In pivotal FRAND case, Munich appeals court struggles with two aspects of Huawei v. ZTE — and unnecessarily so

Considering the totality of what the appeals court said on Thursday, there can be no reasonable doubt that the judges are trying to fix the problem. They are aware of what is wrong with the status quo. They see all those motions to stay the enforcement of SEP injunctions, and they have also had to set the record straight on the correct security amount for provisional enforcement.

If every German patent infringement court was as solution-oriented as they are, the problem would never have arisen in the first place.

But this may have been the first SEP appeal these three appellate judges ever heard on the merits. Most cases settle on terms that are – as the appellate judges correctly suspect – frequently above the FRAND range.

Their idea of collateral as an enabler of FRAND determinations is as unworkable as it was unpopular with all parties, including the powerful amicus curiae (the European Commission). Now that they have that feedback, they can think again, and they may simply realize that it’s best to send the matter to Luxembourg.

It speaks to their diligence that they cross-checked the European Commission’s position in different ways, but they made mistakes in that process. This article addresses two aspects with which they said they were struggling.

1. What if the implementer never makes a counteroffer?

The Munich appeals court opposes – without saying so, or maybe even without having realized it to the full extent – Sisvel v. Haier‘s central holding, which is a departure from sequentiality to the effect of importing the implementer’s subsequent behavior into the analysis of Huawei v. ZTE step 2: the declaration of the implementer’s willingness to take a license on FRAND terms.

At the same time, the appeals court believes there should be some back and forth between the parties. That is also the Commission’s view, just that the EU’s executive government wants guardrails: the SEP holder must never ask for more than a FRAND rate, as it has an antitrust duty to deal with licensees on FRAND terms.

The appeals court still struggles with strict sequentiality (of the analysis). It can’t accept the notion that an implementer may never make a counteroffer.

There are two reasons for which the appeals court is worrying about a non-issue:

• It is indeed true, as a flowchart in the European Commission’s amicus brief shows (August 4, 2024 ip fray article), that a SEP holder making a supra-FRAND demand is not entitled to a counteroffer. It simply fails to get an injunction.
• But the European Court of Justice rightly wasn’t worried about that scenario. Unless the SEP holder’s initial royalty demand is laughable, no implementer will be advised by its lawyers to refrain from making a counterproposal. Even if the implementer considers it unlikely that the SEP holder gets over the hurdle that is Huawei v. ZTE step 3, it can’t rule it out, and in that scenario it will at least want to have the chance that the court considers the counteroffer FRAND (in which case, as per the EC’s flowchart, no injunction issues). There is really no benefit from not making a counteroffer. But it is legally possible without consequences if the court indeed finds that the SEP holder’s royalty demand was supra-FRAND.

The EC’s outside counsel was asked whether the implementer should be required to make a counteroffer, and answered that question in the affirmative, but without specifying the circumstances.

2. How can national courts give meaning to the reference to security (to be provided by the implementer) in Huawei v. ZTE?

Presiding Judge Lars Meinhardt repeatedly came back to para. 67 of Huawei v. ZTE:

“Furthermore, where the alleged infringer is using the teachings of the SEP before a licensing agreement has been concluded, it is for that alleged infringer, from the point at which its counter-offer is rejected, to provide appropriate security, in accordance with recognised commercial practices in the field, for example by providing a bank guarantee or by placing the amounts necessary on deposit. The calculation of that security must include, inter alia, the number of the past acts of use of the SEP, and the alleged infringer must be able to render an account in respect of those acts of use.” (emphases added)

Apart from the fact that he reads “appropriate” out of that paragraph (by saying that the SEP holder’s demand should be the basis for security, unless facially absurd), he way overrates that passing reference to security (as it is not found in the actual answers to the referring court’s questions) and may lack the context of Orange-Book-Standard.

Sisvel v. Haier is not the first bad decision that the Federal Court of Justice of Germany made in an SEP context. The previous one was Orange-Book-Standard (2009), and the irreconcilability of that one with the European Commission’s positions in some SEP antitrust matters in the early 2010s gave rise to Huawei v. ZTE. The reference to security is simply part of the Orange-Book-Standard legacy.

The Orange-Book-Standard “logic” was that an implementer had to proactively identify and reach out to each and every SEP holder, ask for a license, send money even if a license was denied, and the Federal Court of Justice, at the time, considered it extraordinarily lenient to accept, in lieu of physical payments, the provision of security.

When Judge Ulrike Voss (“Voß” in German) made the preliminary reference in Huawei v. ZTE in early 2013, she phrased her questions for the purpose of resolving conflicts between Orange-Book-Standard and the EC’s stance in the Samsung and Motorola antitrust contexts.

In para. 38, the judgment mentions Judge Voss’s reference to security:

“[The referring court considers that an infringer ought, initially, to be able to provide security instead of paying the royalty directly to the proprietor of the SEP in question.”

The Dusseldorf court asked five questions. The ECJ effectively answered questions 1-4 together (as they all related to injunctive relief) and question 5 (about non-injunctive remedies, where there are no restrictions) separately. Question 4 was the one that mentioned security:

“If the fulfilment of the infringer’s obligations arising from the licence that is to be granted is a prerequisite for the abuse of a dominant market position:

Does Article 102 TFEU lay down particular requirements with regard to those acts of fulfilment? Is the infringer particularly required to render an account for past acts of use and/or to pay royalties? May an obligation to pay royalties be discharged, if necessary, by depositing a security?” (emphasis added)

That subquestion about security was then answered in para. 67 (quoted further above) by saying that if both the SEP holder and the implementer have each made an offer that the other side rejected, the implementer should then give security to the appropriate amount.

That changes nothing about the strictly sequential order of the analysis. The dispositive part in boldface letters does not mention security. It just states that after an infringement notice, the implementer has to say it wants a FRAND license, and the SEP holder then has to make a FRAND offer. If that offer is not FRAND, it’s over.

The appeals court feels that the possibility of step 3 (analysis of SEP holder’s royalty demand) being the end of the road would render para. 67 about security irrelevant. Not so.

The first thing to consider is that the ECJ reduced the obligations on the implementer relative to Orange-Book-Standard. Prior to Huawei v. ZTE, German case law simply required the provision of security (with actual royalty payments being preferred) as soon as possible after the implementer started using the patent in question. Then the ECJ said: no, the SEP holder has to give an infringement notice and (provided that the implementer wants a license) has to make an offer, and then the implementer can still make a counteroffer, but if that one is rejected, then it should not continue to use the patent without giving security.

The other way to look at it is that para. 67 is part of a block that discusses all potential directions in which the process can go, while the actual answer to the Dusseldorf court’s questions 1-4 mandates a strictly sequential analysis, every single step of which constitutes a potential point of failure (steps 1 and 3 for the SEP holder’s efforts to obtain an injunction; step 2 for the defendant; and if step 4 is reached, the one who wins that one wins the whole injunction dispute). The question is not whether security is always needed. It’s whether it will ever be needed. And such scenarios exist indeed:

• If both offers are in the FRAND range, no injunction will issue under Huawei v. ZTE. But in that case, the implementer should still give security, also considering that Huawei v. ZTE does unconditionally allow recovery of damages.
• As the appeals court also mentioned on Thursday, Huawei v. ZTE envisions the possibility of the parties agreeing on a third-party FRAND determination. But in a scenario where the parties agree that they will enter into a license agreement on terms set by a third party (which could be a court of law or an arbitration panel), they’re already way past the point at which an infringement court would have to decide whether or not to grant an injunction. Of course, if there are going to be lengthy FRAND determination proceedings, security may be highly appropriate. It’s just not part of the actual answer to the Dusseldorf court’s questions, which are all about when an injunction will issue (and when it will not).

It is now up to the European Commission and HMD to provide the Munich Higher Regional Court’s Sixth Civil Senate with input that enables the judges to arrive at the right decision. It is another question whether HMD deserves to be let off the hook: there are indications of HMD being an unwilling licensee, and VoiceAge EVS’s counsel would like the court to look at the question of market power first. But the EC is not interested in whether HMD or VoiceAge EVS wins this particular case. And the appeals court, too, has realized that this is about a question of transcendental importance.