Tuesday, July 20, 2021

Flimsy patent exhaustion argument weighs against willingness to take standard-essential patent license, and § 315 still no safe harbor: Mannheim court

German patent prosecution and litigation firm Bardehle Pagenberg published an article last week on a landmark Mannheim FRAND judgment that came down in early March, but the redacted version of which apparently wasn't published until a couple of months later. In that case, LG Electronics won an injunction against TCL over a standard-essential patent (SEP). The redacted judgment doesn't name the parties, but LG issued a press release a week after its first-instance victory.

I strongly recommend the summary and the analysis provided by Bardehle's Professor Tilman Mueller-Stoy and Jan Boesing. After reading the Mannheim ruling, I don't have much to add, but I do wish to address two of the key holdings (one of them is actually just a dictum) because they are so very relevant to aspects of SEP litigation that this blog has addressed and will continue to discuss. Maybe my way of putting it will even encourage some more people to dig deeper by reading the aforementioned article.

Patent exhaustion clause in implementer's counteroffer needs to be timely and stand on solid ground, or will contribute to finding of unwillingness

In some patent--not only but also SEP--cases, patent exhaustion has saved the day for defendants. It's been almost ten years that I attended a French Samsung v. Apple preliminary injunction hearing that resulted in a victory for the iPhone maker because of the exhaustive impact of a license agreement between Qualcomm and Samsung. In that Mannheim case that was decided in March, TCL sought to benefit from a license agreement between LG and the same San Diego chipmaker: Qualcomm. Not all of the accused products in LG v. TCL came with a Qualcomm chip (unlike the particular iPhone model at issue in that French case), but some, and TCL wanted to benefit from patent exhaustion in two ways:

  1. TCL's counteroffer excluded Qualcomm-powered devices from the computation of the "release payment" (i.e., back-royalties) that would compensate LG for past infringement.

  2. TCL also reserved the right to dispute its obligation to pay license fees on future product sales if and when its SEPs might be exhausted under a Qualcomm-LG agreement.

The way I understand the Mannheim Regional Court's Second Civil Chamber (Presiding Judge: Dr. Holger Kircher), the judges would have considered at least the first part--and possibly even the second part--acceptable if TCL had raised the question of patent exhaustion early in the negotiations and if it had a strong case for exhaustion. However, the court notes that it was a very late stage of the infringement proceedings at which TCL brought this up for the first time, and dilatory tactics are often fatal to a FRAND defense in Germany under the Federal Court of Justice's two Sisvel v. Haier decisions clarifying the application of the European Court of Justice's Huawei v. ZTE guidance. But the court also looked at the clause of the Qualcomm-LG agreement TCL's exhaustion theory was based upon, and found TCL's argument unavailing as a matter of contract law. The ruling also mentions the territorial nature of patent exhaustion.

SEP holders can insist on back-royalties as an indispensable contractual condition. The court was also concerned that TCL might relitigate the exhaustion-related merits in the future by withholding payments.

The ruling doesn't explicitly say that TCL lost the case just because of the shortcomings of the exhaustion-related parts of its counteroffer. It's one of of those multifactorial findings, and TCL did other things that the court deemed to call into question TCL's willingness to take a license on FRAND terms. Also, to be on the safe side, the court also found that LG's offer and negotiating conduct were exemplary (without using that particular term), making TCL look even worse by comparison. Still, my subjective understanding of the decision is that the exhaustion part in and of itself would have been sufficient for TCL to lose the case. Of course, it remains to be seen what the appeals court will say (unless the case gets settled).

Given that the court found TCL's patent exhaustion theory not only belated but also legally deficient, I wouldn't want to jump to conclusions as to what would happen in a case where the patent exhaustion argument is substantially stronger, and made early on, though there still is an argument over whether exhaustion occurred. When products are sold in a different jurisdiction than the one in which they or the relevant components are made, patent exhaustion is rarely a slum dunk for defendants. And a conservative defendant really has to tread carefully in Mannheim now when it comes to exhaustion-related clauses in a proposed license agreement.

§ 315 FRAND licensing offer no safe harbor despite appellate decision

The LG v. TCL decision came down shortly after a ruling by the Karlsruhe Higher Regional Court--to which all Mannheim patent decisions are appealed--that breathed new life into the § 315 safe harbor. § 315 German Civil Code enables contract clauses that leave the determination of an exact amount to a court of law if the parties cannot agree. It's like a placeholer for an actual number, enabling a binding agreement to be concluded even though what is often the single most important question may be left open.

Even the arguably patentee-friendliest judge ever to have served on the Federal Court of Justice of Germany, Professor Peter Meier-Beck, declared himself sympathetic to the § 315 approach to SEP licensing at a Mannheim conference earlier this month.

In LG v. TCL, § 315 came up only in an obiter dictum. That is so because TCL merely brought it up as an analogy when seeking to defend its approach to patent exhaustion against criticism that a licensing offer is unacceptable to the patentee if it leaves open such a fundamental question of exhaustion, which has the potential to give rise to subsequent litigation. TCL apparently told the court that a § 315 offer doesn't totally resolve everything either, but a license agreement comes into being and an injunction may not issue.

Interestingly, the Mannheim court once again rejected the suggestion that a § 315 offer was sufficient. It didn't say that no § 315 offer would ever be acceptable from an implementer in a SEP case, but took a rather negative position.

That would have been inconceivable in a comparable U.S. case. If the Federal Circuit had addressed a question like this in another patent case and had said pretty clearly that a particular type of approach to the royalty amount is FRAND, a court below wouldn't dare to deviate from it. But the U.S. is a common law jurisdiction, while Germany is a civil law jurisdiction ("civil law" meaning in this case that it is in the tradition of the sixth-century Corpus Juris Civilis and the Napeolonic Code Civil).

What the Mannheim court does here is intransigent: it acts as if it had not been overruled (in the form of an order to stay the enforcement of an injunction due to the defendant likely prevailing, as opposed to an actual appellate opinion) over a § 315 clause in Nokia v. Daimler. But it's not a miscarriage of justice or whatever. They can do it, though they will likely be overruled again and again. In LG v. TCL it's just a dictum, so there can't be a formal reversal. Maybe the appeals court will assert its authority again and also issue a dictum. It might also just ignore this part as it's not outcome-determinative.

As a SEP holder I'd definitely be encouraged by that Mannheim LG v. TCL ruling. Nokia probably knew about it already when it decided to bring 11 (eleven!) patent cases against OPPO in Mannheim this month. Nokia is also suing OPPO in Munich and Dusseldorf, but Mannheim is the center of gravity of the German part of that dispute. At least initially.

LG will even more aggressively enforce its patents now, so I guess we'll see LG in action in Mannheim again in no time. And TCL is a frequent defendant to patent infringement complaints. What we won't see too soon, however, is an Ericsson v. TCL case: they've settled their long-running dispute according to Reuters.

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