FRAND on German terms: German FCJ rejects European Commission’s FRAND position and ECJ referral

Germany's Federal Court of Justice (FCJ) has recently handed down its decision in the VoiceAge EVS v. HMD appeal case concerning Standard Essential Patents. In dismissing the appeal, the FCJ further clarified the requirements for the FRAND defence under German antitrust law, based on the ECJ’s ruling and its own previous “FRAND Defence” rulings. This “FRAND Defence III” ruling is only the third decision the FCJ has issued on this topic since the landmark judgement of the European Court of Justice (ECJ) in Huawei v. ZTE in 2015.

The ruling confirms Germany’s role as a leading FRAND enforcement jurisdiction by maintaining its (patentee-friendly) approach from previous “FRAND Defence” rulings and dismissing the EU Commissions push for a further ECJ referral, which may have changed the SEP litigation landscape in Europe significantly. 

Willingness to license is a continued obligation 

The FCJ confirms its position that the framework for fair, reasonable and non-discriminatory (FRAND) negotiations should not be applied in strict sequential order. Rather, the conduct of both the SEP holder and the implementer throughout the licensing negotiations must be assessed as a whole, in particular, the implementer’s continued willingness to license. In taking this approach, the FCJ moved away from the European Commission’s more rigid view of the FRAND framework for negotiations between implementer and SEP holder, which the Commission had submitted by way of an amicus curiae brief during the proceedings, a notably very rare step before German courts that demonstrates the vehemence with which the Commission sought to intervene.

The FCJ further denied a referral to the ECJ on the following issues: (i) the infringement notice, (ii) the requirements for the licence offer, (iii) the security deposit, and (iv) the proportionality defence.

No infringement notice necessary for claims for damages, information and accounting

The FCJ clarified that an SEP holder only needs to send an infringement notice for claims for injunctive relief, recall and destruction. This is because only those remedies raise the question of whether the SEP holder might be abusing its market dominance under antitrust law. In this case, VoiceAge EVS first sought damages, information and accounting without prior infringement notice which the FCJ found unproblematic. The court also noted that VoiceAge EV’s original statement of claim constituted an infringement notice for the additional remedies of injunctive relief, recall and destruction that VoiceAge EVS subsequently sought. 

Reaction to licence offer as evidence of willingness to license

The FCJ held that the implementer must continuously show that it remains willing to take a licence. The implementer therefore must reply promptly and with substance to an SEP holder’s licence offer, explaining why it believed the officer is not FRAND. If the implementer does nothing by staying silent or if it delays its response the court will treat this as evidence that the implementer is not genuinely willing to license. These obligations apply even where the SEP holder’s first offer is not fully FRAND‑compliant, because simply making a not fully FRAND compliant offer does not amount to abusive conduct. Abuse only arises if, in the end, the SEP holder refuses to grant a licence on FRAND terms.

Significance of the Security Deposit

The FCJ also addressed the role of the implementer’s security deposit when the SEP holder rejects the implementer’s counteroffer. It confirmed that providing an adequate security deposit is an essential factor in showing that the implementer is a genuinely “willing licensee.” This mirrors the approach taken by the Munich courts in the first and second instance decisions in this case. Because the implementer in this case did not provide a sufficiently high deposit, the FCJ did not decide whether the deposit should be calculated using the SEP holder’s offer or the implementer’s counteroffer.

The FCJ also clarified that a partial payment to the SEP holder is not required as long as it is still uncertain whether and under what conditions a licence agreement will be concluded. On first reading, this might sound like the FCJ opposes partial payments in SEP licensing negotiations. But the judgment can be understood in such a way that this applies only where it is unclear whether the parties will ultimately enter into a licence.

Where it is clear that a licence must be taken - such as in the Munich Regional Court’s decision in Wilus v. ASUS - the FCJ may be open to the view that the implementer must make a partial payment of the “undisputed” amount to show willingness while the final licence fee remains in dispute. In that decision, the Munich Regional Court held that the obligation to make a partial payment applies when the parties have agreed that the implementer is obliged to take a licence, but the amount of the licence fee is still in dispute. In this case, the implementer must make a partial payment to the SEP holder for the “undisputed” amount and, under certain circumstances, provide an additional security deposit (read more).

An unwilling licensee cannot raise the proportionality defence

The FCJ made clear that HMD could not rely on a proportionality defence to resist an injunction because it had used the SEPs while behaving in a way that showed unwillingness to take a licence. In other words, if an implementer fails the FRAND test due to its own unwilling conduct, it cannot then argue that an injunction would be disproportionate.

Key takeaways for the industry

1. The SEP holder’s obligation to issue an infringement notice first only relates to claims for injunctive relief, recall and destruction.

2. The implementer’s willingness to license is a continued obligation, not only a one-time declaration. In this sense, the implementer must respond promptly and substantively to the SEP holder’s licence offer. Silence or delay in responding is treated as evidence of unwillingness to licence.

3. The implementer’s security deposit must cover an adequate amount and be provided without delay after the SEP holder’s rejection of the implementer’s counteroffer.

4. The implementer’s proportionality defence against an injunction claim is not justified when the implementer shows an unwillingness to license through its conduct.

What’s next?

Since the FCJ’s “FRAND Defence III” ruling signals that the FCJ is not willing to fundamentally change its approach and considers this approach to be in line with the ECJ’s ruling in Huawei v. ZTE, implementer’s hopes that SEP litigation in Germany may take a different direction seems to have been quashed. Eyes will now need to turn to the lower instance courts, in particular the courts of the Munich venue, for a potential change in approach.