20 May 2019
Dutch Court of Appeal gives guidance on FRAND license negotiations
For the first time, the Court of Appeal of The Hague has given guidance on the interpretation of the CJEU decision in Huawei v ZTE and the standards for assessing FRAND defences under Dutch law. In its decision in Philips v Asus of 7 May 2019, the Court of Appeal of The Hague considered that the steps described in Huawei should not be considered as strict requirements but rather as guidelines. The Court of Appeal granted an injunction against Asus because it held that Asus had employed delaying tactics and had not acted as a ‘willing licensee’.
Philips appealed an earlier judgment of the District Court of The Hague regarding Philips’ patent EP 1 623 511 to a “Communication System”, which Philips alleged was standard essential but which patent was revoked by the District Court. The Court of Appeal overturned the decision and held that the patent was valid and essential to the UMTS/LTE standard. It also held that Philips did not abuse a dominant position in the sense of Article 102 TFEU.
The Court of Appeal first of all considered that Philips was under no obligation to disclose its patent application as an SEP prior to the finalization of the standard. The ETSI IPR Policy and ETSI Guide mention this should happen “as soon as feasible” and “in a timely fashion”, however according to the Court of Appeal a reasonable interpretation is that this should be done shortly after the standard is finalized and it has become clear what technology is included. The ETSI standards are not designed to be open standards free of IP rights, but designed to achieve technically optimal solutions.
The Court of Appeal considered that the CJEU in Huawei did not issue a strict set of rules: if the SEP holder has not precisely and fully complied with any of the steps, this does not immediately and necessarily imply that enforcing its SEP would constitute an abuse of a dominant position. The CJEU rather provided guidelines for good faith negotiations between the parties about a license. The factual circumstances of the case must be taken into account when assessing whether enforcement of an SEP should be regarded as abusive. On the one hand, the SEP holder can be expected to inform the user of his SEPs, to offer a license and to enter into good faith negotiations before claiming an injunction, so that the negotiations can take place without the pressure of a possible injunction. On the other hand, the SEP user must be a willing licensee and not apply delaying tactics, which inter alia means that within a short time-frame the user must present a written counter-offer.
The Court of Appeal held that Asus was not a ‘willing licensee’, but instead applied a ‘hold-out’ strategy. Philips had informed Asus of its UMTS patent portfolio in 2013 and several meetings took place, always at the initiative of Philips. Philips explained the infringements, but Asus never had a technically qualified person present at the meetings and never provided a (technical) response. According to the Court of Appeal, Asus did not show any interest in a license, avoided a discussion on license terms, did not ask about Philips’ license agreements with others and never got in touch with Philips after a meeting. Philips sent a proposal for a standard license agreement and a list of relevant UMTS/LTE patents and claim charts to Asus on 21 September 2015, but Asus did not respond. Also at a meeting on 15 November 2015, no discussion on the license terms took place and Asus did not make a counter-offer. Philips indicated at the end of the meeting that it was expecting a counter-offer, but it did not receive one. Philips then sued Asus on 15 December 2015.
The Court of Appeal held that it follows from Huawei that if the SEP holder has met its duty of notification (as was held to be the case here), it is a condition for the obligation of the SEP holder to make a FRAND license offer, that the SEP user – after receipt of the notification – has shown willingness to enter into a license agreement under FRAND conditions. This condition was not met, as Asus was held not to be actually willing to negotiate in good faith. Philips was thus not required to make a specific license offer that is FRAND to Asus and was free to initiate injunction proceedings.
According to the Court of Appeal, Philips was thus not even required to make its license offer of 21 September 2015. The Court of Appeal therefore sets aside Asus’ argument that Philips’ offer did not meet the requirements of Huawei because Philips would not have specified that and why its offer was FRAND. The Court of Appeal superfluously held that specifying that and why an offer is FRAND, is not a requirement following from Huawei.
Asus did make a counter-offer to Philips after the proceedings were initiated, but the Court of Appeal held that this could at most lead to the SEP holder having to negotiate in good faith with the SEP user, but this cannot lead to the conclusion that the initiated proceedings would – in retrospect – constitute an abuse or that the SEP holder would have to suspend such proceedings. This would open the door to delaying tactics by the SEP user.
As the Court of Appeal considered the patent to be valid and essential to the standard and Philips was not held to have acted abusively, an injunction, account of profits, rectification, recall and destruction of goods, and damages were ordered against Asus.
The Court of Appeal’s decision is open to appeal before the Supreme Court.