'Patent Wars'

Essential patent holders may be forced to make licence offer before seeking an injunction

In an opinion issued today to the European Court of Justice (ECJ), Advocate General Wathelet has said that in certain circumstances, patent holders should be required to make a specific licence offer to the alleged infringer before they can bring injunction proceedings. 

This is the latest development in the on-going ‘patent wars’ between the world’s mobile phone companies over how the profits from the multi-party research which goes into generating each generation of mobile phone technology should be divided up. It has potentially far-reaching consequences and has been subject to significant debate between the parties, the European Commission and intervening Regulators from the Netherlands, Finland and Portugal – not to mention in standards-setting bodies such as the European Telecommunications Standards Institute and the International Telecommunications Union.

The dispute

The legal dispute arises over a European patent held by Chinese telco Huawei, which is deemed ‘essential’ to the ‘Long Term Evolution’ (LTE) standard. The LTE standard relates to 4G mobile communications and arguably anyone complying with this standard must use Huawei’s patent. Huawei is now locked in German litigation with ZTE, a group of Chinese companies selling base stations in Germany that Huawei alleges incorporate Huawei’s patented technology.

The German court has asked the ECJ to confirm when an essential patent holder can legally block access to essential intellectual property – is it a breach of competition law to apply for an injunction where the defendant is willing to pay a reasonable licence fee?

The European Commission’s view

This is a critical question, with the European Commission taking a strong position on the back of its recent investigations into the use of patents by Samsung and Motorola Mobility and arguing that a standard-essential patent (SEP) holder abuses a dominant position where it applies for an injunction without offering a licence. In contrast, the Dutch Government argued that the Commission’s approach was “a strange use of competition law” because it creates a “safe haven” for the alleged infringer to use the patent during licence negotiations without any compensation flowing to the patent holder.

The Advocate General’s perspective

The Advocate General appears to have sided with the Commission, recommending to the ECJ that it may be a breach of competition law to apply for an injunction in the following circumstances:

• The proprietor of a SEP has made a commitment to a standards body to grand third party licences on fair, reasonable and non-discriminatory (FRAND) terms;
• The SEP proprietor has made a request for corrective measures or sought an injunction against a user before it has honoured this commitment; and
• The user has shown itself to be objectively ready, willing and able to enter into a licensing agreement.

In these circumstances, the proprietor must, before seeking redress, alert the user to the alleged infringement, giving full details. In addition, the proprietor must present the user with a written offer of a licence on FRAND terms. The offer must contain all terms normally included in a licence in the relevant sector, including the precise amount of the royalty and how it is calculated.

However, the Advocate General does state that the user must provide a considered and serious response to this offer, including promptly presenting any counter-offer. There will be no competition law breach where the conduct of the user is purely tactical and/or dilatory.

The Advocate General also proposes that where the parties go to court or arbitration to agree FRAND terms, the proprietor can require financial security, so obtaining some protection from the “safe haven” concern raised by the Netherlands.

It is also not a breach of competition law to bring a damages-only action for past infringements of the SEP.

Can a “willing” user still challenge the patents validity?

Despite these protections for the proprietor, the Advocate General has provided that a “willing” user can still reserve the right to challenge the validity of the SEP in litigation. This issue has been a point of contention, with some commentators (and the German courts) arguing that this right should be waived in order to be deemed a willing licensee.

However, given the track record of successes by users challenging the validity of such patents in the global patent wars to date, it is apparent that many allegedly essential patents are not valid. Consequently, waiving the right to bring a challenge would result in a user having to negotiate a licence for a bundle of patents only a small proportion of which are in fact legally effective This could distort the bargaining positions of the parties.

Although many of the players have been able to reach licence agreements without resorting to litigation, where litigation has taken place the licence fees which have been claimed have far exceeded the amounts ultimately awarded by the courts. Removing the licensee’s ability to argue for a lower licence fee by challenging the validity of part of the portfolio could make it easier for licensors to enforce more substantial royalty rates.

The ECJ must now decide…

The Advocate General’s Opinion is non-binding and we now await the decision of the ECJ, which is likely to shape the future of litigation over SEPs.