The development of technical standards can provide an important role in many industries to support compatibility between the products of one company and those of others. In the telecommunications sector, standards and interoperability ensure that a seller’s handsets are able to work with mobile networks (subject to validation against a mobile operator’s specific requirements). For example, consumers can expect a chosen handset to connect to the network they subscribe to, as well as to foreign networks on international roaming, and network operators expect new hardware installed within their network to be able to operate with hardware sourced from other suppliers. As well as network effects, standards also deliver obvious “macro” benefits to the wider economy, for example, efficient resource allocation and encouraging research and development at the technology level.
The LTE standard is a fourth generation (4G) mobile network communication standard which is composed of more than 4,700 declared SEPs. In fact, both Huawei and ZTE are holders of a number of declared SEPs relating to the LTE standard. The number of potential SEP holders relating to the LTE standard means that the manufacture of LTE products can potentially require technology companies to take out multiple licenses. For LTE product makers that hold some SEPs, this can mean entering into complex cross-licensing arrangements with others.
Standard setting bodies have long been alive to the potential for SEP holders to misuse their power in agreeing (or, indeed, refusing to agree) licences to allow the standard to be applied. This is a key risk when IP is contributed to open standards. In the mobile telecommunications sector, industry standards are set by the European Telecommunications Standards Institute (ETSI), a body that is composed of network operators, manufacturers, user representatives, service providers, universities, and others. During the development of an ETSI standard, members are required to inform the standards body of any IP rights which they own that they consider are essential to that standard and commit to offer licences to those SEPs on Fair Reasonable and Non-Discriminatory (FRAND) terms. On 4 March 2009, Huawei made such a commitment to the ETSI to license a European patent it holds that it declared “essential” to the LTE mobile standard.
Disputes in patent licensing negotiations generally arise when parties are unable to reach agreement on what is “fair” and “reasonable” under the FRAND requirement. In those circumstances, the SEP holder will usually commence an action against the implementer for infringement of its SEP and also seek an injunction to prevent on-going infringement.
The conduct of SEP holders who have given a commitment to grant licences to third parties on FRAND terms has given rise to a number of actions before the courts in various jurisdictions and investigations by competition authorities. Increasingly, disputes of this kind have arisen in the mobile technology sector between SEP holders that compete in downstream markets and require reciprocal licensing arrangements, for example the disputes that have arisen in recent years between Apple and Samsung.
These decisions have led to a number of divergent legal approaches and, consequently, a considerable degree of uncertainty. For example, the German courts have taken a patentee-friendly approach, as was established in the Orange Book case, whilst the European Commission has taken an implementer-friendly approach, as established in the recent Samsung and Motorola cases which also involve mobile standards – these are discussed in detail below.
In the US, the Federal Trade Commission (FTC) has also managed to involve President Obama in the debate by persuading him to veto the import ban on Apple products which the International Trade Commission (ITC) held infringed a Samsung SEP.4 The veto was exercised on the basis that Samsung had committed to license its SEP on FRAND terms, so should not have sought an import ban for products using the teaching of the patent. The veto was, however, surprising to many, given the ITC’s recognition that Samsung had been negotiating in good faith and that Apple was unwilling to take a licence.
(a) The “Orange Book Standard” defence in Germany
A relatively long line of case law on this issue has been established by the German Courts, dating back to May 2009 and the Orange Book case.5 The Orange Book case concerned a de facto standard for CD-Rs (Compact Disc-Recordable). Philips, the patent holder, alleged that CD-Rs must comply with the specifications set out in a document known as the Orange Book such that any party marketing CD-Rs had to obtain a license under Philip’s patent .
Philips commenced patent infringement actions against several manufacturers of CD-Rs that had not sought a licence for its patent. Philips also applied for an injunction against those manufacturers as well as an award of damages. In its defence, one of the defendants argued that Philips was abusing its dominant position on the market for CD-Rs by seeking an injunction for its patent, thereby infringing Article 102 TFEU.
The German Federal Court of Justice held that a potential licensee can raise a competition law defence against an application for an injunction in limited circumstances, if it can show that:
- it has made an unconditional offer to license under terms that cannot be refused by the patent holder without abusing its dominant position; and
- these terms require the implementer to behave as if a licence were in place by, for example, making royalty payments into an escrow account and waiving its right to challenge the patent.
This approach has been endorsed in a number of subsequent cases, where injunctions had been granted. So the essence of the position under the German case law is the requirement that implementers must take positive steps that do not call into question their willingness to pay royalties. In reality, the competition defence became difficult for implementers to rely on because it required the implementer to effectively accept the validity of the patent and the case on infringement against it.
(b) The European Commission’s decisions in Samsung and Motorola
In the telecommunications sector, SEPs have become a key battleground between technology companies with large patent portfolios as standards have incorporated more technology and consequently a greater number of patents, and as mobile phones have become more sophisticated.
In Germany, Samsung and Motorola were each in negotiation with Apple for the licensing of their respective mobile telecoms SEPs. Those negotiations subsequently broke down, prompting Samsung and Motorola to bring patent infringement proceedings against Apple in the German Courts. In the context of those patent infringement proceedings they applied for interim injunctions for their respective SEPs. This encouraged the European Commission to open formal competition investigations against Samsung and Motorola to determine whether those proceedings constitute an abuse of a dominant position.
The Huawei v ZTE case came to trial in Germany after the Commission had adopted a statement of objections6 (which is confidential to the parties to the procedure) against Samsung but before a decision had been adopted (and before a non-confidential version of that decision had been published).
However, it was evident from the Commission’s press releases in Samsung at the time that the Orange Book Standard may not be compatible with the Commission’s approach under the competition rules. The German Court therefore felt it was necessary to stay the Huawei proceedings and make a preliminary reference to the CJEU to ensure consistency between its own decisions and the Commission’s approach.
The Commission has since concluded its cases against Samsung and Motorola. In the case of an SEP, the Commission’s position is that where a patent holder has given a commitment to license on FRAND terms, and the potential licensee is “willing” to negotiate a licence on that basis, the seeking of an injunction by the patent holder could constitute an abuse of a dominant position contrary to Article 102 TFEU. This is on the basis that, in the Commission’s view, the SEP holder can use the threat of an injunction to distort licensing negotiations and impose unjustified licensing terms on licensees.
In Samsung, the Commission decided not to proceed to an infringement decision and instead accepted legally binding commitments7 (under Article 9 of Regulation 1/2003)8 offered by Samsung not to seek injunctions in relation to any of its present and future SEPs for mobile devices for a period of 5 years against any potential licensee that agrees to accept a particular licensing framework for the determination of FRAND terms and conditions. The detailed licensing framework provides for:
- a negotiation period of 12 months; and
- if no agreement is reached, a third party FRAND determination by a court or arbitrator.
In Motorola, the Commission went down another path and adopted an infringement decision9 (under Article 7 of Regulation 1/2003) against Motorola finding that it had abused its dominant position by seeking an injunction against Apple in relation to its SEP for the GPRS standard. However, the Commission exercised its discretion (and exceptionally) did not impose a fine because of the divergent decisions of Member States and the absence of EU case law.
(c) The Advocate General’s Opinion10
Prior to the CJEU reaching its decision on questions referred by national courts, the EU Court process provides for one of the Advocate Generals (AG) to deliver an opinion on the issues before the CJEU to aid the court.
AG Wathelet’s Opinion, therefore, gave the first indication of how the EU’s highest court would likely approach the interaction between competition law and IP rights in the context of interim injunction applications for SEPs.
The AG first noted the factual differences between the Orange Book case and the dispute in Huawei v ZTE. The patent in the Orange Book case related to a de facto standard for which the owner of the patent at issue had not given a commitment to grant a licence on FRAND terms. It is natural that, in those circumstances, the patent owner will have greater negotiating power than in the case of an SEP owner . In view of the factual differences, the AG’s view was that the Orange Book Standard could not be transposed by analogy to the Huawei case.
The AG opined that a “middle path” needed to be found between excessive protection for the SEP holder and excessive protection for the implementer. The AG criticised the German line of case law (for offering too much protection to the patentee), and the approach of the Commission (for offering too much protection to the implementer).
The AG observed that an injunction has at least the potential to restrict competition. However, by making a commitment to grant a licence to third parties on FRAND terms, the patent holder does not give up its right to seek an injunction, and the seeking of an injunction cannot by itself constitute an abuse of a dominant position.
The AG’s conclusion in this regard is unsurprising because in most jurisdictions around the world, the claimant in a patent infringement action can seek an injunction against an alleged infringer preventing the latter from continuing to use the inventions claimed in the patent, until the substantive case on infringement (and in some cases also validity) has been determined. The right of a party to go to court and ask for an injunction is a universally recognised right and enshrined in Article 47 of the Charter of Fundamental Rights (right to an effective remedy and to a fair trial).
However, the AG opined that where the standard implementer is “willing” to conclude a licence, seeking an injunction will constitute an abuse of dominance. The AG identified specific guidelines for the negotiation of licences for SEPs. These have generally been endorsed by the CJEU as set out below.
Whilst the AG was not asked by the German Court to consider whether an SEP holder is necessarily dominant in the relevant market, the AG commented that an SEP holder may be presumed to be dominant but that it is possible to rebut this presumption with “specific, detailed evidence”. This observation, and the suggestion of a presumption, was somewhat curious. It seemed to ignore the fact that a declared SEP may not really be essential to design a product that is standard conformant.
More importantly, depending on the circumstances and the specific SEP, it might be questioned whether an SEP holder can really be dominant by virtue of its ownership of a single SEP where a mobile phone manufacturer (or network hardware maker) must license numerous SEPs from more than one SEP holder in order to comply with a particular standard. This – the question of dominance – would need to be assessed on the facts of the case. As mentioned above, the LTE standard has more than 4,700 declared SEPs and mobile telephony equipment makers will typically enter into complex cross-licensing arrangements in relation to the use of numerous patents. In those circumstances, can it really be the case that all SEP holders for the LTE standard are dominant?