Monday, November 24, 2014

Thoughts on Advocate General Wathelet's Opinion in Huawei v. ZTE

Last week I published a summary of AG Wathelet's opinion in the pending CJEU case of Huawei v. ZTE, which addresses the question of whether (or more precisely, under what conditions) it is an abuse of dominant position for the owner of a FRAND-encumbered SEP to seek injunctive relief.  Now that I've had some time to reflect on the opinion, here are a few thoughts.

First, the AG distinguishes his proposed approach to the question from that of the German Bundesgerichtshof in the Orange-Book-Standard case and from that of the European Commission as reflected in its December 2012 press release in the Samsung investigation.  One might say that he has attempted to chart a middle path of sorts.  Here's what he has to say about the two approaches he rejects:

31.     First, the referring court points out that the Bundesgerichtshof (Federal Court of Justice, Germany) found in its judgment of 6 May 2009 in Orange-Book-Standard (KZR 39/06, ‘Orange-Book-Standard’) that, where the owner of a patent seeks a prohibitory injunction against a defendant who has a claim to a licence for that patent, the patent owner abuses his dominant position only where the following conditions are met:
‘First, the defendant must have made the applicant an unconditional offer to conclude a licensing agreement (an offer which, specifically, must not contain a clause limiting the licence exclusively to the cases of infringement), it being understood that the defendant must consider itself bound by that offer and that the applicant is obliged to accept it, since its refusal of the offer would unfairly hamper the defendant or breach the principle of non-discrimination.
If the defendant considers the amount of royalty claimed by the applicant to be excessive, or if the applicant refuses to quantify the royalty, the offer of an agreement is regarded as unconditional if it provides that the applicant is to determine the amount of the royalty fairly.
Secondly, if the defendant is already making use of the subject-matter of the patent before the applicant accepts its offer, it must meet the obligations which, for use of the patent, will be incumbent on it under the future licensing agreement. That means, in particular, that the defendant must render an account for its acts of use in accordance with the terms of a non-discriminatory agreement and that it must meet the resulting payment obligations.
As regards the fulfilment of that payment obligation, the defendant is not required to pay the royalty directly to the applicant. The defendant is at liberty to deposit a security for payment of the royalty at an Amtsgericht (Local Court)’. 
32.     Secondly, the referring court points out that, in a press release regarding a Statement of Objections sent to Samsung Electronics and Others (COMP/C‑3/39.939) in the course of an infringement procedure relating to the mobile telephony market, the European Commission made a preliminary assessment to the effect that the bringing of an action for a prohibitory injunction was unlawful in the light of Article 102 TFEU, given that the case concerned an SEP, that the patent holder had indicated to a standardisation body that it was prepared to grant licences on FRAND terms and that the infringer was itself willing to negotiate such a licence.  . . .
47.     It is clear that the referring court’s questions have been largely inspired by the Orange-Book-Standard judgment of the Bundesgerichtshof and the Commission’s press release in the Samsung case.
48.  As regards Orange-Book-Standard, the significant factual differences between that case and the dispute before the referring court should be noted. The patent at issue here is essential to the LTE standard which was developed as a result of an agreement concluded between the undertakings (including Huawei and ZTE) involved in the standardisation process within ETSI, whereas the standard at issue in the Orange-Book-Standard case before the Bundesgerichtshof was a de facto standard.  It follows that, in Orange-Book-Standard, the owner of the patent at issue had not given any commitment to grant licences on FRAND terms. It is only natural that, in those circumstances, the patent owner will have greater negotiating power than in the case of an SEP the owner of which is, like the licence applicant, a member of a European standardisation body, and that an action for a prohibitory injunction on its part will ultimately be regarded as abusive only if the royalty it demands is clearly excessive.
49.     In view of that significant factual difference between that case and the dispute before the referring court, I am of the opinion that Orange-Book-Standard cannot be transposed by analogy to the present case.
50.     On the other hand, although the press release in the Samsung case does concern an SEP the owner of which has given a commitment to a standardisation body to grant licences on FRAND terms, it seems to me that a mere willingness on the part of the infringer to negotiate in a highly vague and non-binding fashion cannot, in any circumstances, be sufficient to limit the SEP-holder’s right to bring an action for a prohibitory injunction.
51.     To my mind, a pure and simple application to the present case of the case-law established by the Bundesgerichtshof in Orange-Book-Standard or the press release would result in the over-protection or under-protection of the SEP-holder, of those using the teaching protected by the patents or of consumers, respectively.
The EC however (after the referring court made its referral to the CJEU) did provide more detail of what it means to be an "willing licensee" in its April 2014 FAQ on the Samsung and Motorola matters, which seems very similar to AG Wathelet's approach (a point that Florian Mueller notes here): 
The Motorola decision provides a "safe harbour" for standard implementers who are willing to take a licence on FRAND terms. If they want to be safe from injunctions based on SEPs by the patent holder, they can demonstrate that they are a willing licensee by agreeing that a court or a mutually agreed arbitrator adjudicates the FRAND terms.
Samsung's commitments implement in this case the "safe harbour" concept established in the Motorola decision in practical terms. They provide for a "safe harbour" available to all potential licensees of the relevant Samsung SEPs. Potential licensees are protected against injunctions sought by Samsung on the basis of such SEPs if they submit to the licensing framework provided for by the commitments.
Moreover, in footnote 18 of the opinion the AG recognizes that "the Commission itself is of the opinion that far more stringent requirements should be imposed on the infringer" than are suggested in the 2012 Press Release.

Second, I thought it was noteworthy that the AG alluded to the possibility that other laws might be more appropriate for addressing the issue presented:
8.       In the light of the questions submitted by the referring court, I shall confine my observations in this Opinion to competition law and, in particular, to the question of abuse of a dominant position.
9.       That does not mean, however, that the matters at issue in the dispute before the referring court, which, in my view, stem largely from a lack of clarity as to what is meant by ‘FRAND terms’ and as to the requisite content of such terms, could not be adequately — if not better — resolved in the context of other branches of law or by mechanisms other than the rules of competition law.
My own view is that other branches of law generally are better for addressing the question of whether or under what circumstances courts should deny injunctions.  As I've stated many times before, including in this paper, competition law strikes me as a second-best solution to a problem that could be more directly addressed through the law of patent remedies.  To be sure, the U.S. eBay approach isn't necessarily ideal in its articulation of the relevant criteria for granting or denying injunctions; but at its best it can focus courts' attention on what I view as the relevant economic considerations, namely whether the risk and potential consequences of patent holdup--properly defined as the ability of the patent owner to use the threat of injunctive relief to extract a royalty attributable not only the value of the technology in comparison with alternatives, but also on switching costs--exceed the information and error costs arising from having to calculate a postjudgment royalty.  Article 12 of the EC Enforcement Directive, which the AG cites in paragraph 63, could be deployed to much the same effect.  

Moreover, some of the considerations the AG cites as reasons for proceeding cautiously in the case at hand stem from E.U. law recognizing the right to intellectual property and the right of access to courts (paras. 59-67).  It seems to me that both of these considerations weigh more heavily when the question is whether a patentee is violating positive law--in this case, competition law--by seeking an injunction, than when the question is merely whether a court should substitute a damages remedy for an injunction.  Competition law also might not be an ideal fit because of the potential collateral consequences that can follow from a finding that a party is in violation.  (In the U.S., though not in Europe, these would include among other things the prospect of the patentee incurring treble damages liability, though exactly what those damages might be in the present context is a bit unclear--a point I probably should have addressed in the paper linked above.)  In addition, the competition law option might require proof of other elements including dominant market position (which the AG believes might not always be present in the SEP context) and, in the U.S. at least, would go against the grain of finding persons liable for unilateral conduct other than in the most extreme circumstances.  And perhaps most importantly, if the reason for denying an injunction is based primarily on the economic considerations I sketched out above, it arguably doesn't matter much if the patent is FRAND-encumbered or has been declared essential.  (If anything, the AG's reluctance to extend his analysis to de facto standards like the one at issue in the Orange-Book-Standard case itself might seem to invite some patent owners to opt out of participating in SSOs, a point that Florian Mueller also makes in his analysis linked above.)   Nevertheless, I recognize that a more routine denial of injunctive relief in preference for an ongoing royalty would be a radical change for most European countries, and to be sure there would be problems if the ongoing royalty would not fully compensate for the delay and other losses occasioned by the infringement of a valid patent.  

A third point I would highlight is the AG's proposal that implementers must be ready, willing, and able to accept a FRAND license, and that they may be enjoined if instead that are acting in a manner that is "purely tactical and/or dilatory and/or not serious" (para. 88).  I'm not entirely sure what the right approach is here.  On the one hand, an injunction could serve as a penalty for bad behavior on the part of implementers and therefore might seem to be a useful weapon for a court to have in reserve.  On the other, if the SEP owner is willing to accept a FRAND license, why not just have the court determine the amount of the license if the parties can't agree on one, and award other (perhaps more proportional) sanctions if the court believes the implementer has acted in bad faith?  (For some musings on this topic, see my post on Professor Choi's recent article here.)  Perhaps the correct resolution of these matters depends in part on the body of law chosen to address the issue.  Intuitively it seems somewhat unfair to accuse the patent owner of an antitrust violation or abuse of right if the defendant isn't bargaining in good faith, whereas if the question is merely what remedy a court should award in a patent infringement suit the defendant's good or bad faith is less relevant (and if necessary can be dealt with by other sanctions, as just noted). In any event, though, I am happy to see the AG propose that merely reserving the right to challenge validity and infringement does not mean that the implementer is acting in bad faith (paras. 94-96).

Thursday, November 20, 2014

Summary of the Advocate General's Opinion in Huawei v. ZTE

As I noted this morning, Advocate General Wathelet's opinion in the Huawei v. ZTE dispute pending before the Court of Justice for the European Union is now available for download (including, as of just a little while ago, in English) hereThe English-language version of the questions referred to the CJEU are as follows:
1. Does the proprietor of a standard-essential patent who informs a standardisation body that he is willing to grant any third party a licence on fair, reasonable and non-discriminatory terms abuse his dominant market position if he brings an action for an injunction against a patent infringer although the infringer has declared that he is willing to negotiate concerning such a licence?
is an abuse of the dominant market position to be presumed only where the infringer has submitted to the proprietor of a standard-essential patent an acceptable, unconditional offer to conclude a licensing agreement which the patentee cannot refuse without unfairly impeding the infringer or breaching the prohibition of discrimination, and the infringer fulfils his contractual obligations for acts of use already performed in anticipation of the licence to be granted?
2. If abuse of a dominant market position is already to be presumed as a consequence of the infringer’s willingness to negotiate:
Does Article 102 TFEU lay down particular qualitative and/or time requirements in relation to the willingness to negotiate? In particular, can willingness to negotiate be presumed where the patent infringer has merely stated (orally) in a general way that that he is prepared to enter into negotiations, or must the infringer already have entered into negotiations by, for example, submitting specific conditions upon which he is prepared to conclude a licensing agreement?
3. If the submission of an acceptable, unconditional offer to conclude a licensing agreement is a prerequisite for abuse of a dominant market position:
Does Article 102 TFEU lay down particular qualitative and/or time requirements in relation to that offer? Must the offer contain all the provisions which are normally included in licensing agreements in the field of technology in question? In particular, may the offer be made subject to the condition that the standard-essential patent is actually used and/or is shown to be valid?
4. If the fulfilment of the infringer’s obligations arising from the licence that is to be granted is a prerequisite for the abuse of a dominant market position:
Does Article 102 TFEU lay down particular requirements with regard to those acts of fulfilment? Is the infringer particularly required to render an account for past acts of use and/or to pay royalties? May an obligation to pay royalties be discharged, if necessary, by depositing a security?
5. Do the conditions under which the abuse of a dominant position by the proprietor of a standard-essential patent is to be presumed apply also to an action on the ground of other claims (for rendering of accounts, recall of products, damages) arising from a patent infringement?
Here's my summary of the opinion, mostly based on my reading of the German version.  (The original language is French, which I didn't realize until I'd almost finished reading the German version, or else I would have read it in French.  Oh well.  In any event, I checked what I had written on the basis of the German version and have made a few small changes and additions based on the English-language version, which only came to my attention about two hours ago.)

1. The German Orange-Book-Standard case and the European Commission's approach to FRAND-encumbered SEPs as stated in its press release in the Samsung investigation present two conflicting approaches to the question of when European competition law prevents the owner of an SEP from seeking injunctive relief.  The AG believes that the Orange-Book-Standard approach is not directly relevant to the present case, however, because that case involved a de facto standard, rather than a standard adopted by an SSO (paras. 48-49).  At the same time, under the EC's approach the SEP owner cannot be denied an injunction simply because the accused infringer has made an utterly vague and nonbinding statement that it is prepared to enter into a license (para. 50).  Simply applying either approach to the present case would result in two much or too little protection accruing to the SEP owner, the user or the infringer (para. 51).

2.  The AG will proceed on the assumption that Huawei's patent confers upon Huawei a dominant position, because the questions presented rest upon this assumption, and therefore the issue of Huawei's dominance is not properly before the CJEU.  But the AG is of the view that national courts should not simply presume that SEPs confer dominance, rather they should consider the evidence (paras. 53-58).

3.  The questions presented require a weighing of, on the one hand, the right to intellectual property and the right of access to the courts (on the part of Huawei) and ZTE's freedom to conduct business, which could be compromised by the issuing of an injunction (para. 59).  The AG is of the opinion that merely seeking an injunction is not, by itself, an abuse of dominant position.  Rather, injunctions are an essential means for patent owners to assert their rights to IP (para. 61).  It therefore follows that any constraint on the right to seek an injunction inevitably constitutes an enhanced constraint on IP and thus may be permitted only under exceptional and very specific circumstances (para. 62).  At the same time, the right to IP is not an unconstrained right (citing recital 12 and article 12 of the 2004 EC Enforcement Directive) (para. 63).  The AG's view is that where the accused infringer is technologically dependent on the patent and is objectively ready, willing and able to conclude a license on FRAND terms, and where the patent owner conducts itself in an unfair or unreasonable manner against the infringer, the act of seeking an injunction can be an abuse of dominant position (para. 74).       

4. In answer to the first question, then, as long as the patent infringer is ready to conclude a license and to comply with it, especially with respect to paying a reasonable royalty, the SEP owner must before commencing an action for an injunction undertake certain concrete steps in order to respect its FRAND commitment and especially its special responsibility under article 102 of the TFEU.  This is all the more necessary when it is not certain that the infringer necessarily knows that it is using the teaching of a valid SEP.  The AG notes that for the LTE-Standard at issue here there are more than 4,700 declared patents, and that a substantial number of them are believed to be neither valid nor essential (paras. 80-81).  Therefore, it is not unreasonable to negotiate and conclude licenses for FRAND-encumbered SEPs ex post, that is, after commencing use of them (para. 82). 

What therefore must the SEP owner do before commencing an infringement action, in order to avoid an abuse of dominant position?  First, the accused infringer (to the extent it is not evident that is already so informed) must be informed in writing what the relevant patent is how it is infringed (paras. 83-84).  In addition, the SEP owner must present to the accused infringer a written offer of FRAND terms, which must contain all of the terms normally found in a license in the relevant industry, especially the amount of the particular royalty and the manner in which it is to be calculated (para. 85).         

What must the alleged infringer do?  It must consider the offer carefully and seriously.  If it doesn't accept the license, it should present to the owner within a short period of time a reasonable written counteroffer, pointing out the terms with which it disagrees.   But if the accused infringer is acting in a purely strategic and/or hesitant and/or insincere manner, it is not an abuse for the SEP owner to commence an action for an injunction (paras. 87-88). 

The AG is also of the view that the accused infringer should be able to reserve the right to challenge infringement and validity, because otherwise an invalid patent may go unchallenged or the defendant wind up paying for a patent it is not infringing (paras. 94-96).

5.  In light of the above, the AG did not find it necessary to answer the second and third questions (para. 97).

6.  On the fourth question, the AG believes that the posting of a bank guaranty for the payment of royalties or lodging interim payments in an escrow account for the past and future use of the patents may be demanded by the patent owner (para. 98).

7.  On the fifth question, because a recall or removal of allegedy infringing goods may have the same impact as an injunction, these remedies as well should be subject to the rules set out above.  However, there is nothing wrong with the patent owner seeking a rendering of accounts, by which the owner can determine the amount of the defendant's use, as long as the measures are reasonable and proportionate.  Similarly, an action for damages for past use does not pose a problem (paras. 100-02).

Finally, I'll conclude by quoting the English-language version of the conclusion (para. 103), which is more definitive than the brief summary of it that I posted earlier this morning:
103.   In the light of the foregoing considerations, I propose that the Court should reply as follows to the questions referred for a preliminary ruling by the Landgericht D├╝sseldorf:
The fact that a holder of a standard-essential patent (SEP) which has given a commitment to a standardisation body to grant third parties a licence on FRAND (Fair, Reasonable and Non-Discriminatory) terms makes a request for corrective measures or brings an action for a prohibitory injunction against an infringer, in accordance with Article 10 and Article 11, respectively, of Directive 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights, which may lead to the exclusion from the markets covered by the standard of the products and services supplied by the infringer of an SEP, constitutes an abuse of its dominant position under Article 102 TFEU where it is shown that the SEP-holder has not honoured its commitment even though the infringer has shown itself to be objectively ready, willing and able to conclude such a licensing agreement.
Compliance with that commitment means that, prior to seeking corrective measures or bringing an action for a prohibitory injunction, the SEP-holder, if it is not to be deemed to be abusing its dominant position, must — unless it has been established that the alleged infringer is fully aware of the infringement — alert the alleged infringer to that fact in writing, giving reasons, and specifying the SEP concerned and the manner in which it has been infringed by the infringer. The SEP-holder must, in any event, present to the alleged infringer a written offer of a licence on FRAND terms which contains all the terms normally included in a licence in the sector in question, in particular the precise amount of the royalty and the way in which that amount is calculated.
The infringer must respond to that offer in a diligent and serious manner. If it does not accept the SEP-holder’s offer, it must promptly present to the latter, in writing, a reasonable counter-offer relating to the clauses with which it disagrees. The making of a request for corrective measures or the bringing of an action for a prohibitory injunction does not constitute an abuse of a dominant position if the infringer’s conduct is purely tactical and/or dilatory and/or not serious.
If negotiations are not commenced or are unsuccessful, the conduct of the alleged infringer cannot be regarded as dilatory or as not serious if it requests that FRAND terms be fixed either by a court or by an arbitration tribunal. In that event, it is legitimate for the SEP-holder to ask the infringer either to provide a bank guarantee for the payment of royalties or to deposit a provisional sum at the court or arbitration tribunal in respect of its past and future use of the patent.
Nor can an infringer’s conduct be regarded as dilatory or as not serious during the negotiations for a FRAND licence if it reserves the right, after concluding an agreement for such a licence, to challenge before a court or arbitration tribunal the validity of that patent, its supposed use of the teaching of the patent and the essential nature of the SEP in question.
The fact that the SEP-holder takes legal action to secure the rendering of accounts does not constitute an abuse of a dominant position. It is for the national court in question to ensure that the measure is reasonable and proportionate.
The fact that the SEP-holder brings a claim for damages for past acts of use for the sole purpose of obtaining compensation for previous infringements of its patent does not constitute an abuse of a dominant position.

English version of Advocate General's Opinion in Huawei v. ZTE is now up

Thank you to one of my readers, Damir Isanbirdin, for calling this to my attention; here it is.  I'll be back this afternoon with my own brief summary.

Opinion of the Advocate General in the CJEU's Huawei v. ZTE FRAND Case

Here is a link to CJEU's webpage, from which you can download today's Opinion of the Advocate General in German, French, Spanish, Italian, and several other languages, but not English.  I've just started skimming the German version (it's 7:00 in the morning where I am), and I may report back later today with more detail, but here's what I gather so far based primarily on the conclusion (Ergebnis) paragraph 103: 

1.  The owner of a FRAND-encumbered SEP abuses its dominant position by seeking an injunction when it is shown that it has not kept his commitment even though the defendant is ready, willing, and able to conclude a license on FRAND terms.
2.  The SEP owner should convey a comprehensive written offer to the defendant before seeking an injunction.
3.  The accused infringer should react to this offer carefully and seriously.  If he rejects it, he should within a short time propose a counteroffer.  It is not an abuse of dominant position if the accused infringer's behavior is strategic or hesitant or insincere. 
4.  If negotiations are fruitless, the accused infringer is not acting hesitantly or insincerely if it requests a determination of FRAND conditions from a court or arbitration panel.  In such a case, the SEP owner can demand a bank guaranty or deposit in escrow for the payment of past or future royalties.
5.   The accused infringer is not acting hesitantly or insincerely if it requests a determination of whether the patent is valid and infringed.
6.  The SEP owner is not abusing its dominant position if it requests financial information, but the court should ensure that the measures are reasonable and proportionate.
7.  The SEP owner's request for damages for past infringement is not an abuse of dominant position.
*                    *                    *

On a somewhat related note, Spicy IP and FOSS Patents both have coverage this week on the Indian FRAND case between Ericsson and Micromax.  The court lowered the interim royalty rates that Micromax must pay Ericsson pending trial.  According to the court's order, "It is made clear that the above order is purely an interim arrangement and is not a determination of the FRAND rates for the Ericsson portfolio," and "It is directed that the trial in any event will be completed not later than 31st December, 2015."

Wednesday, November 19, 2014

Video of Last Week's Patent Remedies Conference at American University

The video of last week's patent remedies conference at American University, which I blogged about here and here, is now available on the conference website, here.  I'd recommend clicking on the "Pop Out" window in the upper right-hand corner of the video screen, so you can fast-forward or rewind as you like. 

Tuesday, November 18, 2014

Patent Colloquium at University of Toronto This Friday, November 21

I won't be attending this one myself, but it looks like a terrific lineup of prominent jurists, economists, and law professors.  The final session, titled "Standards-Essential Patents: Enforcement Options with FRAND Terms," will be moderated by Anthony Niblett with presentations by Alison Jones, Jorge Contreras, and Norman Siebrasse.  Here's the conference website and the complete schedule.  Check it out if you're in Toronto Friday.

Monday, November 17, 2014

Papers from the Texas Intellectual Property Law Journal's February 2014 FRAND Conference

Some of the papers that were presented at or submitted in connection with the Texas Intellectual Property Law Journal (TIPLJ)'s February 21, 2014 IP Symposium on "FRAND and the Antitrust/Intellectual Property Interface," which I live-blogged (links here, here, here, here, here, here, and here), have now been published.  (Some of them also had been presented earlier at a workshop at the University of Florida, which I live-blogged in September 2013, see here, here, here, here, here, here, here, here, and here.  My own symposium paper, The Comparative Law and Economics of Standard-Essential Patents and FRAND Royalties, is still awaiting publication; in the meanwhile, the ssrn version can be accessed here.)  The following is a list of the ones that have been published so far.  (I'm actually not 100% sure if Professor Ko's paper was submitted in connection with the symposium, but it fits with the theme.)  The papers do not appear to be available on TIPLJ's website, but readers with a subscription to Westlaw or Lexis should be able to access them.  Moreover, versions of the papers by Professors Sokol & Zheng, Page, Hylton, and Ko are available on ssrn.  

Christopher Yoo, Standard Setting, FRAND, and Opportunism, 22 TIPLJ 69-70 (2013).

D. Daniel Sokol & Wentong Zheng, FRAND in China, 22 TIPLJ 71-93 (2013).

Roger D. Blair & Thomas Knight, Problems in Sharing the Surplus, 22 TIPLJ 95-107 (2013).

William H. Page, Judging Monopolistic Pricing:  F/RAND and Antitrust Injury, 22 TIPLJ 181-208 (2014).

Keith N. Hylton, A Unified Framework for Competition Policy and Innovation, 22 TIPLJ 163-79 (2014).

Haksoo Ko, Facilitating Negotiation for Licensing Standard-Essential Patents in the Shadow of Injunctive Relief Possibilities, 22 TIPLJ 209-21 (2014).