The Court of Justice of the European Union (CJEU) has delivered its ruling in Case C – 170/13Huawei Technologies Co. Ltd v ZTE Corp., ZTE Deutschland GmbH. The ruling provides guidance for determining when an owner of a Standard Essential Patent (SEP) might breach competition law when bringing an infringement action against a third party. This guidance is likely to be significant both to companies that own SEPs and to companies wishing to enter markets that require conformance to standards.
Huawei Technologies Co. Ltd (‘Huawei’), one of the largest telecommunications equipment vendors in the world, brought a Patent infringement action against ZTE Corp. and ZTE Deutschland GmbH (‘ZTE’), a Chinese multinational telecommunications equipment vendor, in Germany in April 2011. Huawei alleged that ZTE infringed a European(DE) Patent, which relates to the standards for Long Term Evolution (LTE) – commonly known as LTE 4G.
The Patent relates to the LTE standards in such a way that it would inevitably be infringed by a technology operating in accordance with the LTE standards. Therefore, in 2009, Huawei declared the Patent to be a Standard Essential Patent (SEP). At the same time, they undertook to grant licences to third parties on Fair, Reasonable And Non-Discriminatory (FRAND) terms. Before the infringement action was brought, Huawei had been in licensing negotiations with ZTE, but no licence was agreed.
During the infringement proceedings, the Düsseldorf district court (Landgericht) referred a series of questions to the Court of Justice of the European Union (CJEU). The questions were intended to clarify the circumstances under which an owner of an SEP might abuse their dominant position in the market place, in breach of European competition laws, by bringing an infringement action against a third party.
The recent ruling of the CJEU sets out the circumstances under which an SEP owner would not be considered to be abusing their dominant position. Firstly, the CJEU drew a distinction between infringement actions seeking an injunction prohibiting continued infringement or a recall of products, and infringement actions seeking the rendering of accounts and an award of damages.
The CJEU said that for infringement actions seeking the rendering of accounts or an award of damages, an SEP owner does not abuse its dominant position. This is because the action is in relation to past acts and therefore has no direct impact on competitor products appearing or remaining on the market.
The CJEU said that for infringement actions seeking a prohibitive injunction or recall of products, an SEP owner does not abuse its dominant position if:
• prior to the action, the SEP owner alerts the alleged infringer and, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, provides a written offer for a licence on FRAND terms, specifying the royalty rate and the way in which it is to be calculated; and
• where the alleged infringer continues to use the SEP, the alleged infringer has not diligently responded to the offer of a licence, in accordance with recognised commercial practices in the field and in good faith.
The CJEU added that if an alleged infringer rejects an offer of a licence and still wishes to bring an abuse of dominant position action against the SEP owner, the alleged infringer must submit a counter-offer to the SEP owner. Furthermore, if that counter offer is rejected, the alleged infringer must provide appropriate security, for example a bank guarantee.
Finally, the CJEU also indicated that to assist in FRAND licensing negotiations, an independent third party may be consulted to determine a FRAND royalty rate. Unfortunately, however, no specific guidance was given on how to determine if an offer should be considered FRAND.
There is still some uncertainty for parties entering into licensing negotiations in respect of SEPs, particularly when determining if an offer should be considered FRAND. However, the ruling provides some useful guidance to SEP owners wishing to avoid abuse of dominant position actions being brought against them. Likewise, there is also useful guidance for potential infringers wishing to keep the option of bringing an abuse of dominant position action against the SEP owner. The ruling is therefore likely to have a significant impact on the way in which parties negotiate licences for SEPs in the future.
If you need further information please contact Simon Kahn or your usual Boult Wade Tennant adviser.