Is German SEP litigation set to increase with the "confidentiality club decision"​ of the Higher Regional Court of Düsseldorf?

Better keep your mouth shut if you are a subject to a German
confidentiality club

"Can you just agree the confidentiality club regime with the other side?"  If you are an associate in an English patent law practice  you will have had the joy of not only hearing that request but spending weeks negotiating the operation of and admission to the quintessential confidentiality club.  Although many faces fall when they are given this task, all English patent litigators cannot imagine a world without them.  The position is not the same in other jurisdictions across Europe, like Germany.  However, this may have changed with a recent groundbreaking decision from Düsseldorf.  Kat friend Christopher Weber (Kather Augenstein) explains the case which  is set to make litigating standard essential patents (SEP) in Germany a whole lot easier:

"When a defendant invokes the FRAND objection, the SEP owner may be obliged to provide evidence that its license agreement is not discriminatory.  However, the SEP owner will also be at pains to ensure that the commercial aspects of the agreement remain confidential. Should the defendant refuse to keep the agreement confidential, it was unclear how the SEP owner could ensure confidentiality in German proceedings. That has now changed.  

With a new decision of January 17, 2017, the Higher Regional Court Düsseldorf has provided a way to overcome that hurdle. The effect of the decision now provides a means to place pressure on a defendant to conclude an NDA.  But before getting into the details of the decision it is worthwhile to set the scene of the problems and the conflicting interests of both parties.

Generally, confidentiality is a major concern for the parties in German patent litigation. Unlike other jurisdictions Germany has so far not adopted the trend to allow strict confidentiality under its procedural law provisions. The public may be excluded from the main hearing when confidential facts are discussed.  The files of the proceedings may also not be readily available. Briefs and exhibits are not published in a publicly accessible database (cf. EPO proceedings). However, every party to the litigation must have access to all the documents that were revealed to the court by either party. The statutory anchor for this principle is the constitutional right to be heard and the rule of law principle under Art. 103.1, 19.3 of the Basic Law for the Federal Republic of Germany, i.e. the German Constitution. Thus, many would (and do) consider that the notion that substantial information concerning an action would not be available to complete scrutiny by the parties would be an anathema to the dogmatic principles of German procedural law. 

However, this principle often hinders parties whenever SEP are asserted in infringement proceedings before German courts to obtain an injunction. SEP proprietors are forced to undertake a tightrope walk regarding the confidentiality of its license practice. On one side of this tightrope is the legal obligation to furnish the necessary facts to support one's own position in the parties’ proceedings. On the other side is the danger that confidential facts may become publicly disclosed and used against the SEP in other commercial negotiations.

As SEPs must be licensed under FRAND conditions in the light of Art. 101 TFEU, to defuse the anti-competitive nature of the standard-setting process the plaintiff must establish that the license offer it has provided during the third step of the well-known Huawei criteria is non-discriminatory (FRAND) (CJEU, dec. of. 16 July 2015, C-170/13, no. 63 – Huawei Technologies ./. ZTE Corp. et al).  It is at this point the new case-law of the Düsseldorf infringement courts comes into play.   The Higher Regional Court of Düsseldorf has explicitly required SEP-plaintiffs to disclose prior license agreements with industry players that are comparable to the defendant in the present proceedings (Higher Court of Düsseldorf, dec. of 17 Nov. 2016, I-15 U 66/15, no. 32 [German]) or other license agreements.  By doing so, the plaintiff can establish that the requested royalty is non-discriminatory (or even that it should be deemed fair and reasonable as well).  On the basis of the confidentiality situation pointed out above, these license agreements would then also have to be submitted to the defendant in the litigation – and any interveners if present as well.  Usually, SEP owners will refrain from doing so especially if the concerned license agreements contain a strict non-disclosure clause. German courts often state that a court order overrules contractual non-disclosure clauses, thus meaning that the SEP owner should not have breached contract. However, confidential clauses are not merely cosmetic but also a means to an end: companies do not want to disclose their commercial practices to competitors.  In license negotiations this can be prevented via an NDA.  However, in litigation under German law it is very difficult to avoid broad disclosure.  It could possibly be avoided if the defendants and interveners would sign an NDA, but without any procedural leverage it is difficult to get the defendant to play along.  For the defendants to a court action there is no downside in getting to know all details about the plaintiff’s licensing practice.  It’s also possible that tactically some defendants would leverage this pressure point for a SEP owner who has the burden of proof in showing that the license agreement is non-discriminatory. Therefore, the defendant will normally invoke its constitutional right and not conclude an NDA. 

The tide seems to have suddenly turned if the asserted patent is an SEP that conveys market dominance within the meaning of Art. 102 TFEU.  As reported, a few weeks ago the Higher Regional Court of Düsseldorf issued a decision in the case I-2 U 31/16 [German with incorrect date; an English courtesy translation is available here] containing and relating to specific confidentiality orders. The court seems to apply a two-step approach: 

(1) As the defendants must not be excluded from accessing specific documents in the court file, they have to enter into an NDA with the plaintiff. The second order of the above mentioned decision proposes the key provisions  for such NDA (essentialia negotii for our amici felium). The receiving party is urged to name a maximum of 4 persons in its company (assumingly this would cover the whole group of companies) that act as a confidentiality filter.   Only the listed people are allowed to access specific passages in documents or whole documents that are marked as “strictly confidential” and acknowledged by the court. In addition to this, external experts of the receiving party are allowed to access these documents. The defendant is, however, fully liable for any confidentiality breaches of the aforementioned persons and must even safeguard that confidentiality is maintained if one of the appointed staff members leaves the company. Further, the court requested a contractual penalty clause amounting to a sum of EUR 1 million per breaching act. The proposed NDA regime is rounded off by a number of exemptions from confidentiality, e.g. if the confidential facts were already known by the receiving party or if the confidential facts became public or were communicated (legally) to the receiving party by a third party. At the time such exemption applies, the receiving party is urged to inform the disclosing party of the specific fact concerned and of its source of information within three weeks. 

(2) The alternative to an NDA may be derived from the first order in the decision by the Higher Regional Court of Düsseldorf.  The receiving party can waive its constitutional access right partially and only have its appointed external counsel access the documents. In such case, the receiving party’s external counsel must not disclose the information to their clients.  Their professional obligation to inform the client of every document exchanged in the litigation is suspended in this regard. The intervener supporting the plaintiff has apparently chosen this alternative in the Düsseldorf proceedings. 

The question remains why a defendant to an SEP-action should be obliged to waive or restrict its fundamental right voluntarily. Here the Huawei ping pong comes into play. According to Huawei, the defendant must act like a willing licensee throughout the proceedings to keep its FRAND objection alive. The refusal to maintain specific documents confidential may be construed as a lack of willingness to reach a FRAND license agreement. In the end the court could reject the FRAND defence for the reason that the defendant did not sign the NDA. At least, one presiding judge of the Higher Regional Court pondered this question in a presentation two weeks ago. Whether or not the courts will take this step is currently not clear – the answer is, however, expected to be given rather sooner than later. 

In fact, the new approach of the Düsseldorf courts is highly welcome from a practitioner’s point of view. It should eliminate the confidentiality concerns for Plaintiffs in German SEP litigation, while providing the option for enough information to ascertain whether a license agreement is in fact non-discriminatory and forcing the defendant to engage sensibly in the discussion under the threat of losing the FRAND objection. To misquote von Clausewitz: The new confidentiality regime is the mere continuation of Huawei by other means. A basic concern of SEP owner has just been assuaged, making SEP actions a more viable proposition.

The AmeriKat understands that one of Christopher's colleagues, Peter Kather, will be speaking on the topic of confidentiality on 23 March 2017 at the 16th Patent-law Days in Düsseldorf.   The IPKat looks forward to following this burgeoning area of law in Germany.