In the last months, the Landgericht Düsseldorf (District Court of Düsseldorf – LG Düsseldorf) has handed down 10 judgments dealing with standard essential patents (SEPs) in the smart phone sector. While not all judgments have been published yet, cases 4a O 17/17 and 4b O 4/17 answered a number of fundamental questions as to how German courts will apply the CJEU’s case law for FRAND licensing of SEPs by patent pools.
If SEP owners, who have made a FRAND commitment, wish to act against patent infringements, they risk those proceedings being characterised as an abuse of a dominance. To escape liability under Art. 102 TFEU in such cases, SEP owners must comply with the approach laid down by the CJEU in Huawei/ZTE. In short, a SEP owner must notify the alleged infringer of the infringement. If the alleged infringer then signals its willingness to accept a license, the SEP owner has to offer terms that are fair, reasonable and non-discriminatory (FRAND). Only if the alleged infringer does not accept that offer and fails to submit a FRAND counter-offer (and provides no security for the FRAND royalties), can the SEP owner safely commence patent infringement proceedings.
LG Düsseldorf considered the individual elements of the Huawei/ZTE approach. In doing so, it built upon and developed earlier judgments.
Notification of the infringement
In 2017, the Higher Regional Court of Düsseldorf (OLG Düsseldorf) had clarified that a SEP owner does not need to send the infringement notice directly to the infringing entity but may notify the parent company or parent of the company group of an alleged infringer, on the basis that it can be assumed that the parent will inform the relevant subsidiaries of the alleged infringement. In case 4b O 4/17, LG Düsseldorf took the view that the same assumption applies if a specific subsidiary of a company group took a leading role in negotiating a licensing agreement and acted as point of contact for the SEP owner. If so, the SEP owner can send the infringement notice to the negotiating entity.
The court also pointed out that an alleged infringer cannot rely on failure of the SEP owner to send a notification of infringement if it can be assumed that it was already aware of the infringement.
Willingness to take a license
There are no specific requirements for signalling willingness to take a license. Quoting OLG Düsseldorf, the court held that an alleged infringer can make an informal and general declaration. Equally, in some situations, actions that imply a willingness to take a license may also be sufficient.
The SEP owner’s FRAND offer
In both cases, the SEP owner had submitted a standard license agreement which LG Düsseldorf considered to be a FRAND offer.
Generally, Huawei/ZTE requires that the SEP owner presents to the infringer a “specific, written offer for a licence on such terms, specifying, in particular, the royalty and the way in which it is to be calculated”. According to the LG’s interpretation of this requirement, the SEP owner needs to include the amount of the royalties, together with an explanation of their calculation and must explain the essential reasons why it believes that its offer is FRAND. The court explained that the calculation need not be mathematically precise in the sense of the royalty rate but can be based on “valuations and estimates”.
Comparable license agreements that have already been concluded can serve as important indicators as to the appropriateness of the proffered terms and conditions. If the owner has previously licensed the relevant SEP(s), the supporting calculation and reasons it needs to provide may be less detailed. For example, if the number of license agreements suggests market acceptance, e.g. by the market share of licensed products at a specific royalty rate, a detailed calculation will not be required. However, the SEP owner needs to refer to all relevant agreements; it may not cherry-pick those that support its desired level of royalties.
In the instant case, the SEP owner had submitted a standard license agreement that did not explain the calculation but which had already been accepted by a number of licensees (in one case approx. 2,000 standard license agreements had been concluded). The court took the view that the more standard license agreements that have been concluded, the more likely it is that the agreement’s conditions are FRAND, including both the royalty rates as well as the geographic scope.
LG Düsseldorf’s approach is open to the criticism that the pre-existing standard license agreements were already inflated by the licensor’s dominant position. However, the court dismissed this argument on the basis that the SEP owner must demonstrate market acceptance, which can be shown by similarities between existing licensees and new applicants.
According to LG Düsseldorf, a pool license as such does not raise antitrust concerns unless it systematically includes a number of patents that are not required to comply with the standard, or if pool members collude on royalties for competing (non-essential) technologies (see also EU Commission Guidelines for Transfer of Technology Agreements, para. 246).
In case 4a O 17/17, the defendant argued that the pool contained various non-essential patents and presented a sample-based analysis of the pool’s patents. The court held that the evidence submitted was insufficient and that the defendant would have had to (i) specify which patents were non-essential and (ii) show that none of those non-essential patents were made use of for the relevant products. Furthermore, for an abuse, patent owners need to systematically include non-essential patents in the pool order to increase their royalties, which the court found not to be the case.
Although the court did not expressly decide if there is a limit for mixing SEPs and non-essential patents in the same pool, it appears that licenses for such mixed pools are capable of being FRAND. However, any such mixed pool would be outside the safe harbour rule according the EU Commission Guidelines for Transfer of Technology Agreements (para. 261).
Pre-existing license agreements may also constitute evidence that a specific combination of SEPs in a pool license is FRAND. If SEP owner(s) have already licensed a specific portfolio for comparable products, prima facie, the combination of SEPs appears to meet the parties’ interests.
LG Düsseldorf’s judgment in case 4a O 17/17 has been appealed. It remains to be seen if OLG Düsseldorf will add further clarifications to the handling of FRAND licensing by German courts.