European Court Of Justice Holds Standard-Essential Patent Owner Can Abuse Its Position By Seeking To Enjoin Infringement

By Seth D. Greenstein

The European Court of Justice ruled today that the owner of a standard-essential patent abuses its dominant position when it seeks an injunction in an action for patent infringement against an infringer that has expressed genuine willingness to license the patents on fair, reasonable, and nondiscriminatory (“FRAND”) terms.

In Case C-170/13, Huawei Technologies Co. Ltd. v. ZTE Corp. (July 16, 2015), the Court of Justice held that such an abuse of a dominant position violates Article 102 of the Treaty on the Functioning of the European Union.  This is the first definitive statement by the European Court on an issue that has received close attention in United States courts and from the U.S. Department of Justice (“DOJ”).  Its opinion provides some of the most definitive guidance on negotiations of FRAND licenses and lawful licensing conduct – and stakes out perhaps the most aggressive posture on the consequences of a patent owner’s failure to follow that guidance.

Background

Two Chinese telecommunications companies, Huawei Technologies Co. (“HTC”) and ZTE Corp., participated in a standards development organization (“SDO”) for advanced mobile phone technology (commonly called “LTE” or “4G”) known as the European Telecommunications Standards Institute (ETSI).  Participants in ETSI standards-development projects must agree to the ETSI Intellectual Property Rights Policy, which requires members to disclose ownership of patents that would necessarily be infringed by implementing a standard (“standard-essential patents” or “SEPs”), and to declare their intention to license the patents on FRAND terms.  Refusal to provide the declaration may result in removal of the covered invention from the standard, or suspension of technical work, until the matter is resolved.

Following a breakdown of patent license negotiations between HTC and ZTE, HTC filed suit for infringement, requesting damages, recall of infringing products, an accounting, and injunctive relief.  ZTE countered that the request for injunction constituted an abuse of HTC’s dominant position, since ZTE remained willing to accept a FRAND license.

The U.S. Approach to Injunctions for SEPs

In the last few years, the availability of injunctive relief for infringement of SEPs has received increasing attention in the United States.  Ruling on a patent dispute between Samsung Electronics and Apple Inc., the U.S. International Trade Commission issued an exclusion order, on June 4, 2013, against importation of Apple smartphones and tablet computers made abroad that were found to infringe certain SEPs that Samsung had committed to license on a FRAND basis before an SDO.  In a letter dated August 3, 2013, U.S. Trade Representative Ambassador Michael Froman (acting under the authority granted to the President under Section 227 of the Tariff Act) disapproved that determination and prevented the injunction from taking effect.

The Ambassador based his disapproval on the DOJ’s January 8, 2013, “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments.”  That policy articulated DOJ’s view that injunctive relief can be incompatible with FRAND licensing commitments made to an SDO, when the threat of an injunction enhances the licensor’s market power and pressures the licensee to accept onerous terms inconsistent with FRAND obligations. An injunction order for an SEP “may harm competition and consumers by degrading one of the tools SDOs employ to mitigate the threat of such opportunistic actions by the holders of F/RAND-encumbered patents that are essential to their standards.”  However, DOJ noted, SEP owners could be entitled to injunction when, for example, an infringer refuses to pay a FRAND royalty, or refuses to negotiate a FRAND license agreement, or is not subject to the jurisdiction of a court that could award damages.  And, a licensee is entitled to demonstrate that the proffered license did not comport with FRAND terms.  See Apple Inc. v. Motorola, Inc., 757 F.3d 1286 (Fed. Cir. 2014) (denying injunction to mobile phone SEP owner on similar grounds).

The Court of Justice Ruling

The European Court responded to questions referred to it from a German court as to whether abuse of a dominant position under TFEU Article 102 could be found by the request for compensatory and equitable relief for infringement of an SEP subject to FRAND commitments.  The Court recognized that patent owner’s right to enforce its intellectual property rights did not per se implicate Article 102; however, the irrevocable undertaking to grant FRAND licenses in return for inclusion in a standard could justify the imposition of specific requirements for and limits on enforcement.  Those requirements, with guideposts for both the SEP licensor and licensee, are as follows:

First, the SEP owner must give notice showing the manner of the alleged infringing use of a valid patent essential to the standard.  Because more than 4,700 patents have been asserted as essential to the ETSI LTE standards, the court agreed that an entity may not necessarily be aware of the patent.  Thus, the court held, an SEP owner that seeks injunctive relief without first giving notice to the alleged infringer will violate Article 102.

Second, once the alleged infringer confirms its willingness to take a license on FRAND terms, the SEP owner must present a written offer for a FRAND license, including the amount and basis for calculation of the requested royalty.

Third, the alleged infringer must respond diligently, in accordance with reasonable commercial practices and good faith, either by accepting the offer or by making a counter-offer to any clauses it deems unreasonable.  Even if the negotiations are unsuccessful, an infringer’s diligent response could preclude the entry of injunctive relief.  Conversely, an infringer that fails to make such a counter-offer would not be entitled to raise Article 102 as a defense.

Where the counter-offer has been rejected yet the alleged infringer continues to use the patent, the alleged infringer must provide appropriate security for the use, such as a bank guarantee or an escrow deposit, and be able to account for past and ongoing use.

The court suggested that the parties may agree to have an independent third party determine the amount of the royalty, by decision and without delay.

Finally, the court held that any agreement cannot preclude the licensee from challenging the validity or essentiality of the patent.  Such a challenge is in the public interest, and only a licensee would have sufficient economic interest to bring it.

Based on these same considerations, the Court of Justice held that seeking an order to recall infringing products from commerce, before engaging in the requisite notice and negotiating process, also could constitute an abuse under Article 102.  However, the court saw nothing in Article 102 to prohibit the SEP owner from seeking an accounting for damages and damages for infringement, inasmuch as neither would take competitors’ products compliant with the standard off the market.

The November 2014 preliminary ruling from the Advocate General attributed the dispute to the lack of clarity in defining what constitutes FRAND terms, and suggested that SDOs consider minimum license conditions, or “rules of good conduct” to further guide the parties.  While the Court of Justice opinion does not venture so far as to prescribe the yet-elusive contours of “FRAND” licensing, its three-step process should clarify how patent owners can insulate themselves against charges of abuse of market dominance, and how potential licensees can preserve their positions while continuing to market their products during the course of a good faith patent dispute.

– Edited by Gary J. Malone