Thursday, May 21, 2020

Mannheim court reverses position on FRAND defense: standard-essential patent injunctions become readily available again

On Tuesday, the Mannheim Regional Court held a trial in a Nokia v. Daimler case (case no. 2 O 34/19 over EP2981103 on an "allocation of preamble sequences") and announced the most colossal about-face I've seen from a court so far on a key question of patent law:

Presiding Judge Dr. Holger Kircher of the Mannheim court's 2nd Civil Chamber explained to the parties and intervenors that he and his side judges had concluded their court's application of the Court of Justice of the EU's Huawei v. ZTE standard-essential patent (SEP) injunction decision had been erroneous for several years. They were now going to interpret the CJEU opinion differently, with severe implications for those defending themselves against SEP injunction requests in that court.

For the time being, I'm not going to comment on the technical merits, though a Tier 2 (= indirect) supplier to Daimler disclosed to the court its implementation of the relevant part of the cellular standard in question and it appears to be clearly non-infringing, given that patent law is all about using specific means to achieve a result, as opposed to the result viewed in isolation. Also there appears to be a very strong case for impermissibly-added subject matter, which would render the patent invalid. But let's focus on FRAND.

In Huawei v. ZTE, a case referred to the CJEU by the Dusseldorf Regional Court, the EU's top court wanted to prevent both holdup (SEP holders obtaining supra-FRAND royalties against the backdrop of an injunction) and holdout (implementers using delaying tactics as opposed to negotiating license terms with SEP holders in good faith). Therefore, injunctions shouldn't be available as long as good-faith negotiations are ongoing, but mere lip service to negotiation wouldn't suffice. The key paragraph that sums up the CJEU's position on both parties having to act in good faith (with the initial obligation of making a FRAND-compliant licensing offer falling upon the SEP holder) is paragraph 71 (click on the image to enlarge; this post continues below the image):

That one is the final paragraph of the relevant part of the CJEU's ruling. It's the answer to the most important parts of the questions the Dusseldorf court had raised. It states clearly that, for (chrono)logical reasons, the SEP holder must make a FRAND offer "prior to bringing that action," and the implementer is expected to respond diligently and without delaying tactics to that offer, which means it has to make a FRAND counteroffer. FRAND is a range, so both the SEP holder's offer and the implementer's counteroffer can be FRAND at the same time.

There are 2x2=4 possible combinations of FRAND and non-FRAND positions taken by the parties on the licensing terms they would accept (click on the image to enlarge; this post continues below the image):

What the CJEU meant was that only one of the four combinations would lead to an injunction. The SEP holder would not get one if it failed to discharge its FRAND licensing duty, and if both parties made offers within the FRAND range, the SEP holder wouldn't be entitled to an injunction either as it could simply accept the implementer's counteroffer (or negotiate further to find some common ground in between).

What the Mannheim court explained on Tuesday is that the test would, from now on, focus on the implementer's counteroffer. Judge Dr. Kircher and his colleagues have recently decided to interpret para. 66 of the CJEU's decision to that effect:

66. Should the alleged infringer not accept the offer made to it, it may rely on the abusive nature of an action for a prohibitory injunction or for the recall of products only 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.

We'll get to the interpretation of that paragraph in a moment. The net effect is that a SEP holder could get away with a FRAND violation if the court isn't convinced that the counteroffer is FRAND. Instead of one of the four FRAND/non-FRAND combinations resulting in an injunction, all but one would (click on the image to enlarge; this post continues below the image):

That approach is materially consistent with, and may very well have been inspired by, the Munich I Regional Court's recently-published SEP guidelines.

But is that really a correct interpretation of Huawei v. ZTE?

It's a highly problematic approach to say the least.

Paragraph 71 is the one that really matters. It refers to all previous paragraphs, such as para. 66, as "the foregoing considerations" and then states a rule.

It's not just about whether para. 66 would be considered way too important. It also takes para. 66 out of context in another way: para. 66 discussed a scenario in which "the alleged infringer [does] not accept the offer made to it." It says "the offer", not just "any offer." And "the" offer is previously defined as an offer on FRAND terms.

Focusing on the implementer's (counter)offer turns the CJEU's case law on its head. It used to be the German Orange-Book-Standard approach to place all the burden on the implementer. But then came the CJEU (in Huawei v. ZTE and basically said (in other words): "No, firstly the SEP holder has an obligation under the antitrust laws, but if it discharges its FRAND duties, then we're not going to tolerate holdout tactics by the implementer. The implementer can keep negotiating, but within reason."

Arguably, the new (but actually not so new) Mannheim stance on SEPs is even worse than Orange-Book-Standard was, given that in the old days defendants were at least able to avert an injunction by making a licensing offer that relegated the determination of royalty amounts to a future judicial proceeding (they still had to post a bond or make a deposit).

The problem is clear. The impact can be disastrous. But how can this be fixed?

If an injunction comes down (the decision will be announced on June 23), Daimler can appeal it to the Karlsruhe Higher Regional Court. That appeals court could stay the enforcement of the injunction rather swiftly and set the record straight.

Regulatory authorities such as the European Commission and Germany's Federal Cartel Office could make filings with the Mannheim court, or with the appeals court in Karlsruhe. The courts would be free to disagree, but less likely to disagree with, say, DG COMP than with Daimler.

Theoretically, a solution could also come from the legislature. However, the German patent reform process is much ado about (pretty much) nothing due to the ineptitude of those pushing for injunction reform to make lawmakers understand what benefits an economic majority. They've foolishly wasted time and energy within existing industry organizations instead of just simply forging a strong cross-sectoral alliance and taking matters into their own hands while the window of opportunity to influence the political opinion-forming process was open. Now that window is closed, not in formal but in practical terms.

The new un-FRAND-ly development in Mannheim is shocking, and I believe there will be some resistance by industry. For the sake of innovation, and in the ultimate interest of consumers, I can only hope that it will be forceful, intelligent, timely, and effective.

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