Landmark decisions on FRAND licensing in Germany: What to look out for in negotiations

By Dr. Claudia Milbradt

Download article as PDF 

With the Huawei/ZTE decision in 2015, the Court of Justice of the European Union (CJEU) declared FRAND (fair, reasonable and non-discriminatory) a European standard in negotiating licenses for standard essential patents. It also triggered an ongoing discussion about when and how to apply FRAND.

Background

Today, it is well acknowledged by the courts that the antitrust objection of compulsory license can be brought against patent infringement claims. Early in 2004 with Standard-Spundfass, Germany’s Federal Court of Justice published its first decision on the general existence of antitrust objections following its decision concerning behavioral standards in the objecting process in 2009 as a precursor to the CJEU’s decision: the O­range Book standard. Although a concrete decision on FRAND has not yet reached Germany’s Federal Court of Justice, recent trial and appellate court decisions offer some guidance on how to handle FRAND negotiations in Germany.

Both appellate courts that had yet to rule on FRAND, the Higher Regional Court of Düsseldorf and the Higher Regional Court of Karlsruhe, apply Huawei/ZTE in conse­cutive steps to test for FRAND confor­mity where a license is negotiated. In most cases, the patent owner came across a potential infringement and wanted the infringer to cease and desist or to license the standard bearing on the patent. The following outlines the steps necessary to remain FRAND compliant under German Law. The decisions rendered since 2015 before the trial courts, the Regional Courts of Mannheim and Düsseldorf and their instances of appeal mentioned above and the Higher Regional Courts of Frankfurt and Düsseldorf provide some criteria.

Infringement notification

If the owner of a standard essential patent (SEP) comes across an infrin­ging action, he must notify the infringer accordingly as to which part of the stan­dard his or her patent concerns and how it is being used by the infringing party. Merely indicating that the infringing party manufactures products using the standard is insufficient. Instead, the patentee must state the technical function of the infringing product that uses the standard protected by such patents with claim charts. Notification must take place before a lawsuit is filed (at the la­test before payment of court costs is due, hence when filing the lawsuit).

Patent owners must provide enough information to the alleged infringer to allow for an independent evaluation of the situation. Although claim charts do not have to be sent to the infringer per se, a “proud list” showing the 10-15 strongest SEPs as part of a portfolio should at least be provided.

Demanding a license

The alleged infringer is required to show willingness to enter into a license agreement. The time span to declare willingness depends on the information provided by the patentee giving notification of the alleged infringement. However, willingness should be shown no later than three months after the notification was given, since it is sufficient to state whether or not general interest in a license exists. Notably, this does not bar the infringer from challenging the pa­tent’s validity in the meantime.

FRAND offer

The steps taken by the parties should lead to the point where offers and counter­offers can be made fair, reasonable and non-discriminatory. Although the Higher Regional Court of Karlsruhe rejected the necessity for the patentee to make sure that the alleged infringer can understand – based on objective criteria – why he or she thinks his or her offer is FRAND compliant, it is advisable to proceed in a way to show said compliance; especially since the patentee must decide on license fees and offer a substantial reply when the infringer denies the offer  since it is not FRAND. The benchmarks for the courts to decide whether the license complies are often hypothetical references of how a license would look without the SEP owner’s market-dominating position or comparable licenses already granted in the relevant sector.

Notwithstanding the fact that a broad range of fees can be FRAND, arguments can be made that existing licenses are inadequate for the particular situation, or that the SEP owner has not shown sufficient factors,and the suggested license fee is irreproducible for potential licensees.

To mitigate the risk of a suggested license not being FRAND, the negotiated contract should contain adjustment clauses for significant changes in the patent’s scope or validity (e.g., when a main patent of an SEP portfolio expires, the suggested license cannot be FRAND anymore); or if third parties could claim additional royalties from the licensee due to a large patent portfolio held by multiple entities that protect the standard, a clause sta­ting that such licenses combined shall not expose the licensee to a financial burden.

Counteroffer

To deny an offer made by the patentee, the alleged infringer must react with ­reasonable care and without undue delay. A potential licensee may make a counter­offer with factual evidence to show why he or she thinks the license offered is not FRAND. If the offer is denied but use of the alleged infringed SEP continues, it is advisable for the alleged infringer to deposit a fictitious license fee, which would be ambiguous because the alleged infringer would be forced to calculate the license fee based on FRAND standards.

Closing remarks

Noting that the courts must conclude the offer made by the patentee complies with FRAND sets the bar high for SEP owners in the future when making claims to alleged infringers, is important to both sides. Nonetheless, even though an alleged patent infringement is challenging for potential partners to a long-term licensing of diverse patent portfolios, the recent decisions can be used as guidance in negotiations between potential licensors and licensees.

claudia.milbradt@cliffordchance.com