opinion

Huawei v ZTE – has it given us the answers to FRAND licensing? Not quite…

MCI185_Gavel

Telecoms.com periodically invites expert third parties to share their views on the industry’s most pressing issues. In this piece James Tumbridge and Robert Peake of Pillsbury Law take a look at a recent FRAND ruling to see if it has clarified this murky area of law.

In the Huawei v ZTE case, the Court of Justice of the European Union (CJEU) looked at whether a patent holder of a standards essential patent (SEP), available on fair, reasonable and non-discriminatory terms (FRAND), can seek an injunction against a party that says they will take a licence, but the parties can’t agree the terms and so no licence is agreed.

The CJEU decision is understandable but the practical guidance is limited.  The central question the CJEU looked at was whether the seeking of an injunction by an SEP holder, having given commitments to license its patent on FRAND terms, may amount to an abuse of dominance contrary to article 102 of the Treaty on the Functioning of the European Union (TFEU).  On this important question of abuse of dominance, the CJEU confirmed that the exercise of an intellectual property right by a dominant undertaking may be abusive, but only in exceptional circumstances. The court then concluded that exceptional circumstances exist where (i) the right in question pertains to an indispensable patent such as a SEP, and (ii) the right holder has given commitments to licence the SEP on FRAND terms.

The court found that providing FRAND commitments gives rise to a ‘legitimate expectation’ on the part of SEP implementers/potential licensees, that a licence will be granted on FRAND terms, and that they would therefore not face threat of injunction.  Accordingly, the court found that the refusal by a SEP holder to licence on FRAND terms may ‘in principle’ amount to an abuse of a dominant position under EU competition law, and that such refusal may also be raised as a defence by an alleged infringer, to a claim by a SEP holder for injunctive relief.  The CJEU also noted that if the licensee makes a counter offer to the patent holder that is rejected, they should be providing appropriate security pending resolution of the licensing.  Failure to do so, perhaps weighing in favour of a court granting an injunction against a party that has not yet taken a licence, as it suggests they are not willing to pay.

The CJEU did provide a guide to obligations for both parties in the context of FRAND negotiations, where an SEP holder wishes to avoid abusing its dominant position, and where an implementer wishes to avoid having an injunction granted to restrain its use of an SEP:

  • (i) Before seeking an injunction, the SEP holder must alert the alleged infringer by identifying the patent in question and the manner in which it is alleged to be infringed;
  • (ii) The alleged infringer must express its willingness to take a FRAND licence;
  • (iii) The SEP holder must then make a FRAND offer in writing, including, at a minimum, the royalty rate and how it is calculated;
  • (iv) The alleged infringer must respond to the offer ‘diligently and in good faith’ and in line with ‘recognised commercial practices,’ signifying in particular that they not engage in delaying tactics.
  • (v) If the alleged infringer refuses an offer, they must ‘promptly’ submit a written counter offer;
  • (vi) If the alleged infringer is working the patent, it ‘should’ provide appropriate security, for example a bank guarantee, from the point at which its counter-offer is rejected;
  • (vii) Where the parties fail to agree a licence following a counter-offer, they may agree to request an independent third party to determine the level of royalty.

However, notwithstanding these obligations, the court confirmed that an alleged infringer remains free to challenge, in parallel with FRAND negotiations, the validity of the patents at issue and/or the propriety of their designation as essential to a standard and/or their actual use by the alleged infringer.

Therefore whilst the court’s guidance helps, important questions remain as to how to judge what is a FRAND offer that, if rejected, will entitle an SEP holder to an injunction.  On the issue of judging ‘fairness’ we have no real help at all.  Further, the court’s reliance on ‘recognised commercial practices’ provides little clarity for the parties, in particular with regard to what may constitute a ‘delaying tactic’ by an alleged infringer.

Another concern is the lack of certainty as to what constitutes an offer to licence on FRAND terms, or more specifically what is and is not FRAND compliant.  For example, how do we judge if an offer is non-discriminatory, without knowledge of the terms which the licensor may have agreed with others?  This also leaves room for uncertainty for a SEP holder; what is the position when an offer is made, on what are thought to be FRAND terms, but the offer is then ignored by the implementer, and it is later found by a court not to be FRAND compliant?  Whether an offer is FRAND compliant will centre on the question of the appropriateness of the royalty sought, yet, the court’s decision does not provide guidance in that respect.  On the seeking of injunctions, the Institute of Electrical and Electronics Engineers (IEEE) has adopted a controversial policy barring the holders of SEPs under an IEEE standard from doing so, until they have obtained a court determination on the appropriate royalty rate.  Such a position it became an industry approach, and if at odds with the Court guidance, only creates more uncertainty as to whether that position would even be enforced.

It is interesting to note that similar issues are being grappled with internationally.  In Japan, in order to address concerns that the approach to competition policy may unduly restrict the exercise of patent rights by SEP holders, the Japan Free Trade Commission have issued an amendment to their ‘Guidelines for the Use of Intellectual Property under the Antimonopoly Act.’  The Commission noted that submissions during a public consultation commented that the Guidelines could be interpreted to mean that the seeking of an injunction by an SEP holder would in principle violate competition law.  In consequence, the Guidelines have been revised to clarify – similar to the approach of the CJEU noted above – that pursuing an injunction on the basis of a SEP will only violate competition law in certain circumstances, and that such determination will be made on the facts of each case.

The Guidelines were also revised to clarify how a licensee’s willingness to take a licence on FRAND terms should be assessed.  Submissions to the Commission pointed to the CJEU decision in Huawei v ZTE as a model approach, and indeed the Commission’s revised Guidelines take inspiration from that decision.  The behaviour of both parties is to be taken into account when determining whether a licensee is ‘willing,’ and factors to be considered include:

  • Whether the potential licensee has been alerted to the alleged infringement;
  • Whether a licence offer has been made specifying the basis for a reasonable royalty rate; and
  • Whether a reasonable counter offer has been made promptly.

Additionally, the Guidelines confirm that a potential licensee challenging the validity, essentiality or possible infringement of an asserted SEP, does not mean the licensee is not ‘willing,’ provided it acts in ‘good faith in light of the normal business practices.’  The Commission’s Guidelines are not binding on the Japanese IP court, but the fact that the CJEU approach has been taken into account by the Commission suggests that a harmonious international approach to FRAND is possible.  Sadly though, Japan has not answered the parts still unclear in Europe.

In the US, we have seen a different approach to SEP licensing and the threat of injunctions against implementers/potential licensees.  There, the courts have adopted a rigid approach to royalty rates based on the ‘smallest saleable unit’ which implements the patent in question; the effect being to reduce the level of the appropriate royalty.  This approach was adopted in order to avoid having juries set excessive royalty rates, for example based on the value of end products which incorporate the patent; this is not a concern in Europe, where the appropriate rate will be determined by the court and not a jury.  Save that the idea of high royalties on component parts of say a mobile phone, can easily be seen as problematic, given the range of patents that could cover part of a mobile phone.  In such a case the making of any electronic device could become totally uneconomical.

Sadly the lessons from the CJEU take us only so far, and what we need is a clear system for resolving FRAND terms and royalty rates, to take away the uncertainty and risks.

 

James TumbridgeJames Tumbridge is a Partner and Head of the Intellectual Property and Litigation department in Pillsbury’s London office

 

 

 

Robert PeakeRobert Peake is an Associate with the Intellectual Property practice in Pillsbury’s London office

  • Huawei


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