Injunctions and SEPs: A Battle of Willingness

July 2015

In the latest case before the CJEU concerning standard essential patents (SEPs) and anti-competitive behaviours (Huawei Technologies Co. Ltd v ZTE Corp., ZTE Deutschland GmbH C-170/13), the CJEU has set out the particular circumstances under which bringing an action for a prohibitory injunction against an alleged infringer by the proprietor of a standard-essential patent  may constitute an abuse of a dominant position.  

The Court distinguished actions seeking a prohibitory injunction or the recall of products from those seeking the rendering of accounts and an award of damages, specifying that where a patent proprietor offers a licence on FRAND terms,  before it brings such an action for an injunction prohibiting the infringement of its patent or for the recall of products for the manufacture of which that patent has been used, that proprietor must present to the alleged infringer a specific offer to conclude a licence. 

SEPs holders can hold significant power, which can give rise to potentially anti competitive behaviours.  The frequency of patent litigation in general, and related to SEPs in particular, has increased considerably over the past 30 years (see here) and the so-called “Smartphone wars” have been widely reported in the popular press.  To alleviate these competition concerns and to ensure that the benefits of standardisation are promulgated, standard-setting organisations may require that patent holders commit to license their SEPs on fair, reasonable and non-discriminatory (FRAND) terms.  The conduct of SEP-holders who have given a commitment to grant licences to third parties on FRAND terms has given rise to a plethora of actions before the courts of several European counties.  In his Opinion in November 2014, the AG drew attention to a lack of clarity as to what is meant by ‘FRAND terms’, pointing out that a commitment to grant licences on FRAND terms is not the same as a licence on FRAND terms. 

Huawei are owners of patent EP 2090050 B1 (the Patent), which is said to be ‘essential’ to the Long Term Evolution (LTE) standard developed by the European Telecommunications Standards Institute (ETSI).  This means that anyone using the standard inevitably uses the teaching of that patent.  The Patent was notified to ETSI by Huawei, which, in turn, on 4 March 2009, gave ETSI a commitment to grant licences to third parties on fair, reasonable and non-discriminatory terms (‘FRAND terms’). 

ZTE developed and marketed products including base stations with LTE software.  These products were made for use with the LTE software, and operated on the basis of the LTE standard.  This of course meant that the ZTE products used the Huawei Patent.  ZTE have historically opposed the patent at the EPO on the grounds it was not valid, and although ZTE’s opposition was rejected, an appeal against that decision is still pending.

The questions answered today by the CJEU go back to a dispute in Germany where Huawei, in an action for infringement of the Patent, sought an injunction against ZTE, prohibiting the continuation of the infringement.  Negotiations between ZTE and Huawei for the conclusion of a licence to the Patent on FRAND terms broke down, leading to Huawei brining an action to against in Germany against ZTE, to obtain an injunction prohibiting the continuation of the infringement.  ZTE claimed such an action for a prohibitory injunction constituted an abuse of a dominant position as ZTE had been ‘willing to negotiate’ such a licence.

The German Court referred questions to the CJEU concerning, amongst other things, whether the fact that an SEP-holder brings a claim for damages, constitutes an abuse of dominant position.   The referring court’s questions have been largely inspired by the Orange-Book-Standard judgment of the Bundesgerichtshof and the Commission’s press release in the Samsung case.   On the one hand, Orange-Book-Standard was not analogous to the present case, and on the other hand, although the press release in the Samsung case did concern an SEP the owner of which has given a commitment to a standardisation body to grant licences on FRAND terms, a mere willingness on the part of the infringer to negotiate in a highly vague and non-binding fashion cannot, in any circumstances, be sufficient to limit the SEP-holder’s right to bring an action for a prohibitory injunction.

The judgement has clarified that the SEP proprietor does not abuse its dominant position in bringing such an action for an injunction or recall of products as long as the following conditions are satisfied:

(1) prior to bringing the action, the proprietor has first alerted the alleged infringer of the infringement, designating the patent in question and specifying the way in which it has been infringed. The patent proprietor must also, after the alleged infringer has expressed willingness to conclude a licensing agreement on FRAND terms, have made a specific written offer to the alleged infringer for a FRAND licence specifying the royalty and the way in which the royalty is to be calculated.

(2) the alleged infringer has not diligently responded to the proprietor’s offer to licence on FRAND terms. The diligence is to be judged in accordance with “recognised commercial practices in the field and in good faith” and is to be based upon objective factors with the particular requirement that there be no delaying tactics on the part of the alleged infringer.

The Court has held, inter alia, that the alleged infringer which has not accepted the offer made by the proprietor of the SEP may invoke the abusive nature of an action for a prohibitory injunction or for the recall of products only if it has submitted to the proprietor of the SEP, promptly and in writing, a specific counter-offer that corresponds to FRAND terms.

With regard to actions seeking the rendering of accounts and an award of damages, it was held that the prohibition of abuse of a dominant position does not, in circumstances such as those in the main proceedings, prevent an undertaking in a dominant position and holding a patent essential to a standard established by a standardisation body, which has given an undertaking to that body to grant licences for that patent on FRAND terms, from bringing an action for infringement against the alleged infringer of its patent with a view to obtaining the rendering of accounts in relation to past acts of use of that patent or an award of damages in respect of those acts of use. Such actions do not have a direct impact on standard-compliant products manufactured by competitors appearing or remaining on the market.

Clarification from the ECJ that an SEP proprietor bringing an action for infringement is unlikely to be viewed as an abuse of a dominant position is welcome.  However SEP proprietors should take note of the their explicit obligation to make a written offer a licensing agreement on  FRAND terms and specifying a royalty prior to considering seeking an injunction or a recall of products.

The requirement for diligence and no delaying tactics on the part of the alleged infringer provides a disincentive to the potential licensee acting in bad faith. However, the judgement leaves open to interpretation what is meant by a “diligent” response on the part of the infringer, which is to be judged “in accordance with recognised commercial practices in the field”.  The continuing lack of clarity with regard to what constitutes FRAND licence terms could also make the new criteria difficult to navigate. 

The question remains open regarding when an SEP proprietor is deemed to hold a “dominant position”.  Does such a “dominant position” arises merely by having an SEP, or is more required?

Overall the judgement strikes a balance between providing clearer guidance to SEP holders regarding which actions in relation to the SEPs are likely to fall foul of competition law and clarifying that delaying tactics and bad faith on the part of a potential licensee makes it more likely that the SEP holder can seek an injunction with a reduced risk of contravening the prohibition of the abuse of a dominant position. There is a public interest in standards-compliant products not being taken off the market as a result of unfair play by market competitors.

The case will now revert to the referring German Court for judgement.

This update was prepared by Susan Keston, Patent Director in our Glasgow office.

If you would like further advice on this or any other matter please contact Susan or your usual HGF representative or visit our Contact page to get in touch with your nearest HGF office.