Munich Regional Court cements its approach of determining FRAND rates more readily in standard essential patent cases

Munich is one of Europe’s leading venues for standard-essential patent (SEP) litigation, and the court has issued comprehensive guidance on how it expects FRAND negotiations to be conducted. Following several decisions regarding SEPs and FRAND over the past months, the 7^th Chamber of the Regional Court Munich I (the Court) has consolidated this case law and further developed its approach for SEP cases in an unusually detailed (67-page) guidance document. This article explains the key changes and the steps that SEP owners and implementers should consider in how they approach negotiations and SEP litigation.

Key takeaways for SEP licensing discussions

Previously when deciding SEP cases, German courts focused on the parties’ conduct during licensing negotiations – in particular the implementer’s willingness to take a license. This assessment regularly led to the conclusion that the implementer had not properly fulfilled its FRAND obligations and was therefore an “unwilling licensee”, so the court would issue an injunction. Recently, however, the Court has shifted its approach and more actively engages in substantive FRAND assessments and set out much clearer conduct requirements for implementers to follow in order to open the path to a substantive assessment. This post summarizes the key points that companies active in standard-driven businesses should follow in their negotiation conduct and further guidance from the Court:

• Lower threshold for licensee willingness: To date, the implementer acting like a willing licensee was a necessary condition before a court would assess FRAND terms on the merits. The test for this was based on an overall assessment of whether the implementer continuously showed that it was willing to take a licence on “whatever terms are FRAND”, in particular by engaging in the licensing discussions meaningfully, without any relevant delay. The flexibility of this test provided very little in the way of guidance for a party engaged in negotiations and typically led to a judicial finding of unwillingness. The Court now changes this approach by distinguishing between the “external” and the “internal” willingness to take a licence:
   

  • The “external willingness” is a formal, procedural threshold test. It is met when the implementer is not engaged in an obvious “hold-out”, which generally means that the implementer has paid the royalty amount undisputed between the parties and, under certain conditions, has also posted a security (read more on the specific requirements here). This test provides a clear guideline for implementers to follow.
     

  • If there is “external willingness”, the Court will assess “internal willingness” next. “Internal willingness” means that the implementer must accept an offer from the patent owner that lies within the FRAND range (see next bullet). Practically, this means that the Court must conduct a substantive FRAND assessment of the SEP owner’s offer, whereas previously, the willingness was a requirement for the court to substantively assess the offer at all. Put differently, only the clearly outlined “external willingness” is required to get to the substantive assessment stage, creating more predictability for implementers.
     

• Assessment of the SEP holder’s offer – comparable licences and top-down approach: The substantive FRAND assessment of the SEP holder’s offer was the key topics of the Court’s recent case law and its guidelines. Although the analysis of “comparable licences” is the starting point for the Court, the “top-down approach” remains highly relevant. This can be either because there are no “comparable” licence agreements, or, if there are, by using the top-down approach as a cross-check to avoid that a patent holder uses a small number of non-representative licence agreements as “comparables” to enforce royalty rates that do not correspond to an actual established licensing practice. In practice, the key factor determining the outcome of a case will be whether a licence agreement presented by the SEP holder is a suitable “comparable”. The Court mentions several factors for assessing this, including an absolute cut-off period of five years after which licence agreements are generally no longer considered suitable.
   

• Possible adjustment factors: As possible adjustment factors to the license rates, the Court mentions in particular volume discounts of up to 30% for very high unit sales (a 10% discount is regularly permissible where annual unit sales are in the seven-digit range), discounts for licensing of several standards, and a (debatable) discount of 15% for the size of patent portfolios of Chinese companies. However, the Court also discusses surcharges, for example for substantial delays in negotiations, e.g. by an exclusion application at ETSI.
   

• Security payment does not constitute a “safe harbour”: The Court also considered whether the payment of a security in the required amount could constitute a “safe harbour” for the implementer, safely preventing an injunction. Although the Court had initially contemplated such a concept, it ultimately rejected it in the guidelines. The Court noted that a comprehensive range of alternative dispute resolution mechanisms already exists, including the Court’s own longstanding mediation offer, established arbitration institutions such as the ICC, and the newly introduced Patent Mediation and Arbitration Centre at the Unified Patent Court. Instead of a formal safe harbour, the Court offers a “FRAND FIRST hearing” as a practical alternative, allowing the parties to discuss FRAND issues early in the proceedings instead of arguing extensively on infringement and validity, when FRAND aspects are the core of the dispute.

Practical implications for SEP licensing disputes before the Court

The Court makes clear that it will apply these detailed guidelines in future SEP/FRAND proceedings and expects the parties to take them into account for their submissions. With the offer of a “FRAND FIRST hearing”, the Court further accelerates the proceedings and gives the parties the opportunity to clarify any open questions concerning FRAND early on – potentially allowing an early settlement after receiving guidance from the court. The Court emphasises that these guidelines should foster transparency and predictability for the parties in SEP/FRAND proceedings.

It should be noted that these guidelines represent only the Court’s considerations and are not generally binding in Germany. It remains to be seen whether the 21^st Chamber of the Regional Court Munich I, which also deals with SEP/FRAND proceedings, or other courts, including the appeal courts, will adopt the presented approach.