What does it take for a defendant to avoid being injuncted under the CJEU's ruling on FRAND?

In July everyone engaged in telecoms patents leapt on the decision finally issued by the CJEU in respect of the burning question: is the holder of a declared standards-essential patent (“SEP”) entitled to an injunction against a technology user which expresses itself willing to take a licence but does not accept that the terms on offer are in fact fair, reasonable and non-discriminatory (“FRAND”). The Court gave a remarkably brief decision in the dispute between Huawei and ZTE, which clarified the fundamental point – yes, an injunction may be available – but opened a whole series of other questions as to when exactly an injunction will be granted.

In a dispute between SEP-holder Sisvel and two companies in the Qingdao Haier group, the Dusseldorf court has found one set of circumstances where an injunction is appropriate – and simultaneously illustrated the potential value for technology users of having such disputes heard in the English courts, instead.

The preconditions for an injunction

The Court ruled that an SEP holder, which has given an irrevocable undertaking to the standardisation body to grant a licence on FRAND terms, does not abuse its dominant position by bringing an action for infringement seeking an injunction or the recall of products as long as:

(a) the SEP holder has 

(i) alerted the infringer to the fact of the infringement and the way in which the SEP has been infringed, and 

(ii) (after the infringer has expressed its willingness to conclude a licence agreement) presented a written offer for a licence on FRAND terms which specifies the royalty and how it was calculated; and

(b) where the infringer continues to use the SEP, the infringer has not diligently responded to the holder’s offer, in good faith and with, for example, no delaying tactics. This may require a prompt, written counter-offer and the provision of security such as a bank guarantee for the royalties due for past and on-going sales.

But when does a disagreement over the proposed terms of a licence cease to be good faith and become a delaying tactic? In particular, the Court’s acceptance that an alleged infringer cannot be criticised for challenging the validity of the patent or indeed whether it is in reality essential to the standard (and so necessarily infringed) opens the door to lengthy disputes as to the rights and wrongs of those issues before any licence can be finalised. The provision that an alleged infringer which agrees in principle to take a licence must provide security pending final terms being agreed is meant to protect the SEP holder during this period – but the Court stopped short of mandating third party adjudication of the appropriate royalty, leaving that to the parties’ equally uncertain agreement.

How not to do it

A decision has now been given by the Dusseldorf Regional Court, addressing some of these questions. Sisvel had provided information as to its allegation of patent infringement to the head company in the Qingdao Haier group before bringing the claim, and proposed licence terms including royalty rates, but Haier had not responded until after the claim was filed. At that point it made a counter offer, and made others including one just before the actual trial. At no time did it provide security for the royalties due under any of its sales, until the hearing itself when it produced sales data and a small bond for accrued royalties. 

Haier’s FRAND defence was rejected. The German court did not look into the details of whether Sisvel had provided enough information before starting the action, or the FRAND (or otherwise) nature of either side’s offers. Nor did it accede to Haier’s request for Sisvel to produce copies of the other licences it has granted under the patent in suit, to enable Haier to assess whether or not those offers were FRAND. It simply found that Haier’s conduct amounted to delaying tactics so that the responses it had given through the course of the action were not sufficient to ward off an injunction. Haier would have had to provide a bond to cover accrued royalties within one month of making its first counter-offer, to demonstrate its good faith and avoid the injunction.

Apply to London for disclosure of licence documents, first?

The court’s refusal to order production of the existing licences granted under the patent illustrates one limitation of the German patent litigation process for disputes of this nature. Had Haier brought a case in the English court, disclosure of those licences would have been inevitable, before the German case came anywhere near a final hearing. This would have enabled the parties to negotiate over FRAND terms with equality of information, and hence more even bargaining power. The speed and cost-efficiency of Germany’s courts have made them a strongly preferred venue for patent disputes in recent years; but cost-efficiency can sometimes lead to a material disadvantage, as Haier discovered in this case, to their cost.