The CJEU, in its landmark judgement of 16 July 2015 in Case C 170/13 between Huawei and ZTE (on referral in March 2013 from the Düsseldorf Landgericht), came down firmly in favour of the patent proprietor’s ultimate right to enforce its standard-essential patents (SEPs), by injunctive relief if necessary, where an infringer does not show adequate willingness to pay royalties on fair, reasonable and non-discriminatory (FRAND) terms.
Whereas the holding of an essential IPR can (but does not necessarily) confer dominance in a marketplace, the CJEU re-iterated that it is settled case-law that the exercise of an exclusive right linked to an IPR forms part of that right. So the exercise of such a right, even if it is the act of an undertaking holding a dominant position, cannot in itself constitute an abuse of a dominant position (referring to the well-known judgments in Volvo; RTE and ITP v Commission; and IMS Health). However, it is also settled case-law that the exercise of an exclusive right linked to an intellectual-property right by the proprietor may, in exceptional circumstances, involve abusive conduct for the purposes of Article 102 TFEU.
The alleged infringer must demonstrate its willingness to negotiate by promptly making a specific FRAND counter-offer to the patentee’s demands. There must be no delaying tactics, but the alleged infringer cannot be criticised for challenging the validity of the patent and/or the essential nature of the patent.
The facts presented to the CJEU by the referring court related to the Long Term Evolution (LTE) standard and there was no dispute that Huawei’s patent was indeed essential to products compliant with that standard (which, incidentally, the CJEU interprets to mean “necessary for manufacture of a competing product without compromising the essential functions of the product”). The referring court was also of the clear opinion that Huawei’s position in the marketplace was dominant. In his earlier opinion of 20 November 2014, the Advocate General pointed out that the fact that a company owns an SEP does not necessarily mean that it is in a dominant position. Indeed, the CJEU noted that ZTE also claimed to have patents essential to the standard and that the two parties had “equivalent bargaining power”. Under such findings (and given the large number of other parties also claiming to have patents essential to the LTE standard), it is hard to see how Huawei can be said to be “dominant”. Nevertheless, dominance was a question of fact for the referring court to consider, and the CJEU proceeded on the assumed situation presented to it.
ZTE’s only counter-offer to Huawei involved a cross-licence, which was unsatisfactory to Huawei. It is for the Dusseldorf court to consider whether the counter-offer was fair and reasonable. In considering whether to grant an injunction to Huawei, it must “strike a balance between maintaining free competition — in respect of which Article 102 TFEU prohibits abuses of a dominant position — and the requirement to safeguard Huawei’s intellectual-property rights.”
If the exercising by Huawei of its patent rights were so extensive or severe as to be liable to monopolize to Huawei the entire market for products complying with the standard, this would indeed be abusive conduct.
On the subject of past damages, the court was clear that Huawei can, under the same conditions, seek an account of profits for past damages, because such an action “cannot have any direct impact on products complying with the standard in question manufactured by competitors appearing or remaining on the market”. The court remained silent on actions for delivery up or destruction of existing products. It is difficult to envisage a court giving such an order where the patentee is under a FRAND licensing obligation.
A landmark decision
This decision is the culmination of 20 years of debate over the tension in Europe between IP law and competition law. There have been earlier decisions relating to copyright, but this is the first relating to a patent. In effect, it quashes the Commission’s opinion (press releases No IP/12/1448 and MEMO/12/1021 of 21 December 2012) that the bringing of an action for an injunction for infringement of an SEP is abusive, under Article 102 TFEU, where the proprietor of that SEP has previously indicated to a standardisation body that it is prepared to grant licences on FRAND terms and the infringer is willing to negotiate but the parties cannot agree on the royalty to be paid.
The Advocate General’s earlier opinion discussed dominance in a little more detail than the Court. In a footnote to that opinion, it is pointed out that anyone complying with a standard set by a standards body must inevitably make use of the teaching of an SEP (thus requiring a licence from the patent proprietor) and that this may give rise to a rebuttable presumption that the owner of that patent holds a dominant position, but he expressed the opinion that it must be possible to rebut that presumption with specific, detailed evidence.
Were ZTE’s patents also valid and essential to the standard? This is not examined in detail in the facts behind the CJEU decision, except in the conclusion that the two parties were deemed to have equivalent bargaining power. No doubt if ZTE were to present a forceful counterclaim, the factual situation may be different and the offer of a cross-license may indeed be FRAND.
The CJEU noted that the concept of an abuse of a dominant position is:
• an objective concept
• relating to the conduct of a dominant undertaking which,
- on a market where the degree of competition is already weakened precisely because of the presence of the undertaking concerned
• through recourse to methods different from those governing normal competition in products or services on the basis of the transactions of commercial operators,
• has the effect of hindering the maintenance of the degree of competition.
In the standards-setting arena, the degree of competition can be weakened where an invention is adopted by a standards body on the promise of FRAND licenses being available. Reneging on such a promise would be recourse to a method “different from those governing normal competition”.
Owners of SEPs must run their licensing programs fairly and with diligence if they are not to lose their right to an injunction as a last resort. Licensing terms must be set out in full and should contain all the provisions normally found in a licensing agreement. Parties receiving demands for royalties on terms they do not believe to be fair and reasonable can challenge the essentiality of the patent and its validity, but must make a prompt and specific counter offer to the terms presented and should consider an escrow arrangement for setting aside damages pending resolution of the negotiation. Where a counter-proposal includes a cross-licensing element, there must be credibility in the proposal. Falling short of these steps runs the risk of the full force of an injunction to cease and desist.