EU’s Highest Court Confirms that Seeking an Injunction for SEPs May Constitute an Abuse of a Dominant Position

July.20.2015

On July 16, 2015, the EU's highest court, the Court of Justice, rendered its long-awaited ruling on whether seeking an injunction for a standard-essential patent against an alleged patent infringer constitutes an abuse of a dominant position pursuant to Article 102 TFEU. The judgment was in response to a request for a preliminary ruling from the Landgericht Düsseldorf (Regional Court of Düsseldorf, Germany)^[1] in the course of a dispute between Huawei Technologies Co. Ltd and ZTE Corp. together with its German subsidiary ZTE Deutschland GmbH.

An SEP is a patent for a technical standard adopted by a formal standard-setting organization (SSO). When an intellectual property right essential to a standard is brought to the attention of an SSO, the SSO generally requires the owner of the right to promise to license its SEP on fair, reasonable, and non-discriminatory terms. In this connection, the European Commission has stated that it is anti-competitive to use injunctions in relation to SEPs when an SEP holder has committed to license the SEP on FRAND terms and the licensee is willing to take a licence on such terms.^[2]

The Court of Justice outlined that in order for an SEP owner, which has undertaken to license its SEP on FRAND terms, to be able to seek a prohibitory injunction against an alleged infringer—without infringing Article 102 TFEU—it must present a written offer on FRAND terms to the potential licensee.

The Court's judgment provides welcome guidance in the light of the questions that remained unanswered following the Commission's attempt to address the issues raised in such cases. However, important questions do still remain open.

Background to the dispute

In 2009, Huawei notified the European Telecommunications Standards Institute ETSI, an SSO, that the patent in question was essential to the Long Term Evolution LTE standard in connection with wireless communication of high-speed data for mobile phones. At the same time, Huawei promised to grant licenses, on FRAND terms, to third parties implementing the LTE standard.

After the breakdown of negotiations for the conclusion of a licensing agreement on FRAND terms, Huawei brought an infringement action before the Landgericht Düsseldorf against ZTE. Among other things, Huawei sought to obtain a prohibitory injunction, the recall of products and an assessment of damages. In its defence, ZTE argued that the action for a prohibitory injunction constitutes an abuse of a dominant position since ZTE is willing to enter into a licence with terms that are compliant with FRAND.

The Landgericht Düsseldorf sought guidance from the Court of Justice to determine the point at which the proprietor of an SEP infringes Article 102 TFEU as a result of bringing an action for a prohibitory injunction.

Court's judgment

Despite the range of legal remedies provided to ensure a high level of protection for intellectual property rights, the Court stated that—in the light of an irreovacable promise to grant licenses on FRAND terms—it was justified to impose on a proprietor an obligation to comply with specific requirements when bringing actions for a prohibitory injunction or for the recall of products.

In this regard, the Court held that the proprietor of an SEP, which has promised to grant licenses on FRAND terms, can abuse its dominant position in certain circumstances by seeking an injunction against the use of its SEPs. The Court further stated that an SEP owner does not abuse its dominant position when:

prior to bringing that action, the proprietor has, first, alerted the alleged infringer of the infringement complained about by designating that patent and specifying the way in which it has been infringed, and, secondly, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, presented to that 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, and
where the alleged infringer continues to use the patent in question, the alleged infringer has not diligently responded to that offer, in accordance with recognised commercial practices in the field and in good faith, this being a matter which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.

The Court held that it was for the Landgericht Düsseldorf to determine whether the above-mentioned criteria are satisfied as regards Huawei and ZTE.

As regards infringement actions seeking the rendering of accounts for past acts of use of an SEP, or an award of damages brought by an SEP owner that has promised to grant licenses on FRAND terms, the Court held that—since such actions do not have a direct impact on the products of competitors appearing or remaining on the market—they cannot be regarded as an abuse under Article 102 TFEU.

Implications of the Court's judgment

The judgment places specific burdens on both the proprietor and potential licensees of SEPs. A proprietor has to present a written offer on FRAND terms specifying, in particular, the amount of the royalty and calculation method. This ruling differs from the leading decision in the United States that held that the initial license offer for a FRAND-encumbered SEP need not comply with FRAND as long as it leads to an executed license on FRAND terms.^[3] The Court has, moreover, indicated that the offer should be in line with the terms agreed with other competitors, in order to satisfy the "non-discriminatory" prong of FRAND.

With respect to a potential licensee, in order to be able to rely on the protection of Article 102 TFEU after having rejected the offer made to it, it has to submit to the proprietor a written counter-offer on FRAND terms. The Court's decision appears to be the first ruling worldwide to put an affirmative obligation on potential licensees to counter with FRAND-compliant license terms before being able to rely on a SEP owner's promise not to prevent others from practicing those SEPs.

In justifying its ruling, the Court of Justice noted that LTE standard is composed of more than 4,700 SEPs. Thus, like many other standards, the large number of SEPs means that a user of a standard will be unaware which SEPs are both valid and essential. The Court also drew attention to the fact that an SSO, such as ETSI, does not check whether patents are valid and/or essential to the standard during the standardisation process. In this respect, an alleged infringer cannot be criticised for challenging, in parallel to negotiations, the validity and/or essential nature of the patents.

Despite the judgment's providing further guidance to the position adopted by the Commission, important questions remain unanswered. The Court of Justice deliberately did not rule on what constitutes either a FRAND royalty rate or a FRAND royalty base. And while the Court endorsed the notion of arbitration for FRAND disputes, it did not provide guidance on situations where only one party is willing to submit to a binding determination of FRAND. But, by essentially outlining a dispute resolution framework coupled with unattractive disclosure risks at court, the Court is sending a clear signal for its desire that such disputes be resolved between the parties rather than in courtrooms.

If you desire more information about the implications of the Court's judgment, please contact the authors or your Orrick relationship partner.

Jay Jurata is a Partner in Orrick's Washington, D.C. office, Douglas Lahnborg is a Partner in Orrick's London and Brussels offices, and Kamran Vojdani is a Professional Support Lawyer in Orrick's Brussels office.

[1] Pursuant to Article 267 TFEU, the Court of Justice of the European Union can give preliminary rulings on questions concerning interpretation of the Treaties or acts of the institutions that are raised before any court of a Member State should a decision on the question be considered necessary for that court to give judgment.

[2] See the Commission's Memo/14/322 of 29 April 2014 published following the Commission's Motorola decision and Samsung settlement.

[3] Microsoft Corp. v. Mororola, Inc. 864 F.Supp.2d 1023, 1038 (W.D. Wash. 2012).