Huawei V. ZTE: Too Many Open Questions?

2015-12-23

By Frank Fine

Head of International Antitrust

DeHeng Law Offices, Brussels

The European Court of Justice has confirmed that an owner of standard essential patents (SEPs) must satisfy certain conditions before it seeks an injunction preventing a manufacturer from using the SEP. 

On 16 July 2015, the European Court of Justice handed down an important judgment which will have important ramifications for SEP licensing, regardless of the industry concerned.  The background of this case concerns the “patent wars” between various smart phone manufacturers who also own and/or are seeking to license SEPs.   The case arose from a referral of various questions from a Dusseldorf court. 

Huawei is the owner of a patent relating to synchronization signals, which forms part of the “Long Term Evolution” standard. Thus, anyone implementing the standard would have used the Huawei patent.  The patent was registered with ETSI and, accordingly, Huawei undertook to license the SEP on FRAND terms. 

The facts state that the parties had discussions concerning the infringement of the SEP and the possibility of ZTE licensing it on FRAND terms.  Huawei indicated the amount it deemed to be a reasonable royalty.  Meanwhile, ZTE was practicing the Huawei patent without paying it royalties.  It appears that negotiations broke down and thereafter, Huawei sought an injunction in the Dusseldorf court. 

The main issue before the ECJ was whether, by seeking an injunction, a SEP owner abuses its dominant position pursuant to Article 102 of the European Treaty.  In the course of its judgment, the ECJ laid down the conditions that must be met for SEP owners to avoid an abuse of dominant position when seeking an injunction.

On the preliminary issue of whether Huawei was dominant, there was no discussion in the ECJ judgment.  This was because the parties were in agreement that Huawei was dominant.  This is consistent with prior Commission decisions and Court judgments suggesting that the owner of a standard (or of a patent within it) may be considered dominant simply by virtue of owning it.

On the issue of abuse, the Court indicated that there is a tension between IP ownership and antitrust law, which came into play here by virtue of Huawei seeking to protect its patent.  To resolve this attention, the Court laid down the conditions that must be met before a SEP owner seeks an injunction.

First, the SEP owner must alert the alleged infringer of the infringement by designating the SEP being used and how it has been infringed.

Second, after the alleged infringer has expressed his willingness to take a license on FRAND terms, the owner must submit to the former a written offer on FRAND terms, in accordance with the duty imposed by the standardization body and specifying, in particular, the amount of the proposed royalty and how it is calculated.

Third, the alleged infringer has failed to respond “diligently” with a “good faith” written counteroffer specifying his proposed FRAND terms. 

Fourth, if the alleged infringer has begun using the SEP in question without a license, he has failed to provide security as from the point when his counteroffer has been rejected. 

Fifth, where no agreement has been reached following the submission of the alleged infringer’s counteroffer, the parties “may, by common agreement,” instruct an independent third party to determine the royalty amount. 

In parallel with these negotiations, EU law does not prohibit the alleged infringer from challenging the validity of the SEPs in question.

With the above guidance, the case was sent back to the Dusseldorf court for resolution on the facts. 

Comments:

Unfortunately, the ECJ judgment contains ambiguities which either party would be able to exploit to its own advantage. 

For one thing, the Court did not lay down any timelines for the above steps. For example, there is no clear deadline for the alleged infringer’s submission of a counteroffer. 

Even more troubling, the above fifth “condition” is not a true condition.  The Court did not impose a duty on the parties to appoint an independent third party to determine the applicable royalty rate.  Arguably, this was an error if one assumes that the Court was seeking to discourage SEP owners from seeking injunctive relief. In NDC Health/IMS Health, a similar case before the Commission and Court which I was involved in, the Commission imposed a duty upon the parties, within a specific time, to agree to an independent expert to decide the applicable royalty rate (if the parties failed to agree on royalties). If the parties failed to agree on an expert, the Commission would appoint the expert itself. 

Those seeking to license SEPs on FRAND terms would be advised to overcome the above ambiguities by taking the following steps:

If the FRAND offer provided by the SEP owner contains no deadline for acceptance, the SEP owner should immediately notify this fact to the SEP owner and indicate that a decision will be provided within a specific (diligent) deadline determined in good faith. 

If the putative licensee submits a counteroffer, it should include language to the effect that it is valid for a specific time (say 15 business days) or it will be deemed rejected, thus putting pressure on the SEP owner to respond quickly.  

Finally, it is advisable for the putative licensee to state in the counteroffer that if the SEP owner fails to accept the counteroffer by the stipulated deadline, the putative licensee recommends that the royalty issue be settled by an independent expert. Again, tight deadlines for these processes should be built into the counteroffer. If the SEP owner rejects this approach, a national judge may be inclined to reject the application for an injunction.