A standard-essential patent, or “SEP”, is a patent that protects technology that is essential to a standard.  Standards are especially important in industries such as telecommunications, where they are set by bodies including the European Telecommunications Standards Institute (“ETSI”) to allow for the interoperability of devices and infrastructure produced by competitors and include, for example, the standards relating to 4G.

A patent is, by its nature, a time-limited monopoly right.  The owner of an SEP has an extremely valuable asset, in that those who wish to be involved in a market will need to pay for a licence to do so.  However, if the owner of an SEP acted in an unfettered and self-interested way, by refusing to license to certain competitors or new entrants, charging inflated fees or requiring onerous terms, it would have the effect of distorting the market as well as defying the purpose of standard-setting.

To resolve this issue, standards-setting organisations often require that their members irrevocably undertake to offer licenses for SEPs on fair, reasonable and non-discriminatory (“FRAND”) terms, which will involve the licensing terms and the royalty rates at which such licenses are offered and aim to ensure that all existing competitors and new entrants to the market are treated similarly.

EU competition law and enforcing SEPs

Articles 101 to 109 of the Treaty on the Functioning of the European Union are the basis of the EU’s competition law.  Article 102 prohibits abuse of a dominant position, the principles underpinning which reflect many of the concerns intended to be addressed by FRAND licences.

There is an obvious need to balance the EU’s concerns to ensure free competition with its members’ obligations to protect and enforce intellectual property rights.  Directive 2004/48/EC, for example, requires member states to provide those measures, procedures and remedies necessary to ensure the enforcement of intellectual property rights, including the grant of interlocutory injunctions.

The question arises as to what remedies are available to the holders of SEPs when a third party uses the SEP without, for whatever reason, completing the offered license.  Can an infringer rely on the requirement to grant FRAND licenses to deny an interim injunction to the SEP’s owner because it does not accept that the offered licence is on terms that are fair, reasonable and non-discriminatory?

The Orange Book Standard decision

In 2009, the German Federal Supreme Court dealt with the question in a matter related to CD-R standards and an SEP held by Philips.  The defendant had produced and marketed products without a licence from Philips, arguing that the royalties which Philips demanded were excessive and discriminatory in relation to the terms granted to others.

The German decision held that (although the defendant had not met these requirements), to rely on a defence against an injunction based on abuse of a dominant position, the defendant must:

• have unconditionally offered to enter into a licence on adequate terms, which had been rejected; and
• act like a true licensee despite the SEP owner’s rejection, which includes offering to objectively determine a reasonable licence fee, regularly rendering accounts and paying over these fees, or at least paying them into an escrow account.

European Commission decisions: Samsung and Motorola

A different approach, which appeared less sympathetic to SEP owners’ rights to an injunction, was subsequently taken by the European Commission in two decisions involving action taken by Motorola and Samsung in respect of Apple’s alleged infringement of their SEPs.  Both related to telecommunications standards set by ETSI and were subject to FRAND commitments.

The Commission held that an SEP proprietor subject to a FRAND undertaking that seeks an injunction against a willing licensee abuses a dominant position.  If the licensee had been willing to take a licence and be bound by a determination of FRAND royalties by the relevant court, no injunction should be granted.

In respect of the Motorola decision, the Commission found Motorola had also acted anti-competitively by attempting to require that Apple give up its rights to challenge the validity or infringement of Motorola’s SEPs.

Huawei Technologies Co. Ltd v ZTE Corp., ZTE Deutschland GmbH

As a result of the apparent difference in approach the Commission had taken from the German courts, the question was referred to the Court of Justice of the European Union (“CJEU”) resulting in their judgment of 16 July 2015 (Case C‑170/13).  The reference (from the Landgericht Düsseldorf) was again made in respect of a telecommunications standard set by ETSI, in the context of an SEP owned by Huawei Technologies Co. Ltd (“Huawei”).  Huawei had undertaken to grant licences on FRAND terms.

The CJEU noted the exercise of an exclusive right linked to an intellectual property right may, in certain circumstances, amount to abuse of a dominant position for the purposes of Article 102.  Such an abuse may be committed if a holder of an SEP has undertaken to grant licences on FRAND terms and then refuses to do so.

The patent owner has rights to the protection of intellectual property and to an effective judicial remedy pursuant to Articles 17(2) and 47 of the Charter of Fundamental Rights of the European Union, but its obligation to grant licences on FRAND terms justifies the imposition of additional specific requirements when seeking a remedy for infringement of an SEP.

The SEP proprietor does not abuse its dominant position in seeking an injunction prohibiting the infringement of its patent or seeking the recall of products for the manufacture of which that patent has been used, as long as the following requirements are met:

• Notification: The proprietor of the SEP must first alert the alleged infringer of the infringement complained about by designating that SEP and specifying the way in which it has been infringed;
• Written offer: After the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, it is for the proprietor of the SEP to present to that alleged infringer a specific, written offer for a licence on FRAND terms, in accordance with the undertaking given to the standardisation body, specifying, in particular, the amount of the royalty and the way in which that royalty is to be calculated.

If the alleged infringer does not accept the offer, to rely on an abuse of dominant position defence to prevent an injunction being granted, it must take the following steps:

• Diligently respond: The alleged infringer must respond promptly and in writing with a specific counter-offer that corresponds to FRAND terms;
• Provide security: The alleged infringer must provide appropriate security in respect of its use of the SEP, such as a bank guarantee or depositing funds, the calculation of which includes past acts.  It must also be able to render an account.

If no agreement is reached after the counter-offer is made, the parties “may, by common agreement” refer the matter of royalties to determination by an independent third party.

Furthermore, Article 102 did not prohibit an SEP proprietor from bringing an action for infringement against the alleged infringer of its patent and seeking the rendering of accounts in relation to past acts of use of that patent or an award of damages in respect of those acts of use.

WAB Comment

The CJEU’s decision in Huawei v ZTE strikes a difficult balance between competition and patent law concerns.  It provides a reasonably clear framework under which SEP owners may approach alleged infringers and ensures that they are not precluded from enforcing those rights by means of an injunction if the alleged infringer does not respond appropriately.

For those accused of infringement, the decision permits continued use without accepting a licence on terms they do not agree are fair, reasonable and non-discriminatory, provided they provide an appropriate counter-offer in reasonable time and provide the necessary security.  They do not, in doing so, have to admit infringement or the validity of the patent.

Whilst SEP owners may not be able to obtain interim orders to stop the use of patented technology by infringers who nonetheless follow the prescribed steps, they can be assured that bringing an action for infringement and seeking accounts and damages will not offend Article 102.  In the meantime, the requirement to provide security should provide reassurance that those damages will ultimately be paid.