The new guidelines for SEP litigation FRAND defence before the Muich Regional Court

On February 4, the Munich Regional Court published two new guidelines for patent litigation concerning SEPs falling under the Huawei v. ZTE rules and for patent litigation involving confidential information and evidence. These guidelines compliment the long established general guidelines of the Munich Regional Court for patent infringement proceedings. However, while the general guidelines merely explain how the framework for patent infringement cases are handled in Munich, the guidelines on patent litigation concerning SEPs particularly contain important statements on how the Munich Regional Court intends to deal with the applicable aspects of competition law.

Guidelines on SEP litigation/FRAND defense

The guidelines on SEP litigation are explicitly applicable only in cases of a FRAND encumbered patent, which is essential to a declared standard. This corresponds to the scope of the CJEU decision Huawei v. ZTE. The Munich Regional Court reiterates the principles established under Huawei v. ZTE in general and will of course observe the order of the steps the parties usually have to take in pre-trial negotiations.

No prior license offer required

One interesting aspect is that the Munich Regional Court explicitly acknowledges the plaintiff’s option to bring an infringement action without a prior license offer, if the initial complaint does not include motions for an injunction, recall or destruction. The motions for an injunction, recall and destruction can then be amended during the ongoing proceedings after the plaintiff makes an initial license offer. This option might shorten the defendant’s time to react to the license offer before the main trial in which the Court will decide over the injunction. However, the guidelines contain a paragraph which allows that the Court adjusts the time between the inclusion of the additional motions and the second oral hearing. 

Defendant must make a FRAND counteroffer

While the Düsseldorf and Mannheim Regional Courts have treated the steps to be taken by the plaintiff and defendant in a consecutive order and do not require defendants to make a counter-offer, if the plaintiff’s initial offer was not FRAND, the Munich Regional Court will follow a slightly different procedure, which resembles the procedure followed in the UK High Court. The Munich Regional Court will review the plaintiff’s initial license offer only on a high level and in case the plaintiff’s initial offer is not obviously unreasonable, the defendant shall always be required to make a counter-offer. The counter-offer is also reviewed on a high level for obvious non-compliance with FRAND principles. If the defendant makes a reasonable counter-offer, the Court will engage in a full FRAND review of the plaintiff’s offer. The defendant’s counter-offer therefore serves as an “entry ticket” to the full FRAND review of the plaintiff’s offer and ultimately a FRAND defense.

Advantages on defendant’s side

Should the plaintiff reject the defendant’s counter-offer, the defendant will have to provide accounting for past use in accordance with the counter-offer and provide financial security for past royalties to the plaintiff. In this regard, even though it is not explicitly spelled out in the new guidelines, it can be expected that in Munich, like in all other German courts so far, global offers for entire SEP portfolios are the norm and can therefore legitimately be requested by plaintiffs. Thus, it can also be expected that counter-offers for single patents or countries will usually not be accepted. The defendant’s counter-offer therefore usually also has to be a global license offer to the plaintiffs portfolio of SEP’s for the same standard and accounting for past use has to be provided on this basis. Regarding the financial security, the Munich Regional Court’s view is more favorable for the defendant. Even if the plaintiff’s initial offer and the defendant’s counter-offer are based on a global license, the financial security only has to cover the past use of the plaintiff’s SEP portfolio in Germany. This is consistent with the purpose of the security, which shall compensate the plaintiff for the denial of an injunction. If the plaintiff asserts its patent rights only in Germany, there is no need to provide security to the plaintiff for sales in other countries where the plaintiff has not taken any legal action. According to Munich, the security should cover an amount of 110 % of the accrued reasonable royalties for sales in Germany. This reduces the amounts, which defendants have to submit as security in FRAND cases considerably and makes it easier to maintain a FRAND defense in case the plaintiff rejects a counteroffer.

Advantages on plaintiff’s side

While the requirements on the financial security are rather favourable for the defendant, other aspects the Munich Regional Court will likely appeal to plaintiffs:

• First of all, the Court will dismiss the FRAND defense without further review, if the defendant already had a license to the asserted patent but terminated this license or caused its termination. The same applies, if the defendant is offered a license to the asserted patent, but did not include it in a counteroffer.
• Secondly, while defendants can raise the invalidity or non-use of certain SEP’s in the plaintiffs portfolio, according to the guidelines this will likely not be taken into account by the Munich Regional Court in the royalty assessment, if the plaintiff’s initial offer contains a retroactive price adjustment clause in case patents are later found not infringed or invalid. With the price adaption clause the plaintiff can therefore effectively cut off any discussion about the inclusion of invalid or irrelevant patents into the offered portfolio. In such case, the defendant would have to take a license to the plaintiff’s offered portfolio as is and has to argue against the composition of the portfolio in separate proceedings at a later stage.
• Thirdly, while the Munich Regional Court will conduct a full review of the plaintiff’s initial offer for non-discrimination and require the disclosure of the plaintiff’s existing licenses with third parties, it offers plaintiffs the option to shift the full burden of proof for fairness and reasonableness of the offered royalty rate to the defendant. If the plaintiff’s initial license offer includes a retroactive most favored nation's clause, the plaintiff seems to be completely relieved from explaining and proving that the requested royalty rate is actually fair and reasonable. A defendant who wants to challenge the absolute amount of the requested royalties bears the full burden of proof that the absolute amount requested by the plaintiff is too high. Given the inevitable uncertainty in such price evaluations, it is foreseeable that it will be a considerable effort for defendants to convince the Court that the plaintiff’s royalty rates are too high and should be reduced.
• Finally, if the plaintiff’s initial offer includes clauses taking patent exhaustion into account and avoiding “double dipping”, defendants cannot refer the plaintiff to suppliers of patent practicing devices or components as the more appropriate licensees. The plaintiff can insist on a license with the defendant of its choice and does not have to accept license offers from the defendant’s suppliers. This effectively gives plaintiffs a choice at which point in the supply and distribution chain they want to license by selecting the corresponding defendants.

Guidelines on confidentiality and evidence

Simultaneously with the new guidelines on litigation involving SEPs under Huawei v. ZTE, the Court also published its guidelines for the protection of the parties' confidential information in patent litigation. This is particularly relevant in SEP litigation, where the plaintiff has to disclose prior licenses with third parties, but also helpful (and explicitly applicable!) in other patent infringement proceedings, e.g. if the plaintiff wants to introduce evidence from foreign proceedings, which is subject to a protective order (e.g. in Sec. 1782 proceedings in the US).

In the FRAND context, the Court makes it very clear that it expects the full disclosure of the plaintiff’s third party licenses and that it is not possible to hide behind confidentiality clauses in these third party licenses. In case the disclosure of a third party license is not permitted under respective confidentiality clauses, the Court will upon request of a party order the disclosure of the license with the expectation that such a court order prevails over the contractual confidentiality obligation in the NDA.

Otherwise, the guidelines on the treatment of confidential information will likely become largely obsolete as soon as the currently discussed reform of the German Patent Act enters into force. The reformed Patent Act will include the detailed rules on the protection of confidential information in the new German Trade Secrets Act into the new German Patent Act by reference.

Conclusion

The Munich guidelines on the FRAND defense contain a number of new and interesting proposals how to deal with issues in SEP litigation, which are fiercely debated around the globe and for which there are no generally accepted solutions so far. How this plays out in practice and how it will impact the balance between SEP holders and implementers in the global FRAND battle, remains to be seen when the first decisions on the basis of the guidelines are published. However, the guidelines already provide useful information for potential plaintiffs when selecting a forum for SEP litigation and for potential defendants having to assess litigation risks and build a FRAND defense.