Germany's highest court clarified the obligations of owners of standard essential patents (SEPs) when licensing their patents. They are not always required to submit claim charts to alleged infringers to satisfy their notice obligation and can offer less favorable terms than previous licenses if circumstances with the accused infringers are different from those with previous licensees. They may also insist on a license that includes all patents infringed by the implementer and a worldwide portfolio license if the alleged infringer develops or manufactures the accused products in different geographical regions. Also, to preserve a Fair, Reasonable, and Non-Discriminatory ("FRAND") defense, accused infringers must declare their willingness to agree to a license on FRAND terms "clearly and unequivocally," and if no agreement between the parties is reached, the accused infringers must diligently provide information on alleged infringing use and an appropriate amount of security based on such use.
What Does SEP and FRAND Mean?
Standard setting organizations are industry groups that collaborate to make standards on technology enabling different entities to make different products that can work together in the same way. Different examples of technology covered by standards include USB and Bluetooth.
If a patent claims the technology required to practice the standard, that patent may be considered a standard essential patent (SEP). If a patent is designated as standard essential, the SEP owner typically must agree to license the SEP using fair, reasonable, and non‑discriminatory (FRAND) terms to help promulgate the technology. If the SEP owner does not offer a license under FRAND terms, an alleged infringer may claim a defense that it should not have to execute a license to practice the standard due to the unreasonable terms the SEP owner imposed.
Background of the Case
Sisvel accused Haier of infringing a SEP. Nearly a year later, Haier responded by requesting more information. And at a later date, Haier said it was willing to take a license if a German court found Haier infringed a valid patent.
The parties rejected each other's license offers, and Sisvel sued Haier for patent infringement at the Regional Court of Düsseldorf. Haier invoked a FRAND defense based on Sisvel offering much higher license fees to Haier than it did to a previous licensee.
In 2015, the Court of Justice of the European Union, in Huawei v. ZTE, created a five‑step framework that governs enforcement of SEPs in all European Union countries. The framework establishes a series of obligations the SEP owner must meet to seek an injunction based on SEPs and obligations that the accused SEP infringer must meet to invoke the FRAND defense against the SEP owner's injunctive relief claim:
Step 1: To enforce a SEP, the SEP owner must give notice of infringement.
Step 2: The accused infringer must then express its willingness to agree to a licensee agreement on FRAND terms.
Step 3: The SEP owner must offer a license on FRAND terms.
Step 4: The accused SEP infringer must respond diligently. If it does not accept the offer, it must present a counteroffer on FRAND terms.
Step 5: If the counteroffer is rejected, the accused infringer must provide information on their use and provide appropriate security calculated based on the provided information.
In Sisvel, the German Federal Court of Justice, the country's highest court, further clarified how this framework is applied in German courts.
The Decisions of the Lower Court and Appeals Court
After determining that Haier infringed the patents, the Regional Court of Düsseldorf rejected Haier's FRAND defense and granted Sisvel's injunction, concluding that Haier failed to provide information on alleged infringing use and provide appropriate security after Haier's counteroffer was rejected (steps 5 and 6). That court held that it was irrelevant whether Sisvel's offers complied with FRAND because Haier still failed its obligations.
On appeal, the Higher Regional Court of Düsseldorf reversed, finding that Haier's FRAND defense had merit. It disagreed with the lower court's decision to not assess whether Sisvel's license proposals were FRAND-compliant (step 3). In performing this analysis, the appellate court held that Sisvel's offers were discriminatory since it offered Hisense, one of Haier's competitors, a significantly lower royalty rate (80% less) without providing a reasonable and objective explanation for this disproportionate treatment. The appeals court ruling interpreted the Huawei framework consecutively — finding that the obligations of a certain step of the negotiation process only applied when the obligations of the previous steps were adequately completed. In the view of the appeals court, Sisvel never satisfied its obligation to offer a FRAND-compliant license offer (step 3) so Haier was never obligated to provide information and security (step 5).
The Decision by the German Federal Court of Justice
The German Federal Court of Justice reversed the appeals court, finding that Haier failed its obligations at an earlier stage in the negotiations because it delayed negotiations and did not clearly express a willingness to take a license with FRAND terms (step 2). Specifically, the high court found that Haier merely presented an initial "hope" to have formal negotiations and, in later correspondence, only showed a conditional willingness to take a license on FRAND terms if a German court found the patent claims valid and that Haier infringed those patent claims.
The high court also found that patent owners do not need to submit claim charts to satisfy their notice requirement, so Sisvel's identification of the SEP and Haier's alleged infringement was sufficient to meet Sisvel's initial obligations (step 1).
The high court also reversed the appeals court's holding that Sisvel offered a license with discriminatory terms because the appeals court did not consider the fact that the Chinese government placed political pressure on Sisvel to give Hisense a lower royalty rate. This fact made the circumstances of Hisense and Haier different and justified Sisvel offering different license terms for Hisense and Haier.
The high court commented on three other aspects of SEP licensing:
- A SEP owner may require a license to cover all SEPs implemented in the infringing products.
- A SEP owner may require a worldwide license if a potential licensee that only develops products for a specific geography is not disadvantaged. For example, if an alleged infringer does not manufacture or distribute a product in a certain geographical area, then the SEP owner cannot require the alleged infringer to pay licensing fees for patents in the worldwide portfolio that cover that geographical area.
- A SEP owner's claim for damages involving SEP licensing issues can exceed the amount of the expected FRAND license fee. In other words, a non-compliant licensee's liability is not limited to the standard fair and reasonable royalty.
Strategy and Conclusion
In Germany, SEP owners have certain rights and obligations when licensing their patents:
- They must give notice of infringement but do not necessarily have to submit claim charts to infringers to satisfy this notice obligation.
- They must offer FRAND terms but they can offer less favorable terms than previous licenses if circumstances with the accused infringer are different from those with previous licensees.
- They may insist the license include all patents infringed by the implementor.
- They may further insist on worldwide portfolio licenses for patents the implementor needs for the legal manufacturer or legal distribution in various geographical locations the implementor operates in.
Furthermore, to preserve a FRAND defense, accused infringers must declare their willingness to agree to a licensee on FRAND terms "clearly and unequivocally." If no agreement between the parties is reached, accused infringers must diligently provide information on alleged infringing use and appropriate amount of security based on such use.
The Sisvel decision can be found here.
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