In many fields of technology agreed technical standards are key to achieving interoperability. Smartphones and tablets, for example, have to comply with the standards set by international organisations such as ETSI and ITU to function properly. The standard-setting process commonly includes the notification of patents that have to be used in order to comply with the standard (Standard Essential Patents or SEPs) and an undertaking by their owners to license them to others on FRAND (fair, reasonable and non-discriminatory) terms.
Competition authorities have in recent years put the use of SEPs under the competition spotlight, casting doubt on any use of SEPs to get an injunction against a competitor.
Now the European court has given its views on how SEPs can be used against competitors without breaching competition law (Huawei v ZTE).
Huawei has a European patent which it notified to ETSI as essential to the ‘Long Term Evolution’ mobile standard. At the time of notifying, Huawei gave the usual undertaking to grant licences to third parties on FRAND terms.
ZTE approached Huawei to ask for a licence but the parties could not agree on terms. ZTE carried on using the standard in its products.
Huawei then sued ZTE in Germany for patent infringement. It asked the court for an injunction and product recall, as well as damages and information about past sales. The German court thought that the injunction and product recall elements might be anticompetitive and referred a series of exam questions to the European court.
The European court has now answered the questions, but not quite in the way they were asked. Instead, the judges have set out a sequence of events that would put the patentee in the clear.
- The patentee should alert the competitor to the existence of the patent and the alleged infringing activity.
- Assuming that the competitor wants a licence, the patentee should then make a specific, written offer of a licence on FRAND terms. The patentee should know based on the licences it has granted to others what is fair.
- The competitor should respond diligently, 'in accordance with recognised commercial practices in the field’ and 'in good faith', avoiding delaying tactics.
- If the competitor does not accept the licence offer it should submit a specific, written counter-offer.
- If the counter-offer is rejected the competitor should provide security such as a bank guarantee pending conclusion of the negotiations.
- The parties can refer the question of royalties to an independent expert at this point.
- The competitor should remain free to challenge the validity of the patent and whether it is essential to the standard.
The court seems to have a rather simplified view of how commercial negotiations are carried on. Presumably deviation from the steps it sets out would leave the owner of a SEP open to allegations of abusive behaviour.
In any event, it leaves a lot to be argued about.