It Takes Two to Tango: The German Federal Supreme Court Acknowledges that Infringer Hold-Out Is a Real Problem
Germany’s highest court has clearly and emphatically placed SEP implementers on notice that hold-out will not be tolerated, and that implementers must proactively share the burden and obligation to timely achieve a FRAND license. An infringer’s conduct during FRAND negotiations is decisively important, and an infringer’s failure to undertake its burden and satisfy its obligations will preclude it from claiming that the patentee acted anti-competitively, or abused a dominant market position. The decision also clarifies German jurisprudence on what may, and more importantly what does not, constitute discriminatory terms in a FRAND proposal. Specifically, non-discriminatory does not mean an SEP holder must provide equal terms to all licensees, which aligns German FRAND principles with SEP jurisprudence in the United Kingdom.
Sisvel acquired the asserted patent from Nokia in 2012, and declared that it was essential to ETSI’s GSM standards. Sisvel initiated licensing discussions with Haier and sought a global SEP license. After negotiations failed, Sisvel sued Haier in Dusseldorf. In the action, Sisvel sought an injunction, and the destruction and recall of infringing goods. The first instance court found that the asserted claims were infringed, and rejected Haier’s antitrust object as a FRAND defense because of Haier’s unacceptable delay in negotiating a license agreement. In 2017, the regional Court of Appeals reversed the decision of the lower court.
The Court of Appeal’s reversed because it determined that Sisvel had failed to make a FRAND offer to Haier, concluding that it was evident that Sisvel’s proposal was discriminatory, or unequal, compared to a license that Sisvel granted to a Chinese licensee. Concerning the lower court’s rejection of Haier’s antitrust object, the Appeals Court again disagreed, and found that Haier’s one-year delay in communicating a willingness to license, after receiving a first indication of infringement, was an acceptable delay. The matter was appealed to the German Federal Supreme Court, and was heard by the Cartel Senate (“Senate” or “Supreme Court”) in May.
The main issue addressed in the appeal to the Supreme Court was whether the regional appellate court erred in concluding that Sisvel had abused a dominant market position, under Article 102 of the Treaty of the Functioning of the European Union (‘TFEU”). The Supreme Court concluded that the appellate court had erred, and ruled that there was no abuse of a dominant market position, premised largely on Haier’s intentional delay and improper conduct during the licensing negotiations.
The Senate addressed how an infringer’s intentional hold out during FRAND negotiations has a material impact on the patentee’s economic power. Specifically, the Senate noted that when an implementer begins supplying infringing products to the market before receiving a license, the patentee’s bargaining positons is weakened; and that position is further weakened when an infringer delays, or “holds out,” in taking a license until the patent expires. Accordingly, an infringer’s conduct must be taken into account when assessing whether the patentee’s judicial assertion of an SEP is an abuse of a dominant market position.
Therefore, if an infringer wants to lodge as a FRAND defense that the assertion of standard essential patent claims is an abuse of a dominant market position, the infringer must first demonstrate that it has done two things: that it has made an unconditional offer to conclude a license; and, the unconditional offer proposes terms and conditions that would be unreasonable for the SEP holder to refuse. The Senate noted that an SEP owner can abuse its dominant market position by failing to undertake sufficient efforts to enable the implementer to make the required unconditional offer. The takeaway, however, is clear: both parties, patentee and infringer, actively must share the burden and obligation of achieving a license. The SEP owner has the primary burden to explain and justify its FRAND licensing terms, including an objective reason for any perceived discriminatory terms. The implementer seeking the license, however, has the burden to demonstrate that the patentee’s offer constitutes an impermissible anticompetitive obstruction, and is thus discriminatory.
The ultimate impact of the Supreme Court’s ruling is left to be seen. One can imagine that lots of room for mischief may still exist, even if an efficient infringer follows the court’s guidance. For example, the requirement that an infringer’s unconditional counter-proposal must include conditions that would be unreasonable for the patentee to refuse is vague enough to permit significant disagreement; not to mention what it takes to make an offer “unconditional.” The ruling is, nonetheless, an important jurisprudential step forward, and provides the SEP community with several key takeaways.
First, and most importantly, it is a welcome paradigm-shift for Germany’s highest court to acknowledge hold out as a serious problem in FRAND negotiations, and focus on the impact of the infringer’s conduct and role it plays in the failure to reach a license agreement. Second, the Senate’s clear articulation that non-discriminatory does not mean equal terms for all users is very useful, as is the clarification that an anti-competition analysis must focus on whether a competitive disadvantage exists in the relevant market amongst equivalent licensing transactions. This guidance should have a profound impact on licensing discussions occurring as a result of the roll-out of 5G technology, where markets outside of handsets and mobile stations, e.g., cars and IoT products, are required to license standard essential patents directed at connectivity. Third, the ruling provides needed detail as to what quantum and quality of information a patentee must disclose to meet its initial burden to communicate with an alleged infringer. Greater transparency is often offered as a solution for improving the dynamics of FRAND negotiations, but in reality can serve the ends of efficient infringement and hold out in the form of serial requests for varied and different types of information. Third, concerning damages, an infringer holding out from taking a license faces the consequence of having to pay non-FRAND damages for the period before it clearly and unequivocally committed to taking a FRAND license. Fourth, and last, the SEP community has eagerly wanted clear and well-aligned legal guidance from the key FRAND jurisdictions. The ruling strives to demonstrate harmony between FRAND law and principles in Germany and the UK. Hopefully, American courts will find this jurisprudence compelling and instructive.