New focus on security deposit in German Standard Essential Patent litigation

The Higher Regional Court (OLG) Munich has now handed down its much-awaited ruling finding in favour of SEP-holder VoiceAge in the case VoiceAge EVS v HMD. The OLG’s refusal to refer the proceedings to the Court of Justice of the European Union (CJEU) erased the most tangible prospect in recent years of a potentially game-changing decision from the CJEU for European SEP litigation, including the new Unified Patent Court (UPC). 

Tech companies holding SEPs or marketing devices using technological standards and being involved in SEP negotiations should be aware of OLG’s security deposit-focused approach which may shift the goalposts in German SEP litigation.     

What was special about these proceedings?

The German courts’ implementation of the 5-step FRAND framework laid down in the landmark EU judgment in Huawei v. ZTE has been controversial from the beginning, but especially so since the Federal Court of Justice’s (FCJ) judgments in Sisvel v. Haier (read more). In contrast to UK courts, which frequently render substantive decisions on FRAND licensing terms (read more), German courts are more focused on the implementer’s unwillingness to conclude a license based on their negotiation behaviour.

The European Commission (EC) has been critical of German courts’ approach and even intervened in the appeal proceedings before the OLG with “observations”,  advocating for a strictly sequential application of the five steps and a potential referral to the CJEU (read more). 

The OLG chose not to follow that request, instead openly criticizing the EC’s observations for being formalistic and partly self-contradictory, zeroing in on an aspect of the Huawei framework that has not been the focus in German SEP litigation so far: the implementer’s security deposit.

The OLG decision in VoiceAge v. HMD has important implications for all SEPs and thus for any tech company that markets connected devices or makes use of technological standards such as 5G, Wi-Fi or USB.

The OLG’s position on steps 1 to 4 of the “FRAND dance” 

On steps 1 to 4 of the Huawei framework, the OLG Munich largely follows well-trodden German case law. According to the OLG, the Huawei decision sets out a paradigm of dynamic negotiations rather than a purely static or sequential one:

• The OLG clarifies that the SEP-holder can also give the notice of infringement required before asserting an injunctive claim (step 1) by filing an infringement action that is limited to damages and ancillary claims. If the implementer knows which patent(s) they allegedly infringe, e.g. because the parties have entered into detailed negotiations mentioning individual patents, they are barred from invoking the insufficiency of the infringement notice at a later stage. 
   
• Likewise, a missing or insufficient declaration of willingness to take a licence (step 2) on the implementer’s part does not automatically deprive them of their FRAND defence, especially if the SEP-holder makes a license offer (step 3) and negotiations ensue. That initial insufficient willingness can be corrected through increased efforts at a later stage is an important message for implementers, even though the court still found HMD to be unwilling in the specific case.
   
• Contrary to the EC and in line with both the UPC’s Local Division Munich (read more) and the German FCJ, the OLG states that whether the SEP-holder’s first license offer (step 3) was FRAND will only be assessed if the implementer provides a FRAND counteroffer and the SEP-holder does not subsequently revise the initial offer. The court argues that the first offer merely serves as gateway to negotiations but should not be the pivotal element. According to the court, the implementer is not entitled to FRAND terms that correspond to “the most advantageous end of the FRAND range”, meaning that if the terms offered by the SEP owner are FRAND, the implementer must accept them.
   
• The OLG views the implementer’s counteroffer (step 4) as a generally mandatory act that follows from the very nature of negotiations. Otherwise, the first offer could not serve as a basis for negotiations (see above step 3) that enable the implementer to raise their objections and the SEP-holder to correct their initial offer.

OLG’s novel approach puts the security deposit in the spotlight

The OLG then moves on to the fifth and final step of the FRAND process and makes the court’s FRAND determination conditional upon the implementer providing a “reasonable security” which must be based on the SEP-holder’s last offer, putting forward the following reasoning and requirements:

• The implementer’s obligation to deposit a security is triggered once the SEP-holder rejects the implementer’s counteroffer. Both counteroffer (step 4) and security deposit (step 5) are specific ways in which the implementers demonstrate their “continuous willingness” to take a licence on FRAND terms, as required by the FCJ.
   
• The OLG had previously hinted that even delays in negotiating and other signs of seeming unwillingness of the implementer can be “cured” by providing a security deposit. However, in its judgment, the OLG backpaddled on this point and deliberately left this open.
   
• The amount of the security must generally match the SEP-holder’s last offer. If this offer includes a worldwide portfolio licence (which is possible according to FCJ case law), the security deposit must also cover the entire portfolio and must not be adjusted to specific territories or patents. This means that the implementer must make a security deposit that likely significantly exceeds what can be claimed as damages in the infringement case, which generally relates to one patent and one territory. 
   
• Drawing on a recent decision by the UPC’s Local Division Munich, the OLG requires that the implementer provide a “qualified security” (qualifizierte Sicherheit), e.g. by making a binding declaration that they are willing to accept the SEP owner’s offer if the court finds that such offer is in fact FRAND. This means that the security will have to be applied to such license offers if deemed FRAND. This is to prevent the implementer from “changing their mind” last minute and to ensure that the SEP-holder actually receives the security as royalty payment if the offer is FRAND and a final court decision establishes the infringement. 
   
• While acknowledging that this requirement has not been spelled out explicitly by the CJEU, the OLG maintains that it follows from the requirement of providing a “reasonable security”. Otherwise, the purpose of ensuring that the SEP-holder actually receives the security could not be achieved since the implementer – as opposed to the SEP-holder – is not obligated to conclude a licence agreement and may choose to have the court impose an injunction, in which case the security could be reclaimed if it was not qualified.

The OLG granted leave to appeal to the FCJ due to the novelty of its security-focused approach and the fundamental importance of the legal questions involved. According to first reports, HMD wasted no time and filed its appeal within the same week. Unlike the OLG, for which it was discretionary, the FCJ might be obligated to refer the case to the CJEU for a preliminary ruling according to Art. 267(3) TFEU if it finds that questions of EU law need to be resolved to make a finding in the case. It remains to be seen whether the FCJ will take that route or consider – like many other German courts – that the current practice is in line with the CJEU’s Huawei guidelines.

Impact on current SEP litigation and FRAND negotiations

• The OLG decided to stay the course of German SEP case law. Yet, it ventured onto new territory by fleshing out the obligation to provide a security deposit and making the court’s FRAND determination dependent on the security and the implementer’s commitment to accepting a licence at the court’s FRAND terms.
   
• While the OLG did further pave the way to actually reach the stage of FRAND determination, it also set a high threshold for implementers to get there.
   
• A paradigm shift towards a more implementer-friendly approach through another CJEU ruling is not within grasp, but also not off the table yet. But even if the FCJ decided to refer the case to the CJEU, both the referral and the EU court’s decision are likely to be years away. 
   
• Yet, a new preliminary ruling by the CJEU would have the potential to create another watershed moment like the Huawei decision which – as opposed to the EC’s observations – would be binding on both the courts of EU member states and the UPC. 

Meanwhile, the relevant players will follow closely to see how the other German courts will react to the security-focused approach from Munich and whether the FCJ will give the CJEU another opportunity to have a final say in the matter – so stay tuned while we keep an eye on further developments!