Standard Essential Patents in Infringement Litigations - Orange-Book-Approach and latest developments Conference on Information Technology, Innovation and Competition Law: The Role of the Courts Rome, 15 July 2013 by Dr Klaus Grabinski Judge, Federal Court of Justice, Germany

A. Orange-Book-Standard-Case Bundesgerichtshof (Federal Court of Justice) of 6 May 2009 – Case No. KZR 39/06: I.The facts: The plaintiff (Philips N.V.) was the holder of a patent concerning recordable and rewritable optical data carriers (in particular CD-R and CD-RW). The patented invention concerns the coding of information on the record carrier by means of EFM modulation. The defendant distributed CD-Rs and CD-RWs throughout Europe. A. Orange-Book-Standard-Case Bundesgerichtshof (Federal Court of Justice) of 6 May 2009 – Case No. KZR 39/06: I.The facts: The plaintiff (Philips N.V.) was the holder of a patent concerning recordable and rewritable optical data carriers (in particular CD-R and CD-RW). The patented invention concerns the coding of information on the record carrier by means of EFM modulation. The defendant distributed CD-Rs and CD-RWs throughout Europe. Standard Essential Patents in Infringement Litigations 2

3 According to the allegations of the patent proprietor –all commercially available CD-R and CD-RW had to comply with the mandatory specifications listed in the so called Orange-Book-Standard and, therefore, –inevitably had to use the patent-in-suit. Plaintiff required injunctive relief and damages. The defendant denied an infringement of the patent. In addition, the defendant objected that he was discriminated by the plaintiff compared to other companies by demanding more than a license fee of 3 % which the defendant considered to be reasonable. The District Court and the Court of Appeal decided in favour of the plaintiff. According to the allegations of the patent proprietor –all commercially available CD-R and CD-RW had to comply with the mandatory specifications listed in the so called Orange-Book-Standard and, therefore, –inevitably had to use the patent-in-suit. Plaintiff required injunctive relief and damages. The defendant denied an infringement of the patent. In addition, the defendant objected that he was discriminated by the plaintiff compared to other companies by demanding more than a license fee of 3 % which the defendant considered to be reasonable. The District Court and the Court of Appeal decided in favour of the plaintiff. Standard Essential Patents in Infringement Litigations 3

4 II.Decision of the Bundesgerichtshof : 1)Patent Infringement The defendant infringed the patent-in-suit. 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.Decision of the Bundesgerichtshof : 1)Patent Infringement The defendant infringed the patent-in-suit. 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. Standard Essential Patents in Infringement Litigations 4

5 2)The antitrust law compulsory licence defence a)Admissibility The Bundesgerichtshof held that the antitrust law compulsory licence defence is generally admissible against the request of a patent proprietor for injunctive relief. 2)The antitrust law compulsory licence defence a)Admissibility The Bundesgerichtshof held that the antitrust law compulsory licence defence is generally admissible against the request of a patent proprietor for injunctive relief. Standard Essential Patents in Infringement Litigations 5

6 b)Conditions The anti-trust law compulsory licence defence can only be raised successfully when three conditions are satisfied. Otherwise the patent holder does not act abusively and the defence will fail. b)Conditions The anti-trust law compulsory licence defence can only be raised successfully when three conditions are satisfied. Otherwise the patent holder does not act abusively and the defence will fail. Standard Essential Patents in Infringement Litigations 6

7 1 st Condition Market-dominating position of the patent owner The patent owner has to be in a market- dominating position that is derived not (solely) from the creative achievement underlying the invention but is based at least in part on the fact that the patent adheres to a standard. 1 st Condition Market-dominating position of the patent owner The patent owner has to be in a market- dominating position that is derived not (solely) from the creative achievement underlying the invention but is based at least in part on the fact that the patent adheres to a standard. Standard Essential Patents in Infringement Litigations 7

8 2 nd Condition An offer that cannot be refused. The defendant has to make an unconditional offer to the patent proprietor to conclude a licence agreement to which it stays bound and which the patent holder 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 affirm infringement of the patent-in-suit does not suffice. 2 nd Condition An offer that cannot be refused. The defendant has to make an unconditional offer to the patent proprietor to conclude a licence agreement to which it stays bound and which the patent holder 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 affirm infringement of the patent-in-suit does not suffice. Standard Essential Patents in Infringement Litigations 8

9 3 rd Condition Acting of the party seeking a licence as if it were a licensee in good standing The party seeking a licence has to comply with the obligations stipulated for the use of the licensed product by the licence agreement still to be concluded if it already uses the patented product before the patent proprietor has accepted the offer. This means in particular that the party seeking a licence has - to provide regular accounting and - to pay royalties resulting from his accounting 3 rd Condition Acting of the party seeking a licence as if it were a licensee in good standing The party seeking a licence has to comply with the obligations stipulated for the use of the licensed product by the licence agreement still to be concluded if it already uses the patented product before the patent proprietor has accepted the offer. This means in particular that the party seeking a licence has - to provide regular accounting and - to pay royalties resulting from his accounting Standard Essential Patents in Infringement Litigations 9

10 How to determine the amount of the licence fee in the offer? The determination of the amount of the licence fee in the offer of the licence seeking party gets difficult when the patent proprietors licence fee claims are excessive in the eyes of the party seeking a licence 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. How to determine the amount of the licence fee in the offer? The determination of the amount of the licence fee in the offer of the licence seeking party gets difficult when the patent proprietors licence fee claims are excessive in the eyes of the party seeking a licence 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. Standard Essential Patents in Infringement Litigations 10

11 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 holder in the latters reasonable discretion rather than a specific licence fee rate and -deposit an amount that it deems appropriate under antitrust law. 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 holder in the latters reasonable discretion rather than a specific licence fee rate and -deposit an amount that it deems appropriate under antitrust law. Standard Essential Patents in Infringement Litigations 11

12 What will the court do when the licence seeking party has put in escrow an amount of money it deems to be appropriate under anti-trust law? The court will assess whether prima facie the amount of money that has been put in escrow is sufficient and the other conditions of the compulsory licence defence are met. If yes, the infringement court may limit itself to determining that the patent holder is obliged to accept the offer of a licence contract and to specify the licence fee according to his fair discretion and dismiss the infringement action. What will the court do when the licence seeking party has put in escrow an amount of money it deems to be appropriate under anti-trust law? The court will assess whether prima facie the amount of money that has been put in escrow is sufficient and the other conditions of the compulsory licence defence are met. If yes, the infringement court may limit itself to determining that the patent holder is obliged to accept the offer of a licence contract and to specify the licence fee according to his fair discretion and dismiss the infringement action. Standard Essential Patents in Infringement Litigations 12

13 What will happen when the infringement action has been dismissed because of the Compulsory Licence Defence? The parties agree on a licence contract and settle the dispute. The parties do not agree on a licence contract. The party seeking a licence deems the amount of the licence fee as specified by the patent holder as discriminatory or abusively excessive under anti- trust law. In this case it may initiate a second lawsuit in which the court will decide whether the amount of the licence fee as specified by the patent holder is in conformity with anti-trust law. What will happen when the infringement action has been dismissed because of the Compulsory Licence Defence? The parties agree on a licence contract and settle the dispute. The parties do not agree on a licence contract. The party seeking a licence deems the amount of the licence fee as specified by the patent holder as discriminatory or abusively excessive under anti- trust law. In this case it may initiate a second lawsuit in which the court will decide whether the amount of the licence fee as specified by the patent holder is in conformity with anti-trust law. Standard Essential Patents in Infringement Litigations 13

14 Orange-Book-Standard-litigation scenario in a nutshell Patentee sues for infringement of a SEP and requires injunctive relief (and damages). Defendant makes an offer to the patentee of the SEP royalties to be determined by the patentee in the latters reasonable discretion behaves as if it were already a licensee renders account about the use of the patent puts an amount in escrow that it deems appropriate under antitrust law Court will assess whether the offer meets the requirements of a serious offer and the amount put in escrow is prima facie appropriate under antitrust law. Court will dismiss the action when conditions are met. Orange-Book-Standard-litigation scenario in a nutshell Patentee sues for infringement of a SEP and requires injunctive relief (and damages). Defendant makes an offer to the patentee of the SEP royalties to be determined by the patentee in the latters reasonable discretion behaves as if it were already a licensee renders account about the use of the patent puts an amount in escrow that it deems appropriate under antitrust law Court will assess whether the offer meets the requirements of a serious offer and the amount put in escrow is prima facie appropriate under antitrust law. Court will dismiss the action when conditions are met. 14Standard Essential Patents in Infringement Litigations 14

15 Expectation that in most cases the patent infringement litigation gets more streamlined because the compulsory licence defence can be handled more easily and the second lawsuit will not happen most of the time since parties settle the case in between. Expectation that in most cases the patent infringement litigation gets more streamlined because the compulsory licence defence can be handled more easily and the second lawsuit will not happen most of the time since parties settle the case in between. 15Standard Essential Patents in Infringement Litigations 15

B. Developments after Orange-Book I.Cases law of German courts –Several decisions of German trial courts were handed down in which issues left open in Orange-Book were specified like e.g. »what are the requirements of a serious offer. II.Statement of Objections of the Commission in Samsung case, press release of 21 December 2012 Commission took the preliminary view that where a commitment to license SEPs on FRAND terms has been given and where a potential licensee has shown itself to be willing to negotiate a FRAND licence recourse to injunctions harms competition. B. Developments after Orange-Book I.Cases law of German courts –Several decisions of German trial courts were handed down in which issues left open in Orange-Book were specified like e.g. »what are the requirements of a serious offer. II.Statement of Objections of the Commission in Samsung case, press release of 21 December 2012 Commission took the preliminary view that where a commitment to license SEPs on FRAND terms has been given and where a potential licensee has shown itself to be willing to negotiate a FRAND licence recourse to injunctions harms competition. Standard Essential Patents in Infringement Litigations 16

III.Referral of the Düsseldorf District Court to the European Court of Justice of 21 March 2013, C-170/13 - Huawei/ZTE, Questions: 1)Quality of the offer of the infringer willingness to negotiate or binding offer and acts of fulfilment? 2)If (only) willingness to negotiate is required what are the conditions? 3)If binding offer is required what are the conditions? 4)If acts of fulfilment are required what are the conditions? Disclosures also relating to past acts of infringement? Giving security is good enough? 5)Damages or only royalties for past acts of infringement? III.Referral of the Düsseldorf District Court to the European Court of Justice of 21 March 2013, C-170/13 - Huawei/ZTE, Questions: 1)Quality of the offer of the infringer willingness to negotiate or binding offer and acts of fulfilment? 2)If (only) willingness to negotiate is required what are the conditions? 3)If binding offer is required what are the conditions? 4)If acts of fulfilment are required what are the conditions? Disclosures also relating to past acts of infringement? Giving security is good enough? 5)Damages or only royalties for past acts of infringement? Standard Essential Patents in Infringement Litigations 17

Thank you very much for your attention! Standard Essential Patents in Infringement Litigations 18