Defence against Standard-essential Patents – Recent case law in Germany

(IPRinfo 2/2010)
Christian Harmsen
Partner, Bird & Bird

In Germany, the Federal Supreme Court found that the defendant in a patent infringement proceeding may raise the competition law defence in regard to damages.

There is an ever growing number of industrial standards, ranging from high-tech mobile telephone standards – such as GSM, 3G or the upcoming LTS or video compression standards like MPEG-2 or the newer H.264 to even such mundane sounding industrial goods as barrels for chemicals.

It was in a case involving such barrels that the German Federal Supreme Court found in 2004 for the first time that the defendant in a patent infringement proceeding may raise the so-called competition law defence in regard to damages (decision of July 13, 2004 – Standard-Barrel, GRUR 2004, 966).

Hot disputes on defence in C&D claims
The court found that if the defendant has a right to be granted a license to the patent under competition law, the patent owner/plaintiff cannot successfully request to sentence the defendant to pay damages. The reason is that the plaintiff cannot demand more damages than he could demand license fees in case a license agreement would have been concluded.
After this, it was hotly disputed whether the same defence could also be raised against cease and desist (C & D) claims, which are in most cases far more dangerous for the patent user.

In 2007, the District Court of Düsseldorf, which is highly regarded in patent matters, accepted this for the very first time. It dismissed three complaints based on the alleged infringement of patents necessary to use a mobile telephone standard (three decisions of February 13, 2007 – Siemens vs. Amoi). However, other courts have decided differently.

It was not until 2009 that another case reached the German Federal Supreme Court thus letting it decide on this question. In its widely regarded decision ”Orange Book Standard” (GRUR 2009, 694) the Supreme Court not only accepted the competition law defence as admissible against cease and desist claims but further specified the preconditions the defendant would need to fulfil to be successful.

The Orange Book decision
According the Orange Book decision, the patentee’s claim for cease and desist may be opposed by the defendant on the grounds of abuse of a dominant market position (Art. 82 EC, Sec. 19, 20 ARC).

This so-called ”competition law defence” is based upon the assumption that the patentee must not discriminate an undertaking asking for a license by charging higher license fees than it usually requests or by denying licensing at all, if the relevant patent is essential to the marketing of products on a license-dependent market.

Such behaviour, says the Court, must in any case be objectively justified. Otherwise, the patent infringement claim itself as well as the foregoing denial of (non-discriminatory) licensing constitute an abuse of a dominant market position.

However, such an abuse does not automatically result in a right of the defendant to make use of the patent in suit for free.
Rather, the Court has ruled that, in order for the competition law defence to be well founded and the ongoing making use of the patent in suit to be lawful, the defendant is required to report on the usage of the patent to the patentee on a regular basis and pay the license fees resulting from this usage accordingly. Payment can be made to the patentee or into an escrow account.

Supreme Court accepted competition law defence
Since the defendant may face difficulties when assessing the adequate license fee to be paid to the patentee in order to comply with this precondition, the Court has found it sufficient for the defendant to offer to the patentee the payment of an undetermined license fee and leave the exact determination to the equitable discretion of the patentee, subject to possible additional litigation in separate proceedings.

However, when doing so, the defendant must at the same time deposit license payments with e.g. a fiduciary and these payments must amount to at least objectively adequate license fees. In this case, the claim for cease and desist can be dismissed by merely ordering that the patentee is obligated to accept the undermined license offer of the defendant and to determine the exact license fee according to his equitable discretion.

With this decision the court recognises the competition law defence by trying to keep most of patent infringement proceedings free of disputes on the adequate licence fee.

Many unresolved questions
While the decision gives some answers, it certainly raises even more questions. Namely, what is a fair, reasonable and non-discriminatory (FRAND) offer? What form should such an offer have? What does it mean to live the license? What to do about damages for the past/past royalties?

The decision of the Federal Supreme Court is silent in regard to these questions. Fortunately, some of those have already been answered, if not definitely, by the instance courts.

For example, the German Regional Courts seem to agree that the offer needs to be unconditional. This can be done by sending a signed license offer to the patentee. The offer cannot be made on the condition that the court later finds the patent not infringed or that the patent is held invalid.

It is unclear, whether an offer with a time-limit (e.g. until the oral hearing of the specific instance, or an offer with the provision to refund the paid license fees in case the patent is later found invalid) would be considered unconditional, as there is no case law yet.

Several decisions determining FRAND terms
In regard to what is FRAND and what is not, there is a plethora of decisions by lower courts. A selection:
o Bundling of patents into a license pool is generally FRAND, because a ”one-stop” license ensures that all licensees obtain all necessary licenses for using the respective standard by a sole license request (District Court Düsseldorf, 4 O 195/07 – Video Signal Coding I).
o However, if there is systematic incorporation of non-essential and not-infringed patents into the pool, the bundling may be un-FRAND (District Court Düsseldorf, 4 O 195/07 – Video Signal Coding I).
o The denial to give a license because foreign mother company of patent user still owes license fees to the patentee may be FRAND, if there is a risk that the patent user circumvents paying the royalties by constantly founding new entities (District Court Düsseldorf, 4a O 197/07).
o The royalty rate of a single patent may be un-FRAND if the cumulative burden of the royalties for all standard essential patents which must be potentially licensed by the standard user is too high. Thus, there may be a need to implement a royalty cap (District Court Düsseldorf – Siemens vs. Amoi).

There is no case law pertaining to the question whether the patent user also has to pay royalties for any past use of the patent. However, one could argue that one only has to ”live the license” and pay royalties after the license offer was made. As the cease and desist claim is only effective for the future and the patentee can claim damages for any past use, there would be no need to already pay royalties for the past to successfully raise the competition law defence.

C&D injunction would be a worse alternative
Some standard license agreements, nevertheless, contain a provision that on conclusion of the agreement royalties for past have to be paid. If the patentee would allow some patent users to avoid this provision while all others have to follow it, it might constitute an act of unfairness versus these other licensees.

While there certainly remain a lot of details to be clarified and arguments to be exchanged, the decision ”Orange Book-Standard” means at least that the basics of the competition law defence are clear: it is possible to raise it successfully and, thus, to avoid a sentence to cease and desist, albeit at a possible high cost.

However, when facing a cease and desist injunction, this might be the lesser evil and at least allow the patent user to keep his business running and his customers relations intact.

Note
In the above text, the references to Art 82 refer to EU Treaty. After the Lisbon Treaty came into effect (1 December 2009), the numbering of Treaty articles changed. For instance Art. 81 (competition – restrictive agreements) became Art. 101 and Art. 82 (competition – abuse of dominant position) became Art. 102.