The Huawei v. ZTE “Dance” as Prophylactic Rule?

In its 2015 decision in Huawei Techs. Co. v. ZTE Corp., Case C-170/13, the CJEU stated that

. . . article 102 TFEU must be interpreted as meaning that the proprietor of an SEP, which has given an irrevocable undertaking to a standardisation body to grant a licence to third parties on FRAND terms, does not abuse its dominant position, within the meaning of Article 102 TFEU, by bringing an action for infringement seeking an injunction prohibiting the infringement of its patent or seeking the recall of products for the manufacture of which that patent has been used, as long as:

 

— prior to bringing that action, the proprietor has, first, alerted the alleged infringer of the infringement complained about by designating that patent and specifying the way in which it has been infringed, and, secondly, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, presented to that infringer a specific, written offer for a licence on such terms, specifying, in particular, the royalty and the way in which it is to be calculated, and

 

— where the alleged infringer continues to use the patent in question, the alleged infringer has not diligently responded to that offer, in accordance with recognised commercial practices in the field and in good faith, this being a matter which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.

As readers probably aware, earlier this year the European Commission filed an amicus brief in a German case, HMD Global Oy v. VoiceAge EVS GmbH & Co. KG., which argues that, contrary to current German practice, the steps of the Huawei v. ZTE “dance” should be followed strictly and sequentially—meaning that the SEP owner should not file a complaint requesting injunctive relief before the above steps have been followed, and also that the implementer’s expression of its willingness to license (the part labeled “secondly” from above) should not be conflated with its diligence and avoidance of delaying tactics (what is referred to as “step four”).  In other words, once the complaint is filed and the court is evaluating whether the owner lawfully may seek injunctive relief, the court should determine if the owner has provided the requisite notice, then whether the implementer adequately expressed its willingness, then whether the owner made a “specific, written offer for a licence on” FRAND terms, then whether the implementer responded in good faith and without delay to that offer.  In the background, of course, is the empirical fact that German practice subsequent to the BGH’s two Sisvel v. Haier decisions of 2020 has had the effect of shifting bargaining power in favor of SEP owners.  Implementers are unlikely to succeed when they raise the Huawei defense.    

I’m inclined to think the EC is right, though I have been struggling to articulate exactly why it might matter that the courts rigorously adhere to the sequence of steps as outlined in the Huawei decision.  Part of what’s going on is the concern raised in the brief that the German practice doesn’t adequately abide by the CJEU’s concern that negotiations should be given time to play out without litigation pending (see brief paras. 66-70).  Putting that issue to one side, however, and focusing on the question of whether it is appropriate to conflate steps 2 and 4, one might argue that such a formalistic adherence to Huawei is unwarranted, because antitrust (competition law) is, or should be, focused on economic substance rather than on form—the substance here being that consumer welfare would suffer if SEP owners were to ignore their FRAND commitments and exercise their SSO-facilitated market power by seeking injunctive relief against willing prospective licensees.  To be sure, a focus on substance doesn’t mean that every competition law issue should devolve into some sort of unstructured, totality-of-the-circumstances inquiry.  It often is helpful to provide a certain structure on the analysis, so that courts can focus on the dispositive issues.  That’s why, for most alleged antitrust offenses, U.S. courts apply a structured Rule of Reason that involves proceeding with a series of inquiries (e.g., is the challenged agreement something that might plausibly have a procompetitive justification; if so, do the antitrust defendants have market power; etc.) until we get to a point where judgment can be entered for one side or the other.  But there is no point in proceeding in the customary order just to maintain tradition, and courts are free to go out of order when it makes sense to do so.  See, e.g., NCAA v. Alston, 594 U.S. 69, 97 (2021) (stating that the structured Rule of Reason “steps do not represent a rote checklist, nor may they be employed as an inflexible substitute for careful analysis. . . . [W]hat is required to assess whether a challenged restraint harms competition can vary depending on the circumstances. . . . The whole point of the rule of reason is to furnish ‘an enquiry meet for the case’”).  Analogously, one might agree with the approach of the German courts under which, if it can be determined early on that the implementer is engaging in delay tactics, it is fair to conclude that the implementer isn’t a willing licensee; and there isn’t much point in scrutinizing the SEP owner’s initial offer too closely, or forbidding the owner from “catching up” by making its offer after filing the complaint.  On this view, requiring the courts to proceed with the Huawei steps, in order, in every case, may seem overly rigid and divorced from sound case management and economic substance.  (Compare the position of the English courts that the implementer may repent of its unwillingness up to the very last minute, as long as it agrees to abide by the terms of a FRAND license to avoid being excluded from the U.K. market.  See InterDigital Tech. Corp. v. Lenovo Group Ltd,, [2023] EWHC 539 (Pat) ¶¶ 536-38.))

And yet . . . sometimes there may be a point in adhering to rigid rules, to prevent a violation of substantive law from occurring.  Though I am not a criminal law scholar, the analogy that comes to my mind is the Miranda warning known to anyone who’s ever watched a U.S. cop show (“You have the right to remain silent. Anything you say can and will be used against you in a court of law. You have the right to an attorney,” etc. ).  The Supreme Court has held that if the police elicit a confession from a suspect before having given the suspect his Miranda warning, the confession is inadmissible—not because the failure to give the warning itself violates the Fifth Amendment guarantee against self-incrimination, but because the warning is a necessary “prophylactic” intended to prevent Fifth Amendment violations from occurring.  See Vega v. Tekoh, 597 U.S. 134 (2022).  Perhaps one could think of adherence to the Huawei sequence of steps as a sort of prophylactic rule as well.  The reasoning might proceed as follows.  If the initial FRAND offer is not closely scrutinized before inquiring into whether the implementer has engaged in delay, there is less of an incentive for the SEP owner to make a FRAND offer in the first place (maybe just something that is not clearly unFRAND).  The implementer, knowing that it incurs some risk of being found to be, whether accurately or not, an unwilling licensee, may then feel pressure to accede to what may be nonFRAND terms (knowing, moreover, that it may have no choice but to do so, if it is subsequently enjoined).  In contrast, if the court subjects the initial offer to close scrutiny before considering whether the implementer is engaging in delay tactics, there is more of an incentive for the SEP owner to make a genuinely FRAND offer, or something close to it, ab initio.  On this reasoning, if we want to avoid coercing implementers into agreeing to supraFRAND terms, it may make sense to follow the Huawei sequence of steps, even if this might seem like elevating form over (economic) substance.

In response, I imagine the German courts would say that no one is coercing genuinely willing implementers to agree to non-FRAND terms.  But again, if implementers perceive that courts will err from time to time in finding willing prospective licensee to be unwilling, some implementers may wind up acceding to terms that are not FRAND rather than risk having to bargain, ex post, from an even weaker position after an injunction has been imposed.  In functional terms, at any rate, it seems to me that that is what the debate is, or should be, about.  Of course, there may not be any reason to assume a priori that courts’ estimates of implementer willingness will systematically err in favor of SEP owners.  Whether that has proven to be true as an empirical matter, on the other hand, may be a matter on which reasonable minds may disagree, and perhaps should form part of the background in determining whether rigid adherence to the Huawei dance is a necessary prophylactic rule.                  

From Around the Blogs

1. Enrico Bonadio, Jorge Tinoco, and Daniel Leopoldino have published a post on the Kluwer Patent Blog titled SEPs Injunctions with a Tropical Flavour: the Brazilian Scenario.  The post discusses several FRAND cases in which Brazilian courts have granted preliminary and, in one case, permanent injunctive relief.  The authors note one recent case, however—DivX v Gorenje—in which the court denied a preliminary injunction, subject to the defendant posting a bond, which they state “ might represent a turn in the national SEPs case law, which would place Brazil more in line with other jurisdictions such as the EU where FRAND commitments are taken seriously . . . .”

2. Graham Burnett-Hall has published a post on EPLaw titled UK – Panasonic v. Xiaomi – Appeal / FRAND, discussing the recent decision of the EWCA holding, as the author states, “that, once the parties to a FRAND dispute have agreed that the UK court should determine the fair, reasonable and non-discriminatory (FRAND) terms for a global licence for the relevant standard essential patents (SEPs), it is not consistent with the patentee’s FRAND obligations for the patentee to pursue separate proceedings and seek injunctions against the same implementer in other jurisdictions,” and that instead the patentee should be an interim license that may be adjusted later on.  I also blogged about this decision recently, here.

3. On ip fray, Florian Mueller published a post titled UPC’s Dusseldorf LD enjoins resale of smartphones for elderly over LED patent, addresses some interesting legal questions, discussing a recent decision (Seoul Viosys v. expert e-Commerce GmbH & expert klein GmbH) granting an injunction, notwithstanding the fact that the patent in suit forms a relatively minor component of the end product (see para. I(G) of the decision). 

4.  I mentioned a few weeks ago that OxFirst would be presenting a free webinar on the European Commission’s amicus brief, filed with the Munich Higher Regional Court, in HMD Global Oy v. VoiceAge EVS GmbH & Co.  The recording of the webinar is now available here.  I should note that I will be participating in a webinar on this topic, along with inter alia my coeditors Peter Picht and Erik Habich, sometime in November; more details to follow.

5.  On Patently-O, Dennis Crouch published a post titled The Historical Roots of Patent Injunctions: Revisiting Horton v. Maltby (1783).  Very interesting post, thought I remain unconvinced that U.S. courts are legally obligated to consider ongoing infringement inherently to constitute irreparable harm, given the courts’ contemporary ability to award damages, including postjudgment damages for ongoing infringement.

Some Recent Papers on Royalties

1. William F. Lee and Mark A. Lemley have published The Broken Balance:  How Built-In Apportionment and the Failure to Apply Daubert Have Distorted Patent Infringement Damages, 37 Harv. J.L. & Tech. 255 (2024).  Here is a link, and here is the abstract:

The United States patent system is designed to be a balance: in exchange for the inventor disclosing their invention to the public, patentees are granted exclusive rights to that invention for a period of time. This ensures that patentees are adequately compensated for their innovation and society at large benefits from the patent’s disclosure. This balance is now broken. Over recent years, patentees — particularly non-practicing entities — have been permitted to seek and recover unreasonable damages that stretch far beyond the value of the technology they invented. This has had serious and negative consequences: excessive patent damages discourage innovation, increase risk and cost of production, and, in turn, increase the cost of products to consumers.

 

Patent law has a solution to this broken balance: apportionment. This principle, which dates back to the nineteenth century, holds that damages must be limited to the value of just the patented invention and cannot capture the value of other features or technology. When applied as intended, apportionment ensures the patent balance — patentees recover the value of what they invented but no more. But therein lies the problem: in recent years, many courts have been backsliding from the principle of apportionment. First, some courts have permitted plaintiffs to rely on “built-in apportionment” to bypass apportionment entirely. Second, some courts have failed to properly apply Daubert and Federal Rule of Evidence 702 to exclude unreliable apportionment theories, particularly where experts purport to use regressions or conjoint survey analysis.

 

The Federal Circuit and district courts should take action to correct the skewed balance caused by improper application of apportionment law. The Federal Circuit should end the “built-in apportionment” exception to apportionment and district courts should do the hard work at the Daubert stage of ensuring that apportionment is effective and reliable. Inventors, businesses, and the balance upon which the patent system was built depend on it.

I previously read the paper in draft, and noted it on this blog here.

2. Maria Teresa Bartalena has published an article titled Reasonable Royalty Damages Across Different Countries and Through a Law and Economics Lens, 2 J. Law, Market & Innovation 59 (2023).  Here is a link to the paper, and here is the abstract:  

In most legal systems, a reasonable royalty represents the minimum compensation for patent infringement litigation, and it is undoubtedly the most used among the remedies at the courts’ disposal. Therefore, its calculation is crucial in the intellectual property field and, more specifically, within the function of liability in this context to incentivise investments in R&D and promote innovation.

 

Nonetheless, some differences can be found between the methods used to calculate reasonable royalty awards in two largely developed countries, ie in the U.S., where judges are deemed to consider only the parties’ ex ante information and in Germany, where ex post considerations are involved in calculation.  This article intends to analyse how these different approaches can affect investments in the field of technology and innovation. In this process, German and U.S. case law will be primarily investigated, but some references will also be taken from Chinese experience, a legal system for some aspects similar to civil law ones and in which patent infringement disputes are solved by specialised judges, such as in Germany, whose set of remedies, nonetheless, has been recently modified to include a measure that resembles much the treble or punitive damages of the U.S. Code.

3.  John Turner has posted a paper on ssrn titled Welfare-Optimal Rewards and Royalties for a Full Stack of Standard-Essential Patents.  Here is a link, and here is the abstract:

This paper studies the problem of determining the optimal size and structure of royalties for a full stack of standard-essential patents (SEPs). Conditioning on a full stack sidesteps many complicated and contested issues that typically arise when determining fair, reasonable and non-discriminatory (FRAND) royalties for SEPs. This focuses attention on an important question-what should be the total cost of licensing SEPs for a particular standard to incentivize both standard development and adoption? To study this problem, I adapt a workhorse general equilibrium model to capture the behavior of firms that invent and implement new technology standards, and derive the welfare-optimizing level and structure of royalty-based rewards for the full stack. This model shows that a new standard can emerge and yield higher welfare as long as the reward satisfies two "guardrail" conditions. As a fraction of income spent on standard-compliant goods, the reward: (1) must exceed the unrecovered invention cost margin; and (2) must be less than the welfare contribution margin of the standardized technology. If the first condition does not hold, invention of standardized technology is unprofitable; if the second does not hold, product variety and/or output per variety is so low that welfare would not improve. Multiple reward structures can optimize economic welfare. With an optimal reward structure, a one-percentage-point increase in reward size decreases product variety by one percentage point.