1. Paris Lyon Litigating standard essential patents: Huawei v. ZTE The ECJ ruling Young Eplaw Conference – 18 April 2016 - Brussels Amandine Métier

2. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling Summary 1.Background of the case 2.ECJ guidance

3. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling Huawei holds European patent 2090050 relating to a “Method and apparatus of establishing a synchronization signal in a communication system” designating Germany The patent was notified by Huawei to ETSI on 4 March 2009 as a patent essential to the “Long Term Evolution” standard In accordance with the ETSI rules, Huawei undertook to grant licences to third parties on FRAND terms In Germany, ZTE Corp. markets products implementing the LTE standard 1. Background of the case (1/3)

4. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling Huawei and ZTE engaged in licensing discussions But no offer relating to a licensing agreement was finalized ZTE implements the standard and Huawei’s patent without paying any royalties In April 2011, on the basis of Article 64 EPC and Paragraph 139 ff of the German Law on Patents, Huawei brought an action for infringement against ZTE seeking:  an injunction prohibiting the infringement, ordering the rendering of accounts and the recall of the products, and granting an award of damages 1. Background of the case (2/3)

5. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling The Landgericht Düsseldorf considered that the decision on the substance in the main proceedings turned on whether the action brought by Huawei constituted an abuse of that company’s dominant position within the meaning of Article 102 TFEU The Landgericht Düsseldorf decided to stay the proceedings and to refer the questions to the European Court of Justice 1. Background of the case (3/3)

6. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling Questions referred to the ECJ 1.Bringing an action for an injunction based on SEP = abuse? Or is it an abuse only when the infringer gave an unconditional offer to conclude a licensing agreement and fulfilled its contractual obligation for past acts?  “Does the proprietor of [an SEP] which informs a standardisation body that it is willing to grant any third party a licence on [FRAND] terms abuse its dominant market position if it brings an action for an injunction against a patent infringer even though the infringer has declared that it is willing to negotiate concerning such a licence? Or is an abuse of the dominant market position to be presumed only where the infringer has submitted to the proprietor of the [SEP] an acceptable, unconditional offer to conclude a licensing agreement which the patentee cannot refuse without unfairly impeding the infringer or breaching the prohibition of discrimination, and the infringer fulfils its contractual obligations for acts of use already performed in anticipation of the licence to be granted?”

7. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling Questions referred to the ECJ 2.If abuse is to be linked to the infringer’s willingness to negotiate, are there specific requirements in relation to this willingness to negotiate? Is a general statement to be prepared to enter into negotiations sufficient or should the effective entering into negotiations by the alleged infringer be required?  “If abuse of a dominant market position is already to be presumed as a consequence of the infringer’s willingness to negotiate: Does Article 102 TFEU lay down particular qualitative and/or time requirements in relation to the willingness to negotiate? In particular, can willingness to negotiate be presumed where the patent infringer has merely stated (orally) in a general way that it is prepared to enter into negotiations, or must the infringer already have entered into negotiations by, for example, submitting specific conditions upon which it is prepared to conclude a licensing agreement?”

8. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling Questions referred to the ECJ 3.What are the requirements to be fulfilled by the acceptable and unconditional offer to conclude a licence to assess whether there is an abuse?  “If the submission of an acceptable, unconditional offer to conclude a licensing agreement is a prerequisite for abuse of a dominant market position: Does Article 102 TFEU lay down particular qualitative and/or time requirements in relation to that offer? Must the offer contain all the provisions which are normally included in licensing agreements in the field of technology in question? In particular, may the offer be made subject to the condition that the [SEP] is actually used and/or is shown to be valid?”

9. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling Questions referred to the ECJ 4.What are the requirements to be fulfilled by the infringer in relation to the obligations arising from the licence to consider whether there is an abuse?  “ If the fulfilment of the infringer’s obligations arising from the license that is to be granted is a prerequisite for the abuse of a dominant market position: Does Article 102 TFEU lay down particular requirements with regard to those acts of fulfilment? Is the infringer particularly required to render an account for past acts of use and/or to pay royalties? May an obligation to pay royalties be discharged, if necessary, by depositing a security?”

10. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling Questions referred to the ECJ 5.Should an abuse be found where the action initiated by the patentee does not relate to an injunction, e.g. the rendering of account?  “Do the conditions under which the abuse of a dominant position by the proprietor of [an SEP] is to be presumed apply also to an action on the ground of other claims (for rendering of accounts, recall of products, damages) arising from a patent infringement?”

11. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling The Court indicated that it must strike a balance between:  maintaining free competition in respect of which primary law and, in particular, Article 102 TFEU prohibit abuses of a dominant position, and  the requirement to safeguard proprietor’s intellectual property rights and its right to effective judicial protection, guaranteed by Article 17(2) and Article 47 of the Charter of Fundamental Rights of the European Union Remark: the dominant position being not contested, the Court only focused on the notion of abuse. 2. The ECJ guidance

12. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling 2.1 Legal proceedings brought with a view to obtaining the recall of products and an injunction The Court first reminded that:  the abuse of a dominant position is an objective concept  the launch of an infringement action, even if the right- holder is in a dominant position “cannot in itself constitute an abuse of dominant position” (§46), except in “exceptional circumstances” (§47)

13. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling 2.1 Legal proceedings brought with a view to obtaining the recall of products and an injunction Then the Court relied on the particular nature of the case, i.e.:  the patent at issue being essential to the LTE standard, it cannot be avoided by the competitors implementing the standard  the patent is essential to the standard provided that the proprietor of the patent undertook to grant licences thereof on FRAND terms  the refusal to license may therefore constitute an abuse The court therefore decided to provide guidance in order to avoid an action for injunction or the recall of products from being regarded as abusive

14. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling Prior to launch proceedings:  alerting the alleged infringer of the infringement by identifying the SEP at issue and “specifying the way it has been infringed” (§61) After the alleged infringer has expressed its willingness to conclude a licence on FRAND terms:  Providing a written offer for a licence on FRAND terms, specifying in particular the amount of royalties and the way it is calculated (§62) 2.1.1 The obligations of the SEP-holder

15. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling First: diligently responding to the offer made by the patentee  i.e. “in accordance with recognized commercial practices in the field and in good faith, a point which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics” (§65) If the alleged infringer does not accept the offer made to it, it must submit a counter-offer (on FRAND terms) “promptly and in writing”; it cannot otherwise rely on any abuse of dominant position (§66) If the alleged infringer used the teachings of the SEP at issue prior to the conclusion of the licensing agreement and its counter-offer has been rejected, it must “provide appropriate security, in accordance with commercial practices in the field”  E.g. bank guarantee or amount placed on deposit taking into account the number of past acts of use (the alleged infringer must be ready to provide the rendering of accounts in this respect) 2.1.2 The obligations of the alleged infringer

16. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling Determination of the FRAND royalties by an independent third party  it requires the parties’ common agreement Possibility for the potential infringer to challenge validity or essentiality, in parallel with the negotiations of the licence 2.1.3 In case of unsuccessful negotiations

17. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling 2.2 Legal proceedings brought with a view to obtaining the rendering of accounts or an award of damages The actions for infringement brought by the holder of an SEP, seeking  the rendering of accounts in relation to past acts of use of that SEP or  an award of damages in respect of those acts of use, “do not have a direct impact on products complying with the standard in question manufactured by competitors appearing or remaining on the market” (§74) Consequently, the ECJ stated that such actions cannot be regarded as an abuse of dominant position

18. Litigating standard essential patents: Huawei v. ZTE The ECJ ruling How the guidance set by the ECJ is interpreted by national courts?  see Thomas Migaiski’s presentation What about the remaining issues that have to be solved?  See Vittorio Cerulli Irelli’s presentation National aftermath after the ECJ ruling

19. Contact information 1, rue Volney 75002 Paris Tel. +33 (0)1 47 03 62 62 Fax +33 (0)1 47 03 62 69 3, cours Charlemagne 69006 Lyon Tel. +33 (0)4 72 69 39 39 Fax +33 (0)4 72 69 39 49 www.veron.com Thank you!

20. Young EPLAW Brussels, April 18th, 2015 Thomas Misgaiski Litigating standard essential patents: Huawei / ZTE ECJ ruling National Aftermath: Germany

21. I. ECJ Mechanics FRAND negotiations (P = Plaintiff, D = Defendant): –P: Alert –D: Willingness –P: FRAND offer –D: FRAND counter offer –P: Rejection of counter offer –D: Security and rendering of account –third party determination of FRAND (by common agreement)

22. II. Issues currently discussed in German case law (1) Requirements for initial alert and consequences of missing alert DefendantPlaintiff Formal requirement defined by CJEU in Huawei vs. ZTE Purpose of information decisive which can be achieved otherwise (e.g. through third parties, information on webpage, obviousness for essential features of a standard) Negotiation process shall be formally started without pressure of pending litigation (“arms length”) Alert can be substituted by complaint and should not be used as excuse for competition defense (what did Defendant do after complaint?)

23. (1) Requirements for initial alert and consequences of missing alert Presiding Judge of the Düsseldorf Court of Appeals Kühnen: o Alert must contain reference to specific patent as well as actions that are said to infringe said patent  In principle, infringement alert as well as licence negotiations have to have failed before an infringement action can be brought  However, an action is not to be dismissed just because this requirement has not been met.  Status at the time of the oral hearing decisive. II. Issues currently discussed in German case law

24. (1) Requirements for initial alert and consequences of missing alert As far as can be seen the above view has not yet been confirmed in a judgment of a German court So far coherent view of the courts for cases where the infringement action was filed before the ECJ decision was issued: action not to be dismissed E.g.: Regional Court Düsseldorf, 4a O 73/14 (31 March 2016) o Court indicates that ECJ requirements intend to enable licence negotiations without pressure of a pending lawsuit  indication that infringement alert and subsequent negotiations have to be concluded before filing a lawsuit o Similar: Regional Court Mannheim in Philips v. Acer (7 O 23/14) (but also not decided in the end)  In any event, Plaintiff would be allowed to file lawsuit anew in case FRAND defence was successful in a first attempt if this time he complied with ECJ requirements

25. II. Issues currently discussed in German case law (2) Plaintiff’s FRAND offer and burden of proof? DefendantPlaintiff Plaintiff has to kick-off with initial FRAND-offer and is bearing burden of proof in this respect (including substantiation of royalty rate). Plaintiff needs to ensure that offer is FRAND, but is not required to present proof. If Defendant considers offer not to be FRAND, it bears the burden of proving this (or at least making a reasonable showing) and it needs to establish why counter-offer is FRAND. If Plaintiff’s offer is not FRAND, the subsequent obligations for Defendant according to the FRAND mechanism are not triggered. Even if Plaintiff’s offer should be considered not FRAND, Defendant cannot rely on FRAND defense if own obligations according to FRAND mechanism are not fulfilled.

26. II. Issues currently discussed in German case law (2) Plaintiff’s FRAND offer and burden of proof? Regional Court Düsseldorf in Sisvel v. Haier (4a O 144/14): Did not assess whether Plaintiff offer was actually FRAND o Questions at issue were, e.g.:  Alert of infringement only through service of complaint  Offer was not made towards defendant itself  Portfolio license offered only Court held that in any event Defendant’s reaction to offer did not comply with ECJ obligations: o No securities provided after rejecting Plaintiff’s offer o No rendering of account  If Defendant’s reactions to Plaintiff’s offer do not comply with ECJ obligations there is no need to assess whether Plaintiff’s offer was FRAND in the first place  Injunction granted

27. II. Issues currently discussed in German case law (2) Plaintiff’s FRAND offer and burden of proof? Düsseldorf Court of Appeals in Sisvel v. Haier (I-15 U 65/15; 13 Jan 2016): Stayed enforcement of injunction Reason: Regional Court’s findings on FRAND defence were obviously flawed: o It cannot be left open whether Plaintiff’s offer was FRAND o Only if Plaintiff’s offer is FRAND do the Defendant’s obligations according to the ECJ ruling arise o Regional Court should have discussed:  Pre-trial declarations of Plaintiff  Royalties, how they are calculated and whether individual terms are customary  Global portfolio licence FRAND?  First instance decision not yet lifted, but enforcement stayed only. The above issues, i.e. whether Plaintiff complied with ECJ obligations, will have to be assessed during appeal proceedings

28. II. Issues currently discussed in German case law (2) Plaintiff’s FRAND offer and burden of proof? Regional Court Mannheim in Philips v. Acer, 7 O 23/14, 4 March 2016: Court does not have to assess whether Plaintiff’s offer is FRAND It is only to be evaluated whether it is obviously not FRAND: o SEP proprietor’s offer has to comprise all essential terms so that it could readily be accepted by the alleged infringer o Infringement courts only obliged to a “summary review” whether the offer evidently contradicts FRAND criteria o Hence, alleged infringer is obliged to make FRAND compliant counter offer, render account and provide security  FRAND defence rejected, because Acer restricted its counter offer to Germany and to the patent in suit only; security provided on that basis was found to be evidently not sufficient

29. II. Issues currently discussed in German case law (2) Plaintiff’s FRAND offer and burden of proof? Regional Court Mannheim approach: Intention of ECJ -> relieve national infringement courts from the burden of assessing what is FRAND o Otherwise, ECJ would have given more details on what FRAND is o Possibility of third party determination of FRAND -> if Plaintiff’s offer has already to be evaluated in full, then there is no room for third party determination anymore Düsseldorf Court of Appeal approach: Court points to para 65 of ECJ decision regarding infringer’s obligation: o “(…), it is for the alleged infringer diligently to respond to that offer” o The term "that offer" refers to the required license contract offer of the patent proprietor, which according to the ECJ must be FRAND. o Hence, Defendant’s obligation to respond to Plaintiff’s offer is only triggered if “that offer” was FRAND in the first place Reasoning for different approaches by the courts:

30. II. Issues currently discussed in German case law (3) Determination of FRAND? What is a FRAND royalty rate: o Regional Court Düsseldorf in judgment of 31 March 2016 (4a O 73/14) found Plaintiff’s offer to be FRAND:  Offer was based on “standard license fees” applied by Plaintiff  Plaintiff produced license agreements with various licensees, including industry leaders, having comparable terms as the license offered to Defendant; this was taken as strong indication that offered royalty rate was FRAND  Interesting side note:  The court denied Defendant’s objection that the rates agreed upon in the produced agreements could not be FRAND since the agreements were concluded after the Regional Court Mannheim had granted injunctions against these licensees  The court held in a nutshell that these licensees knew that they were only obliged to accept licenses on FRAND terms, hence it could be assumed that the agreed licenses are FRAND because otherwise the licensees would not have accepted these terms.

31. II. Issues currently discussed in German case law (3) Determination of FRAND? Answered questions (or so it seems): o Is portfolio offer FRAND  yes, because common industry practice, per-patent licensing artificial o Can counter offer be limited to individual SEP  no, industry practice solely focused on portfolio licensing; thus, Plaintiff does not have to accept per-patent counter-offer. o Portfolio offer worldwide, EU or country-wide  determinative question is FRAND; hence, if Defendant is active in multiple countries, it is “reasonable” and “fair” for the Plaintiff to cover multiple countries; it is common practice to grant worldwide licenses; existing worldwide license agreements are a strong evidence for FRAND compliance of corresponding offer o Can FRAND offer cover various standards/non-SEPs?  Generally no; if applicability of antitrust law depends on relevance for product market, this has to be proven for each standard and thus generally bundling across standards is equally inadmissible as bundling of SEPs with non-SEPS

32. Thank you! Thomas.Misgaiski@hoyngrokh.com

33. Litigating Standard Essential Patents After Huawei / ZTE Young EPLAW Congress - 18 April 2016 Brussels - Hilton Brussels Grand Place Vittorio Cerulli Irelli, PhD London vcerulliirelli@trevisancuonzo.com

34. THE BASIC NEGOTIATION FRAMEWORK SET BY THE CJEU SEP HolderImplementer Prior to proceedings: alert implementer of infringement -designate SEP -specify way of infringement Expression of willingness to conclude a licence on FRAND terms Prior to proceedings: FRAND offer specifying -amount of royalty -way in which royalty is calculated If not accepted: FRAND counter-offer Counter-offer rejected Adequate security including past due Render accounts

35. THE BASIC NEGOTIATION FRAMEWORK SET BY THE CJEU Many open questions: Mostly unanswered (even in Germany!) Very few precedents (almost all in Germany) One exception: the Sisvel v. ZTE litigation in Turin (mostly decided on unrelated issues, but interesting nonetheless)

36. 1. THE REQUIREMENTS (IF ANY) OF THE ALERT BY THE SEP HOLDER CJEU states: “designate SEP and specify way of infringement” Does it mean providing claim charts? For each SEP included in the FRAND offer? No settled view Possibly advisable (AG Opinion, paragraph 84) No reason to exclude that claim charts for additional SEPs can be provided at later stage, together with the FRAND offer

37. 2. THE DEGREE OF JUDICIAL SCRUTINY ON THE CONTENTS OF THE INITIAL FRAND OFFER Is the Implementer’s obligation to submit a counteroffer triggered only by a FRAND-compliant license offer by the SEP Holder? or Is it enough that the SEP Holder’s offer indicates a specific royalty structure (no matter if FRAND) to shift the burden to the alleged infringer to submit a FRAND-compliant counteroffer?

38. 2. THE DEGREE OF JUDICIAL SCRUTINY ON THE CONTENTS OF THE INITIAL FRAND OFFER Conflicting views (e.g. LG and OLG Düsseldorf decisions in the Sisvel v. Haier litigation) However: Infringement proceedings are not the best venue to assess FRAND nature of SEP Holder’s offer A good faith willing licensee should react with a FRAND counter-offer no matter if the initial offer of the SEP holder is FRAND

39. 3. THE AVAILABILITY OF “OBJECTIVE FACTORS” TO ASSESS THE NEGOTIATING BEHAVIOR OF THE IMPLEMENTER CJEU states that the Implementer must behave “in accordance with recognized commercial practices in the field and in good faith” with no “delaying tactics” Questions to be answered by Courts: How long can an Implementer wait to express its initial willingness to take a license on FRAND terms after SEP Holder’s initial alert? How long can an Implementer wait to send a FRAND counter-offer? Can any delay be cured? (EU Commission in Case AT.39985-Motorola: yes; CJEU: no? German courts: no?) How soon after rejection of the counteroffer must the Implementer provide information and security? (LG Düsseldorf in Sisvel v. Haier: 1 month) How is the amount of the security to be calculated (SEP Holder’s offer? Implementer’s offer? Including past due?)?

40. 4. THE DEGREE OF JUDICIAL SCRUTINY ON THE CONTENTS OF THE FRAND COUNTEROFFER OF THE IMPLEMENTER First degree of judicial scrutiny – the coverage of the counteroffer: Porfolio or per patent/per country? Second degree of judicial scrutiny – the FRAND nature of the royalty rate indicated in the counteroffer Are benchmarks available?

41. 4.1. PORTFOLIO OR PER PATENT/PER COUNTRY OFFERS? Can the Implementer stick to a SEP-specific offer and refuse to negotiate a portfolio license? Can the Implementer’s counteroffer be limited to the country of action? Can the SEP Holder refuse such a per-patent/per-country approach? Hard questions, but by looking at “recognized commercial practices in the field” (CJEU, paragraph 65): Wide evidence that portfolio licenses are standard practice (numerous witness declarations of licensing managers in US litigations in recent years stated that they were not aware of “any SEP ever negotiated on a ‘per patent/per country’ basis”) Worldwide portfolio licenses appear the most rational option for standard compliant products infringing a portfolio of patents of the SEP Holder and marketed/manufactured in a plurality of countries (alternative option would be litigating every single patent in every single country) Above position referred to be in line with majority view expressed by EU Judges attending the Venice Conference Above position upheld by German Courts (LG Mannheim, decision of 4 March 2016 in Philips v. Acer), Romanian Courts (obiter in Bucharest Court of Appeal, decision of 28 October 2015, in Vringo v. ZTE) and soon to be decided by UK Courts (Unwired Planet v. Huawei & Samsung, Briss J) On the other hand, package licenses may raise concerns (only SEPs? only the specific standard?)

42. 4.2. THE FRAND NATURE OF THE ROYALTY RATE OF THE COUNTER OFFER Again, infringement proceedings not the best venue to assess FRAND nature of royalty, but: Are benchmarks available? Court of Genoa, decision of 8 November 2004 in Philips v Princo (Implementer’s offer lawfully rejected as not in line with terms of SEP Holder’s licensing program), but In most cases, other license agreements of little help (cross licenses, multiple portfolios, etc) If not, what role for third party determination? Safe harbor if offered by the Implementer? Commission’s view: yes (Case AT.39985-Motorola, Commission Decision of 29 April 2014) A duty to accept if SEP Holder makes the offer not to lose FRAND defence? If not, reverse hold up?

43. 5. CAN THE SEP HOLDER TARGET DIFFERENT ENTITIES? The typical target: dealers Conflicting views: Dealers are possible targets (Court of Turin, 18 January 2016, Sisvel v. ZTE; LG Mannheim, 10 March 2015, SLC vs Deutsche Telekom): No exhaustion if manufacturer is a willing licensee The dealer has to be a willing licensee Dealers cannot be targets (OLG Karlsruhe, 23 April 2015, SLC vs Deutsche Telekom) A way to circumvent the FRAND obligation and seek license conditions that the licensee would not accept without the threat of an injunction Potential for discrimination if SEP Holder, who has concluded licensing agreements with other manufacturers, then asserts its patent against dealers

44. 6. IS THE FRAND OFFER TO BE SENT TO SUBSIDIARIES? Highly relevant issue: SEP Holders’ actions often directed against local subsidiaries Conflicting views: FRAND offer has to be sent to the subsidiary (Court of Turin, 18 January 2016 in Sisvel v. ZTE) No need to send FRAND offer to the subsidiary (LG Düsseldorf, 3 November 2015 in Sisvel v. Haier)

45. THANK YOU Vittorio Cerulli Irelli, PhD London vcerulliirelli@trevisancuonzo.com MILAN Via Brera, 6 20121 Milan Italy T.: +39 02 8646 3313 F.: +39 02 8646 3892 PARMA Strada Felice Cavallotti, 28 43121 Parma Italy T.: +39 0521 508079 F.: +39 0521 533617 ROME Via delle Quattro Fontane, 20 00184 Rome Italy T.: +39 02 8646 3313 F.: +39 02 8646 3892 BARI Corso Vittorio Emanuele II, 10 70122 Bari Italy T.: +39 080 87 64 216 F.: +39 080 87 64 215 www.trevisancuonzo.com