MPEG LA's AVC Pool License confirmed as FRAND in Dusseldorf

In a series of cases brought by licensors of the MPEG LA AVC pool against Huawei and ZTE, the Düsseldorf Regional Court held that MPEG LA's standard AVC license is FRAND and the licensors, who contributed to the MPEG LA AVC pool were under no obligation to offer different license agreements.

Huawei in particular raised numerous objections against the MPEG LA AVC pool licenses, which were all dismissed by the court. A detailed discussion of these objections can be found in the decision 4a O 63/17 of 9 November 2018 concerning a patent held by MPEG LA's licensor Tagivan, which was asserted against Huawei.

MPEG LA and Huawei had discussed a possible AVC license on and off since 2009. When MPEG LA decided to initiate infringement actions in 2017 (filed by the respective owners of selected AVC pool patents) Huawei had already received MPEG LA's AVC standard license agreement and information as to how the patents in the pool relate to different parts of the standard.

At the time of the action, the MPEG LA AVC license was signed and in force for 1400 licensees. Huawei had been provided with a list of these licensees and a confirmation by MPEG LA that they had all accepted the standard license agreement.

After the action was filed, Huawei submitted a counteroffer, which deviated from MPEG LA's standard license in several aspects. The counteroffer was directed to Tagivan as owner of the asserted patent instead of MPEG LA as pool administrator.

Consequently it was limited to those patents in the MPEG LA AVC pool, which are held by Tagivan. Even though the counteroffer was worldwide, it defined different rates for different regions. Europe and the US were high price regions with higher royalties, whereas China and certain other countries were assigned to a low price region with lower royalties.

The Düsseldorf Regional Court granted the injunction against Huawei and found that the MPEG LA AVC standard license constituted a FRAND offer by the plaintiff and that Huawei's counter offer was insufficient.

Firstly, the court confirmed that the plaintiff as holder of a patent, which is essential to an important standard, is in a market dominant position. Given the relevance of the AVC standard, the court saw no reasonable doubt in that regard.

Regarding the formal steps to be observed by the patentee before initiating an action for an injunction under the ECJ decision Huawei v. ZTE, the court showed a pragmatic approach. The plaintiff was not obliged to send a notice of infringement to Huawei itself but could point to information already provided to Huawei by MPEG LA as pool administrator. It was apparent to Huawei that MPEG LA was authorized to negotiate and grant a license.

Repeated information by the patentee or a reference would have been a superfluous formality. Likewise, it did not matter that the information was not provided to the German defendant, but to Huawei's parent company in China. License agreements of this kind tend to be negotiated on the group level with effect for all subsidiaries.

Regarding the information about the royalty calculation required under

Huawei v. ZTE

, the court was also generous since the MPEG LA AVC license is widely accepted in the market. In case the patentee can point to an established licensing practice and widely accepted royalty rates, additional information about the calculation of the royalty rate is not required.

However, the court emphasized that the patentee has to disclose all license agreements with significant licensees and cannot present a particularly advantageous selection to support its case. Apparently, MPEG LA had complied with these requirements and had provided a complete list and copies of all relevant license agreements.

Regarding the question whether the royalty rate is objectively fair, the court put the burden of proof on the defendant. Since the royalty rates of the MPEG LA AVC pool are widely accepted in the market, it would have been Huawei's burden to show that these rates are nevertheless unfair. In this regard, Huawei had not done enough in view of the court. This also applies to the argument that Huawei could be unduly burdened by royalty stacking.

Since the MPEG LA AVC pool already covers a substantial share of standard essential patents and Huawei could not point to significant royalties payable to other pools or patentees for the AVC standard, the court refused to consider merely hypothetical royalty stacking.

The court also rejected Huawei's reduced royalty rates for China and other low price countries. First, Huawei's general assertion that mobile phone prices in China are lower compared to Europe and the US, was successfully challenged by MPEG LA.

Moreover, the court held that it is possible to enforce MPEG LA's AVC patents in China and noted that a significant number of players in the Chinese market had already accepted the MPEG LA AVC pool license. In this context, the court remarked that a patentee cannot be obliged to sue all potential infringers in a new market immediately, but is entitled to sue selected patentees at different times to keep the litigation risk controlled.

Since MPEG LA could show that they had already initiated legal proceedings against other Chinese competitors of Huawei such as ZTE, the court was satisfied that Huawei would not be discriminated against in the Chinese market by selective enforcement. The court was also not convinced that the number of valid AVC pool patents in China is significantly lower than in other markets. According to the court, the MPEG LA AVC pool portfolio is the fourth strongest in the world in terms of patent numbers.

Huawei's assertion that the pool also contains a significant number of patents, which are actually not standard essential, was equally rejected. The court was satisfied that MPEG LA conducts essentiality checks before accepting patents into the pool and does not pursue a strategy of enlarging the portfolio by including non-essential patents. From the court's perspective, it is inevitable that a pool of standard essential patents will also contain a number of patents, which would be found non-essential if it came to a trial. This does not automatically constitute abuse.

At last, the court considered discrimination, but dismissed that it was the case for the MPEG LA AVC pool. The fact that certain licensees apparently payed in installments or had agreed on certain set offs, did not constitute discrimination as long as the actually calculated royalty rate was the same. Yearly overall royalty caps do not constitute discrimination either in the court's view.

This could be different, if the royalty caps apply only to very few licensees who pay a lower royalty per unit than the general market. In the present case, the court held that MPEG LA's royalty cap does not work selectively, but can apply to all licensees, provided they are successful in the market.

For these reasons, the court held that MPEG LA had made a sufficient FRAND license offer to Huawei before initiating infringement proceedings. Consequently, Huawei's counteroffer, which was directed only to the plaintiff Tagivan and limited to pool patents held by Tagivan, was dismissed. The patentee can legitimately choose to contribute patents to a pool and license them only via the pool, provided the patents in the pool are bundled for legitimate reasons, eg because they are essential to the same standard.

This decision in favor of MPEG LA shows that despite a stricter application of the non-discrimination requirement in FRAND, German courts grant patentees significant discretion in setting royalty rates and selecting the licensing arrangement.

If a patentee can point to an established licensing practice accepted by a significant part of the market, the Dusseldorf Regional Court will usually not engage in time consuming and costly expert discussions on royalty setting unless the defendant can point to significant arguments why the widely accepted rate is too high.