Compulsory Licence Defence in Patent Infringement Proceedings presented at the 2009 International Conference on Judicial Protection of IPR 11 September 2009, Chengdu, China by Dr. Klaus Grabinski Judge at the Federal Court of Justice, Germany

Compulsory Licence in Patent Infringement Proceedings 2 I. Patents and Standards Patents –Aim: Encouragement of innovation and disclosure thereof –Prerogative of the patent owner: Exclusive right to exploit the disclosed innovation –Right of prevent third parties from using the invention –Right to grant or to refuse a licence to applicants to use the patent instead of or in addition to the patent owner’s own use –This is even true if the patent owner gets into a market-dominating position because the invention involves extraordinary technical or economic advantages that make alternative solutions unmarketable, »Example: Patent on Aspirin (Acetylsalicylic Acid [ASA]) in 1899 Patents –Aim: Encouragement of innovation and disclosure thereof –Prerogative of the patent owner: Exclusive right to exploit the disclosed innovation –Right of prevent third parties from using the invention –Right to grant or to refuse a licence to applicants to use the patent instead of or in addition to the patent owner’s own use –This is even true if the patent owner gets into a market-dominating position because the invention involves extraordinary technical or economic advantages that make alternative solutions unmarketable, »Example: Patent on Aspirin (Acetylsalicylic Acid [ASA]) in 1899

Compulsory Licence in Patent Infringement Proceedings 3 I. Patents and Standards Industrial Standards: –Aim: Achievement of interoperability and product compatibility –Implication: Everybody who wants to get on the market has to use the standard. –Examples: JPEG (Joint Photographic Expert Group), MPEG Moving Picture Expert Group); GSM (Global System for Mobile Communication), SDRAM (Synochronous Dynamic Random Access Memory), etc. Industrial Standards: –Aim: Achievement of interoperability and product compatibility –Implication: Everybody who wants to get on the market has to use the standard. –Examples: JPEG (Joint Photographic Expert Group), MPEG Moving Picture Expert Group); GSM (Global System for Mobile Communication), SDRAM (Synochronous Dynamic Random Access Memory), etc.

Compulsory Licence in Patent Infringement Proceedings 4 Patents incorporated into a Standard (“Essential Patents”) Everybody who wants to get on the market has to use the patents that are incorporated into the standard. The patent owner gets into a market dominating position. This market-dominating position is derived not (solely) from the creative achievement underlying the invention (like in the example of the invention of ASA) but is based at least in part on the fact that the access to the product market is dependent on the adherence to the standard (cf. German Federal Court of Justice, 13 July 2004, Case No. KZR 40/02, 36 IIC 742 [2005] – Standard Tight-Head Drum). Patents incorporated into a Standard (“Essential Patents”) Everybody who wants to get on the market has to use the patents that are incorporated into the standard. The patent owner gets into a market dominating position. This market-dominating position is derived not (solely) from the creative achievement underlying the invention (like in the example of the invention of ASA) but is based at least in part on the fact that the access to the product market is dependent on the adherence to the standard (cf. German Federal Court of Justice, 13 July 2004, Case No. KZR 40/02, 36 IIC 742 [2005] – Standard Tight-Head Drum). I. Patents and Standards

Compulsory Licence in Patent Infringement Proceedings 5 Case law concerning Standard related Patents –Patent ambush Abuse of standard setting process by not disclosing patents related to a standard? (Rambus case: FTC: Yes; CAFC in 2008: No; US Supreme Court in 2009: No). –Declaration of non-essentiality Court declaration of patents to be non-essential that have been claimed to be essential to the standard setting organisation by the patent proprietor (Nokia/InterDigital case: UK High Court (Patent Court) in 2007: Yes [Only 1 out of 31 patents claimed to be essential to the 3G standard to ETSI by the defendant was found to be essential by the court.]) –Claim to the grant of a licence of an essential patent The patent proprietor is abusing his market-dominating position by applying criteria for granting licences of an essential patent that are discriminatory or unfairly restrain access to the market (Standard-Tight- Head Drum Case: German Federal Court of Justice in 2004: Yes [discriminatory restriction of market access by the defendant of the counter-claim]). Case law concerning Standard related Patents –Patent ambush Abuse of standard setting process by not disclosing patents related to a standard? (Rambus case: FTC: Yes; CAFC in 2008: No; US Supreme Court in 2009: No). –Declaration of non-essentiality Court declaration of patents to be non-essential that have been claimed to be essential to the standard setting organisation by the patent proprietor (Nokia/InterDigital case: UK High Court (Patent Court) in 2007: Yes [Only 1 out of 31 patents claimed to be essential to the 3G standard to ETSI by the defendant was found to be essential by the court.]) –Claim to the grant of a licence of an essential patent The patent proprietor is abusing his market-dominating position by applying criteria for granting licences of an essential patent that are discriminatory or unfairly restrain access to the market (Standard-Tight- Head Drum Case: German Federal Court of Justice in 2004: Yes [discriminatory restriction of market access by the defendant of the counter-claim]). I. Patents and Standards

Compulsory Licence in Patent Infringement Proceedings 6 The “Orange-Book-Case” I.The facts: The plaintiff (Philips N.V.) is the proprietor of a patent concerning recordable and rewritable optical data carriers (in particular CD-R and CD-RW). The patent is important for the coding of information on the record carrier which is realized by means of EFM modulation. The defendant distributes CD-Rs and CD-RWs throughout Europe. According to the allegations of the patent proprietor –all commercially available CD-R and CD-RW have to comply with the mandatory specifications listed in the so called “Orange-Book- Standard” and, therefore, –inevitably have to use the patent-in-suit. The “Orange-Book-Case” I.The facts: The plaintiff (Philips N.V.) is the proprietor of a patent concerning recordable and rewritable optical data carriers (in particular CD-R and CD-RW). The patent is important for the coding of information on the record carrier which is realized by means of EFM modulation. The defendant distributes CD-Rs and CD-RWs throughout Europe. According to the allegations of the patent proprietor –all commercially available CD-R and CD-RW have to comply with the mandatory specifications listed in the so called “Orange-Book- Standard” and, therefore, –inevitably have to use the patent-in-suit. II. Compulsory Licence Defence

7 The defendant denies an infringement of the patent. In addition, the defendant objects that he is discriminated by the plaintiff against other similar companies by demanding more than a license fee of 3 % which is considered reasonable by the defendant. The defendant denies an infringement of the patent. In addition, the defendant objects that he is discriminated by the plaintiff against other similar companies by demanding more than a license fee of 3 % which is considered reasonable by the defendant. II. Compulsory Licence Defence 7Compulsory Licence in Patent Infringement Proceedings

8 II.The decision of the Court of Appeal: 1)Defendant infringes the patent. 2)The anti-trust law objection of a compulsory licence failed. The defendant did not prove a discriminatory behaviour by the plaintiff. The defendant’s submissions did not sufficiently support the allegation that the handling of the licence agreements with other companies lead to only 3 % of the net sales price being paid to the plaintiff. 3)The Court of Appeal ordered the defendant –to cease and desist –provide information and established that –the defendant is liable to pay damages. II.The decision of the Court of Appeal: 1)Defendant infringes the patent. 2)The anti-trust law objection of a compulsory licence failed. The defendant did not prove a discriminatory behaviour by the plaintiff. The defendant’s submissions did not sufficiently support the allegation that the handling of the licence agreements with other companies lead to only 3 % of the net sales price being paid to the plaintiff. 3)The Court of Appeal ordered the defendant –to cease and desist –provide information and established that –the defendant is liable to pay damages. II. Compulsory Licence Defence 8Compulsory Licence in Patent Infringement Proceedings

9 III.Decision of the Federal Court of Justice [ 6 May 2009 – Case No. KZR 39/06] : 1)Patent Infringement The Court of Appeal was right in assuming a patent infringement. The CD-Rs and the CD-RWs distributed by the defendant are data carriers which literally realize all features of the claim 1 of the patent- in-suit. III.Decision of the Federal Court of Justice [ 6 May 2009 – Case No. KZR 39/06] : 1)Patent Infringement The Court of Appeal was right in assuming a patent infringement. The CD-Rs and the CD-RWs distributed by the defendant are data carriers which literally realize all features of the claim 1 of the patent- in-suit. II. Compulsory Licence Defence 9Compulsory Licence in Patent Infringement Proceedings

10 2)The antitrust law compulsory licence defence a)The antitrust law compulsory licence defence is generally admissible against the request of a patent proprietor for injunctive relief. »“For a company with a dominant market position that »discriminates another company seeking a licence in a business transaction usually accessible to similar companies or »unreasonably obstructs a company seeking a licence by refusing to conclude a patent licence agreement it has been offered.” »it would be an abuse of the dominant market position »if injunctive relief in a patent infringement case would be accessible” »provided the dominant market position is dependent on the adherence to the standard (not derived solely from the creativeness of the invention) [cf. Federal Court of Justice 13 July 2004 – Standard Tight-Head Drum; slide 4]. 2)The antitrust law compulsory licence defence a)The antitrust law compulsory licence defence is generally admissible against the request of a patent proprietor for injunctive relief. »“For a company with a dominant market position that »discriminates another company seeking a licence in a business transaction usually accessible to similar companies or »unreasonably obstructs a company seeking a licence by refusing to conclude a patent licence agreement it has been offered.” »it would be an abuse of the dominant market position »if injunctive relief in a patent infringement case would be accessible” »provided the dominant market position is dependent on the adherence to the standard (not derived solely from the creativeness of the invention) [cf. Federal Court of Justice 13 July 2004 – Standard Tight-Head Drum; slide 4]. II. Compulsory Licence Defence 10Compulsory Licence in Patent Infringement Proceedings

11 b)However, the antitrust law compulsory licence defence is only effective if two conditions are met. Otherwise the patent proprietor does not act abusively.  1 st Condition The defendant made an unconditional offer to the patent proprietor to conclude a licence agreement to which it stays bound and which the patent proprietor cannot reject without violating the prohibition of discrimination or anti- competitive behaviour. - An offer to conclude an agreement only subject to the condition that the infringement court affirms the infringement of the patent-in-suit does not suffice. -If the party seeking a licence makes an offer on customary terms, the patent proprietor can claim that it does not have to accept individual contract terms only if it offers other terms in accordance with its obligations under antitrust law. b)However, the antitrust law compulsory licence defence is only effective if two conditions are met. Otherwise the patent proprietor does not act abusively.  1 st Condition The defendant made an unconditional offer to the patent proprietor to conclude a licence agreement to which it stays bound and which the patent proprietor cannot reject without violating the prohibition of discrimination or anti- competitive behaviour. - An offer to conclude an agreement only subject to the condition that the infringement court affirms the infringement of the patent-in-suit does not suffice. -If the party seeking a licence makes an offer on customary terms, the patent proprietor can claim that it does not have to accept individual contract terms only if it offers other terms in accordance with its obligations under antitrust law. II. Compulsory Licence Defence 11Compulsory Licence in Patent Infringement Proceedings

12  2 nd Condition The party seeking a licence complies with the obligations stipulated for the use of the licensed subject matter by the licence agreement still to be concluded if it already uses the subject matter of the patent before the patent proprietor has accepted the offer. The party seeking a licence has to behave as if the patent proprietor had already accepted said offer. This means that the party seeking a licence has in particular - to account for the use on a regular basis and - to pay the licence fees (royalties) resulting from his accounts to the patent proprietor  2 nd Condition The party seeking a licence complies with the obligations stipulated for the use of the licensed subject matter by the licence agreement still to be concluded if it already uses the subject matter of the patent before the patent proprietor has accepted the offer. The party seeking a licence has to behave as if the patent proprietor had already accepted said offer. This means that the party seeking a licence has in particular - to account for the use on a regular basis and - to pay the licence fees (royalties) resulting from his accounts to the patent proprietor II. Compulsory Licence Defence 12Compulsory Licence in Patent Infringement Proceedings

13  How to determine the amount of the licence fee? The amount of the licence fee and thus also the licence-seeking party’s obligation to perform are limited to the amount resulting from the terms of an agreement that is unobjectionable under antitrust law. What to do if - the party seeking a licence considers the patent proprietor’s licence fee claims to be excessive or - the patent proprietor refuses to quantify the licence fee because it believes to be entitled to refuse to grant a licence in the patent anyway? The party seeking a licence has the right - to offer to conclude a licence agreement providing for a licence fee to be determined by the patent proprietor in the latter’s reasonable discretion rather than a specific licence fee rate and - deposit an amount that it deems appropriate under antitrust law.  How to determine the amount of the licence fee? The amount of the licence fee and thus also the licence-seeking party’s obligation to perform are limited to the amount resulting from the terms of an agreement that is unobjectionable under antitrust law. What to do if - the party seeking a licence considers the patent proprietor’s licence fee claims to be excessive or - the patent proprietor refuses to quantify the licence fee because it believes to be entitled to refuse to grant a licence in the patent anyway? The party seeking a licence has the right - to offer to conclude a licence agreement providing for a licence fee to be determined by the patent proprietor in the latter’s reasonable discretion rather than a specific licence fee rate and - deposit an amount that it deems appropriate under antitrust law. II. Compulsory Licence Defence 13Compulsory Licence in Patent Infringement Proceedings

14 In order to be on the safe side the party seeking a licence may deposit an amount that is higher than the one that it deems appropriate under antitrust law. - It will not be prevented from asserting that a determination of the licence fee by the patent proprietor in this amount is unreasonable. The patent proprietor is completely free in determining the licence fee. - The determination is unreasonable only if it is not within the limits set by antitrust law and unreasonably obstructs the licensee or discriminates it against other licensees. In order to be on the safe side the party seeking a licence may deposit an amount that is higher than the one that it deems appropriate under antitrust law. - It will not be prevented from asserting that a determination of the licence fee by the patent proprietor in this amount is unreasonable. The patent proprietor is completely free in determining the licence fee. - The determination is unreasonable only if it is not within the limits set by antitrust law and unreasonably obstructs the licensee or discriminates it against other licensees. II. Compulsory Licence Defence 14Compulsory Licence in Patent Infringement Proceedings

15 If at least a sufficient amount has been deposited and if the other conditions of the “compulsory licence defence” are met, the infringement court may simply establish that the patent proprietor is obliged to accept the licence offer and to determine the licence fee at its reasonable discretion and dismiss the patent infringement action. If at least a sufficient amount has been deposited and if the other conditions of the “compulsory licence defence” are met, the infringement court may simply establish that the patent proprietor is obliged to accept the licence offer and to determine the licence fee at its reasonable discretion and dismiss the patent infringement action. II. Compulsory Licence Defence 15Compulsory Licence in Patent Infringement Proceedings

16  Second lawsuit if the licensee does not agree to the determination of the licence fee by the proprietor If the licensee does not agree to the licence fee determined by the patent proprietor he can sue the patent proprietor. In this lawsuit the licensee will have to prove that the determination of the licence fee by the patent proprietor is unreasonable because it unreasonably obstructs the licensee or discriminates him against other licensees and, therefore, is not within the limits of anti-trust law.  Second lawsuit if the deposited amount does not cover the licence fee determined by the proprietor If the deposited amount does not cover the licence fee determined by the proprietor the proprietor can sue the licensee.  Second lawsuit if the licensee does not agree to the determination of the licence fee by the proprietor If the licensee does not agree to the licence fee determined by the patent proprietor he can sue the patent proprietor. In this lawsuit the licensee will have to prove that the determination of the licence fee by the patent proprietor is unreasonable because it unreasonably obstructs the licensee or discriminates him against other licensees and, therefore, is not within the limits of anti-trust law.  Second lawsuit if the deposited amount does not cover the licence fee determined by the proprietor If the deposited amount does not cover the licence fee determined by the proprietor the proprietor can sue the licensee. II. Compulsory Licence Defence 16Compulsory Licence in Patent Infringement Proceedings

17 3)Back to the Orange-Book-Case In the Orange-Book-Case the judgement of the Court of Appeal against the defendants was confirmed since - the defendants had not even accounted at least for the licence fees of 3 % that they owed according to their own opinion and - had not deposited corresponding amount. 3)Back to the Orange-Book-Case In the Orange-Book-Case the judgement of the Court of Appeal against the defendants was confirmed since - the defendants had not even accounted at least for the licence fees of 3 % that they owed according to their own opinion and - had not deposited corresponding amount. II. Compulsory Licence Defence 17Compulsory Licence in Patent Infringement Proceedings

18 Case-law from other courts Prior to the decision of the Federal Court of Justice in the “Orange-Book”-case most lower courts recognized the admissibility of the compulsory licence defence in patent infringement proceedings (Düsseldorf District Court, 13 Feb. 2007, 4a 124/05 [Siemens v. Amoy]; 11 Sept – 4a 81/07 [MPEG LA]). However, the compulsory licence defence was not successful in most cases because the patentee offered a the licence agreement that was not considered to be discriminatory or unreasonable obstructive and/or the defendant did not make a serious offer for a licence agreement. Case-law from other courts Prior to the decision of the Federal Court of Justice in the “Orange-Book”-case most lower courts recognized the admissibility of the compulsory licence defence in patent infringement proceedings (Düsseldorf District Court, 13 Feb. 2007, 4a 124/05 [Siemens v. Amoy]; 11 Sept – 4a 81/07 [MPEG LA]). However, the compulsory licence defence was not successful in most cases because the patentee offered a the licence agreement that was not considered to be discriminatory or unreasonable obstructive and/or the defendant did not make a serious offer for a licence agreement. II. Compulsory Licence Defence 18Compulsory Licence in Patent Infringement Proceedings