Licensing essential patents in Germany: when the compulsory license defense applies

Intellectual Property and Technology News

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The German Federal Court of Justice (FCJ) recently issued a decision expected to strongly impact both the licensing of essential patents and patent infringement proceedings based on essential patents in Germany (May 6, 2009 – KZR 39/06 – the Orange Book case).1 Not only has the decision confirmed the admissibility of the competition law defense against issuing an injunction, but also it has laid down the prerequisites for a defendant to rely on that defense.

 

Traditional conflict between patents and standards

 

The relationship between patents and standards has always been one of conflict. Patents value the unique, while standards define the uniform. If new technologies are to be adapted for the marketplace in a cost-effective way, standards are fundamental.

 

Essential patents cover technologies that must be used when building a standard-compliant product. Thus, a manufacturer of a standard-compliant product runs the risk of patent infringement if it has not first licensed all essential patents. In contrast, the owner of an essential patent enjoys a comfortable situation, knowing that a standard-compliant product cannot be built without access to its patent. From this advantageous position, the patent owner is free to determine license fees.

 

The licensing behavior of owners of essential patents has always been scrutinized under competition law. A number of German courts previously held that owners of essential patents enjoy a dominant market position that is subject to review under competition law. However, prior to the Orange Book case, whether and under what conditions a defendant could raise the anti-competition defense against the issuance of an injunction in patent infringement proceedings had not been clarified.

 

Background of the FCJ decision in the “Orange Book” case

 

The “orange-book standard” ensures that a CD can be played on every common CD player; the technology to achieve this is thus essential for every producer of CD-R and CD-RW products. In the Orange Book case, the plaintiff filed a claim for patent infringement relating to the orange-book standard for recordable and rewritable compact discs against a defendant who manufactured CD-Rs and CD-RWs without a license. In the patent infringement proceedings, the defendant argued it was entitled to a license under FRAND (fair, reasonable and non-discriminatory) terms and that the plaintiff’s refusal to grant a license amounted to an abuse of its dominant position in the CD-R market.

 

The compulsory license defense

 

The FCJ confirmed that the compulsory license defense is generally admissible if an injunction is requested based on the infringement of an essential patent. The FCJ emphasized that the refusal of a market-dominating patent owner to grant a license at reasonable conditions precluded an injunction as an available remedy. Enforcing a patent against a discriminated infringer would amount to an abuse of a market-dominating position.

 

The court emphasized, however, that for the defense to apply, certain conditions had to be fulfilled:

  • The potential licensee must have requested a license from the patent owner
  • The patent owner must have refused that license without substantive reason and thereby abused its dominant position, and
  • The potential licensee must have acted like a real licensee.

 

Impact on licensing of essential patents

 

The Orange Book decision has a number of implications for essential patent-dependent industries. These implications must be considered in licensing negotiations to avoid the risk of an injunction:

  • The user of an essential patent has to approach the patent owner and make a binding, unconditional offer for a license to the essential patent. The offered conditions must be such that the patent owner cannot refuse them without discriminating against the potential licensee.
  • The license fee must not be specified in the offer; the determination can be left to the equitable discretion of the patent owner.
  • The patent user has to behave like a real licensee and thus provide regular royalty reports. Moreover, it has to secure license fees resulting from those reports by escrowing a sufficient amount.

 

In practice, determining a sufficient license fee is likely to be difficult, particularly in cases where more than one patent is used. The court did not offer any guidance on this topic, other than to indicate that the amount may well be higher than what the patent user himself considers reasonable, and must “in any event be adequate.” The patent user is likely to secure a higher payment in escrow than what he considers reasonable to avoid an injunction to be issued. Part of the payment may then be reclaimed in a second lawsuit.

 

Where manufacturers have already used essential patents, they are unlikely to have met the new conditions now set by the FCJ. To avoid an injunction, manufacturers should make payments from the time they start using the essential patents, which can amount to a very large sum.

 

Impact on patent infringement proceedings

 

The approach of the court is quite pragmatic in that it articulates the exact method for determining a reasonable license fee. If an amount the court considers at least sufficient has been deposited in escrow, and the other conditions of the compulsory license defense are met, the court will decide that the patent owner must accept the license offer and determine an equitable license fee. Following the determination of the license fee by the patent owner, the patent user may request that the court, in separate proceedings, decide whether the amount set by the patent owner is reasonable. Whether the actual fee requested by the patent owner is adequate is thus postponed to subsequent proceedings. This process reduces the time until a decision is rendered in an infringement proceeding. As a consequence, however, infringement claims will automatically be followed by proceedings to determine the reasonable amount of a license fee, doubling the number of proceedings.

 

For more information about licensing essential patents in Germany, please contact Bettina Carr-Allinson and Julia Schoenbohm.

 

 

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1. Bundesgerichtshof (BGH ) [Federal Court of Justice] decision of May 6, 2009, KZR 39/06, NJW-RR 2009, 1047