Five years after Huawei ZTE FRAND licensing obligations again before the ECJ


On 26 November 2020, the Düsseldorf Regional Court announced that it would suspend a patent infringement proceeding and refer key questions on compulsory licensing of standard essential patents (SEP) to the European Court of Justice (ECJ).

Background: Licensing obligations of the SEP holder

The background to the referral is the ongoing debate on the obligations of SEP holders under EU competition law. SEPs are patents that are part of a technical standard. If the use of the standard is necessary for access to or providing a competitive offer on a product market, the SEP can give the holder a dominant market position. The litigation in question focuses on mobile phone patents, which must be used to implement mobile phone standards such as 3G or LTE.

This creates tension between the rights and interests of the SEP holder and those of SEP implementers. On the one hand, the patent gives its holder the right to exclude third parties from using the patent without consent. On the other hand, market participants are interested in access to a standard-relevant product market, which is only possible if the products comply with the standard and if the SEP can be used under Fair, Reasonable And Non-Discriminatory (FRAND) conditions.

This conflict is to be resolved amicably by imposing obligations on both SEP holders and SEP implementers that are intended to enable access to standardised technology under FRAND conditions (FRAND obligations).

If a SEP implementer meets its obligations, the SEP holder is obliged to grant a license for its SEP on FRAND terms. If the SEP holder, nevertheless, brings an action for injunctive relief against the SEP implementer, the SEP implementer can defend against this by invoking the abuse of a dominant position (FRAND defense). At the least, German courts can reject the claim for injunctive relief in such a case as "currently unfounded".

FRAND obligations under the Huawei/ZTE decision of the ECJ

The conditions of the FRAND defence and the FRAND obligations of the parties were laid down in 2015 in the ECJ’s decision "Huawei/ZTE" (judgment dated 16 July 2015, case C-170/13), also after a referral by the Düsseldorf Regional Court. The FRAND obligations in the pre-litigation period included a notice of infringement by the SEP holder, a declaration of license willingness by the SEP implementer, a license offer by the SEP holder and a potential counter-offer by the SEP implementer (also referred to as FRAND code of conduct). These obligations are in a gradual relationship, which means that one party must fulfil its FRAND obligations if the other party has fulfilled its obligations at the previous level.

Although the Huawei/ZTE decision of the ECJ provided a basic framework for the FRAND defence, in daily practice it leaves many questions unanswered.

The Düsseldorf Regional Court again suspended a proceeding and referred questions to the ECJ for a preliminary ruling, which were raised in the course of the practical application of the principles laid down in the 2015 decision.

Clarification of the requirements set out in Huawei/ZTE

One complex of questions referred for a preliminary ruling is intended to clarify the requirements of the Huawei/ZTE decision.

In practice, discussions between SEP holders and SEP implementers are rarely as structured as the ECJ's FRAND code of conduct requires. Often the parties behave differently than the ECJ would require if Huawei/ZTE case law were to be applied literally.

In these cases, the question arises whether FRAND obligations can also be fulfilled in a different manner.

One of the core questions posed by the Düsseldorf Regional Court is whether FRAND obligations must necessarily be completed prior to initiating litigation or whether the parties can still make up for their obligations during the proceedings. The referral also includes questions as to when it can be assumed that the SEP implementer is likely to make a considerable request for licensing (license willingness).

Can it be assumed, for example, that there is no license willingness if the alleged SEP implementer remains silent about an infringement notice (for several months or even completely) in the pre-litigation period or makes a particularly low counter-offer for a license?

These questions are of particular practical relevance, and are decisive in the outcome of litigation against an unlicensed SEP implementer.

Licensing obligations and the FRAND defence in complex supply chains

The application of the Huawei/ZTE decision takes on a further dimension when considering multi-level supply chains.

The Huawei/ZTE decision deals only with a bilateral relationship between a SEP holder and an individual SEP implementer. Cases are much more complex where pre-products or products in the multi-level supply chain are already covered by a SEP and where suppliers have unsuccessfully asked the SEP holder for a FRAND license.

In particular, this situation occurs in "Connected Car" disputes, which are increasingly brought before German courts. The SEP owners – some of which are non-practicing entities – are of the opinion that their FRAND obligations only force them to grant access to the standardised patented technology in general. At which level of a supply chain they grant the FRAND license is left to them. Manufacturers of complex end products argue that the SEP holder cannot, on the one hand, refuse to grant a FRAND license to the manufacturers’ licence-willing suppliers and, on the other hand, seek injunctive relief from end-product manufacturers. The ECJ did not have to rule on FRAND obligations in such a complex situation in the Huawei/ZTE case.

The Düsseldorf Regional Court has also referred questions on licensing in the supply chain to the ECJ. Specifically, it asks inter alia, whether a manufacturer of end products can invoke the FRAND defence against an action for injunctive relief by the SEP holder if the SEP holder refuses a FRAND license to a licence-willing supplier. In its questions, the Düsseldorf Regional Court also addresses the relevance of industry practices, a possible licensing priority and the exhaustion of rights.

These questions have high practical relevance for industries where IPR licenses are traditionally taken at the supplier level, because they have to deliver a pre-product or product free of third-party rights. The relevance is not limited to the "Connected Car" disputes. Also, in other areas of the Internet of Things (IoT), manufacturers and suppliers of formerly non-digital products now have to deal with SEP licenses. In addition to telecommunication SEPs, the focus here is on areas such as sensor technology, standards for electricity storage, charging and interface technology.

Long-awaited referral and impact on the parallel legislative process

Due to its considerable practical relevance, clear guidance on the key issues of FRAND licensing and related obligations is urgently expected in practice. The reactions in professional circles to important FRAND decisions show this in particular.

Already in May 2020, the German Federal Supreme Court (Bundesgerichtshof – BGH) announced its long-awaited and, after its publication in July 2020, often-cited decision "FRAND Einwand" (FRAND defence), in which it independently interpreted the FRAND obligations according to the ECJ's Huawei/ZTE decision and thus provided the German courts with guidance, at least on practical points. Apparently, the conditions of Art. 267 (3) TFEU were not met in the proceedings, which would have obliged the BGH to refer the matter to the ECJ.

Experts had assumed, however, that a referral to the ECJ would be made soon after the German Federal Cartel Office (Bundeskartellamt) approached the Mannheim Regional Court as amicus curiae in a "Connected Car" dispute in June 2020, and suggested a referral. The court decided against a referral and issued an injunction against the defendant car manufacturer, which can only be enforced provisionally against a high-security deposit.

Especially against the background of the "Connected Car" disputes, the desire for more legal certainty as to when a SEP holder can enforce its right to injunctive relief has become increasingly apparent in practice. In this context, a legislative initiative was launched to amend the German Patent Act in respect to the claim for injunctive relief. The government is expected to submit the draft of this "Second Act to Simplify and Modernise Patent Law” (Zweites Gesetz zur Vereinfachung und Modernisierung des Patentrechts) to the Bundestag in January 2021. The current draft provides for the exceptional exclusion of the injunctive-relief claim if its enforcement is disproportionate.

Impact and outlook

Against the background of considerable practical relevance, the Düsseldorf Regional Court's submission to the ECJ is to be welcomed. In particular, the increased implementation of SEPs in various fields of IoT makes licensing in the supply chain appear even more relevant in the future. A uniform application of the law can only be ensured by more concrete specifications by the ECJ.

For ongoing SEP litigation in Germany, this also means that the proceeding may be stayed by analogy with sec. 148 of the German Code of Civil Proceedings (ZPO) if one of the questions submitted is relevant to the dispute. In such a case, in the interests of the uniform application of EU law and for reasons of procedural economy, it may be necessary to await the ECJ’s decision. At the same time, extensively staying SEP disputes could lead to a temporary gap in legal protection for SEP holders. Stay orders by the courts therefore will always have to take all the circumstances of the individual case into consideration.

For more information on the ramifications of this referral and how it could affect your German business, contact your CMS partner or local CMS experts:

Dr. Thomas Hirse, Sven Krause