IP Cases & Articles

Orange: FRAND Terms For Standards Related Patents

In May 2009 the German Federal Supreme Court (BGH) handed down a judgment which established conditions under which the proprietor of a standards essential patent could enforce injunctive relief against an infringer in Germany.

Conversely the judgment established conditions under which a defendant could avoid an injunction based on the patent proprietor’s abuse of a dominant position under Article 82 of the Treaty of Rome, upon which competition law (anti-trust law) in the European Union is founded. This article looks at the effects of that decision on the open question of the relationship between competition law and standards related patents and how further decisions have developed this aspect of law in Europe, such as the parallel judgment by the Netherlands court between the same parties, and the more recent decision of the District Court of Mannheim between Motorola v Apple.

Those practicing in the field of electronics and software will be well aware of the importance that standards play in the establishment of modern electronics and computing devices, particularly where interoperability is required.

Since the days in which the first pan-European mobile telecommunications system, GSM, was standardised by the European Telecommunications Standards Institute (ETSI), patents which are essential for the operation of a standardised system have become extremely valuable intellectual property. However it was not until the late 1990s that standards setting bodies such as ETSI began to recognise the importance of establishing a policy for technology which must be used to implement a standard and for which patents for that technology were owned by contributors to the standard or indeed held by parties not contributing to the standard. Standards setting bodies therefore established an IPR policy which required parties contributing to the development of a standard to declare any patent and patent applications which are considered by the declarer to be essential to the standard. Parties declaring patents as essential had to agree to license those patents and patent applications to other parties on fair, reasonable and non-discriminatory terms, which are known by the abbreviation FRAND. FRAND conditions embody the concept that the holder of a patent which is essential to a standard should not abuse the monopoly which must be infringed if the standard is implemented by agreeing to license to any and all parties equally, thereby avoiding any possible infringement of EU competition law. However what FRAND meant in practice was an open question.

The principle of FRAND is an attempt by the standards setting bodies to mediate between a monopoly right, which by its nature is anti-competitive, and a competition law which promotes a level playing field in the market place. However, the conditions for enforcing a standards related patent remained an open question and what FRAND meant in practice.

The Orange Book case concerned CD-Rs and CD-RWs, the format and operation of which is set out in a standard known in the technical field as the Orange Book. The patent proprietor Philips sued SK Kassetten in the German regional court for distributing CD-Rs and CD-RWs for infringement of a patent essential to the correct operation of the CD-Rs and CD-RWs according to the Orange Book. The patent was determined by both the regional court and the Court of Appeal to be infringed. As a remedy for the infringement, the regional court granted the patent proprietor injunctive relief in addition to damages. The injunctive relief included a prohibition against manufacturing, offering for sale, placing into circulation, using or possessing or importing CDs, as well as an account of profits. These remedies including the injunctive relief were upheld by the Appeal Court except for a minor clarification. The defendant appealed the decision to the BGH on grounds which included that the Appeal Court should not have upheld the decision of the regional court to grant the patent proprietor injunctive relief, because this was not consistent with the requirements of FRAND.

The BGH confirmed that the holder of a standards essential patent is entitled to injunctive relief. The defendant is only entitled to a defence against an injunction if the patent proprietor does not license the patent after the defendant has made an unconditional offer to license on FRAND terms, and is bound by the license agreement for infringing acts committed before the license was concluded. Injunctive relief will be denied if the patent proprietor discriminates against a company seeking a license under that patent or inequitably obstructs the proposed licensee to prevent the licensee entering a market which FRAND terms are intended to allow. The defendant bears the burden of proving that the offered license is fair and reasonable, and the patent proprietor can refuse the license if the demands being made by the defendant go further than what would be considered to be fair and reasonable under competition law. Notably, the BGH indicated that offering to take a license only under the condition that the court finds that the patent is infringed does not make the offer unconditional and therefore injunctive relief is still available.

In a further development of the decision, the German District Court of Mannheim, in the case between Apple and Motorola, determined that Motorola was entitled to injunctive relief for patent infringement, even though Apple had offered to take a license on FRAND terms. Consistent with the Orange Book judgment by the BGH, the court differentiated between the licensing conditions for infringing acts which occurred before an offer to license had been made to those acts after the offer has been made. In particular the Court held that an offer to take a license under FRAND terms for past infringing acts did not represent an unconditional offer so that the claimant is still entitled to injunctive relief in spite of the offer. Past infringing acts which were undertaken without the consent of the patent proprietor should not be limited to FRAND conditions, although these should not be anti-competitive. Furthermore, challenging the validity of a patent whilst offering to take a FRAND license was considered to be inconsistent behaviour and therefore also did not comply with the requirements for an unconditional offer to license. As such the injunctive relief could be upheld.

In contrast theDutch courts in the parallel case to the Orange Book took a different approach. The District Court of the Hague disagreed with the decision of the BGH and concluded that the rights of a patent proprietor are not affected by the presence of an agreement to license a patent under FRAND terms. If no such licence is in existence then the patent proprietor is permitted to exercise its rights under the law, including injunctive relief. If the defendant believes that it is entitled to a licence and has not concluded that licence under FRAND terms then it is up to the defendant to apply to the court for a licence under FRAND terms. A defendant who proceeds to use the patented technology without the permission of the patent proprietor is therefore under a risk of an injunction being granted against infringing activities.

For those working in the standards related industry, one of the questions that these cases present is whether an injunction can be obtained in the case in which the patent proprietor is a non-practising entity. The principles under which a FRAND licence should be offered by the patent proprietor and granted to a defendant are based on competition law and not discriminating against a defendant from entering a market. However if the patent proprietor itself is not satisfying a market for a product then could the patent proprietor still obtain an injunction preventing commercial activities of the defendant within a market which the patent proprietor itself is not satisfying? This is particularly important because many non-practising entities have declared patents to be essential against a standard. Certainly the general principles applied by the UK courts are that injunctive relief is an equitable remedy and considers whether the patent proprietor can be compensated by monetary damages alone and would suggest that based on the circumstances of the patent proprietor it is more difficult to obtain injunctive relief. And yet in all the decisions from the German and the Dutch courts the activities of the patent proprietor as to whether or not they are satisfying the market for the technology does not seem to be necessary when considering the question of whether an injunction can be granted. Certainly the tension between patents which are essential for the performance of a standard and competition law remains and there is still further clarification required in this important area for those practising in the field of electronics and software. Perhaps we will have to wait for the Unitary Patent Court to operate before we get a unified approach to this open question. However, that may be to the detriment of Europe, because at present one can say that the variety of legal traditions in European countries with well-established patent systems in Europe makes the European patent very attractive to patent proprietors.