The ‘FRAND dance’: what it is and why it is causing uncertainty in Germany

Nearly three years after the  Federal Court of Justice’s landmark rulings in Sisvel v Haier I and Sisvel v Haier II (see “How Sisvel v Haier transformed the German FRAND landscape”), SEP owners and implementers alike have been left in a state of considerable uncertainty as to the modalities of the so-called ‘FRAND dance’ required during negotiations. Broadly summarised, the FRAND dance consists of several steps.

May I have this dance?

According to the Federal Court of Justice (and the European Court of Justice), a dominant SEP holder must first notify the implementer of the patent infringement at issue, in case it is unaware of its alleged unlawful use of the SEP’s teaching. In the Sisvel cases, the Federal Court of Justice did not specify precise requirements for this notification; it considers claim charts to be “usually sufficient but not necessary”.

Accepting the invitation

After having received notice of the alleged infringement, the implementer must then express its clear and unequivocal willingness to conclude a licence agreement on FRAND terms without undue delay. Citing the High Court of England and Wales’ famous Unwired Planet v Huawei decision (HP-2014-00005), the Federal Court of Justice shares the view that “a willing licensee must be one willing to take a FRAND licence on whatever terms are in fact FRAND”, even though it and German lower courts have yet to define FRAND terms.

The court emphasises that a willingness to conclude a licence agreement on FRAND terms is not to be considered a single declaration or formal process step that must be carried out and checked off only once. Rather, the implementer must express “a continuing demand for the conclusion of a contract on FRAND terms and its willingness to cooperate in the conclusion of such a contract” during the entire negotiations process.

The dominant SEP owner is only subject to further obligations if the implementer expresses its (continued) willingness to conclude a licence agreement on FRAND terms. According to the court, abuse of market power can ultimately only follow either:

• from the denial of the requested contractual access to the invention; or
• “from unreasonable conditions for a requested access from which the patent holder is not prepared to deviate even at the end of negotiations, ie, the refusal to offer the licensee seeking the conclusion of a licence agreement on FRAND terms, as a result of a negotiation process”.

As a first step, the SEP owner must submit a licensing offer to the implementer, along with the information the implementer requires to assess whether the offer qualifies as FRAND. However, the court considers the patent holder’s offer to be only the starting point of licence negotiations. Therefore, it is not decisive whether the initial offer’s terms are indeed FRAND. According to the court, what qualifies as FRAND in a specific case is not a given set of parameters and terms, but there is “a range of possible reasonable solutions”. Once in receipt of the offer, it is the implementer’s obligation to review the SEP holder’s offer and to articulate:

whether its content requires further information from the patent holder and whether and, if so, to what extent the structure of the offer or individual provisions thereof, in particular the IP rights to be covered by the agreement and the amount and method of calculating the licence fee, (possibly) do not comply with FRAND conditions form the user’s point of view.

The implementer must act without undue delay during the full dance.

The Federal Court of Justice does not request the implementer to advance negotiations in a flawless manner at any stage. A party that fails to sufficiently cooperate from the outset has a chance to mitigate this later on. However, any undue delay must be offset by additional endeavours to reach an agreement.

As a rule, if the implementer does not want to accept the patent holder’s offer, it is obliged to make a counteroffer. Whether the duty to do so is triggered by the SEP holder’s offer depends on the specifics of each individual case, “recognised business practices and the principles of good faith”. Even where the patent holder’s offer obviously does not comply with FRAND conditions, the court does not entirely release the implementer from its counteroffer obligation, but cautions that “it may be sufficient to react by explaining why the offer obviously does not comply”.

Lessons learned

In the Sisvel cases, the implementer failed to meet the requirements in several respects. For example:

• with regard to the implementer’s willingness to take a FRAND licence, it was insufficient for Haier to express mere hopes (“we hope to have a formal negotiation with you”);
• after several months of silence in response to the plaintiff’s infringement notice, Haier needed to act swiftly to offset the delay – even the holiday season did not qualify as a reason to delay a decision; and

• while the court found that the implementer is free to challenge a patent’s validity (and may reserve its right to do so in a licence agreement), Haier was considered unwilling – it made a licence contingent upon the final court decision on infringement and SEP validity.

The SEP owner’s responsibilities as a dance partner

Crucially, the court made it clear that the SEP owner must also exhibit an ongoing willingness to comply with its FRAND obligations. This applies during the full court proceedings. The FRAND defence can succeed and a claim for injunctive relief could ultimately be rejected even if the filing of an action was not abusive, but the further conduct shows that the patent owner did not do enough to reach a mutually agreeable solution complying with FRAND terms.

The road ahead

Almost three years ago, the Sisvel judgments left many questions unanswered and have raised many more since. The Federal Court of Justice avoids providing clear rules for the FRAND dance and definitions of FRAND licence clauses, thereby leaving the door wide open for uncertainty on both sides. German lower courts have a lot of leeway to fill in the gaps, which has already resulted in diverging case law among the main courts in Germany. Such case law will be the subject of analysis in several of our future articles.