Tuesday, November 29, 2016

Mannheim Regional Court denies injunction in standard-essential patents case for antitrust reasons

There was a time when I spent most Fridays--and occasionally also a Tuesday--in Mannheim (and on trains from Munich to Mannheim and back) to watch numerous smartphone patent trials. After coming to terms with a prohibition on making Internet connections from the courtroom (which prevented me from live-tweeting about the proceedings), I generally enjoyed my visits. I admired the depth of the judges' technical understanding and their effective trial management (authoritative, but not authoritarian; highly facts-focused, but with a great sense of humor that I know other trial watchers also appreciated). There are, however, two notable exceptions from my fond memories: the incredibly dry air in the courtrooms and, more than anything else, the Mannheim judges' take on what the obligation to license standard-essential patents on FRAND terms should mean for patent infringement remedies.

Now there is hope for the FRAND defense (or, to reflect the German legal framework more accurately, the FRAND "objection") in Mannheim. I have just obtained a redacted (anonymized) version of a ruling that came down a few months ago in a case involving two wireless standard-essential patents (SEPs) and denied injunctive relief as well as some forms of specific performance that are simply legal (not equitable) remedies in Germany because the court concluded that the defendant's parent company had been a willing licensee while the plaintiff had not met its obligations to explain, prior to the filing of the complaint and not just in a later pleading, why it believed that the royalty it demanded ($1 per device) was fair, reasonable and non-discriminatory (FRAND).

Here's the German-language decision by the 7th Civil Chamber under Presiding Judge Andreas Voß ("Voss" if transcribed to English), some parts of which I will summarize and one long passage of which I will translate further below:

Mannheim Regional Court Ruling 7 O 209-15 by Florian Mueller on Scribd

The first part of the decision finds the defendant liable for the infringement of two wireless patents granted by the European Patent Office and valid in Germany. The defendant is ordered to provide an accounting that will enable the plaintiff to bring a specific damages claim, and the ruling determines that the defendant will owe damages (with the amount not yet having been determined; that's what the accounting is needed for in the first place).

But the plaintiff's other prayers for relief (injunctive relief, specific performance) were thrown out, and applying the applicable loser-pays rule proportionately, the plaintiff is ordered to pick up two thirds of all litigation costs (court fees and parties' legal fees applying standard fees under applicable law) while the defendant, despite losing on the merits, only has to shoulder one third. That cost quota already indicates that the remedies part is the most interesting one.

Under the court's claim construction of some narrow disputed limitations, the defendant is held to have infringed both patents-in-suit. The infringement findings are based on the specification of the standard and there was some argument about whether a certain feature is a mandatory part of UMTS (3G) but, ultimately, a mere capability of devices can constitute an infringement.

With respect to the damages claim, declaratory judgment (with the exact amount to be determined after an accounting) was entered in favor of the plaintiff, and the decision notes that the related relief is not unavailable for antitrust reasons.

Toward the end of the ruling, a patent exhaustion defense is dismissed and a motion for a stay (pending proceedings in the Netherlands, which wouldn't have a preclusive effect on the German case), is denied.

The part I'm now going to provide an unofficial translation of begins near the top of page 15:


4. However, the complaint must be rejected to the extent that Plaintiff is additionally seeking an injunction, a recall, the removal from distribution channels, and the destruction of patent-infringing products. Access to such remedies is barred by antitrust law in light of the opinion of the Court of Justice of the European Union in Huawei v. ZTE [...].

a) The Chamber [= panel] outlined its interpretation of the CJEU opinion in Huawei v. ZTE in a published ruling dated January 29, 2016 ([Mannheim] case no. 7 O 66/15) and reaffirms, after further consideration, its related reasoning. In the Chamber's opinion, the [CJEU] stressed that the exclusionary right based on a patent is unenforceable in an infringement proceeding only under very special circumstances. As a result, any factual circumstances that allegedly outweigh patent law have to be pled and, if in dispute, proven by the accused infringer.

From the Chamber's vantage point, the [CJEU] developed in its opinion a concept that is meant to enable courts to assess the behavior of the SEP holder as well as that of the alleged infringer with a view to whether the enforcement of SEP-based injunctive relief and a recall must be deemed unjustified abuse of a market position and a means of exerting pressure on a negotiating party of a kind that cannot be accepted or whether it must be deemed an appropriate response to dilatory tactics employed by the (alleged) infringer. However, the Chamber is convinced that the [CJEU] opinion does not intend to place the burden of a determination of FRAND [licensing] terms on courts hearing infringement cases in which injunctive relief and a recall--but not a collection of FRAND licensing fees as in a subsequent proceeding--are sought.

To achieve this objective, the [CJEU] deems it necessary that the patent holder--as a prerequisite to bringing a complaint containing a prayer for injunctive relief and a recall, which exerts massive pressure on the alleged infringer at the negotiating table--notifies an alleged infringer of the asserted infringement, specifying the relevant SEP and stating in which way it is allegedly infringed. At a minimum, the patent holder will have to specify the declared-essential patent-in-suit based on its patent number and will have to state that this patent was declared essential to a standard in a notice to the relevant standard-setting organization.

To the extent that the patent holder is additionally required to state in which way the patent is allegedly infringed, the infringement notice must clarify the standard to which the patent is essential and the reasons for which the patent holder believes that the alleged infringer is implementing the teachings of the patent. At a minimum, it is required that the patent holder states which technical functionality of the accused devices implements the standard. Normally, the accused infringer will be aware of the fact that the device is designed to comply with the standard. Therefore, a mere reference to the fact that the alleged infringer makes or sells standard-compliant products is an insufficient infringement notice. Much to the contrary, the notice must enable the alleged infringer to perform or outsource an analysis of the legal situation. Due to the great diversity of technical functions that are typically defined in an industry standard and, especially, in light of the [CJEU's] mentioning of the difficulties in assessing the legal situation, it is a requirement that the SEP holder, at a minimum, specify the category of the technical functionality of the standard in such a way that the alleged infringer is reenabled to meet its general obligation of analyzing the legal situation.

The level of detail required for this notice can only be adjudicated on a case-by-case and context-specific basis. In this analysis, it must be taken into consideration what level of technical knowledge the infringer has or inhowfar such knowledge can be obtained by him, in the form of professional advice, on a reasonably acceptable basis. In the Chamber's opinion, the [CJEU's] requirements for a substantiation of the infringement allegation is generally met by presenting claim charts of the kind customarily presented in licensing negotiations, provided that they recite the asserted claim of the patent-in-suit or a related claim that also has the determinative elements, structured on the basis of claim limitations compared to the relevant passages of the specification of the standard. [Such claim charts] do not have to meet the requirements that an infringement complaint has to meet in order to survive a motion to dismiss. Therefore, it is usually sufficient that the alleged infringer can understand the allegation brought by the SEP holder, at a minimum by externally or internally seeking technical expert advice.

The same applies to the SEP holder's further obligation to submit, prior to bringing a complaint against an alleged infringer who has expressed a willingness in principle to take a license, a specific licensing offer on FRAND terms and to particularly specify the license fee and its derivation. In light of the aforementioned interpretation of the [CJEU] opinion by the Chamber, this entails the requirement that the offer be acceptable [to the effect of concluding an agreement by offer and acceptance] and contain the essential terms and conditions. The [CJEU's] statement that the patent holder has to submit a specific written licensing offer on FRAND terms does not mean that the court hearing an infringement case has to make a determination as to whether or (as the (alleged) infringer will typically claim) not the SEP holder's offer is actually fair, reasonable and non-discriminatory. Otherwise the infringement proceedings would, contrary to the Chamber's interpretation of the [CJEU's] intent, face the burden of having to determine which amount of license fees and which other contractual terms precisely meet those criteria. A licensing offer is contrary to antitrust law and evidently not FRAND only if in light of the specific situation in the negotiations between the parties and in light of market conditions it represents exploitative abuse.

In this regard, the patent holder has to state the method of calculating the license fee. In the Chamber's opinion, the SEP holder must enable the alleged infringer to appreciate on the basis of objective criteria the reasons for which the SEP holder is convinced of the proposed terms meeting FRAND criteria. It is insufficient that an SEP holder proposing a license agreement involving a per-unit fee merely states that per-unit fee without explaining why that amount is deemed to meet FRAND criteria. Therefore, the SEP holder has to shed light on the amount in communications with the alleged infringer, such as by reference to a standard licensing program that is commonly practiced and accepted by third parties or by pointing to other figures from which the royalty sought is derived, such as a pool license fee, which is actually paid for a license to a patent pool by third parties, provided that the pool also contains patents relevant to the standard in question.

The [alleged] infringer must respond to this offer even if--as usual--he does not deem it to meet FRAND criteria [citations to Mannheim and Düsseldorf rulings]. In the Chamber's opinion, an exception herefrom is warranted exclusively in such cases in which the SEP holder's offer is, based on a summary determination, evidently not FRAND and, therefore, constitutes an abuse of a dominant market position by the SEP holder. The counterproposal must be submitted without undue delay, given that the [CJEU] does not support dilatory tactics by alleged infringers. Therefore, the alleged infringer has to respond to the SEP holder's specific written offer as promptly as it can be reasonably expected of him given the specific circumstances of the case and in light of industry practice and the good-faith principle.

If the SEP holder rejects this [counter]proposal and the alleged infringer was already implementing the SEP prior to concluding a license agreement, the [CJEU] requires a bond or deposit that stands as reasonable surety from the moment the counterproposal is rejected. The calculation of the amount of the surety must, among other things, involve the number of past acts of infringement of the SEP in question, for which the alleged infringer must be able to provide an accounting. The surety furthermore has to meet commonly accepted principles in the relevant field.

b) An application of the test laid out herein precludes Plaintiff, for antitrust reasons, from enforcing the [relevant forms of] relief sought in the present case.

aa) In the present case, it is not necessary to determine whether the Chamber's test complies with the Karlsruhe Higher Regional Court's May 31, 2016 ruling (appeal no. 6 U 55/15), according to which an analysis of the SEP holder's offer is not sufficient while the SEP holder should be granted some wiggle room in his FRAND analysis and according to which only a summary assessment, further to a motion for a stay of a first-instance judgment, is required.

bb) That is because Plaintiff has failed to meet its obligation of providing transparency to Defendant as to why it believes the $1 [per-unit] royalty sought to be FRAND or why, as stated by the Karlsruhe Higher Regional Court, it is within the FRAND-related wiggle room granted to it. Instead, Plaintiff merely quantified the $1 per-unit royalty in its offer. The Chamber holds that a mere statement of factors to a multiplication falls short of the [CJEU's] requirements. The general presentation of a UMTS licensing program [exhibit numbers] also fail to provide further information capable of meeting the related [transparency] obligation.

cc) In a briefing (for which leave had been granted), Plaintiff asserts that the Chamber's ruling would create an inconsistency with a parallel chamber [of the same court; this must be a reference to the Mannheim Regional Court's 2nd Civil Chamber], the Chamber holds that, in light of the aforementioned decision of the Karlsruhe Higher Regional Court, that a mere statement of factors to a multiplication underlying the computation of a license fee is insufficient. Such parameters do not enable the alleged infringer to assess whether the offer--be it on the basis of a plausibility check as deemed sufficient by the Chamber or be it in the the form of an objective determination based on the wiggle room granted [to SEP holders] by our appeals court--is FRAND and, if necessary, to make a counterproposal on FRAND terms, as the alleged infringer (as the [CJEU] explained) usually lacks the requisite information on the licensing market, which is at the SEP holder's disposal.

dd) Plaintiff provided such explanations for the first time in its reply brief and presented an expert report by Professor Kearl [exhibit numbers], which allegedly proves that Plaintiff is not seeking a discriminatory royalty rate from Defendant. Such pleading and production of evidence occurred after bringing the complaint and is, therefore, not capable of complying with the [CJEU's] intent that negotiations take place without the burden of a litigation aimed at injunctive relief, a recall, or removal and destruction [of infringing products]. Therefore, the Chamber interprets the [CJEU's] list of requirements as requiring, prior to bringing a complaint, not only a notice of the accused infringement, but also of the method with which the license fee sought by the SEP holder has been calculated. The alleged infringer cannot make a decision in the course of negotiations as to whether he is willing to accept transparent FRAND terms and to take a license unless the method underlying the royalty computation has been substantiated prior to bringing the complaint. The Chamber upholds its related position despite Plaintiff's reference to a recent decision by the Düsseldorf Higher Regional Court [appeal no. I - 15 U 36/16, Exh. K12], which ponders whether it is necessary in each cas that the [CJEU's] list of requirements be met, particularly in this case the obligation to explain the derivation of the license fee sought, prior to bringing a complaint or whether this would be an overly formalistic interpretation of the [CJEU] opinion. Even if it should be procedurally possible to meet previously-unmet requirements at a later stage, by withdrawing the original complaint and refiling after meeting the obligations, it must be ensured that in this case there will be a sufficient amount of time between the withdrawal of the original complaint and its refiling for negotiating without the immediate pressure resulting from a pending litigation. Even if the SEP holder makes up for previously, in the original proceedings, failing to provide the required explanation, he will have to grant the alleged infringer, prior to refiling the complaint, a certain amount of time during which Defendant can evaluate the arguments presented to buttress the methodology underlying the royalty calculation and relating to the question of whether the royalty sought meets FRAND criteria.

If we did not impose restrictions on how the SEP holder can make up, without sanctions, during the course of litigation for a failure to meet obligations prior to bringing the complaint, this would run counter to the guiding principle of the [CJEU's] opinion, according to which negotiations must take place without the burden of a pending litigation, but on the basis of having all information enabling an assessment of whether or not a proposed license agreement is FRAND-compliant. The Chamber's view is supported by the fact that the [CJEU] issued an order to correct the original opinion, which order clarified that the phrase "prior to bringing a complaint" relates to substantiation of the patent infringement allegation as well as an explanation of the derivation of the royalty sought.

ee) In the present case, Plaintiff was not relieved from this obligation on the basis of Defendant having been an unwilling licensee. Even if, in the course of negotiations, Defendant may have occasionally refused to make a payment of license fees, the Chamber cannot conclude that Defendant had generally presented itself as an unwilling licensee. For example, the November 20, 2015 letter [Exhibit B1] by Defendant's parent company criticizes Plaintiff for explaining, in accordance with the [CJEU] opinion, the reasons for which it believes that the royalty it was seeking was FRAND [reference to exhibit]. Defendant reiterated this request [for an explanation] in its December 4, 2015 letter [Exhibit B2]. Defendant furthermore expressed a willingness to pay royalty of 0.071% of the selling price excluding VAT of each product (January 12, 2016 letter, Exh. B5). Furthermore, Defendant's willingness to take a license manifests itself in an offer, prior to this litigation, to transfer certain patents from its own portfolio, regardless of the circumstance that Plaintiff rejected that proposal for not considering it attractive. Defendant's willingness to discuss with Plaintiff a license is also proven by the fact that Defendant obtained the expert report presented as Exh. B11 in order to buttress the license fee it deemed FRAND. While this occurred only after the complaint was brought, it still reflects in the Chamber's opinion a willingness in principle to negotiate a license agreement, notwithstanding the statements that Plaintiff alleges representatives of [...] to have made in the course of negotiations.

The Chamber furthermore views as an indication of Defendant's willingness in principle to take a license the circumstance that Defendant has meanwhile made a significant deposit with a court, allegedly covering its sales with LTE- and UMTS-compatible products around the globe. Even though this occurred only after the complaint had been brought, this circumstance at least enables us to conclude, on the basis of indicia, that Defendant is a willing licensee, which supports the Chamber's holding that Defendant or, respectively, Defendant's parent company is not a generally unwilling licensee.


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