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FRAND defence put on trial before European Court of Justice

The landmark decision “Orange-Book Standard”1 of the German Federal Court of Justice (FCJ) confirms that a defendant sued for the infringement of a standard essential patent (SEP) (patents protecting industry standard technologies) can rely on an anti-trust defence (“FRAND defence”) against claims for injunctive relief, if the plaintiff refuses to grant a licence under FRAND terms (fair, reasonable and non-discriminatory).

October 2013

This decision was initially seen as a breakthrough for defendants. However, since then hardly any FRAND defences raised in later cases have actually succeeded, due to the extraordinarily high practical requirements defined by the FCJ. Because the European Commission recently suggested that the requirements for a successful FRAND defence in Germany might be too strict, the Düsseldorf District Court has stayed a current case between China’s largest telecommunications manufacturers Huawei and ZTE and referred five questions to the European Court of Justice (CJEU). With this referral on 21 March 2013, the Düsseldorf District Court seeks clarification on important details of the FRAND defence, which are absolutely decisive for the relevance of the FRAND defence in future German infringement cases.

Criteria for FRAND defence in Germany

BooksAccording to the “Orange-Book Standard” decision, the defendant’s offer for entering into a licence agreement has to be concrete, binding and unconditional in order to justify a FRAND defence. The offer cannot even be subject to the condition that the courts find the patent valid and infringed. Only the royalty can be left to the reasonable discretion of the patentee – subject to the court’s scrutiny, if the patentee’s demands seem to be unreasonably high or the patentee refuses to offer a royalty rate. Finally, if the defendant has made use of the SEP before the patentee has agreed to the licence offer, the defendant has to act as if his proposed licence offer had already been accepted. Hence, the defendant has to provide regular accounts, calculate royalties transparently, pay sufficient royalties to an escrow account the patentee has access to, and waive the right to reclaim the royalties.

Thus, the defendant has to accept a more or less unconditional surrender on infringement and validity to benefit from the FRAND defence according to “Orange Book Standard”. It is not surprising that the FRAND defence has not become an attractive option under these conditions.

European Commission’s view

The European Commission is aware of the defendant’s difficulties in German SEP cases. In its press release dated 21 December 2012 concerning potential patent abuses in the mobile communications market, the Commission expressed its preliminary view that seeking injunctions based on SEPs amounts to an abuse of market dominance, even if the defendant is merely willing to negotiate a licence on FRAND terms. However, criteria under which such willingness to negotiate a licence may be assumed were not defined.

Questions referred to the CJEU

MalletIn the pending Huawei v ZTE case, where ZTE had raised the FRAND defence, the Düsseldorf District Court found itself between the FCJ and the European Commission. Applying the criteria defined by the FCJ in “Orange Book Standard”, ZTE’s FRAND defence would have had to be dismissed. Applying the criteria expressed by the European Commission, however, ZTE could possibly rely on the FRAND defence. To solve the conflict, the Düsseldorf District Court referred several questions to the CJEU2, dealing with the most urgent problems arising in German FRAND cases:

  • Is it sufficient for a successful FRAND defence if the defendant is willing to negotiate a licence or does he have to make a binding offer to the SEP holder on terms the SEP holder cannot refuse? Does the defendant additionally have to comply with – anticipated licence terms with respect to past acts of infringement?
  • Does Article 102 of the Treaty on the Functioning of the European Union (which seeks to ensure competition) involve specific qualitative and/or time requirements in relation to the"willingness to negotiate" ?
  • In particular, can willingness to negotiate be presumed where the patent infringer has merely stated (orally) in a general way that that he is prepared to enter into negotiations, or must the infringer already have entered into negotiations by, for example, submitting specific conditions upon which he is prepared to conclude a licensing agreement or must the offer contain all the provisions which are normally included in licensing agreements in the field of technology in question?
  • Can the binding offer be made subject to the condition that the SEP in dispute be actually infringed and/or valid?
  • If finding for an abuse of market dominance should require defendant’s fulfilment of obligations arising from the requested licence, are there particular requirements with respect to such fulfilment (e.g. is the infringer particularly required to render an account on past infringement and/or to pay (pre-contractual) royalties, possibly by giving security)?
  • Is the FRAND defence limited to claims for injunctions or does it apply to other remedies for patent infringement as well, e.g. damages, recall or rendering of accounts?

Comments

Mobile deviceThe referral is highly significant for any standardised industry where SEPs are enforced, in particular the telecommunications and electronics industries. The CJEU’s decision can be expected in approximately one year. In the meantime SEP cases, in which a motion for an injunction has been raised and the defendant has declared a serious willingness to discuss a licence, will likely be stayed, at least before the Düsseldorf courts. To avoid a stay and potential conflicts with antitrust law, a current option for an SEP holder with a potential defendant willing to discuss a licence could be to refrain from applying for an injunction until the CJEU has answered the questions referred.

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16 May 2009, KZR 39/06.

2Case no. C-170/13.

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Dietrich Kamlah

Verena Bertram





Dietrich Kamlah and Verena Bertram look at the FRAND defence (i.e. the claimant refuses to license on reasonable terms) to patent infringement in the context of a dispute between two of China's largest telecommunications manufacturers.

"The referral is highly significant for any standardised industry where SEPs are enforced, in particular the telecommunications and electronics industries."