Essentiality checks of SEP portfolios in German litigation after the EU Commission Communication of Nov. 29, 2017

In its Communication regarding “Setting out the EU approach to Standard Essential Patents” (COM(2017) 712) of November 29, 2017, the European Commission grasps the initiative in the FRAND discussion once more. In a surprising move, the Commission put an issue which, has so far, only played a side role in the discussion at the top of its agenda: transparency and the need for essentiality checks.

In light of this, it seems worth having a more detailed look at what the Commission apparently wants to put into the spotlight of the FRAND discussion. The share of undetected non-essential patents is quantified by the Commission as about 10% – 50% (Communication, 1.2.2, p. 5, Fn. 19). Furthermore, the Commission finds that “declarations create a de facto presumption of essentiality in negotiations” (Communication, 1.2.2, p. 5) which implies that royalties are calculated at too high a level as a consequence of licensing presumably unnecessary patents. Obviously, this also affects litigation as injunctive relief essentially depends on the question of whether a license offer is regarded as fair, reasonable and non-discriminatory (FRAND).

Content of the Commission’s proposal

With regard to content, the Commission proposes more transparency with regard to the declaration systems of the databases of Standard Setting Organizations (SSOs) (item 1.2.1 of the Communication) but also campaigns for more scrutiny on the essentiality of SEPs (item 1.2.2 of the Communication). Concerning implementation, the Commission proposes several approaches:

• Providing incentives for stakeholders: e.g. by:
• introducing a certification that the declared SEP portfolios comply with transparency criteria
• confirmation of essentiality by the SSO.
• Coordinating with patent offices as possible candidates for independent essentiality checks.
• Establishing an independent European body tasked to proceed with SEP essentiality assessments.

In any case, the Commission plans to launch a pilot project for SEPs in selected technologies with a view to facilitating the introduction of an appropriate scrutiny mechanism.

Implications

Notably, the Commission does not contemplate implications with respect to court proceedings. However, the general assumption that any kind of certification would benefit the patentee in litigation indicates that the Commission basically sees the burden of proof with the patentee to show essentiality of the offered patents in the context of FRAND negotiations. This is principally in line with German case law. It is, however, (according to recent decisions in Germany) not necessary to bear the full burden of proof. Rather, the patentee has to provide claim charts of selected patents („proud list“, Düsseldorf Higher Regional Court, November 17, 2016, File No. 15 U 66/15, Mannheim Regional Court, March 4, 2016, File No. 7 O 96/14) whereas the required scope is still under discussion (Düsseldorf Higher Regional Court: 10-15 claim charts, Mannheim Regional Court: 2-7). In any case, the need to provide information on essentiality is limited to very few patents out of portfolios of usually several hundreds. As justification for this approach, the German courts refer to customs in the industry. To this end, the analysis of the Commission is rather interesting as it seems to contain a different overall assessment (Communication, 1.2.2, p. 5, highlighting added):

“Stakeholders report that recorded declarations create a de facto presumption of essentiality in negotiations with licensees. This scenario places a high burden on any willing licensee, especially SMEs and start-ups, to check the essentiality of a large number of SEPs in licensing negotiations.”

Of course, the Commission goes on to say that “the related burden needs to remain proportionate” (Communication, 1.2.3, p. 5) and proposes for cost reasons

“calibrating the depth of scrutiny and limiting checks to one patent within a family and to samples […].”

However, this approach is still broader than the requirements German courts currently state. Whereas German courts require only representative samples the Commission suggests checking at least one patent within every family and (additional) samples. Consequently, German courts should probably discuss whether the current approach stands in contrast to the Commissions’ view of necessary requirements of a FRAND offer. Moreover, the handling of the German courts might not be covered by the argument that checking only a rather small amount of sample patents for essentiality is in line with the market as the Commission rather clearly finds said market situation inadequate in terms of competition law. This is basically a legal assessment by the Commission which should be carefully considered by the courts of the member states to avoid contradictions.

Conclusion

For Germany, the practical question is whether the current requirements to show essentiality of a patent portfolio as part of the FRAND offer are sufficient. The Commissions’ Communication seems to indicate that the patentee’s offer can only be regarded FRAND if the patentee shows (at least for every patent family) a sample to prove essentiality. However, the Commission also suggests in the Communication that “Measures could therefore be extended gradually, and apply to new and key standards only, e.g. 5G”. This might leave room to argue that more transparency requirements should only apply with regard to future standards as the parties should be able to plan this beforehand. An economical approach might be to leave the requirements as they are but consider a reasonable deduction for the share of unchecked patents. This would provide an additional value for those SEP owners who already seek confirmation of the essentiality of their patent portfolio in its entirety.

Apart from that, it would be a big step forward, if the Commission can, indeed, establish the possibility of independent essentiality checks leading to issuing confirmation certificates e.g. by the SSOs. If those certificates provide a reasonable presumption of essentiality this could – at least in part – relieve infringement proceedings from lengthy discussions about essentiality. German courts work with a similar presumption with regard to the validity of portfolio SEPs. Based on the assessment that validity is to be presumed for a granted patent, this question is excluded from the FRAND assessment of the license offer in question. An adjustment provision for lowering the royalty is only allowed if a significant amount of portfolio patents are successfully nullified (Düsseldorf Higher Regional Court, November 17, 2016, File No. 15 U 66/15). Of course, it remains to be seen if this approach can also be applied to this extent to certifications of essentiality. Currently a more likely scenario is that the other party might be able to contest a presumption of essentiality (as there is no indication that a certification of essentiality is planned as an administrative act like the granting of a patent).