Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

ECJ’s Judgment of today in case C- 170/13, Huawei v ZTE

with 9 comments

For a number of years many in our peculiar little world have been pretty obsessed with standard-essential patents, due to a great extent to the economic significance of the legal fight at the heart of the so-called smartphone wars.

A bit more than a year ago the Commission made binding the commitments proposed by Samsung (see here for our initial comment on these) and adopted a decision declaring an infringement on the part of Motorola, which did not receive a fine. The Commission tried to introduce clarity in a mudded area in which there were no clear precedents and in which the industry couldn’t agree by providing a safe harbour for standard implementers/willing licensees; the Commission did so by means of two individual cases, one establishing the principle (Motorola), and one articulating it in practice (Samsung).

As these cases were ongoing the European Court of Justice received a preliminary reference from the Düsseldorf District Court (Landgericht Düsseldorf), concerning the very same issues, with the difference that the Court was not being asked about fact-specificities, but about the general, broader, principles and concepts at issue. The referring Court even explicitly opposed the so-called Orange Book standard to the Commission’s reasoning in Motorola and Samsung noting that they would seemingly lead to opposite results in casu. At the time some wondered whether the Commission had done well in deciding its cases prior to the ECJ’s ruling.

The underlying national case was one in which Huawei had sought an injunction against ZTE after the two companies failed to reach a licensing agreement on FRAND terms for a patent essential to the LTE wireless broadband technology standard.

Last November AG Wathelet issued an Opinion in the case in which he essentially concurred with the Commission’s views.

That highly anticipated ruling was rendered only a couple of hours ago (see here), and it has clearly endorsed the Commission’s action in this area.

The questions posed by the referring Court were carefully drafted and structured and sought detailed guidance from the ECJ on very specific points. The ECJ’s ruling nevertheless responds to them altogether (§ 44), given that they all seek to ask one question: when is the seeking of injunctions by an undertaking with a SEP that it has committed to license to third parties on FRAND terms an abuse of dominance?

The Court starts off citing the classic case-law on definition of abuse (§ 45) and recalls the fact that exercising the rights that form part of an IPR cannot in itself constitute an abuse of dominance; an abuse will only exist in exceptional circumstances (§§ 46-47). It then goes on to identify the exceptional circumstances in the case, after noting (§ 48) that they are different from the ones found in the case-law on refusal to supply IPRs.

According to the Judgment, those exceptional circumstances in the situation at issue are (i) the indispensability of the patent (§§ 49-50); and (ii) the fact that SEP status was only achieved in return for an irrevocable undertaking to licence on FRAND terms (§§ 51-52). The Court takes the view that since these circumstances “create[s] legitimate expectations on the part of third parties that the proprietor of the SEP will in fact grant licences on such terms, a refusal by the proprietor of the SEP to grant a licence on those terms may, in principle, constitute an abuse within the meaning of Article 102 TFEU” (§53).

How do we then determine what FRAND terms are? The Court insists on the need of striking “a fair balance between the interests concerned” (a wording that sounds reminiscent of Orange Book, even if the approach in the latter Judgment is then not followed) (§ 55). In this regards, the Court acknowledges that the need to enforce IP rights provides a range of legal remedies including the right of access to Courts (§ 57), and that therefore “in principle, the proprietor may not be deprived of the right to have recourse to legal proceedings to ensure effective enforcement of its exclusive rights (…)” (§ 58).

The Court’s approach is that the irrevocable offer to grant licences on FRAND terms) cannot “negate the substance of [those] rights, but that “it does, none the less, justify the imposition on that proprietor of an obligation to comply with specific requirements when bringing actions against alleged infringers for a prohibitory injunction or for the recall of products” (§ 59).

The Judgment then goes on to identify those “specific requirements”, namely that in order to escape 102 liability:

(1) The SEP holder must give notice or hold prior consultations –even if the SEP has already been used by the infringer- or, in other words, it must “alert the alleged infringer of the infringement complained about by designating that SEP and specifying the way in which it has been infringed” (§§ 60-62; in the latter of these paras. the Court explains the need for this requirement, which has to do with the number of SEPs in a product and the fact that a party may not be aware about possible infringements);

(2) Following the expression of the alleged infringer’s willingness to conclude a licensing agreement on FRAND terms, the proprietor is to present “a specific, written offer for a licence on FRAND terms, in accordance with the undertaking given to the standardisation body, specifying, in particular, the amount of the royalty and the way in which that royalty is to be calculated(§ 63). The Court explains in 64 that this requirement in reality seems to already stem from the commitment to standardization body to grant licences on such terms (§ 64). The Court does not venture into the discussion of what is fair or not, but notes that the proprietor knows the content of other licensing contract and can (should) operate guided by the principle of non-discrimination (§ 64).

(3) It would then be for the alleged infringer “to respond to that offer, in accordance with recognised 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) [Comment: This is perhaps the most unclear part of the Judgment]. In this sense, the alleged infringer will only be able to bring an abuse of dominance claim against the injunction if it has submitted to the proprietor of the SEP in question, promptly and in writing, a specific counter-offer that corresponds to FRAND terms (§ 66) [Comment: I understand how the Court favours defining FRAND terms on the part of the holder by reference to non-discriminatory conditions, but it is unclear to me what FRAND terms are from the perspective of the alleged infringer].

The Court also adds that when the alleged infringer is using the teachings of the SEP prior to concluding an agreement, it should, “from the point at which its counter-offer is rejected, to provide appropriate security, in accordance with recognised commercial practices in the field” which must include, among others, the numbers of past acts of use (of which it must be able to render account) (§ 67).

(4) In case of no agreement after this round of offer and counter-offer, the parties may, by common agreement, request that the amount of the royalty be determined by an independent third party, by decision without delay” (§ 68). [Comment: the Judgment reads “may”, but it sort of reads as intending to be saying “shall”; also, query: what are the implications of the “by common agreement” qualification?

(5) The Court also takes into account the public interest in having invalid or non-truly-essential patents identified as well as the right to effective judicial protection and states, in a nutshell, that the alleged infringer shall not be banned from challenging the validity, essential nature of the patents and /or their actual use (§ 69). [Comment: once again the Judgment resorts to soft wording (i.e “an alleged infringer cannot be criticized for…”) when it seems to mean something clearer (i.e. “the alleged infringer must be free to…”)]

More comments: 

– Interestingly, whereas the Judgment reads as if these were 5 cumulative conditions, as I read them I got the impression that requirements 4 and 5 were not given the same relevance. As observed in the comments above, the drafting seems to be softer, alluding to facultative possibilities or elements that “may” be taken into consideration, as opposed to 1, 2 and 3 that “must” be required. This impression seems to be confirmed by § 71, which in summarizing the Court’s response does only refer to requirements 1 to 3.

In many ways, it would seems as if the Court had included (4) and (5) as a way of endorsing the Commission’s approach in Motorola and particularly in Samsung. 

An open question that remains relates to requirement (4) and the relevance of third party determination given the wording used (i.e. “may”, “by common agreement”, etc).

– Remarkably, there is nothing on the Judgment about the alleged applicability of the ITT Promedia standard for “sham litigation”. As visible from the above, the Court does not approach the case in terms of shams (nor of refusal to supply), but in terms of self-imposed constraints on the right of access to Courts (one more example of the “estoppel abuse” theory identified by Kevin Coates?)

– Also of interest is the Court’s response to Question 5, in which it clarifies that all the above applies only to actions that can prevent products manufactured by competitors to appear or remain on the market (§§ 73-74) and not to other actions (such as those 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).

– I’m not sure that the Court has responded to everything in the manner wished by the referring Court (notably, what’s FRAND remains unclear), but I’m pretty sure that it is a strong endorsement to the Commission, the only noteworthy addition being perhaps the reply to question 5.

Written by Alfonso Lamadrid

16 July 2015 at 7:33 pm

9 Responses

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  1. At last! What a relief. If anything, Huawei v ZTE confirms that FRAND implies procedural courtesy and is devoid of substantive pricing content. And that AT regulators should not meddle with the price system.

    Nicolas Petit

    17 July 2015 at 6:16 am

    • Thanks, Nico. In a way maybe (although I think procedural obligations in this case go beyond mere courtesy), but wouldn’t that also flow from the Commission’s intervention? It did not meddle with prices but left the question of FRAND determination to others; it limited itself to establishing the principle and to blessing one way of articulating that procedural mechanism, much like the Court has done.

      Alfonso Lamadrid

      17 July 2015 at 8:59 am

    • Nicolas: I am not sure I agree. the question of what FRAND means was not before the ECJ. It was 9or could be) a matter that the German court can determine under German law. they can set damages for the past and a FRAND rate for the future. The Court does not abrogate Art 102(a) TFEU. Another interesting element in this judgment: if circumstances create[s] legitimate expectations on the part of third parties” that a patentee “will in fact grant licences”, a refusal by the patentee “may, in principle, constitute an abuse within the meaning of Article 102 TFEU””. That opens some more doors.

      Maurits

      13 August 2015 at 3:46 pm

  2. Alfonso, I agree that the ruling does not add much to what was made already clear by the Commission in its decisions. And that’s probably a pity. The only added value is that now that approach is enshrined in EU law. In this respect, adopting the decisions while the preliminary ruling was ongoing (and months before the AG gave its opinion!) has proved to be a great move by the Commission..Could you imagine what the Court might have come up with without these sound – although administrative – precedents?

    Michela Angeli

    17 July 2015 at 11:29 am

  3. Thanks, Michela, and good to read you here!

    Some people -notably those disappointed at the Judgment- might think that in the absence of those administrative precedents the Court would have had less “institutional constraints” to adopt a different solution, but I agree with you that the move has proved to be smart and has played out fantastically well for the Commission.

    Alfonso Lamadrid

    17 July 2015 at 3:49 pm

  4. From an abuse standard perspective, it is a bit regrettable to read that the fact that an SEP is “essential to a standard” (instead of being “indispensable [essential] to the exercise of a particular activity on a […] market” [GC, Microsoft, para 332]) is now sufficient for a refusal to license an SEP to become abusive (and therefore a competition law issue). The Huawei/ZTE court says:

    49 [The case] is characterised, first, as the referring court has observed, by the fact that the patent at issue is essential to a standard established by a standardisation body, rendering its use indispensable to all competitors which envisage manufacturing products that comply with the standard to which it is linked.

    50 That feature distinguishes SEPs from patents that are not essential to a standard and which normally allow third parties to manufacture competing products without recourse to the patent concerned and without compromising the essential functions of the product in question.

    Could one not say that competition law should be concerned with competition on the market, not mere contract breaches? While a refusal to license on FRAND terms may very well be a proper refusal to deal/license, it should maybe not be considered problematic under Art 102 TFEU unless the conditions of the refusal to deal/license case law (above all: being indispensable to the exercise of a particular activity on a market) are fulfilled. The court seems to assume that it is impossible for someone to come up with an alternative standard when it writes that “patents that are not essential to a standard [sc. as opposed to SEP] […] normally allow third parties to manufacture competing products without recourse to the patent concerned”.

    In nuce: If someone manages to be active on the market without access to an SEP (for that same market), the SEP is not essential to competition and it should be irrelevant whether it is essential to a standard.

    RG

    17 July 2015 at 6:26 pm

  5. To continue the discussion: on 4 September, the LCII will hold in Brussels a morning briefing on Huaweï v ZTE. The event will feature T. Kramler, M. Dolmans and M. Rato. More info @ http://www.lcii.eu/event/huawei-v-commission-implications-for-antitrust-and-patent-law/

    Nicolas Petit

    18 August 2015 at 7:44 am

  6. […] [For an analysis of the ECJ ruling in the Huawei case, please refer to Chilling Competition’s post] […]


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