European Union: IP & Antitrust
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On 11 September 2014, the day of the oral hearing in Huawei v ZTE,1 the CJEU courtroom in Luxembourg was packed with a who's who of competition lawyers from around Europe and beyond to attend the hearing in a landmark case expected to shape the Union's competition laws for many years. The stage had been set by Advocate General Wathelet's bold advisory opinion, which had already changed the trajectory of case law in the member states and found keen adopters especially among German judges.2
While the Huawei judgment provides some important guidance on the relationship between IP rights and competition law, important questions at the intersection of IP and competition law remain unanswered. Predictably, standard essential patent (SEP) holders and implementers have found and will continue to discover areas of law not yet decided by the CJEU. Current cases are often centred around the implementation of the steps SEP holders and infringers must follow under Huawei, but also go beyond what was at issue in the Huawei case.
This article discusses some of the issues in the post-Huawei world. They range from the scope of Huawei itself to remedies (other than injunctions) sought by SEP holders, as well as injunctions against distributors of products implementing the technical teachings of SEPs. Before turning to these issues, we briefly set out the background to Huawei and the key holdings of the CJEU.
The Huawei principles govern the conditions under which the market dominating holder of an SEP may seek an injunction for the infringement of a patent ‘encumbered' with a commitment to license it on fair, reasonable and non-discriminatory (FRAND) terms. The question had been referred to the CJEU by the Düsseldorf District Court, which was faced with a choice between the well-established German Orange Book principles and the nascent and somewhat different approach taken by the European Commission (EC) in its Samsung/Motorola decisions.3
The German Orange Book and EC Samsung/Motorola approaches
In its Orange Book judgment of May 2009,4 the German Federal Court of Justice limited the circumstances in which an alleged infringer can advance a competition law defence to an application for an injunction preventing it from continuing to use the patent's teachings. The case involved a de facto essential patent where the holder had not given a FRAND licensing undertaking, but it was also applied in SEP cases by the district (trial level) and regional appellate courts in Germany. The Orange Book case law provided a test for an abuse of dominance: An SEP holder was guilty of an abuse of dominance only where he had sought an injunction despite the licence-seeker having taken concrete steps to become a licensee. The alleged infringer of an SEP was immune from injunction if it (i) had made an unconditional5 offer to take a licence at a royalty rate that the SEP holder could not reasonably refuse or at a rate to be determined by the SEP holder but subject to judicial oversight, and (ii) had behaved as if it were a licensee (by rendering an account of its use of the patent and paying royalties/securities into an escrow account).
The EC's decisions in Samsung/Motorola, adopted in April 2014,6 offered an alternative approach. The EC essentially found that where an SEP holder had made a commitment to license on FRAND terms (FRAND declaration) to a standard-setting institution, it would be an abuse of dominance to later seek an injunction against a willing licensee. A ‘willing licensee' was held to be an implementer that has agreed to take a licence and be bound by any determination by a court or arbitral tribunal of the quantum of royalties owed.
Huawei v ZTE
The dispute in Huawei v ZTE arose out of ZTE's use of Huawei's patent which was essential for practising the Long Term Evolution (LTE) standard published by the European Telecommunications Standards Institute (ETSI) and which Huawei had committed to license on FRAND terms. Huawei sought an injunction against ZTE in the Düsseldorf court. ZTE argued that Huawei was abusing its dominant position (article 102 TFEU). The court, recognising the conflict between the Orange Book and EC approaches, referred the issue to the CJEU.7
The CJEU held that the irrevocable offer to grant licences on FRAND terms cannot ‘negate the substance of [those] rights' (in particular, to seek an injunction), but ‘it does, nonetheless, justify the imposition on [the SEP holder] of an obligation to comply with specific requirements when bringing actions against alleged infringers for a prohibitory injunction or for the recall of products.'8 In order to avoid article 102 liability, the ‘specific requirements' are:
- The SEP holder must inform the infringer in writing of the relevant SEP and how it has been infringed (infringement notice).9
- The infringer must then express a willingness to license the SEP on FRAND terms (willingness notice).10
- The SEP holder must then make a specific, written offer for a licence on FRAND terms (FRAND offer). The offer must set out the amount of the royalty and the method of its calculation.11
- The infringer must respond to that offer, ‘diligently and in good faith'' in accordance with recognised commercial practices and without undue delay; if the SEP holder's offer is rejected, a counter-offer on FRAND terms must be made promptly and in writing (FRAND counter-offer).12
- If the infringer has used the SEP's teachings before a licence agreement is signed, it must provide appropriate security for its past and future use.13
- Where no agreement as to FRAND terms can be made, the parties may, ‘by common agreement', request that an independent third party determine the amount of the royalty (third-party determination).14 The infringer remains free to challenge the validity, use, or essential nature of the SEP.15
The detailed requirements of each of the individual steps remain the subject of a lively debate by practitioners and judges in recent conferences and judgments.16 In the following sections, we focus on some of the issues beyond the interpretation of the Huawei steps.
The scope of Huawei
SEPs without a FRAND declaration
The cornerstone on which the CJEU's reasoning in Huawei rests is the proposition that a FRAND declaration creates legitimate expectations that justify restrictions on injunctive relief and the recall of products:17
In those circumstances, and having regard to the fact that an undertaking to grant licences on FRAND terms creates legitimate expectations on the part of third parties that the proprietor of the SEP will in fact grant licences on such terms, a refusal by the proprietor of the SEP to grant a licence on those terms may, in principle, constitute an abuse within the meaning of article 102 TFEU.18
Given that the CJEU effectively restricted the Huawei criteria to the seeking of an injunction where a FRAND declaration had been made, it is unclear whether the CJEU's principles also apply absent a FRAND declaration.19 This raises the question of whether FRAND declarations really create legitimate expectations. In order to answer these questions, one has to look at the typical purpose of FRAND declarations and the way they are given by patent holders and perceived by implementers. Unfortunately, the CJEU in Huawei has not reached these questions and has taken the proposition about the creation of legitimate expectations for granted.
- In practice, FRAND declarations are typically given because the rules and regulations of the standard-setting organisations (SSOs) require them.20 The rationale for that is article 101 TFEU. The standardisation process amounts to an agreement (or at least as a concerted practice) between undertakings or as a decision by an association of undertakings under article 101(1) TFEU. However, it is widely accepted that standardisation often has pro-competitive effects because it can, for example, facilitate the development of new products/markets and improve their quality.21 However, standardisation could also stifle innovation.
Accordingly, the EC's position is that the standardisation process will not constitute a restriction of competition only if certain conditions are met:22 first, unrestricted participation in the standard setting process must be ensured; second, the process must be transparent; third, there must not be an obligation to comply with the standard; and fourth, access to the standard on FRAND terms must be secured.
- The SEP holder's motive in making a FRAND declaration is therefore typically not to make a generous unilateral promise to the public to license the patent, as the CJEU implies in Huawei. As companies are typically eager that their patents become part of a standard, the FRAND declaration is made to comply with SSO regulations and to avoid a breach of article 101 TFEU. For these reasons, FRAND declarations are often also rather broad and not specific to one particular patent or technology.
- It is therefore unproven whether the FRAND declaration indeed raises legitimate expectations. In fact, the need to rely on article 102 TFEU shows that the differentiation regarding the rights and duties of an SEP holder as outlined in Huawei, on the one hand, and Orange Book, on the other hand, cannot be justified on the presence or absence of a FRAND declaration alone. A more convincing approach could be to ascertain any restrictions on the right to seek an injunction based on article 102 TFEU, taking into account prior CJEU case law. In any case, whether the CJEU has found a practical and balanced approach in Huawei remains to be seen.
Commercially essential/de facto standard patents
The question regarding the scope of the Huawei judgment will be particularly relevant in cases where neither a formal standardisation exists nor a FRAND declaration has been made (ie, when de-facto essential or commercially essential patents are at stake). The German Orange Book approach, although applied in the SEP context by the lower German courts, related to a de facto essential patent. The EC in Motorola and the CJEU in Huawei (and prior to it Advocate General Wathelet) have distinguished the German Orange Book judgment on that basis. This suggests that applying the Orange Book criteria would remain the correct approach in non-SEP cases.
If, however, the FRAND declaration can hardly be central to the restriction of injunctive relief (as set out above), there is no readily available basis to differentiate between SEPs (with or without a FRAND declaration) and commercially essential/de facto standard patents. It seems that the CJEU's reasoning for establishing the obligations and rights of the SEP holder and the alleged infringer could be similarly applied to the holder of a commercially essential/de facto standard patent: In particular, the CJEU claims that the SEP holder ‘is better placed to check whether its [licence] offer complies with the condition of non-discrimination than is the alleged infringer',23 but there seems to be no obvious reason why this proposition should not apply to dominant holders of commercially essential and de facto standard patents as well.
Damages and the implications of Huawei
Discussions regarding restrictions to the SEP holder's rights have focused mainly on injunctions. According to the CJEU, the reason for restricting the SEP holder's right to injunctive relief (and the recall of products) is that the seeking of these types of relief may ‘prevent products complying with the standard (…) from appearing or remaining on the market.'24 On the other hand, the CJEU briefly stated that ‘the rendering of accounts in relation to past acts of use of that SEP or an award of damages in respect of those acts of use, do not have a direct impact on products (…) appearing or remaining on the market.'25 The CJEU therefore held that such actions cannot be regarded as an abuse under article 102 TFEU. While the seeking of damages as such is thus not considered to be abusive, the extent to which article 102 TFEU and the Huawei judgment have implications for the scope of these rights remains unclear.
Declaration for an entitlement to damages
What seems relatively certain is that the mere seeking of a declaration for an entitlement to damages for past and future use (as opposed to seeking a specific quantum) is unrestricted as such a declaration does not have a chilling effect.26 The implications of article 102 TFEU and Huawei on the quantum of damages (including regarding the time periods for which the SEP holder is entitled to damages), however, are less clear.
For damages claims relating to non-SEPs, patent holders may typically choose between three methods of calculating damages:
- the licence analogy, which is the most commonly used, and which asks what the infringer would have had to pay as reasonable remuneration had it obtained consent to use the invention prior to infringement;
- the infringer profit, where the patent holder can demand the share of the profits that can be accounted to the patented invention; or
- lost profits, where the patent holder claims all profits lost as a result of the infringement.
For damages claims relating to SEPs, it remains unclear whether SEP holders have the right to choose between all three methods of calculation. If SEP holders are limited to the licence analogy method, this further raises the question of whether under that method damages are to be calculated fully or limited only to what the cost of a FRAND licence would have been. Granting the SEP holder the right to choose between the different methods carries an element of welcome deterrence, as otherwise an infringer would gain an unjustified advantage in comparison to a regular FRAND licensee. It further incentivises the alleged infringer to actively seek a licence - absent the threat of at least damages beyond a mere (FRAND) licence an SEP user hardly has any incentive to seek a licence agreement. In a recent decision the Mannheim Regional Court found that damages are not necessarily limited to a FRAND licence. On appeal, the Karlsruhe Higher Regional Court upheld the lower court's decision, holding that it is ‘not manifestly erroneous', but the Karlsruhe Court has yet to form its own opinion.27
The second option (limiting damages to the cost of a (FRAND) licence), though, is perhaps more consistent with the basis of the judgment in Huawei, because (i) it holds the SEP holder to its commitment to license on FRAND terms and (ii) the SEP holder could be viewed as having implicitly waived any interest in the SEP beyond a FRAND licence rate.
However, limiting the SEP holder's right to damages to the cost of a (FRAND) licence may be justified where the SEP holder has refused to grant a licence on FRAND terms after the infringer requested such licence. As an action for damages does not have a chilling effect like the seeking of an injunction, it seems inappropriate to require the SEP holder to comply with the strict Huawei criteria (eg, infringement notice and initial FRAND offer).
Injunctions against distributors
A further highly relevant issue in recent cases in the post-Huawei world is whether the seeking of an injunction against a distributor of a product that uses the SEP constitutes an abuse of the SEP holder's dominant position, when the SEP holder could equally seek an injunction against the manufacturer or supplier of the product. This aspect was not relevant to the Huawei case (as there was no distributor involved), but has been in issue in the St Lawrence (SLC) litigation. St Lawrence, a non-practising entity, has asserted various patents against a number of companies, including Deutsche Telekom, a telecommunications company and distributor of mobile phones. Deutsche Telekom (at least initially) refused to take a licence, but still raised a FRAND defence by pointing to the phone manufacturer's (HTC) willingness to do so.
St Lawrence decisions
In March 2015 the Mannheim District Court held that Deutsche Telekom could not rely, in making its article 102 defence, on those manufacturers that were willing to license, because (i) the willingness of some suppliers to enter into a licence agreement does not have a material legal effect (such as exhaustion) on the supplied devices, and (ii) the SEP holder has a valid interest in injunctive relief against a distributor as otherwise it would face the continuous risk of distribution of products infringing the patent produced by manufacturers that do not satisfy the requirements of a FRAND defence.28
On appeal in April 2015 the Karlsruhe Appellate Court29 stayed the enforcement of the Mannheim court's decision, basing its decision on Advocate General Wathelet's proposed principles and holding that the sole decisive question was whether the assertion of a claim for an injunction constituted recourse to a method different to those governing normal competition in a way that was detrimental to consumers. If the SEP holder gave a FRAND commitment and if it typically formed licence agreements with manufacturers, there was no objective reason for it to assert patent claims against distributors where the manufacturer was a willing licensee. The Appellate Court decision suggests that the patent holder cannot target other downstream parties if a FRAND defence is available somewhere in the distribution chain.
In a more recent decision, handed down in December 2015, the Mannheim court found that neither Deutsche Telekom nor HTC had fulfilled their Huawei obligations and therefore left open the question of whether Deutsche Telekom could have invoked a FRAND defence by pointing to its supplier.
Scrutiny by the European Commission?
St Lawrence's behaviour also came to the attention of the EC. In April 2015 the EC demanded information from the parties to the St Lawrence cases.30 Later during the year and after the Huawei judgment had been handed down, the EC voiced concerns that the Huawei criteria could be circumvented where injunctions were sought against companies active at other levels of the distribution chain.31
As not much more has become public about the EC's views and any potential upcoming formal investigations in this matter, it remains to be seen what approach the EC will take here.
Views voiced by senior judges
Senior German judges Kühnen and Maimann of the Düsseldorf Appellate Court also view injunctions against distributors critically and suggest the following approach:32 According to the judges, the manufacturer must be the primary ‘target' of an injunction, particularly where licence agreements with manufacturers are the industry standard. Further, during ongoing licence negotiations between the SEP holder and the manufacturer, the SEP holder cannot seek an injunction against the distributor. Finally, the distributor may, of course, negotiate with the SEP holder (eg, where the manufacturer does not comply with the Huawei process).
- C-170/13 Huawei v ZTE, EU:C:2015:477 (Judgment).
- For example, St Lawrence v Deutsche Telekom (OLG Karlsruhe, 6 U 44/15, 23 April 2015); see for further details: Herrmann/Manley, ‘Germany: IP & Antitrust', in The European Antitrust Review 2016, pages 151-155.
- Only the EC's press releases were available to the Düsseldorf District Court at the time at which it made its referral to the CJEU (4b O 104/12, 21 March 2013). See EC press releases of 29 April 2014: Commission finds that Motorola Mobility infringed EU competition rules by misusing standard essential patents (IP/14/489) and Commission accepts legally binding commitments by Samsung Electronics on standard essential patent injunctions (IP/14/490).
- BGH, Orange Book Standard, KZR 39/06, 6 May 2009.
- According to the lower German courts, an unconditional offer required that the alleged infringer waived all challenges relating to the patent's infringement, validity and essentiality.
- Commission decisions of 29 April 2014, Case AT.39985 - Motorola - Enforcement of GPRS Standard Essential Patents and Case AT.39939 - Samsung - Enforcement of UMTS Standard Essential Patents.
- The questions referred to the CJEU did not address the circumstances under which an SEP holder is dominant. The CJEU therefore did not rule on this issue.
- C-170/13 Huawei v ZTE, EU:C:2015:477, para. 59.
- Ibid, para. 60.
- Ibid, para. 63.
- Ibid, para. 63.
- Ibid, para. 65.
- Ibid, para. 67.
- Ibid, para. 68.
- Ibid, para. 69.
- See eg, Kühnen/Maimann, ‘Die kartellrechtliche Zwangslizenz nach der EuGH-Entscheidung ‘Huawei/ZTE'', presentation given on 26 February 2016; France Brevets v HTC (LG Düsseldorf, 4b O 140/13, 26 March 2015); St Lawrence v Deutsche Telekom (LG Mannheim, 2 O 103/14, 10 March 2015); OLG Karlsruhe, 8 September 2016, 6 U 58/16; OLG Karlsruhe, 29 August 2016, 6 U 57/16; OLG Düsseldorf, 17 November 2016, I-15 U 66/15; LG Mannheim, 7 O 19/16, 17 November 2016; LG Mannheim, 2 O 131/16, 20 December 2016) - The implications of Huawei and, in particular, the meaning of ‘FRAND' was also addressed in England by the High Court (Birss J) in the Unwired Planet against Huawei case (judgment dated 5 April 2017, case No. HP-2014-000005).
- All following references to the seeking of an injunction should be taken to include the seeking of a recall of products, as the CJEU attributes to both an equally chilling effect.
- C-170/13 Huawei v ZTE, EU:C:2015:477, para. 53.
- This may be particularly relevant where the original SEP holder had made a FRAND declaration and then sold the SEP to a buyer who has not made a similar commitment. The basis for an obligation to give a FRAND declaration, if one wanted to acknowledge one, can in that case hardly be article 101 TFEU as the buyer was typically not involved in the standardisation process.
- See, eg, ETSI Intellectual Property Rights Policy, article 6.
- See, eg, Commission Notice, Guidelines on the applicability of article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, OJ  C 11/01 (Horizontal Guidelines), para. 263.
- Ibid, para. 280.
- C-170/13 Huawei v ZTE, EU:C:2015:477, para. 64.
- Ibid, para. 73.
- Ibid, para. 74.
- Recently confirmed eg, by Düsseldorf District Court, 4b O 120/14, 19 January 2016, paragraph 351 - juris; see also Kühnen/Maimann (fn. 16), slide 181.
- LG Mannheim, 4 March 2016, 7 O 23/14; OLG Karlsruhe, 29 August 2016, 6 U 57/16 - paras. 31 et seqq. (juris) - Should the SEP holder's claim for damages be limited to costs of a FRAND licence, then the determination of what is FRAND obviously becomes highly relevant. The English High Court has set out the rules for determining a FRAND licence in its recent Unwired Planet v Huawei judgment (see fn. 16). According to the High Court a FRAND licence can be determined by analogy to comparable relevant licenses or by calculating the SEP holders share of the total number of patents essential to the relevant standard.
- St Lawrence v Deutsche Telekom (LG Mannheim, 2 O 103/14, 10 March 2015).
- St Lawrence v Deutsche Telekom (OLG Karlsruhe, 6 U 44/15, 23 April 2015).
- MLex article, ‘EU demands info on tech-patent lawsuit against Deutsche Telekom', 30 April 2015.
- Competition Commissioner Vestager said in a conference in 2015: ‘Neither our decisions nor the Huawei judgment mark the end of the story. We are already seeing attempts to circumvent the principle established in our decisions and confirmed by the Court. The most apparent example is when injunctions are being sought against companies active at other levels of the distribution chain, for example, telecoms operators selling phones rather than the phone manufacturer.' (19th IBA Competition Conference, Florence, 11 September 2015) - See https://ec.europa.eu/commission/2014-2019/vestager/announcements/intellectual-property-and-competition_en.
- Kühnen/Maimann (fn. 16), slide 133.