In July, the German Federal Court of Justice, Germany's highest civil court, issued its written opinion in Sisvel International SA v. Haier Deutschland GmbH.1

This is the first German high court opinion on standard‑essential‑patent licensing since the Court of Justice of the European Union issued its landmark Huawei v. ZTE decision in 20152.

Following Huawei Technologies Co. Ltd. v. ZTE Corp., the German high court provided further guidance on SEP licensing, and, in particular, what an SEP implementer must do to raise a defense based on the SEP holder's fair, reasonable and nondiscriminatory commitments.

These FRAND defenses typically involve third-party beneficiary breach of contract claims or claims based on antitrust or unfair competition theories. Those asserting a FRAND defense often argue that, at a minimum, the alleged violation precludes an injunction. But some may also argue the violation is so severe that the asserted patents should be declared unenforceable.

The German high court's decision is widely considered to be pro-patent owner and will impact the SEP landscape not only in Germany, but, given the influence of the German courts and its economy, around the world as well.

Let's decipher Sisvel v. Haier. Sisvel sued Haier for infringing patents allegedly essential for certain communication standards. The Düsseldorf regional appeal court held that Sisvel breached its FRAND obligations by refusing to grant Haier the same discounted rates offered to another licensee, Hisense Co. Ltd., without adequate justification.

The German high court overruled that decision, holding that Sisvel did not abuse its market‑dominant position under the European Union's antitrust laws and criticizing Haier for not behaving as a willing licensee should. As a result, Haier could not raise a FRAND defense.

The SEP-Licensing Dance

The SEP holder starts by notifying the implementer of potential infringement.

According to the German high court, an SEP holder must first notify an SEP implementer of an alleged infringement. The notice, however, need not include much detail beyond identifying the patent(s)‑at‑issue and an infringing act. Detailed technical or legal explanations of the infringement are not necessary. Claim charts, albeit sufficient and common, are not mandatory.

The notice need only enough detail for the implementer, with its own expert and legal assistance, to conduct its own analysis. And in a nod toward practicality, the German high court found Sisvel's notices sent to Haier's parent companies, rather than Haier itself, to be sufficient.

The implementer must respond quickly and clearly and unequivocally declare its willingness to take a FRAND license.

Quick Response

Upon receiving an infringement notice, an implementer is expected to respond promptly, even if the notice involves a large number of patents and standards. For instance, if the implementer believes the notice insufficient to understand the infringement allegation, it should inform the SEP holder quickly.

The court did not specify the time required, but noted that silence for several months may indicate a lack of interest. The German high court found Haier's statement about taking a license more than a year after Sisvel's first infringement notice to be untimely, which by itself, precluded willingness.

Clear, Unconditional Willingness 

To be considered a willing licensee, an implementer must (1) declare its willingness to take a license in a serious, unconditional, clear and unequivocal manner, and (2) subsequently participate in the negotiations in a target-oriented manner.

Expressing the hope to negotiate is insufficient. So are conditional statements. For example, Haier stated that it would be willing to take a license if infringement and validity were both finally determined in the German courts, which the German high court criticized as clearly insufficient. The German high court also expressed some concern that Haier's negotiation position was not taken in good-faith, but was rather an attempt to delay until the patent expired.

The SEP holder must offer terms only after the implementer has unconditionally committed to taking a license.

Only after the implementer declares its willingness to take a license, will the SEP holder be required to specify its demanded rates. The SEP holder also has to substantiate its license offer to enable the implementer to verify whether the offer is FRAND. If the implementer believes the SEP holder's offer is too high, it can counter.

Under Huawei v. ZTE and prior German case law, if the parties cannot agree on FRAND terms, the implementer needs to pay past and ongoing royalties into an escrow account to show that it is a willing licensee. Although the issue does not appear to have been litigated yet, there is a risk that if the amount the implementer sets aside in escrow is considered too low, a court may find it did not actually behave as a willing licensee.

FRAND Terms

Unequal treatment may be OK.

If the implementer objects to the SEP holder's offer as discriminatory, the implementer has to prove unequal treatment exists. According to the court, however, neither antitrust rules nor FRAND commitments necessarily obligate an SEP holder to treat everyone equally. But the SEP holder does have to provide an objective reason for the unequal treatment.

Whether an objective justification exists requires weighing of all interests involved, including the SEP holder's business interests, taking into account the goal of antitrust law in protecting competition. The German high court found that Sisvel was justified in not extending to Haier the same discount it gave to Hisense because the Hisense discount was offered under pressure from the Chinese government. But beyond that, the court did not explain what might justify unequal treatment.

SEP holders may license on a portfolio or global basis.

Although not the focus of the case, the German high court also addressed how an SEP holder might choose the scope of a FRAND license. The court noted that a portfolio license is in principle unobjectionable as long as: (1) it does not obligate the licensee to pay for nonessential patents; and (2) the fees are calculated such that an implementer targeting a specific geographic area is not disadvantaged.

The court added that worldwide portfolio licenses are common practice and provide the benefit of efficiency to both SEP holders and implementers. 

Implications

Faithful Implementation or Radical Expansion of Huawei v. ZTE?

Although Sisvel v. Haier brought SEP licensing and litigation in Germany closer to the framework announced by the Court of Justice of the European Union in Huawei v. ZTE, many have argued that the German high court has shifted the focus of the inquiry to put SEP holders' interests and enforcement freedom ahead of the interests of implementers and the public.

The decision certainly increases the burden on an implementer during licensing negotiations, which will have the effect of pressuring implementers to refrain from pushing back against infringement assertions, even dubious ones.

Further, by upholding Sisvel's justification of its disparate pricing based on foreign government pressure without providing any real guidance of what is, and what is not, a justifiable reason, the German high court's decision has opened the door for more arguments for higher fees during negotiations and in court. Uncertainty in this area would seem to favor the SEP holder given the risk that the implementer may be found unwilling if the royalties it pays into escrow are deemed insufficient.

In addition, referring to the European Commission's 2017 communication on SEPs, the German high court favorably commented on portfolio licenses and worldwide licenses. That issue, however, was not discussed in Huawei v. ZTE. Nor was it particularly relevant to Sisvel v. Haier. The court suggested that, for a broader license, an SEP holder's fee demands should ensure implementers serving a limited geographic area are not disadvantaged. 

However, with a sentiment favoring SEP holders' interests and no explanation of what might amount to an impermissible disadvantage, the German high court's statement may provide little practical protection for the implementers, whose customers will almost certainly travel outside of the implementer's region — in a post-pandemic world, anyway.

Indeed, Haier has challenged the German high court's decision to the German Constitutional Court on the ground that its decision conflicts with Huawei v. ZTE. The Constitutional Court, like the U.S. Supreme Court, has the discretion to hear the case, so it could decline to review the German high court's decision. But we won't know if it will take the case for months.

And observers of the German court system have expressed some doubt that we will see any new significant SEP or FRAND decisions coming out of Germany until the Sisvel v. Haier case is finally resolved. So it may be some time before we get more clarity.

Impact on SEP Licensing

First and foremost, expect SEP holders to open more of their negotiations in Germany. Sisvel v. Haier, if it stands up to Haier's constitutional challenge, offers SEP holders a better chance of reaching a broader, higher-royalty license in Germany than in any other jurisdiction. The threat of an injunction in Germany has always been a source of pressure on alleged infringers.

But combine that with the fact that the courts of most other Group of Seven countries treat SEP holders' injunction bids with caution, if not outright hostility, and Germany's reputation as an attractive place to bring SEP cases will only strengthen.

In view of the German high court's holding, SEP implementers should expect more aggressive demands for prompt and unconditional agreements to take a license, less patience during negotiations, and more pressure to accept portfolio or global licenses. When anticipating or reacting to an infringement allegation, SEP implementers should consider promptly conducting infringement and invalidity analyses and gathering third‑party licensing information.

These steps are necessary for evaluating the need for a license, countering the SEP holder's allegations, or requesting — with factual support — more information. The SEP implementer's well‑documented diligence in arriving at FRAND terms may help demonstrate its willingness to take a license and save its FRAND defense in court.

SEP holders, on the other hand, may want to carefully document the implementer's demands for details or insistence on restricting the license to particular patents or geographical areas. Those actions, without sufficient justifications, may be considered delaying tactics that deprive the implementer of a FRAND defense.

Further, for pricing differences or disputes on the licensing scope, an SEP holder should be prepared to explain different third-party licensing terms. It is not certain, however, how the implementer will learn of those differences. In Unwired Planet v. Huawei,3 the Düsseldorf regional appeal court held that an SEP holder must disclose all existing license agreements to a new license seeker, but the case settled while the appeal was pending before the German high court.

As of now, therefore, it remains unclear how other German courts will address the issue of whether an SEP holder has an obligation to disclose third-party license information during negotiations. 

Conclusion

For the first time after the Court of Justice of the European Union's Huawei v. ZTE decision in 2015, the German high court provided long‑awaited guidance on SEP licensing. Sisvel v. Haier represents a shift in the SEP landscape in Germany in favor of an SEP holder's enforcement freedom and business interests.

From a business perspective, Germany is a major part of the European market. Companies with a European presence will likely need a license to avoid losing the German market due to patent infringement concerns. Germany has been the most popular forum in Europe for SEP licensing and litigation and patent enforcement in general. The Sisvel v. Haier case will ensure that continues.

Moreover, given the international significance of SEPs, the influence of German patent jurisprudence in Europe, and the cross‑border nature of SEP matters, the German high court's decision will likely impact the SEP landscape worldwide. Companies should keep abreast of new developments as courts interpret the German high court's holdings to navigate the changing climate in SEP licensing and litigation in Germany and beyond.

Footnotes

1 Sisvel v. Haier, Case KZR 36/17 (German Federal Court of Justice, oral opinion May 5, 2020).

2 Huawei Technology Co. Ltd v ZTE Corp., ZTE Deutschland GmbH, Case C-170/13 (The Court of Justice of the European Union, July 16, 2015).

3 Unwired v. Huawei, Case I-2 U 31/16 (OLG Düsseldorf, Mar. 22, 2019).

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