which is to be clearly communicated by the SEP holder to the implementer.
German courts usually do not calculate a specific FRAND rate in a given case but limit their judicial review to the question of whether an offer is plainly unacceptable (ie, violates the principle of good faith) based on the arguments provided by the parties.
Different licence rates (eg, staggered rates resulting in higher rates for companies with lower turnover or volume discounts for larger pools of licensed patents), can still be FRAND where they are objectively justified. German courts have even accepted a case where an SEP holder may grant an ‘early bird discount’, that is, reduce the licence rate for the first licensee when rolling out a new licensing programme.
If the implementer manages to show continued and unconditional willingness to take a FRAND licence and the SEP holder continues to insist on its own licensing offer, the SEP holder has the burden to show that the licence rate and the further terms and conditions of its offer are indeed FRAND. The SEP holder can meet this burden by providing comparable licence agreements, which are usually regarded by German courts as a strong indication that the licence terms offered are indeed FRAND. This indicative effect applies to licence rates as well as to other contractual terms (intellectual property rights subject to licence, licensed territory, etc). For a successful attack against such indicative effects, the implementer would have to show that a comparable licence agreement is not FRAND, for example, because it is the result of undue pressure having been exercised by a dominant SEP holder.
The implementer may request that the SEP holder presents its licensing concept and information (insofar as this information is not freely accessible or already available to the SEP implementer) as to whether comparable licensing agreements have already been concluded in terms of time and content and if so, with what content. This applies to contracts concluded earlier even if the portfolio has been transferred.
The exchange of confidential information may be subject to an NDA if so requested by the SEP holder. As regards the exchange of confidential information in court proceedings, the German legislator has recently amended the Patent Act and added rules on confidentiality. According to these new rules, courts may classify information such as contents of SEP licence agreements with third parties as confidential and impose confidentiality obligations on the parties and other persons who acquire access to such confidential information through court proceedings.
SEP implementer: accept offer or make counteroffer
The implementer must diligently respond to the SEP holder’s FRAND offer in accordance with recognised commercial practices in the field and in good faith. Again, there are no general ‘one size fits all’ definitions or rules for the implementer.
Most importantly, the implementer must not apply delaying tactics – though the details as to when the implementer’s reaction is to be considered as delaying tactics are again subject to discussions in each individual case. The line between in-depth negotiations and delaying tactics is often hard to draw and this aspect is therefore the subject of plenty of court cases in which appellate decisions quite often deviate from the findings of the lower courts.
The FCJ has, for example, assumed delaying tactics where the implementer requested the SEP holder to provide details about the way in which additional patents of a patent portfolio could be infringed even though the implementer announced that it would amend its offer after receiving such further details (judgment of 5 May 2020, docket No. KZR 36/17, FRAND-Einwand). According to the FCJ, the SEP holder is not required to provide detailed technical or legal information about the alleged infringement beyond the requirement of the notice of infringement. It is up to the implementer to make its own assessment and seek technical or legal advice in this respect.
The implementer must reply diligently and inform the SEP holder about the reasons why it considers the offer unacceptable. According to the FCJ, the implementer must not remain silent even in the case of a plainly unacceptable offer by the SEP holder, but has to inform the SEP holder why it considers the offer to be plainly unacceptable. In contrast, German lower courts have previously held that the implementer is under no obligation to respond to a plainly unacceptable offer on the grounds that such an offer shows that the SEP holder is actually not willing to license on FRAND conditions. Since this threshold is very high and a court’s analysis of the offer may not be reliably anticipated, implementers will usually be well advised to reply diligently and in detail to the SEP holder’s offer anyway.
If the implementer does not accept the SEP holder’s offer, it must promptly submit a specific counteroffer that corresponds to FRAND terms and includes the patents which are actually implemented. Subject to these requirements, the counteroffer can be of a more limited scope in terms of content and time. To avoid the risk of the licence rate in the counteroffer later being held to be not FRAND, the implementer can leave the rate open for the reasonably exercised discretion of the SEP holder (section 315(3) of the German Civil Code). Again, the implementer can reserve the right to claim nullity or non-essentiality to a standard or non-infringement with respect to the patents to be licensed.
If the implementer rejects the SEP holder’s offer, the implementer must immediately render accounts in respect of the past use of the SEP and provide appropriate security (eg, a bank guarantee or bank deposit) for past royalties. The security must reflect the use of the SEP in the period from first use until the expected availability of a provisionally enforceable first instance decision.
The present introductory overview of the recent German case law underlines that the German legal framework for SEP cases is still in flux. So far, German courts have continued to dodge the development of benchmarks for FRAND terms and mainly focused on applying and refining the negotiation framework established by the CJEU in Huawei v ZTE. This has led to a plethora of case law setting out complex guidance for FRAND negotiations. However, key questions such as how to determine whether or not licence conditions are FRAND as well as whether the SEP holder must offer a licence to any implementer or may select only to license one particular level of a complex value chain have yet to be answered by the courts. Given that the German jurisprudence on SEP/FRAND is constantly evolving, for practitioners who deal with SEP, it is critical to follow the current developments closely. At the same time, it is important to focus on the essentials.