Willing to License? Guidance from Germany on the interaction between SEP Licensing Negotiations and EU Competition Law in Sisvel v. Haier
In Sisvel v. Haier[1], the German Federal Court of Justice (“FCJ”) considered the question under which circumstances an owner of standard essential patents (“SEPs”) could seek an injunction without infringing EU competition law, more specifically without committing an abuse of a dominant position within the meaning of Article 102 TFEU, the European equivalent of Section 2 of the Sherman Act. The judgment is of interest to SEP owners and users for at least three reasons. First, it provides some guidance on how to assess whether a SEP owner holds a dominant position. The FCJ takes the view, for example, that the relative bargaining power between the parties is irrelevant to that effect. Second, the judgment draws a few bright lines for SEP owners and SEP users to follow during the course of SEP licensing negotiations. These guidelines are helpful as they explain how to apply in practice the general framework set out by the EU Court of Justice in Huawei v. ZTE; they are therefore relevant to determine when a dominant SEP owner’s conduct is abusive and, accordingly, when a SEP user may rely on such abuse as a defense. Third, the FCJ adopts a rather flexible approach in relation to price discrimination (even though this point was not developed in detail as it was not decisive in the case at hand). The judgment suggests that different licensing terms offered to licensees are not necessarily abusive, in particular where such differences can be explained by objective justifications.
The FCJ’s judgment also leaves open some significant questions. SEP owners may question the extent of their duty to explain how licensing offers are FRAND, and SEP users will need to consider how to acquire the information needed to assess whether licensing offers are FRAND while still communicating an ongoing willingness to take a FRAND license. It also remains uncertain whether a SEP user can rely on an abuse of dominance defense without itself making a FRAND counteroffer, an issue that lower German courts have taken a slightly different opinion on.
All in all, the FCJ judgment in Sisvel v. Haier is a highly authoritative post-Huawei v. ZTE judgment of the highest German civil court that addresses a number of thorny questions on the interface of IP and antitrust law. While it leaves a number of questions unanswered, the judgment merits close review by both SEP users and SEP owners.
History of the Negotiations and Proceedings
In December 2012, Sisvel sent Haier a notice of infringement letter and offer to license its SEP portfolio on FRAND terms.[2] Haier responded over a year later (but prior to litigation), expressing a “hope to have a formal negotiation.”[3] Sisvel filed suit and the Regional Court granted Sisvel’s request for a cease and desist order, for information and accounting, for destruction and recall, and for damages.[4]
On appeal, however, the Higher Regional Court held that Sisvel had abused its dominant market position.[5] Haier had sent further communications to Sisvel after the Regional Court’s decision, with one letter stating Haier would take a license if German courts found the asserted patents valid and infringed,[6] and another noting that Haier was maintaining its counteroffer and requesting that Sisvel specify how other patents in its portfolio were infringed.[7] The Higher Regional Court found that, although Sisvel had complied with pre-suit notice, it had not submitted a FRAND offer despite Haier’s declaration of willingness to license on FRAND terms.[8] It found Sisvel’s offer to Haier discriminatory compared to a prior offer to another licensee offering a substantial discount.[9] Sisvel’s application for an injunction, absent a FRAND offer, constituted an abuse of a dominant market position and limited the SEP owner’s available remedies. Accordingly, the Higher Regional Court denied destruction and recall and limited accounting and information because Sisvel was bound to a compulsory license on FRAND terms.[10]
Sisvel’s appeal to the FCJ challenged the finding that it had committed an abuse of dominance. The FCJ reversed the Higher Regional Court’s finding of abuse and reinstated the Regional Court’s judgment, in the process defining the parties’ duties in licensing negotiations and explaining how those duties interact with EU competition law.[11]
SEP Holders and Abuse of a Dominant Position
To determine whether an abuse of a dominant position barred Sisvel from seeking injunctive relief, the FCJ evaluated whether Sisvel (1) had a dominant market position and (2) abused that position. First, addressing when a SEP holder has a dominant market position, the FCJ clarified that a dominant position does not follow from the mere fact that a SEP holder can exclude a SEP user from practicing the SEP.[12] It stated that the decisive factor in determining the existence of a dominant position is the economic power that a SEP confers on the SEP owner in relation to the entire market, not the relative bargaining power of the two parties before the court.[13] The definition of the affected market is central to the dominant position analysis.[14] In particular, a technology or industry standard, by creating a set of rules for the product market, prevents SEP users from substituting in non-standard products and creates an upstream market in the granting of intellectual property (IP) rights.[15] That is, the standard grants access to the product market, and the upstream market grants access to the standard.
With the relevant market defined as the upstream market for IP rights, the FCJ assessed what constitutes a dominant position in that market. It considered that the SEP owner’s legal right to require, if necessary by way of an injunction, third parties not to place products that practice the patent on the market, confers on it a structurally superior position of power.[16] It added that this situation gives rise to a barrier to entry, since these legal obstacles make it unreasonable for any company to operate on the market without a prior license.[17] The Higher Regional Court had nevertheless observed that exceptional reasons may exclude the dominance of a SEP owner although it had found that, in the case at hand, there was no evidence to that effect.[18] The FCJ did not call this reasoning into question.[19] The FCJ indicated that the SEP owner holds a dominant position only so long as it can prevent products practicing the patent from entering the market.[20] This coincides with the patent term, such that patent expiration terminates the SEP owner’s dominant position.[21] Sisvel had filed suit before patent expiration, and the FCJ confirmed the finding of the Higher Regional Court that Sisvel’s market position in Germany constituted a dominant position of a substantial part of the market.[22]
As to whether Sisvel abused its dominant position, the FCJ explained that the existence of an abuse depends on the remedy sought by the SEP owner. First, a SEP owner does not normally abuse its dominant position when it seeks damages because a claim for damages does not bar products from entering the market.[23] Second, a SEP owner’s FRAND commitment does not categorically prohibit it from seeking injunctive relief because the FRAND commitment presupposes that a SEP user will take a license on FRAND terms, and a SEP owner has no legal means to force an unwilling party to take a license.[24] Whether a SEP owner abuses its dominant market position by seeking injunctive relief thus depends on how parties’ interactions in licensing negotiations evidence (1) the SEP owner’s commitment to offer a FRAND license, and (2) the SEP user’s willingness to take a FRAND license.[25]
The Parties’ Duties in Negotiation
To determine whether a SEP owner abuses its dominant market position by seeking injunctive relief, the FCJ set out several duties that both SEP owners and users should consider during licensing negotiations. The SEP owner must take certain actions before it can pursue injunctive relief without abusing its dominant market position, but the SEP user may absolve a SEP owner of failing to meet these duties, and open the path to injunctive relief, by failing to express willingness to take a license on FRAND terms.
The SEP Owner’s Duties
The FCJ required SEP owners to (1) give SEP users notice of infringement prior to seeking injunctive relief and—if the SEP user declares a willingness to take a FRAND license—to (2) abstain from seeking injunctive relief and (3) explain why its license conditions are FRAND.
The FCJ required SEP owners to give notice of infringement to fulfill their FRAND commitment, which would ring hollow if SEP owners sought injunctive relief prior to licensing negotiations. But the FCJ may also permit a SEP owner to omit notice if a SEP user already knows it infringes the SEP.[26] Sufficient notice must designate the SEPs infringed and indicate the specific act of infringement.[27] The FCJ did not require detailed technical or legal explanations, but did require designation of the type of infringing act and the challenged embodiments.[28] According to the FCJ, claim charts are generally sufficient but not necessary to indicate the infringing act.[29]
If the SEP user responds to the notice of infringement with a declaration of willingness to license on FRAND terms, the SEP owner must not seek injunctive relief.[30] As the FCJ noted earlier in its judgment, the only grounds for a SEP owner to seek an injunction, given its commitment to FRAND licensing, is a SEP user’s refusal to license.[31] The SEP user’s willingness to take a FRAND license forecloses injunctive relief and holds the SEP owner to its FRAND commitment.
A SEP owner must also explain why its license conditions are FRAND[32] and how the FRAND rate was calculated, but only after the SEP user expresses willingness to take a license.[33] The SEP owner’s explanation of license conditions is particularly important when the SEP owner seeks to license beyond the scope of the alleged infringement (e.g., in the case of a portfolio license).[34] The FCJ explained that whether license conditions are FRAND is a fact-sensitive question, but it put a few boundaries in place. SEP portfolio licenses and worldwide licenses could be FRAND in principle, but SEP owners cannot disadvantage users seeking to develop products in a limited geographical area or require licensing SEPs and non-SEPs together.[35] Regarding discrimination, the FCJ indicated that a SEP owner is, in principle, not required to grant equal licensing terms to all licensees and confirmed that discrimination is only prohibited as an abuse of dominance where the conditions of Article 102(c) TFEU are met, which require, in particular, a distortion of competition.[36] The FCJ held that, by considering that the explanation provided by Sisvel for the differing licensing terms could not constitute an objective justification, the Higher Regional Court had erred in law; these reasons involved the fact that, in its submission, Sisvel was forced to grant preferential conditions to the third-party company due to intimidation or pressure from a foreign authority.[37]
Given the fact-intensive nature of the inquiry, it remains unclear from Sisvel v. Haier just what information a SEP owner must provide to fulfill this duty to explain. The FCJ indicates that the SEP owner’s duty to explain, the exact timeline, and the extent of the explanation depend on the response from the SEP user.[38] The FCJ recognizes that SEP negotiations contain an information asymmetry: the SEP owner is better positioned to identify and formulate FRAND terms, and the SEP user may need help to determine whether a licensing offer complies with FRAND obligations.[39] But the FCJ’s description of the SEP owner’s duty to explain paints in broad strokes; the FCJ focuses more on the SEP user’s willingness to license due to its absence in the case at hand.[40] For example, the FCJ emphasizes that SEP-user participation in negotiations is needed, in the absence of objective measures, to provide comparable licenses from which later parties can determine FRAND license conditions.[41] But the FCJ does not expressly state that a SEP owner must share comparable licenses to explain why its license conditions are FRAND. SEP litigants in future cases will likely seek to further define the scope of the SEP user’s duty to explain.
The SEP User’s Duties
For EU competition law to protect a SEP user from injunctive relief, the SEP user must express unconditional willingness to license on FRAND terms, that is, “on whatever terms are in fact FRAND.”[42] A long silence may evidence unwillingness to license.[43] A hope of negotiation does not express unconditional willingness to license.[44] A willingness to license contingent on judicial determination that the asserted patents are valid and infringed does not express unconditional willingness to license.[45] Also, a counteroffer made after the asserted SEP expires, even if expressing willingness to license on FRAND terms, may not protect the SEP user from retroactive injunctive relief (e.g., destruction or recall).[46] And most interestingly, where a SEP user insists on maintaining its counteroffer unless the SEP owner gives more information, this may indicate that the SEP user engages in delaying tactics and does not express an unconditional willingness to enter into a FRAND license.[47] The Court refrained from deciding whether a belated declaration of willingness to license, in the form of a counteroffer, rekindles the patentee’s obligation to make a FRAND license offer.[48] It did reject, however, such an effect for counteroffers made after the expiration of the patent in suit.[49] The facts of Sisvel v. Haier also offer some guidance on counteroffers. Haier refused to modify its initial counteroffer, despite the near expiration of the asserted patent, unless Sisvel provided claim charts for all patents in its portfolio.[50] The FCJ interpreted this position as objective evidence of delay tactics.[51] The extent of the SEP user’s duty to remain willing to license throughout negotiations, just like the extent of the SEP owner’s duty to explain why its license terms are FRAND, remains unclear.
In addition to expressing willingness to license on FRAND terms, SEP users should consider what negotiating posture evidences willingness to license. SEP users that actively participate in negotiations, avoid any appearance of delay, and make FRAND counteroffers have a better chance of avoiding injunctive relief and holding SEP owners to explaining why license conditions are FRAND.[52] SEP users should object in a timely manner if the information provided by the SEP owner is insufficient to understand the infringement allegation or whether license conditions are FRAND.[53] And SEP users may take note whether any near-term patent expiration may reflect unfavorably on slow responses.[54]
Conclusion
In Sisvel v. Haier, the FCJ applied the general EU competition law principles as set out in the EU Court of Justice’s Huawei v. ZTE judgment to a concrete set of SEP licensing negotiations. The FCJ staked out a few clear positions, particularly regarding which license conditions comply with FRAND and which SEP user actions fail to express an unconditional willingness to license. The FCJ also indicated that the SEP owner’s duties—and the ultimate conclusion as to whether the SEP owner abused a dominant market position—is contingent on the SEP user’s willingness to take a FRAND license. Courts will still need to further define the scope of the SEP owner’s duty to explain license terms and the scope of SEP user actions that reflect an unconditional willingness to take a FRAND license. Another question that was not addressed is whether, when the SEP owner makes an offer that is not FRAND, a SEP user nevertheless must itself make a FRAND counteroffer before raising an abuse of dominance defense.
[1] Sisvel Int’l S.A., v. Haier Deutschland GmbH, KZR 36/17 (BGH May 5, 2020).
[2] Id. at para. 92.
[3] Id. at para. 94.
[4] Sisvel v. Haier, KZR 36/17, at para. 5.
[5] Id. at para. 6–7, 47–51.
[6] Id.
[7] Id. at para. 98.
[8] Id. at para. 48.
[9] Id. at para. 101–102.
[10] Id. at para. 47.
[11] Id. at para. 8.
[12] Sisvel v. Haier, KZR 36/17, at para. 56.
[13] Id. at paras. 62–64.
[14] Id. at para. 57.
[15] Id. at para. 58–60.
[16] Id. at para. 63.
[17] Id.
[18] Id. at para. 61.
[19] Id.
[20] Id. at para. 65.
[21] Id.
[22] Sisvel v. Haier, KZR 36/17, at para. 66.
[23] Id. at para. 111; Huawei v. ZTE, C-170/13, at para. 74 (July 16, 2015).
[24] Sisvel v. Haier, KZR 36/17, at para. 69–70.
[25] The FCJ included recall and destruction of existing products in injunctive remedies that can be abusive. Id. at para. 68.
[26] Id. at para. 73–74.
[27] Sisvel v. Haier, KZR 36/17, at para. 85–87.
[28] Id. at para. 85.
[29] Id.
[30] Id. at para. 75.
[31] Id. at para. 69–70.
[32] Sisvel v. Haier, KZR 36/17, at para. 77.
[33] Id. at para. 99.
[34] Id. at para. 77.
[35] Id. at para. 78.
[36] Id. at para. 81.
[37] Id. at paras. 101–102.
[38] Sisvel v. Haier, KZR 36/17, at para. 79. The FCJ cites to the SEP user’s duty to negotiate diligently without delay tactics. Huawei v. ZTE, C-170/13, at para. 65 (July 16, 2015).
[39] Id. at para. 75. The FCJ notes that the parties’ duties in negotiation mirror their burdens in litigation, and accordingly places the burden of showing discrimination on the SEP user. Id. at para. 76. The FCJ notes that the SEP owner’s duty to explain why licensing conditions are FRAND should enable the SEP user to determine whether that burden has been met. Id.
[40] See id. at para. 77–81.
[41] Id. at para. 81.
[42] Sisvel v. Haier, KZR 36/17, at para. 83, 99. Unwired Planet Int’l Ltd v. Huawei Tech. Co. Ltd, [2017] EWHC 711 (Pat), at para. 708 (Apr. 5, 2017).
[43] Id. at para. 92. The FCJ left open, however, whether an expression of willingness after a long silence triggered the SEP owner’s duty to make a FRAND offer. Id. at para. 93–94. The FCJ also left open whether an expression of willingness to license after litigation commenced could convert a SEP owner’s continued application for injunctive relief into an abuse of a dominant market position. Id. at para. 97.
[44] Id. at para. 95.
[45] Id. at para. 96. Note that the SEP user can express willingness to license and nonetheless reserve the right to challenge validity, essentiality, and infringement of asserted patents. Huawei v. ZTE, C-170/13, at para. 69 (July 16, 2015). A SEP user in licensing negotiations should try to reserve these rights without linking them to a willingness to license.
[46] Id. at para. 100.
[47] Sisvel v. Haier, KZR 36/17, at para. 98.
[48] Id. at para. 100.
[49] Id.
[50] Id. at para. 98.
[51] Id.
[52] Sisvel v. Haier, KZR 36/17, at para. 71, 79, 99.
[53] Id. at para. 76.
[54] Id. at para. 81–82.
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