December 15, 2020 - European Union, Intellectual Property

Huawei v. ZTE revisited – German automotive patent wars to reshape SEP litigation in Europe

I. Introduction

On November 26, the Dusseldorf Regional Court handed down a long awaited decision in the so-called automotive patent wars (case ID 4c O 17/19). The court referred heatedly debated questions in connection with the enforcement of standard essential patents (“SEPs”) to the Court of Justice of the European Union (“CJEU”). The detailed set of questions addresses two main issues:

 1. Whether the entity selling a device (here a car) that includes a component that implements the technology protected  by the SEP would be in compliance with the FRAND procedure set out by the CJEU in Huawei v. ZTE if it were  to refer  the SEP holder to the upstream component supplier rather than making a fair reasonable and non- discriminatory  (“FRAND”) offer itself; and

 2. Certain clarifications on the Huawai v. ZTE requirements regarding the timing of the steps in what is often referred to as the “FRAND dance.”

Although the outcome of an order for reference cannot be foretold, the CJEU decision is expected to be the most influential decision on FRAND licensing since the 2015 Huawei v. ZTE ruling (case ID C-170/13). It may create a more predictable framework of licensing negotiations for both SEP holders and implementers. In addition, it may encourage national courts to finally take a clear stance on the FRAND compliance of an offer in certain cases.

In this article we will give a short overview of the background of the current SEP battles and an outlook of the practical consequences of the CJEU ruling.

 II. Uncertainties following Huawei v. ZTE

In Huawei v. ZTE, the CJEU ruled that the SEP holder must first alert a party of its alleged infringement before bringing an action. If the alleged infringer expresses a willingness to take a license, the SEP holder must provide a written licensing offer on FRAND terms. Only if the alleged infringer continues to use the SEPs in question and fails to respond diligently to the SEP holder’s offer may the SEP holder seek an injunction. A diligent response may include a counter-offer on FRAND terms.

This landmark decision did not curb litigation on FRAND considerably. For one thing, it left courts with significant leeway to interpret each party’s obligations, particularly as to timing. For example, it is unclear how swiftly the offeree must reply before it is deemed unwilling. As a result, SEP cases are often tactically protracted. Furthermore, the CJEU decision did not cover all aspects of SEP enforcement. Important questions such as the actual terms fulfilling the FRAND requirement remained open. Hence, it is difficult for the parties to assess what license terms and royalties are substantively FRAND.

The European Commission (“EC”) tried to provide guidance on those issues with its 2017 communication “Setting out the EU approach to Standard Essential Patents” (available here). Because its initial guidance left open many issues, the EC recently announced that it will encourage industry-led initiatives and possibly enact reforms as part of its action plan on IP (available here).

III. Automotive Wars

Meanwhile, the connected cars battle in Germany took off. In the advent of 5G and the IoT, the car industry, among many others, increasingly implemented mobile communication technology. Thus, their products moved gradually from the area of classic automotive engineering toward the area of mobile communications. This pursuit for connectivity of automated and digitalized products naturally calls for interoperable technical solutions based on standards. This potentially gives SEP holders a whole new field to reap.

Members of the Avanci patent pool, such as Nokia and Conversant, did not want to play by the long-established rules of the car industry and grant licenses at the component level. This is because final product licensing provides a much more attractive royalty base than component-level licensing, as the market value of the smallest salable patent practicing unit is far lower than one of the end products. Accordingly, they launched a wider litigation campaign against car makers, including Daimler, and Volkswagen and other OEMs.

Nokia brought 10 proceedings against Daimler before German courts in Munich, Mannheim, and Dusseldorf. In turn, Daimler and four of its suppliers launched antitrust complaints against Nokia before the Commission’s Directorate-General for Competition, claiming that Nokia abused its dominant market position by not granting a license to the suppliers. One of the suppliers, Huawei, followed suit and brought an action before the Dusseldorf Regional Court, seeking to obligate Nokia to grant a license.

The order for reference by the Dusseldorf court is the latest striking, yet not unexpected, event in the connected cars proceedings. In the present case, Nokia has offered a license only to Daimler and not to Daimler’s suppliers. Daimler, on the other hand, always wanted its suppliers to take a license and the suppliers have emphasized that they are, in fact, willing to do so. 

Positions/ Arguments

Nokia claims it is more efficient to only deal with OEMs like Daimler. They also argue that exhaustion dynamics would have unacceptable practical consequences. On the other side, OEMs argue that injunctions against them are not proportionate in light of Art. 3 of the Enforcement Directive (2004/48/EC). Because suppliers implement the SEP first, OEMs contend that suppliers should be first in line to receive a license. OEMs also invoke efficiency arguments, noting that there are fewer suppliers than OEMs.

Controversy on Willingness

For a long time, the SEP holder’s offer appeared to be the pivotal event. At least before the Dusseldorf courts—the forum that hears the most SEP cases in Germany—it was relatively safe to assume that the SEP holder’s offer signaled the start of the FRAND dance only if the offer was in fact FRAND. In other words, the implementer’s steps under Huawei v. ZTE did not matter, so long as the implementer did not reject any attempt to engage in negotiations and thus render it “unwilling.”

On May 5, 2020, the German Federal Court of Justice (“GFCJ”) specified that the implementer must clearly and unequivocally declare its willingness to conclude a license agreement with the SEP holder on reasonable and non-discriminatory terms. The GFCJ further required that the implementer subsequently participate in the license agreement negotiations in a deliberate manner (case ID KZR 36/17). For support, the GFCJ referred to the High Court of England and Wales’ holding in Unwired Planet vs. Huawei that “a willing licensee must be one willing to take a FRAND license on whatever terms are in fact FRAND.”

Applying these standards, the Munich Regional Court (case ID 7 O 8818/19) and the Mannheim Regional Court (case ID 2 O 34/19) recently held that an SEP implementer does not indicate its unconditional willingness to accept a FRAND license by referring the SEP holder to its suppliers.  To the contrary, such a referral indicates that the SEP implementer is “unwilling” regardless of whether the SEP holder’s offer was FRAND.

The controversial nature of this issue is evident by the Federal Cartel Office’s involvement.  In the Mannheim proceedings, the Federal Cartel Office weighed in to encourage the Regional Courts to stay the proceedings and providing a set of questions for referral to the CJEU.  The Mannheim court did not follow these suggestions, however, and instead issued its ruling with little delay.  Its decision is the second grant of an injunction to Nokia prohibiting Daimler sales, if enforced.

Against this backdrop, the Dusseldorf Courts’ decision to focus on the issue provides hope to OEMs that wish to refer SEP holders to suppliers

 IV. The questions referred to the CJEU

The Dusseldorf Regional Court’s referral to the CJEU suggests the possibility of a different approach to this question favoring OEMs.  Loosely translated, the referred questions are:

 A. Must the SEP holder prioritize licensing of suppliers?

 1. Can a downstream company impede an action for injunctive relief for infringement of a standards-essential patent   for which the patentee has irrevocably undertaken to grant FRAND licenses on the basis that the SEP holder is abusing   its dominant market position under Art. 102 TFEU by refusing to grant an unrestricted FRAND license to the upstream supplier?

 a. If common practice in an end-product manufacturer’s sector is that a part supplier’s license clears the   manufacturer of infringement, does this support the defense against injunctive relief?

 b. Must the SEP holder prioritize licensing of all suppliers regardless of their level in the supply chain, or only the   one supplier immediately upstream of the distributor of the final product? Does this also depend on industry practice?

 2. Does Art. 102 TFEU require that the supplier be granted its own unrestricted license for all types of use relevant under patent law on FRAND terms for products implementing the standard with the result that end-product manufacturers (and, as applicable, intermediaries) no longer need to take their own, separate licenses from the SEP holder to avoid patent infringement for using the respective parts per their intended use?

 3. If the first question is answered in the negative: does Art. 102 TFEU impose particular qualitative, quantitative, and/or other requirements on the criteria by which a SEP holder must decide which potential infringers at different levels of the supply chain it can sue for injunctive relief?

B. Clarifications of the Huawei v. ZTE requirements

 1. Putting aside the SEP holder’s and implementer’s pre-litigation obligations (infringement notice, request for license, FRAND licensing offer; license offer to suppliers to be licensed on a priority basis), is it still possible to satisfy   obligations not previously met during the course of court action to the effect that the rights are preserved?

 2. Should a license request only to be deemed substantial if a comprehensive assessment of all circumstances clearly and unequivocally shows the SEP user’s willingness and readiness to conclude a license agreement with the SEP holder under FRAND terms, irrespective of what those terms (which, due to the non-existence of an offer at that time are not foreseeable) might be?

 a. Does an infringer’s silence for several months after receiving an infringement notice indicate its disinterest in a license, so that - despite a verbally formulated request for a license - there is no such license and the SEP holder's injunction request must be granted?

 b. Can the terms of an SEP user’s counteroffer be interpreted to mean that it has not actually requested a license,  such that the SEP holder's injunction request should be granted regardless of whether its initial license offer was FRAND-compliant?

 c. Is such a conclusion unwarranted if the counteroffer’s license terms, which shall imply that the SEP user has actually not submitted a substantial license request, are either incompatible with high court precedents or otherwise facially non-FRAND?

V.  Nokia’s Reaction

The decision of the CJEU could take up to two years. But for Nokia, time is of the essence. After injunctions obtained in Munich and Mannheim were not sufficient to force Daimler into a license deal, Nokia cannot afford to lose any time and needs another victory fast. In an attempt to prevent the case from actually being heard by the CJEU, Nokia thus appealed the Dusseldorf Court’s decision. This move is not only unusual but also not very likely to succeed, as the Dusseldorf Regional Court’s referral was orchestrated with the Dusseldorf Higher Regional Court, the very same Court which will now have to decide on the appeal.

 VI. Outlook

The referral offers a glimmer of hope to Daimler and other OEMs that their recent run of unfavorable outcomes before German courts may come to an end. But the outcome of the actual decision, how the national courts will implement it, and its actual benefit to SEP implementers remain to be seen. For example, the Munich Regional Court may be reluctant to rely on industry practices regardless of the CJEU’s ruling, in view of its prior decision that a car manufacturer may not rely on car industry’s licensing practices when implementing technology from the mobile communications sector.

The CJEU’s ruling likely will have effects beyond SEP cases involving complex supply chains. Its clarification of issues could accelerate licensing discussions, minimize tactical delays during litigation, and reduce costs overall. Its ruling also may encourage national courts to rule on FRAND terms.

Morrison & Foerster Associate Jacqueline Feigl contributed to the writing of this blog post.