FRAND is in flux in Munich: lower court has concerns about appeals court’s preliminary position, yet made adjustments

The organizer of today’s webinar, Roya Ghafele of OxFirst, mentioned that approximately 200 people registered, on relatively short notice. After Judge Dr. Schoen gave a 45-minute talk, she correctly noted that there was a very high defensity of information.

Munich SEP timelines and procedures

Judge Dr. Schoen said that any SEP cases filed with his court in February would still be likely to be assigned a trial date before the end of 2025.

His court used to hold two hearings in such cases, but in the court’s experience, this was counterproductive because, after the first hearing, parties focused too narrowly on the guidance received from the court.

The Seventh Civil Chamber now goes into trials on the basis of an already written opinion, which doesn’t mean that the court would not potentially change its position, but this way they know they have identified all the important issues. They typically hand down judgments two weeks later so they can focus on the next case.

Appeals court issued post-trial order on November 28 to give guidance to parties ahead of further briefing

It was already previously known that the appeals court shared with the parties a preliminary opinion (not on the entire case, but on the FRAND procedure) on the eve of the Halloween hearing. Today, Judge Dr. Schoen mentioned that the appeals court followed up on November 28 (four weeks after the hearing) with another order clarifying its position on some of the issues that came up in the hearing.

From what was said today, it appears that the appeals court did not change its views fundamentally after the hearing, despite both parties and the EC clearly disagreeing with its idea that the defendant should simply provide collateral corresponding to the patentee’s royalty demand (except in cases where it may be facially absurd).

Lower court critical of appeals court’s FRAND security idea

Judge Dr. Schoen and his panel can be added to the list of those who don’t think that the appeals court’s idea is workable.

While he acknowledged that this would remain to be seen, Judge Dr. Schoen believes the appeals court’s idea will actually increase the pressure on defendants to settle. But he and his panel are also concerned about the implications for patentees. After investing in R&D, innovators already have to wait very long (he mentioned 10 years) before they get paid. The appeals court’s idea of making a FRAND determinatíon after the implementer gives security would cause further delay before money would physically arrive in the patentee’s bank account and could be reinvested in the next round of innovation. That is, in fact, an issue ip fray had also raised, together with the fact that companies can’t actually recognize revenue based on the provision of collateral, which is an issue for publicly traded companies but also for privately-held ones who may use their balance sheets for fundraising.

When Judge Dr. Schoen noted that the appeals court could still change its position, it is fair to say that he was apparently hoping that the appeals court would come up with something better than the security idea that is presently on the table.

Analysis of patentee’s terms by lower court in current state of appellate uncertainty

For Judge Dr. Schoen’s court, the current situation with the appeals court potentially applying a whole new (and not entirely predictable) standard to the review of the next round of cases put before it is a difficult one to deal with. For example, they heard a SEP case in September and adjudicated it in October. That was before the appellate hearing. That case and some others will, however, be reviewed by the appeals court under a potentially new standard.

For the time being, Judge Dr. Schoen’s panel continues to apply German SEP case law (Sisvel v. Haier I & II) as before, but with certain adjustments. In particular, they now make sure that they always checke if the plaintiff’s first and last offer complied with FRAND. Judge Dr. Schoen mentioend that even in the past there were numerous SEP decisions where they had to “calculate” FRAND, but those decisions were redacted, so the outside world could not see how they “calculate” and how they “handle FRAND offers.”

So far, an implementer’s willingness to give security to the SEP holder was only one aspect of many that Judge Dr. Schoen’s panel assessed as par tof its overall FRAND analysis. He stressed that an implementer who gives security only shortly before the hearing (which could be the one in his court or another court’s hearing in a parallel case that is part of the same SEP dispute) engages in hold-out in his panel’s view.

One practical issue relating to security is interest. Judge Dr. Schoen noted that, after collateral is provided, the further proceedings including an appeal could still take very long. An appropriate security amount therefore also has to include interest.

Judge Dr. Schoen referred to case in which the appeals court stayed the enforcement of injunctions based on security being provided by the defendant. It is unclear in which cases that happened. But it suggests that the appeals court is generally more focused on the implementer’s provision of collateral than the lower court is.

Contrasting the appeals court’s stance on security with the case law of the Federal Court of Justice, Judge Dr. Schoen noted that security was not the focus of the Sisvel v. Haier I & II decisions. It was briefly touched upon in one of them, but Judge Dr. Schoen says there wouldn’t have been 10 pages on negotiating conduct if implementers could simply make a deposit and avoid an injunction that way.

Judge Dr. Schoen’s observations on why SEP negotiations fail

According to Judge Dr. Schoen, there are mainly three types of reasons for which parties fail to reach an agreement on a SEP license agreement:

1. The SEP holder makes unreasonably high royalty demands or seeks to impose other unreasonable conditions.
2. The licensee does not want to pay anything or at least not an sufficient amount or makes unreasonable demands involving non-monetary terms.
3. The third set of scenarios was described as relatively rare. Judge Dr. Schoen said that sometimes there are “strategic reasons” for which one of the parties doesn’t want to enter into a license agreement, such as a licensee wanting to demonstrate to the market that is not a soft target.

At first sight, that overview of scenarios in which SEP cases must be resolved by the courts come across as balanced. There appears to be a similar risk for a SEP holder to be denied an injunction as for an implementer to be enjoined.

But what was not addressed during the webinar is why such a seemingly balanced appraoch to SEP disputes has not resulted in a single successful FRAND defense in the entire history of the Munich I Regional Court, the busiest SEP court in Germany in recent years.

The question was not raised, and therefore not comprehensively answered. But some of what Judge Dr. Schoen explained about his court’s approach to FRAND gives an indication as to why all implementers have so far been unsuccessfull with their FRAND defenses, such as for the reason discussed in the next section.

Lower court’s FRAND range analysis rewards strategy of getting small implementers to pay high per-unit royalties

Judge Dr. Schoen made the common-sense point that FRAND is a range, not a point.

But in that range, the court appears to include pretty much any royalty rate that the SEP holder has been able to extract from an implementer, even a small implementer who may not have had the resources to defend itself in the event of a SEP dispute (and/or would have spent more on a proper defense than on an overpriced license).

That is fundamentally different from the UK decisions (at two different levels) in InterDigital v. Lenovo, where the High Court of Justice (EWHC) threw out small-company comparables (such as Fairphone) adduced by InterDigital and InterDigital did not even try to bring those comparables back on appeal.

Judge Dr. Schoen, however, said that implementers can’t persuade his court to ignore such comparables, given that in the end all implementers making comparable products will compete. He illustrated this point by noting that everyone’s products will be put on the same store shelves. Therefore, a large-scale implementer cannot, in his opinion, expect to pay a lower per-unit royalty than a low-volume product maker.

The net effect of that logic is, however, that royalty rates will evolve in only one direction: the only way is up.

No top-down approach (an issue also with a view to the EU SEP Regulation)

Judge Dr. Schoen clearly spoke out against a top-down approach to SEP portfolio valuation. He argues that the value of patents varies greatly, which is why he does not believe one can determine a FRAND royalty based on a percentage of a standard that a given SEP holder owns.

That skepticism of top-down valuations is not at all unique to Judge Dr. Schoen and his panel. It is shared by many licensing experts.

It does mean, however, that everything comes down to comparable license agreements, given that the court will not conduct (or have a court-appointed expert) conduct any other analysis that would arrive at a fair value for a portfolio license. And with respect to comparables, the previous section explained why FRAND defenses are doomed to fail. The SEP holder could just go to a tiny company, force it to accept a supra-FRAND royalty, and in the end even high-volume implementers with the ability to defend themselves in court would be expected to pay the same per-unit royalty.

Those who believe(d) the proposed EU SEP Regulation would move the needle in implementers’ favor should also take note. The EU SEP Regulation in its current form would almost mandate a top-down approach to portfolio valuation. It would not be entirely impossible for a bilateral FRAND determination to have a different result, but practically all the data points that will be provided to the “conciliator” tasked with portfolio valuation will be of a top-down nature. Based on the opposition to top-down valuation that Judge Dr. Schoen stated today, it should then be extremely easy for SEP holders to persuade the Munich I Regional Court’s Seventh Civil Chamber that an EUIPO-led FRAND determination following a top-down approach should simply be ignored.

Near-term, mid-term and long-term outlook

In the months ahead, the Munich I Regional Court’s Seventh Civil Chamber is going to adjudicate SEP cases just like it has been for years, with only some additional elements designed to make the decisions potentially more appeal-proof.

No one can predict what will happen after the appeals court has decided (currently slated for early February, but delays are always possible), given that the decision could go in all sorts of directions. If the appeals court indeed says an implementer just has to provide sufficient collateral, Judge Dr. Schoen believes an injunction would have to issue in cases where it turns out that the SEP holder’s demand was within the FRAND range. But what he did not discuss was whether a SEP holder could simply withdraw a license offer along the way (or let it expire). Otherwise the implementer could always accept the standing license offer to avoid the injunction.

The most important part of the EC’s reasoning, sequentiality, may not be adopted by the Munich Higher Regional Court and, much less, the Munich I Regional Court. In that case it will depend on the EC’s determination. The appeals court said that it would allow a further appeal to the Federal Court of Justice. And the Federal Court of Justice has the obligation to make a preliminary reference to the ECJ if a serious question of interpretation of EU law is raised.

Theoretically, the Federal Court of Justice could decline to refer the matter to the ECJ if it says that the EC did not raise a question of EU law worthy of a preliminary reference. But the EC is the Guardian of the Treaties. It would be difficult for the Federal Court of Justice to reach the conclusion that the very institution in charge of ensuring the consistent and correct application of the Treaty on the Functioning of the European Union (TFEU) does not know what it’s doing. And theoretically, the EC could start a treaty infringement procedure and fine Germany if it concludes that Germany, due to a decision by the Federal Court of Justice, violated EU law. Therefore, unless the EC loses interest in this issue, it is only a question of when, not if, there will be a preliminary reference to the ECJ. The EC could also fine an alternative way of putting the question before the ECJ: it could fine a SEP holder, and the appeal would go to the EU General Court and, from there, to the ECJ.

Given that an ECJ decision is the endgame, it appears questionable whether the appeals court should even try to square the circle and take a security-centric position that is extremely unlikely to be affirmed. So far, no one outside of that three-judge appellate panel considers it anything but a bad idea. That also became clear today.