Observations by the European Commission on the FRAND defence in HMD v VoiceAge – reference for a preliminary ruling by the CJEU in sight?

In recently published amicus curiae observations (“observations”) in the proceedings between HMD Global Oy (“HMD”) and VoiceAge EVS GmbH & Co. KG (“VoiceAge”) before the Munich Higher Regional Court (Oberlandesgericht München), Case No. 6 U 5066/22 Kart, the European Commission (“Commission”) sets out the criteria for application of the antitrust-based defence of compulsory licencing under Article 102 TFEU (“FRAND defence”). The Commission’s interpretation of the standards developed on this by the Court of Justice of the European Union (“CJEU”) (see CJEU, judgment of 16 July 2015, Case C-170/13 concerning Huawei v ZTE) differs markedly from the practice of the German courts.

The Commission above all advocates carrying out a strict step-by-step review of the stages of analysis prescribed by the CJEU. In doing so, it is rejecting the practices applied in German case law up to now. In particular, the Commission believes that there is no room for combining different stages of analysis and for using diffuse criteria such as a review of the patent user’s “willingness to obtain a licence” that is detached from these stages of analysis (Germany’s Federal Court of Justice ruled on this in its decisions of 5 May 2020 and 24 November 2020, Case No. KZR 36/17 concerning Sisvel v Haier).

The Commission’s observations, submitted on its own initiative, were made on the basis of Regulation (EC) 1/2003, which governs the implementation of European antitrust law. It allows the Commission to submit observations to the courts of Member States on its own initiative in order to ensure the uniform application of European antitrust law. However, this authorisation is very rarely exercised – according to the Commission, the observations in the HMD v VoiceAge case are the first such observations in the entire EU since 2020. This shows that the subject of licensing of standard-essential patents (“SEPs”) is currently very high on the Commission’s agenda (see also our news article on the Commission’s efforts to adopt an “SEP Regulation”).

The contents of the Commission’s observations are set out below:

I. Sequence of analysis for the FRAND defence according to the CJEU

The CJEU’s judgment of 16 July 2015 in Case C-170/13 concerning Huawei v ZTE established the basic criteria for a successful FRAND defence by the patent user in disputes over SEPs. In summary, the first stage involves the proprietor of the patent having to alert the user of the infringement. At the second stage, the user of the patent must then declare its willingness to obtain a licence. The third stage involves the proprietor having to respond to this declaration by presenting an offer for a licence to the user on FRAND terms, which the user must either accept or respond to within a reasonable time by making a counteroffer, rendering accounts and providing security. If all these stages have been properly completed or if the proprietor fails to fulfil an obligation to cooperate, the user’s FRAND defence will prevent the proprietor from seeking an injunction.

II. Interpretation of the criteria by the Commission

In its observations, the Commission emphasises the objective of the criteria developed by the CJEU, which is to promote negotiations. The Commission holds that these negotiations have to precede any contentious proceedings, at the same time distinguishing between the filing of a request for an injunction and requests for information and damages. Filing an injunction shifts the balance of the negotiations irreversibly to the detriment of the patent user, which is why it is no longer possible to “cure” missed obligations to cooperate after the application for an injunction has been filed. Requests for information or damages are viewed as not affecting the balance of the negotiations between the parties and therefore not playing a role in FRAND disputes.

1. Stage 1: notice of infringement

In the Commission’s view, stage 1 (notice of infringement from the proprietor of the patent) and stage 2 (declaration of willingness to obtain a licence from the user of the patent) merely represent the starting point for negotiations. This means that they should not be tied to certain licence conditions or royalties. The Commission states that the following mandatory information must be included in the notice of infringement:

• The patent infringement must be expressly complained about,
• the patent number of the patent(s) considered to have been infringed must be stated, and
• the way in which the patent has been infringed must also be stated in the letter itself.

According to the Commission, this extensive initial duty to provide information results from the key position of the proprietor. The proprietor is best placed to provide concrete details of its patent(s) in order to get negotiations going. The notice of infringement itself must also contain the information mentioned. Information which can be found on a website linked to the infringement notice, for example, is not part of the notice and is not sufficient to fulfil this stage.

2. Stage 2: willingness to obtain a licence

The Commission states that the declaration of willingness to obtain a licence by the user of the patent is a formal stage which serves as a basis for entering into licence negotiations. The Commission does not impose any special qualitative requirements. Negotiations on the substance are reserved for the subsequent stages, specifically the offer for a licence (stage 3) by the proprietor and the counteroffer by the user (stage 4). The requirements of these different stages may not be mixed up, leading for instance to the user having more extensive obligations after stage 2.

If the patent user does not issue a declaration of willingness to obtain a licence in response to a sufficient notice of infringement and an application for an injunction is then filed, the Commission also takes the view that the failure to issue a declaration of willingness to obtain a licence can no longer be remedied by the user’s increased cooperation in the subsequent negotiations. The user is then no longer able to raise the FRAND defence.

3. Stage 3: licence offer from the patent proprietor

According to the Commission, the offer of a licence from the proprietor must meet the requirements already mentioned. In particular, it must be specific, written and specify the licence fee and the way in which it is to be calculated. Furthermore, the Commission requires that the court has to review the offer for compliance with the FRAND terms.

The Commission also makes it clear that the further obligation of the user to cooperate in the form of stage 4 (acceptance or counteroffer) is initiated by submission of the offer for a licence, even if the offer does not meet the FRAND terms. This legal interpretation is in line with the current decision-making practice of the German courts.

4. Stage 4: response of the patent user, especially counteroffer

In stage 4, the user must respond to the proprietor’s offer. According to the Commission, the user can either accept the offer or make a specific counteroffer on FRAND terms. If the proprietor rejects the counteroffer and the user wishes to continue using the SEP, the user must also provide a security deposit corresponding to the remuneration for past acts of use. The user is then also obliged to render an account regarding this use. In addition, the Commission points out that the parties can appoint a third party to determine a reasonable licence fee.

However, in the light of the court’s duty to review the conformity of the respective licence offers with FRAND, the question arises as to how a mutual breach of duty (non-FRAND offer by the proprietor and no FRAND response by the user) affects the FRAND defence. The question of how this situation of a mutual breach of duty should be resolved is left open in the Commission’s observations.

5. No cure

The Commission is fundamentally opposed to any curing of previously omitted stages by making up for them after filing a request for a prohibitory injunction, as such opportunities to cure would create negative incentives for both sides. On the part of the proprietor, they would provide incentives to immediately seek an injunction, and on the part of the user they would provide incentives to raise the FRAND defence without making a sufficient contribution to a negotiated solution. Both would adversely affect the licence negotiations which the CJEU wanted to promote with its decision in Huawei v ZTE, or even make them impossible.

III. Implications

In several places, the Commission’s interpretation of the CJEU’s landmark decision in Huawei v ZTE varies from the decision-making practice of the German courts. As such, large parts of the observations come across as an antithesis to German practice. They could also be understood as an intervention by the Commission against a national practice that in the Commission’s view incorrectly applies the CJEU’s FRAND criteria in several respects that are often crucial for a decision. This includes in particular the relatively free review by the German courts of the parties’ willingness to obtain a licence, which involves weakening the sequence of analysis prescribed by the CJEU.

The differing legal interpretations by the Commission on the one hand and many German courts on the other regarding the application of the FRAND defence under Article 102 TFEU clearly call for a further decision by the CJEU, which could most likely be made by submitting a request for a preliminary ruling (Article 267 TFEU). The Commission explicitly suggests this step in its observations should the Munich Higher Regional Court see further ambiguities in the interpretation of the CJEU’s judgment in Huawei v ZTE.

Considering how important the points addressed by the Commission are for many FRAND proceedings and their relevance for decisions, a reference for a preliminary ruling is likely to be expected soon. A decision to make a request for a preliminary ruling would already be a plausible option in the proceedings HMD v VoiceAge before the Munich Higher Regional Court. But other national courts could also submit or join in such a request. Another possibility is that one of the local divisions of the Unified Patent Court will refer questions on this issue to the CJEU under Article 21 of the UPCA in the context of SEP infringement proceedings already pending before the UPC. The licensing of SEPs will thus continue to be a hotly contested issue.