What is your SEP "licensing concept"? The Higher District Court of Düsseldorf in Unwired Planet puts some further constraints on SEP owners
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| Sally found her flexibility in SEP licensing negotiations was a bit constrained |
Over to Axel for the report on the decision:
"Facts
In March 2014, Unwired Planet International Ltd (Unwired Planet) brought an infringement action against China-based Huawei Technologies Co. Ltd and its German affiliate (jointly: Huawei) before the District Court (Landgericht) of Düsseldorf in Germany (District Court), asking for a declaratory judgment to recognize Huawei’s liability for damages on the merits, as well as access to information and the rendering of accounts. The suit was based on one patent declared as potentially essential to the practice of wireless telecommunications standards (Standard Essential Patent, or SEP) developed by the European Telecommunications Standards Institute (ETSI). Unwired Planet had acquired the patent in suit –among other patents– from Telefonaktiebolaget LM Ericsson (Ericsson), who had given an undertaking to ETSI under the ETSI IPR Policy that it would be prepared to enter into negotiations with a view to granting users access to its SEPs on Fair, Reasonable and Non-Discriminatory (FRAND) terms and conditions.
In parallel to the action brought in Germany, Unwired Planet also initiated infringement proceedings against Huawei in the UK. During the course of these proceedings, the parties made certain licensing offers. However, an agreement was not reached.
In January 2016, the District Court granted Unwired Planet’s motions[1]. Huawei appealed the District Court’s ruling. With the present judgment, the Higher District Court (Oberlandesgericht) of Düsseldorf (Court) upheld the decision of the District Court with one exception: It limited Huawei’s obligation to render accounts, by excluding information about production costs and realised profits.
In March 2014, Unwired Planet International Ltd (Unwired Planet) brought an infringement action against China-based Huawei Technologies Co. Ltd and its German affiliate (jointly: Huawei) before the District Court (Landgericht) of Düsseldorf in Germany (District Court), asking for a declaratory judgment to recognize Huawei’s liability for damages on the merits, as well as access to information and the rendering of accounts. The suit was based on one patent declared as potentially essential to the practice of wireless telecommunications standards (Standard Essential Patent, or SEP) developed by the European Telecommunications Standards Institute (ETSI). Unwired Planet had acquired the patent in suit –among other patents– from Telefonaktiebolaget LM Ericsson (Ericsson), who had given an undertaking to ETSI under the ETSI IPR Policy that it would be prepared to enter into negotiations with a view to granting users access to its SEPs on Fair, Reasonable and Non-Discriminatory (FRAND) terms and conditions.
In parallel to the action brought in Germany, Unwired Planet also initiated infringement proceedings against Huawei in the UK. During the course of these proceedings, the parties made certain licensing offers. However, an agreement was not reached.
In January 2016, the District Court granted Unwired Planet’s motions[1]. Huawei appealed the District Court’s ruling. With the present judgment, the Higher District Court (Oberlandesgericht) of Düsseldorf (Court) upheld the decision of the District Court with one exception: It limited Huawei’s obligation to render accounts, by excluding information about production costs and realised profits.
Court’s reasoning
The Court found that Huawei was not obliged to provide Unwired Planet with information about production costs and/or realised profits, because this information is not required for calculating the amount of damages owed for the infringement of the SEP in suit. Since Unwired Planet had failed to meet the conditions established by the Court of Justice of the European Union in the matter Huawei v ZTE [2] – particularly the obligation to make a FRAND licensing offer to Huawei – the amount of damages due was limited to the amount of the applicable FRAND royalty (for certain periods of time).
In this case, according to the Court, the licensing offers made to Huawei were not FRAND because Unwired Planet had failed to establish the non-discriminatory nature of the royalties proposed.
For allowing Huawei to assess the non-discriminatory character of its licensing offers, the Court held that Unwired Planet was obliged to disclose whether other licensees exist and, if so, to which conditions they have been licensed. This obligation extends also to licensing agreements concluded by the previous patent holder, Ericsson, as far as they have not expired or have not been terminated at the point in time, in which Unwired Planet made each licensing offer to Huawei. Unwired Planet had, however, not met these requirements.
In the Court’s eyes, the FRAND undertaking irrevocably limits the exclusion rights arising from a patent ‘in a material manner’ and is, thus, directly and indispensably binding for the new patent holder (without the need for any contractual provisions). What is more, the Court suggested that the FRAND undertaking is binding for the latter not only ‘on the merits’, but also in terms of ‘amount and content’. In other words: the new patent holder is not only – generally – obliged to offer access to the SEP on FRAND terms, it is, moreover, bound to the actual licensing practice of the previous patent holder. Accordingly, the licensing agreements of the former patent holder (which term has not expired) outline the framework, against which no discrimination is allowed.
In this context, the Court explained that, prior to granting the very first FRAND licence, the SEP holder ought to select a specific ‘licensing concept’. This ‘concept’ is ‘legally binding’ for the conduct of the SEP holder and its potential successors, limiting the leeway available for future licensing negotiations, irrespective of whether the royalties agreed for the first licence lie at the lower end of the FRAND scale that had been available to the SEP holder (that is even if the patent holder would have been entitled to request higher royalties for the first licence granted). In the Court’s view, the SEP holder can establish a new ‘licensing concept’ (within the available FRAND range), provided that all licensing agreements subject to the existing ‘concept’ will end at the same point in time. The Court suggested that this could be achieved, for instance, by agreeing with all later licensees that their licence will expire at the same time as the first FRAND licence ever granted.
Besides that, the Court also pointed out that the new SEP holder needs to make sure that it will be able to refer to and present licensing agreements of the prior SEP holder, particularly in court proceedings. An exception could, basically, be made only when presenting such agreements would violate contractual confidentiality obligations. The Court found, however, that this exception will often not apply, since agreeing to comprehensive confidentiality clauses could be in conflict with FRAND: According to the Court, the FRAND undertaking obliges the patent holder to provide its successor with information regarding to the content of existing licensing agreements.
The Court found that Huawei was not obliged to provide Unwired Planet with information about production costs and/or realised profits, because this information is not required for calculating the amount of damages owed for the infringement of the SEP in suit. Since Unwired Planet had failed to meet the conditions established by the Court of Justice of the European Union in the matter Huawei v ZTE [2] – particularly the obligation to make a FRAND licensing offer to Huawei – the amount of damages due was limited to the amount of the applicable FRAND royalty (for certain periods of time).
In this case, according to the Court, the licensing offers made to Huawei were not FRAND because Unwired Planet had failed to establish the non-discriminatory nature of the royalties proposed.
For allowing Huawei to assess the non-discriminatory character of its licensing offers, the Court held that Unwired Planet was obliged to disclose whether other licensees exist and, if so, to which conditions they have been licensed. This obligation extends also to licensing agreements concluded by the previous patent holder, Ericsson, as far as they have not expired or have not been terminated at the point in time, in which Unwired Planet made each licensing offer to Huawei. Unwired Planet had, however, not met these requirements.
In the Court’s eyes, the FRAND undertaking irrevocably limits the exclusion rights arising from a patent ‘in a material manner’ and is, thus, directly and indispensably binding for the new patent holder (without the need for any contractual provisions). What is more, the Court suggested that the FRAND undertaking is binding for the latter not only ‘on the merits’, but also in terms of ‘amount and content’. In other words: the new patent holder is not only – generally – obliged to offer access to the SEP on FRAND terms, it is, moreover, bound to the actual licensing practice of the previous patent holder. Accordingly, the licensing agreements of the former patent holder (which term has not expired) outline the framework, against which no discrimination is allowed.
In this context, the Court explained that, prior to granting the very first FRAND licence, the SEP holder ought to select a specific ‘licensing concept’. This ‘concept’ is ‘legally binding’ for the conduct of the SEP holder and its potential successors, limiting the leeway available for future licensing negotiations, irrespective of whether the royalties agreed for the first licence lie at the lower end of the FRAND scale that had been available to the SEP holder (that is even if the patent holder would have been entitled to request higher royalties for the first licence granted). In the Court’s view, the SEP holder can establish a new ‘licensing concept’ (within the available FRAND range), provided that all licensing agreements subject to the existing ‘concept’ will end at the same point in time. The Court suggested that this could be achieved, for instance, by agreeing with all later licensees that their licence will expire at the same time as the first FRAND licence ever granted.
Besides that, the Court also pointed out that the new SEP holder needs to make sure that it will be able to refer to and present licensing agreements of the prior SEP holder, particularly in court proceedings. An exception could, basically, be made only when presenting such agreements would violate contractual confidentiality obligations. The Court found, however, that this exception will often not apply, since agreeing to comprehensive confidentiality clauses could be in conflict with FRAND: According to the Court, the FRAND undertaking obliges the patent holder to provide its successor with information regarding to the content of existing licensing agreements.
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| Beware of the ghosts of licensing practices past before you acquire your SEP portfolio |
Conclusion
The approach taken by the Court in the present judgment with respect to the binding effect on the latter’s licensing practice has no precedent in German FRAND-related jurisprudence. Until now courts have recognised that FRAND is a range and that SEP holders can offer different terms to similarly situated licensees as long as there is no competitive harm.[3] Moreover, the very wide interpretation of the FRAND undertaking adopted by the Court has the potential to cause significant disruption to well-established commercial practices in the FRAND licensing ecosystem. For instance, many companies have signed so far dozens to hundreds of FRAND licensing agreements, which have often been the result of years of negotiations. The Court’s proposal would remove any flexibility from future commercial negotiations (which currently parties enjoy within the FRAND framework), making deal-making much less likely, which will invariably lead to lower compensation to innovators. This, in turn, would drastically diminish the incentive to share the technology resulted from large R&D investment with others within the standardization process, to the detriment of consumers, which would face more expensive and/or lower quality standardized products or services.
Having probably that in mind, the Court has now allowed for an appeal on points of law against its ruling before the Federal Court of Justice (Bundesgerichtshof). The parties have appealed the present judgment, giving the Federal Court of Justice the opportunity to get involved in FRAND-related topics for the first time."
The approach taken by the Court in the present judgment with respect to the binding effect on the latter’s licensing practice has no precedent in German FRAND-related jurisprudence. Until now courts have recognised that FRAND is a range and that SEP holders can offer different terms to similarly situated licensees as long as there is no competitive harm.[3] Moreover, the very wide interpretation of the FRAND undertaking adopted by the Court has the potential to cause significant disruption to well-established commercial practices in the FRAND licensing ecosystem. For instance, many companies have signed so far dozens to hundreds of FRAND licensing agreements, which have often been the result of years of negotiations. The Court’s proposal would remove any flexibility from future commercial negotiations (which currently parties enjoy within the FRAND framework), making deal-making much less likely, which will invariably lead to lower compensation to innovators. This, in turn, would drastically diminish the incentive to share the technology resulted from large R&D investment with others within the standardization process, to the detriment of consumers, which would face more expensive and/or lower quality standardized products or services.
Having probably that in mind, the Court has now allowed for an appeal on points of law against its ruling before the Federal Court of Justice (Bundesgerichtshof). The parties have appealed the present judgment, giving the Federal Court of Justice the opportunity to get involved in FRAND-related topics for the first time."
For more information and summaries on national court application of the CJEU's decision in Huawei v ZTE and the FRAND licensing negotiation process see additional here and here. And if you really love FRAND, 4iP is organizing a webinar entitled "FRAND access regimes in European Law" which is based on a recent paper published in the Journal of Intellectual Property, Information Technology and Electronic Commerce Law entitled "A FRAND Regime for Dominant Digital Platforms" co-authored by Mathew Heim & Dr Igor Nikolic will address:
• What is the scope of the FRAND regimes as a European law instrument?______________
• What are the common elements that make up FRAND terms and conditions?
• What conclusions can be drawn from past practice?
• How FRAND can be applied going forward?
[1] See District Court of Duesseldorf, judgement dated 19 January 2016, Case No. 4b O 49/14.
[2] Huawei v ZTE, Court of Justice of the European Union, judgment dated 16 July 2015, Case No. C-170/13.
[3] See for example Düsseldorf District Court explaining that the acquirer of a SEP is neither obliged to continue the transferor’s licensing practice in an unmodified manner nor to implement exactly the same conditions in all licensing agreements, provided the conditions are FRAND and no unjustified discrimination takes place. See Unwired Planet v Samsung, LG Düsseldorf, 19 January 2016 - Case No. 4b O 120/14. Also, see Appeal Court of Düsseldorf stating that the different treatment of SEP licensees is accepted if it can be justified as a result of normal market behaviour, and that licensing conditions can be abusive, only if they are significantly different between licensees; see Sisvel v Haier, Appeal Court of Düsseldorf, 30 March 2017 - Case No. I-15 U 66/15. Moreover, the UK Court of Appeal clarified that the Non-discrimination limb of FRAND does not mean a ‘most favoured licensee‘. In other words, a SEP licensor can agree to a lower rate, if it decides to do so, but is not necessarily obliged to offer that rate to other implementers. See Unwired Planet v Huawei [2018] EWCA Civ 2344.
What is your SEP "licensing concept"? The Higher District Court of Düsseldorf in Unwired Planet puts some further constraints on SEP owners
Reviewed by Annsley Merelle Ward
on
Friday, June 07, 2019
Rating:
Reviewed by Annsley Merelle Ward
on
Friday, June 07, 2019
Rating:
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