German SEP litigation series #1: Munich Regional Court intends to raise the stakes in SEP litigation

In an unusual move, the Regional Court (Landgericht, LG) Munich recently issued a “general guidance” (allgemeiner Hinweis) in the ZTE v. Samsung case which could have far reaching consequences for SEP litigation in Germany. The new approach it introduces, quickly made waves in SEP litigation and FRAND negotiation circles and businesses may need to adapt their patent strategies.

In this Part 1 of our blogpost series, we dive into the LG’s intention to deviate from recent appeal case law of the Higher Regional Court (Oberlandesgericht, OLG) Munich. This may shift the goalposts in German SEP litigation even further towards Germany’s SEP-holder friendly approach – something both SEP-holders and any company using technical standards and being involved in FRAND negotiations should be aware of. Part 2 will examine the court’s position on FRAND rate assessment.

“General guidance” amid change?

German courts have traditionally and somewhat controversially interpreted the 5-step “FRAND dance” laid down in the landmark EU judgment in Huawei v. ZTE in a way that puts great emphasis on the implementer’s (un)willingness to take a licence on FRAND terms. In fact, German courts have yet to actually reach the stage of FRAND determination as opposed to, for instance, the UK courts (read more).

Only a few months ago, the OLG Munich issued an important ruling in the case VoiceAge EVS v HMD, focusing on the last step of the Huawei framework, i.e. the implementer’s security deposit, and currently pending on appeal before the Federal Court of Justice (FCJ). In a nutshell, the OLG further paved the way for a court FRAND determination but made the court’s decision on substantive FRAND terms conditional upon the implementer providing a “qualified security” in the amount of the SEP-holder’s last offer during FRAND negotiations and a binding commitment to accept a licence at the court’s FRAND terms (read more).

The Regional Court’s subsequent “general guidance” came as somewhat of a surprise for several reasons as it: 

• openly announced that it disagrees with its appeal court’s security-focused approach and believes it to not withstand the appeal proceedings before the FCJ; 
   
• placed particular emphasis on how German courts should approach FRAND determination and the assessment of royalty rates (read more in Part 2);
   
• outlined its views on the entire Huawei framework and touched upon the non-binding effect of decisions of courts outside of Germany and a number of other issues. 

Munich Regional Court takes implementers’ obligations one step further but to a lesser amount

The Munich LG takes the position that the OLG’s security-focused approach does not provide a “safe harbour” for implementers from an injunction as it still requires courts to assess whether the patent holder’s last offer was FRAND, and if so, to issue an injunction despite the security. It deems a security deposit to be insufficient and states that it considers granting the SEP-holder a partial payment (Teilzahlungsanspruch) based on the following reasoning:

• A security deposit is not enough where the parties are already aligned that the implementer must pay a licence fee and the dispute centres solely on the amount of such licence fee. Under these circumstances, the implementer is obligated to make partial payments to the patent holder in the amount that is “undisputed” between the parties. 
   
• The reason for this is the nature of patent law which requires advance investments, according to the LG. Generally, years may pass before the investment in R&D yields actual revenues from licence fees. A security deposit does secure the patent holder's claims but it does not provide liquidity. In the court’s view, this is not adequate with respect to “undisputed” amounts.
   
• While the Regional Court states that the Huawei framework does not explicitly provide for such a partial payment claim, it maintains that the judgment does not rule it out, either. The CJEU allows claims for damages for past periods as these suits usually do not result in the implementer and its products having to exit the relevant market and do not constitute an abuse of dominance under Article 102 TFEU. Ultimately, the court relies on the FCJ’s pre-Huawei decision in the case “Orange Book” and maintains that partial payment claims correspond to basic principles of law. It takes the position that the more likely it is that the implementer owes royalties (e.g. if the SEP portfolio is particularly large, or if considerable offers have been made by the implementer), the more important partial payment becomes.
   
• This partial payment obligation extends to at least the period “going forward” until a final decision of the appellate court is issued as a security deposit would have to cover the same period. Depending on the case, the implementer might be required to pay for the entire use period or negotiation period, especially where offers differ significantly but the SEP holder is not at risk of insolvency. In such cases, willingness to pay for the full period may demonstrate willingness to license.

Comment

Although the LG does not elaborate on when amounts are to be considered “undisputed”, in practice, this likely refers to the last offer of the implementer and not the SEP holder. Thus, while the OLG merely requires a security deposit, the amount to be put down as security would be much higher than the partial (final) payment required by the LG. 

The LG also does not explain whether its new approach applies in cases where the SEP’s validity or infringement are disputed or whether there is a difference between defending against the specific patent in litigation and accepting the need to take a licence in the SEP owner’s portfolio on a general level. 

Lastly, the practicalities of advance payments are not entirely clear. In practice, most licences provide for payments in regular intervals for a certain accounting period in the past. The LG’s approach seems to suggest that the implementer is required to pay for future sales, but is not very specific in this regard. 

Impact and practical implications

The Munich Regional Court’s guidance signals a significant shift in the German SEP litigation landscape and FRAND negotiations. By further elevating the requirements for implementers and favouring partial payment claims, while likely requiring lower amounts than the OLG, the court introduces a new approach that is unprecedented in German SEP litigation and that could have quite an impact on both SEP holders and implementers:

• Enhanced leverage for SEP holders: The court’s support for partial payment claims (rather than relying on mere security deposits) means SEP holders will receive earlier revenues even while litigation is ongoing, improving their cash flow and bargaining position in negotiations.
• Increased upfront financial exposure for implementers: Companies using patented technological standards will need to prepare for the possibility of having to make partial payments for “undisputed” licence amounts already during disputes, not just at the conclusion of litigation.
• Reduced effectiveness of tactical delays: This new approach significantly lowers the potential of using protracted negotiation or litigation as a strategy to defer payments, possibly pushing towards earlier settlements on FRAND terms.

Meanwhile, there remains some uncertainty. As this guidance diverges from the Higher Regional Court’s recent judgment, clarification from the OLG or even the FCJ may follow down the line and businesses should remain adaptable in their strategies.

Stay tuned while we keep an eye on further developments! If you would like to discuss any of the topics raised in our German SEP litigation series, please do get in touch with any of our key contacts.