Source: http://europeanlawblog.eu/2015/08/19/are-remedies-for-breaching-standard-essential-patents-prohibited-by-article-102-tfeu/
Timestamp: 2017-03-23 14:13:17
Document Index: 586788862

Matched Legal Cases: ['CJEU ', 'CJEU ', 'CJEU ', 'CJEU ', 'Art 47', 'CJEU ', 'CJEU ', 'CJEU ', 'CJEU ', 'CJEU ', 'CJEU ', 'CJEU ']

Are Remedies for Breaching Standard Essential Patents Prohibited by Article 102 TFEU? | About
Are Remedies for Breaching Standard Essential Patents Prohibited by Article 102 TFEU?
By Sam Abboud
In Case C-170/13 Huawei Technologies Co. Ltd v ZTE Corp & ZTE Deutschland GmbH, (Judgment of the 5th Chamber, CJEU, 16 July 2015)the CJEU was asked to rule for the first time on whether seeking an injunction and other associated remedies by the owner of a Standard Essential Patent (SEP) against a company in breach of the patent (but one willing to become a licensee) can amount to an abuse of a dominant position in breach of EU competition law (Article 102 TFEU). It concluded that an injunction or an action to recall products can amount to an abuse of dominance in certain circumstances.
In this post, I first provide a primer on Standards and Standard Essential Patents (‘SEPs’) before summarizing the Court’s reasoning and setting out some initial observations on the judgment’s significance.
Standards & Standard Essential Patents (SEPs) – A Primer
A standard is a technology or set of technologies relating to a particular function or use which is chosen by companies (usually through an industry associations) to the exclusion of other technologies performing the same function. Examples include: agreeing to use a GSM standard for mobile phones in the EU or creating a charger that can be used for all mobile phones (the latter is due in 2017). The common denominator of these and other standards is that having a number of versions of the same product (mobile phone signals and chargers in my examples) does not make sense once the market has matured (the ‘duplication problem’).
Therefore, competition law usually considers these arrangements to be pro-competitive when specific criteria are met, in particular where such standardization is a genuine attempt to address the duplication problem and where the standard is inclusive of all the industry players who wish to become part of the standard.
These arrangements are usually carried out by a Standard Setting Organization (SSO). Each industry may have one or more SSO. Holders of patents used in these standards have to disclose those patents to the SSO and undertake to license the patent on what is known as FRAND terms (fair, reasonable and non-discriminatory) to all the companies creating a standard.
There is a distinction between patents that are essential for the standard, Standard Essential Patents (SEPs), and those that can be by-passed without undermining the technology (non-essential patents). So, for instance, the slide and unlock mechanism in a smartphone is patented but is not essential for the operation of a smartphone standard as other mechanisms for unlocking the phone can and have been devised.
However, this is not to imply that SEPs are rare. To provide some kind of perspective, the telecoms industry has two main SSOs. One of them, ETSI, has 155,474 SEPs declared to it (see the ETSI database for details), which shows that this is not a niche issue. Indeed, the ‘Long Term Evolution Standard’ (LTE) as the standard in question in this case is composed of more than 4700 SEPs (judgment, paragraph 40).
The facts of the case are fairly straightforward. Huawei Technologies (“H.Tech”) had notified ETSI of a patent granted in Germany under the European Patent Convention in respect of a “method and apparatus of establishing a synchronization signal in a communication system.” The exact use of this patent is not relevant and was not considered by the either the Court or the Advocate General.
As alluded to above, H.Tech’s patent was a SEP for the LTE standard. Using the ‘teachings’ of the patent (i.e. the details of the patent, the latter being of course a public document), the defendants, ZTE Corp and ZTE Deutschland GmbH, produced products and software using the standard without a license to do so. H.Tech and the defendants had taken part in the ETSI process by which the LTE standard had been created.
For about a 6-month period the parties negotiated to find an agreement on a license of the SEP at FRAND terms. During the whole period of time, the defendants already used the SEP without the consent of the SEP owner, H.Tech. At paragraph 35 of the judgment, the CJEU notes that it was common ground that both parties were willing to negotiate. However, they failed to agree on terms and as a consequences a case was brought before the German courts.
Questions Asked by the German Court
H.Tech brought an action in the German Courts for (i) an injunction on the continued breach of the patent, (ii) the return of the profits already made by the defendants, (iii) a recall of the products already sold by the defendants and (iv) compensation for the damages suffered.
The German court asked the CJEU whether the SEP owner who had undertaken to a SSO to license its patents on FRAND terms, can use these remedies (above) against a defendant willing to negotiate a license fee without abusing its position of dominance in breach of Article 102.
Judgment of the CJEU: the Court on Seeking an injunction and a product recall
(in particular paragraphs 40 et seq. see also paragraphs 47 et seq. of the opinion of the Advocate General)
The Court first held that the default position was that IPRs grant exclusive rights and that the exercise of those rights could not be undermined by prohibiting recourse to well-established remedies. But it then distinguished this situation from the scenario involving a SEP on two grounds.
First, according to the CJEU the competitors were locked in to the standard and thus had to have access to the SEP that is by definition indispensable for producing the relevant technology.
Secondly, the SEP status had been granted by the SSO on condition that the SEP is licensed on FRAND terms.
It followed according to the Court that there was a legitimate expectation on the part of a willing licensee not to face an injunction or an action for a product recall provided certain conditions were met. Before setting out these conditions the court acknowledged that it was balancing two competing interests at this stage.
First, Directive 2004/48 on the enforcement of intellectual property rights granted IPR owners the right to pursue effective remedies including injunctions and product recalls. This was buttressed, by Art 47 of the Charter of Fundamental Rights which guarantees effective judicial protection. The Court then concluded, however, that these concerns were trumped by the irrevocable FRAND undertaking given by the SEP owner.
The Court envisaged that the process of negotiation should take place as follows before an injunction or a product recall could be sought:
the SEP owner must alert the other party that it is in breach of the patent (both the AG and Court noted that given the plethora of patents in one standard, it may not always be possible for the would-be licensee to know that they are breaching a patent);
an offer should be made in writing from the SEP owner to be answered promptly by the company in breach of the patent;
when answering, the company in breach would undertake to give security to the SEP owner in respect of past breaches of the patent, in line with what the CJEU termed normal “commercial practice”;
a reasonable period of negotiation should follow;
where no agreement is possible a third party determined by mutual agreement will determine the terms of the license;
nothing from the above should prevent the would-be licensee from challenging the validity of the SEP.
If the SEP owner did not abide by the above steps, it could not seek an injunction or product recall without breaching Article 102 according to the Court. Conversely, the implication seems to be (but the CJEU is not explicit on the point) that if the would-be licensee does not abide by its obligations, the SEP owner is free to pursue the relevant remedies.
The Court on seeking damages or an ‘account of profits’
Again, these remedies are standard remedies for the breach of IPRs. Damages are self-explanatory while an account for profits is an action by the patent holder to recover profits made by the unauthorized use of the patent.
Here, however, the CJEU stated that while injunctions and products recalls prevent the emergence of standard, the assertion of damages and account of profits did not prevent a company producing goods in accordance with the standard. The use of damages and an account of profits, therefore, could not amount to an abuse of dominance.
The Court’s reasoning is not extensive; the operative part of the judgment is only about 4 pages long. Implicit in its judgment is the classic effet utile reasoning that a FRAND undertaking would be meaningless if the use of an injunction or product recall would effectively prevent a willing licensee from using the standard.
It is interesting to reflect upon what type of harm – or “abuse”, to use the language of Article 102 – the CJEU believes is at play here. Article 102 provides a non-exhaustive list of abuses. The use of remedies would amount to an abuse usually categorized as a ‘refusal to supply’. Abuses can either be exploitative or exclusionary. The effet utile argument above points to the CJEU viewing the use of remedies as an exclusionary harm.
Similarly, the court’s differential treatment of injunctions/product recalls on the one hand and damages/account of profits on the other, also points towards exclusionary harm.
Nonetheless, it is also possible to see injunctions/product recalls as exploitative.
An alternative way to frame the issue would have been to say that use of these remedies means that the only way a willing licensee would be able to use the standard is if they pay the non-FRAND price envisaged by the SEP owner. Perhaps understandably the CJEU avoided this approach as it would then have had to rule on what constitutes a fair price.
The judgment provides welcome clarifications on a potentially important phenomenon: the use of remedies to protect SEPs. Its reasoning while sparse is compelling. In April 2014 the Commission had issued two decisions on the issue, one against Motorola and another one concerning Samsung (the latter was a commitments decision). The CJEU’s approach is very similar to that of the Commission. One issue that the judgment could perhaps have been clearer about are the time frames envisaged for a negotiation; the matter has thus been left to the national courts. In the Samsung decision the Commission gave the parties 12 months to negotiate before expert third parties were brought in.
The Court’s judgment was perhaps inevitable if one is to consider the Commission’s Rambus decision. In that case, the Commission held that in the context of a standard, the deliberate failure to declare a SEP amounted to a ‘patent ambush’ and hence an abuse of dominance. It is no big step from there to then conceive of injunctions/product recalls as abusive, considering that they have exactly the same effect as a patent ambush: the standard’s use is limited to certain industry players with SEPs. The Court’s decision constitutes, thus, not a massive legal innovation, but a welcome clarification and confirmation of the law.
However, the CJEU may be unable to avoid ruling in future on what constitutes a fair price in a FRAND licensing agreement. As alluded to above, the Court may have temporarily by-passed the issue by adopting an exclusionary theory of harm to explain why injunctions and product recalls can constitute abuses. But by the CJEU’s own definition a third party is to be appointed to resolve a dispute as to what constitutes a fair price for licensing of a SEP. That this process is properly adhered to is of cardinal importance in the future application of the principles of FRAND licensing. As the Commission noted in its Google/Motorola merger clearance decision (paragraph 141):
“[…] the problem of a SEP holder not making a ‘true’ FRAND offer can be prevented if a potential licensee has the opportunity to have the terms of the cash-only option license assessed by an independent third party (whether a court or arbitrator) without the threat of immediately being excluded from the market. […] Without such a possibility, FRAND negotiations may be distorted to the detriment of potential licensees and ultimately consumers who might be faced with less choice and innovation”
In the future we may see preliminary references from national courts or tribunals raising questions to clarify the detail for calculating fair pricing for SEP licenses.
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Posted in Competition law, Intellectual Property	Tagged with Abuse of a dominant position, article 102 TFEU, Case C-170/13 Huawei Technologies Co., competition law, Injunctions, intellectual property, Preliminary Ruling, Standard Essential Patents (SEPs)	Leave a Reply Cancel reply
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