Sisvel v. Haier II: Further insights on German judiciary’s FRAND approach

IPKat friends, Professor Peter Georg Picht, and  PhD student Erik Habich, from the university of Zurich, share with us further insights on the German FRAND approach.

 Only seven months after the German Federal Court of Justice (Bundesgerichtshof) handed down its first decision on the CJEU’s Huawei/ZTE  mechanism for licensing Standard Essential Patents (SEPs) on Fair, Reasonable and Non-Discriminatory (FRAND) terms (FRAND-Einwand; Katpost here), the Antitrust Senate (Kartellsenat) had to decide again, in parallel proceedings between the same parties, and handed down the written reasoning this week. 

The decision FRAND-Einwand II confirms the Court’s stance taken in FRAND-Einwand. However, the Court clarified several important, additional questions that had been controversial before lower courts: Summarily speaking, the reasoning (i) proposes a process-oriented approach to FRAND as opposed to a content-oriented approach, (ii) reemphasizes the importance of willingness to license, (iii) adds flexibility to the Huawei/ZTE conduct obligations, (iv) asserts that the Court’s position is in accord with Huawei/ZTE and Art. 102 TFEU, and (v) rejects a patent ambush defense against subsequent SEP owners. 

Facts of the case

Dealing with similar facts as FRAND-Einwand earlier last year (Katpost here), FRAND-Einwand II concerned a patent that was declared essential to ETSI’s 3GPP standard by its previous owner Nokia under a FRAND declaration. Sisvel acquired the patent in suit and approached Haier, offering standard-compliant mobile devices in Germany, for a global portfolio license in 2012. Unable to agree on licensing terms, Sisvel, just as in FRAND-Einwand but concerning a different patent, sued for infringement at the Düsseldorf Regional Court in 2014 while Haier sued for nullity at the Federal Patent Court. In the infringement proceedings, the first instance Court found the patent infringed and dismissed Haier’s FRAND-defense, finding Haier had delayed negotiations. On appeal, the Düsseldorf Higher Regional Court in 2017 denied the patent injunction, as it considered Sisvel’s licensing offer incompatible with the non-discrimination prong of FRAND.

On appeal, the infringement proceedings were stayed in 2018 until the nullity proceedings before the Federal Court of Justice were concluded. After the Court confirmed the patent to be valid earlier in 2020, the Court essentially granted Sisvel’s appeal in the infringement proceedings. However, contrarily to FRAND-Einwand, the patent had not expired at the time of the judgment.

Findings of the German Federal Court of Justice

Almost 20 pages longer than FRAND-Einwand, FRAND-Einwand II devotes roughly one third of the written reasoning to patent infringement. However, this post shall focus on the implementer’s competition law-based right to a compulsory FRAND license, framed as a procedural defense (kartellrechtlicher Zwangslizenzeinwand) against the action for infringement.

Regarding market dominance as a prerequisite for the applicability of Art. 102 TFEU (and the parallel provision in German competition law), the Court reiterates its findings on this point from FRAND-Einwand. The Court assumed a separate licensing market for a patent that is (as a matter of fact) essential to the standardized technology and non-substitutable by any alternative product configuration without losing important functionality on the product market. Any mobile communications device that does not implement the teaching would not be competitive. Noteworthily, the Court made less of an effort than in FRAND-Einwand to describe how exactly the invention is essential and non-substitutable (without loss of important functionality), although the case concerned a different standard than FRAND-Einwand. While restating that, despite the legal barrier to market entry created by the patent, exceptional circumstances may prevent a finding of dominance of the SEP-owner, the Court again did not find such circumstances to be present.

Concerning the notion of abuse, the Court repeated its two-pronged concept of abuse from FRAND-Einwand (cf. here). Abuse can lay

(i)                  either in the refusal to conclude a FRAND-licensing agreement with the implementer while enforcing the patent

(ii)                or if the SEP-owner fails to take the necessary steps to enable a willing implementer to receive a FRAND license (leading to the Huawei/ZTE criteria).

Interestingly, FRAND-Einwand II jointly justifies these requirements, explaining that for both prongs litigating the SEP is only (!) abusive because the implementer has the right to conclude a FRAND-licensing contract. Therefore, no abuse can be inferred from offering, at the outset of licensing negotiations, terms potentially discriminating or excluding the implementer. Abuse is only committed by (i) a categorical refusal to license or by (ii) unreasonable conditions for the requested access, which the SEP-owner is not willing to budge from even at the end of negotiations, as this would manifest a refusal to offer the licensing agreement at FRAND conditions the implementer is entitled to.

The Court emphasized several further aspects of the notion of abuse, in particular:

-          The Court repeats that the notification of infringement is required only if the implementer is (potentially) not aware of the infringement already.

 

-          More elaborately than in FRAND-Einwand, the Court explains the necessity for the mutual willingness to license with reference to a conduct-oriented (instead of content-oriented) understanding of FRAND: Balanced and reasonable terms can be determined only as the result of a negotiation process in which the opposite interests can be articulated and discussed, leading to a mutually consented, reasonable and fair balance of interests. Therefore, the conduct requirements on both negotiators are mutual in nature and depend on the facts of the individual case. A duty to expedite negotiations exists, if and insofar the next negotiation step is to be expected in good faith and after recognized commercial practice.

 

-          Any duties of SEP-owner other than the notification of infringement are conditional on the implementer’s expression of a clear and unambiguous willingness to license on FRAND-terms. The implementer’s cooperation and contribution to the negotiation is the indispensable counterpart to the SEP-owner’s tolerating the infringement, whilst the implementer undertakes all necessary, possible and reasonable effort to conclude such agreement. Any abusive refusal necessarily presupposes the implementer’s continuing willingness to take a license on FRAND terms.

 

-          The Court explicitly held that such notion of willingness is not contrary to Art. 102 TFEU and Huawei/ZTE: The CJEU emphasized the importance of constructive negotiations for finding a fair balance between the interests concerned, which means that complying with the CJEU’s negotiation duties generally suffices for avoiding an abuse. While the CJEU defines conditions (in particular with regard to patentee conduct) under which no abuse is present, the finding of an abuse of dominance always requires consideration of all circumstances of a case and a weighing of the parties’ interests. In consequence, the particular circumstances of a case can justify conduct obligations that are stricter or less strict than those set out by Huawei/ZTE.

 

-          Any initial offer by the SEP-owner that is not evidently unFRANDly cannot constitute an abuse, as the initial offer is only the starting point for enabling the implementer to negotiate (referring to the second prong of abuse from FRAND-Einwand). Regularly, in complex SEP cases it is not evident which terms are FRAND, even more so because there is a range of FRAND terms. It is therefore for the negotiation process to lead to a fair and reasonable end result. If the SEP-owner had to offer a final set of FRAND-terms from the outset, there would be no need for negotiation. If a party does not want to accept certain terms, it must elaborate the specific aspects that it considers to be unreasonable. Conversely, the opposite party must amend its offer accordingly or explain why the considerations are unconvincing. Even if the parties eventually cannot find a consensual solution, these arguments remain a point of reference for subsequent litigation.

 

-          Based on this process-oriented notion of FRAND, the Court turns to the much-discussed question of an availability of catching-up on missed FRAND conduct obligations. This question was left open in FRAND-Einwand, as the patent had already expired. The Court held that if the implementer failed to express its willingness to license for a longer period of time, the implementer is expected to make additional efforts to contribute to the conclusion of an agreement as soon as possible. The question of the relevant point in time for the availability of catching-up resolved the Court with a twist: Generally, the presence of an abuse is assessed at the filing of the action. However, although the claim to a FRAND license persists even though the implementer is initially unwilling to take such a license, this does not mean that the implementer can assert the claim in an ongoing injunction litigation. This depends on whether the SEP-owner acts abusively by pursuing the claim despite the implementer’s belated willingness to license. The longer the implementer waits, the more effort he must show to conclude a balanced licensing agreement.

Furthermore, the Court declines the availability of a patent ambush defense for the implementer. After the transfer of the patent-in-suit in 2012, Sisvel as its new owner is not a proper addressee for an ambush defense since – as the Court holds –objections against the previous patent owner cannot be asserted against an acquirer of the patent.

All in all, FRAND-Einwand II further enfolds the German Federal Court of Justice’s concept of FRAND licensing. It remains to be seen whether the CJEU considers this concept compliant with its Huawei/ZTE scheme and Art. 102 TFEU in general. This compliance has been challenged last year by the Düsseldorf Regional Court, asking the CJEU (again) for a preliminary ruling on several topics raised in FRAND-Einwand.