Clarification on the application of FRAND in the supply chain – postponed!

The Regional Court of Mannheim delivered its judgment in a much noticed patent infringement case in Germany. The dispute is noteworthy not only because of its economic importance but in particular also because the German Federal Cartel Office (FCO) filed an amicus curiae brief in the dispute, which rarely ever happens, and suggested that the court should refer questions concerning the interpretation of Article 102 TFEU in the context of this case to the Court of Justice of the European Union (CJEU). The court gave at least according to the Court’s press release short shrift to the FCO’s suggestion, rejected a referral to the CJEU and instead granted the injunctive relief Nokia had asked for against Daimler and its suppliers. They apparently used a recent decision of the Federal Supreme Court (FSC) in the Sisvel vs. Haier case to short-cut the anti-trust discussion. As usual enforcement requires a security deposit of the claimant, which (according to public information) is in the unusually high amount of 7 billion euros. It will remain to be seen whether Nokia chooses to enforce the judgment which would expose Nokia to significant damage claims should the decision be later overturned. The defendant has already announced to appeal the judgment.

The important questions at stake merit further consideration of the case and its background.

Background

The fact that connected cars make use of mobile phone standards for connectivity exposes the car manufacturers and their suppliers to standard essential patents (SEPs). At issue between Daimler and Nokia are telematics units in Daimler cars supplied by various suppliers and a number of Nokia patents which Nokia claims are SEPs and which are included in the Avanci patent pool. Nokia has numerous patent infringement actions pending against Daimler before various courts but this is the first case where an injunction decision was issued against Daimler.

Under the established case-law of the CJEU (Huawei vs. ZTE) the user of a standard essential patent who is a “willing licensee” is entitled to a FRAND license under certain conditions. The question at the heart of the Daimler dispute is whether Nokia is entitled to request the license from Daimler based on the car sales (i.e. the last in the supply chain), which is Nokia’s position, or whether Daimler and its suppliers are entitled for the license to be concluded at the supplier level based on the sales of telematics units or its components with the consequence of a potentially lower royalty covering also the further use down-stream in the supply chain (so- called “exhaustion rights”).

Complaint to the EU Commission by Daimler

As a reaction to Nokia's refusal to enter into a license agreement with the suppliers, Daimler and some of its suppliers filed an antitrust complaint against Nokia with the European Commission (Commission) to clarify how essential patents for telecommunications standards are to be licensed in the automotive industry. Daimler takes the view that Nokia’s (at the time of the complaint threatened) enforcement of its SEPs against Daimler coupled with Nokia’s refusal to grant licences to Daimler’s suppliers constitutes an abuse of a dominant market position regarding the involved telecommunication standards 3G and LTE.

Patent infringement proceedings by Nokia against Daimler

The crux for Daimler is that as long as they are not willing to take a license themselves they cannot simply run the FRAND defence in the infringement litigation in the traditional way, namely arguing that they (as defendant in the action) are entitled to the FRAND license. Several of Daimler’s suppliers have joined the actions as interveners.

While the court proceedings were already pending Nokia agreed – reportedly upon informal pressure from the EU Commission – to enter into independent mediation negotiations with Daimler and its suppliers to resolve their licensing dispute. These negotiations failed beginning of this year, however, and it remains unclear whether the Commission will open formal proceedings. Should Nokia choose to enforce the injunction against Daimler in Germany, the Commission will presumably be forced to take a position.

Amicus Curiae Brief by the FCO

After the informal mediation had failed and very shortly before the date for which the Mannheim Court had scheduled the announcement of its decision (23 June) the FCO filed an amicus curiae brief in the proceedings. The FCO recommended to suspend proceedings and refer the following questions to the CJEU under the preliminary ruling procedure:

Firstly, is it an abuse of a dominant position if an SEP holder, such as Nokia, refuses to license a supplier, but sues the end-product manufacturer (in this case Daimler) for patent infringement and injunction? Can Daimler plead that Nokia’s conduct towards a supplier contravenes antitrust law?

Secondly, is an SEP holder free to choose which company in a supply chain to sue for patent infringement, or are there fixed criteria?

Thirdly, the CJEU should define clear cases in which companies at certain stages of the supply chain can be excluded from a licensing offer.

Fourthly, are SEP holders free to decide to offer a FRAND sonly to companies at a certain stage in the production chain?

Judgment of the Regional Court

In the response to the FCO brief the Mannheim Court postponed the announcement of the decision by almost two months, but in the end decided with its decision of 18 August 2020 not to refer any questions to the CJEU but grant the injunction. According to the available press release the court has based its judgement and its refusal to refer the case to the CJEU on two main reasons:

Firstly, the court argued that many of the proposed referral questions related to what constitutes a FRAND license offer of the patentee and that this was not relevant as Daimler and the intervening suppliers had not met their obligation to indicate a sufficient willingness to take a FRAND license. This reasoning appears to be based on the recent judgment of the FSC in Sisvel v Haier, where the FSC specified that the infringer must notify an unconditional willingness to take a license on FRAND terms, whatever the terms may be. Only such notification prompts the obligation of the patentee to offer a FRAND license.

Secondly, the court considered that referring questions to the CJEU and thereby suspending the obtainment of an injunction for Nokia under the patent in suit was not justified in view of the short remaining life-time of the patent (the remaining life-time of the patent is almost 7 years).

The judgment is enforceable only once the claimant posts a security deposit of 7 billion euros. This can be done by bank guarantee. As mentioned, if Nokia enforces the first instance judgment and the judgment is later reversed, Nokia is liable for the damages caused by the enforcement. Daimler can appeal this judgment and has publicly announced it will do so. If Nokia enforced, Daimler could also be expected to seek a suspension of the enforcement, for which, however a high threshold exists.

Outlook

The questions raised by the FCO are not only relevant to the present case, but also concern other proceedings related to SEPs in which Daimler is currently involved, e.g. before the Regional Court Munich. In addition, the questions at stake are of fundamental importance for the general obligations of the holder of an SEP in cases of supply chains. For this reason, it is therefore regrettable that no referral to the CJEU was initiated which could have brought clarifications.

From a legal point of view, the question is whether the holder of a SEP is obliged to license suppliers in a supply chain upstream or whether it can demand a license downstream, i.e. from the manufacturer of the end-product. This question has a very substantial economic dimension, because the amount of royalties is regularly based on the income from the sales unit sold by the licensee which incorporates the infringing component, which would be in case of the car manufacturer the car sales. Even though the contribution of the infringing component to that sales unit is reflected by the royalty rate which is applied, royalties for upstream products will be lower than for downstream products, which is exactly the rationale behind the arguments of Daimler and its suppliers.

Other opportunities for a CJEU referral are coming up soon. One of the intervening suppliers in the Mannheim case has filed an anti-trust complaint with the Duesseldorf Regional Court requesting an order on Nokia to license Huawei and the hearing for this is coming up on 3 September 2020.

In addition, it can be expected that Daimler will re-approach the Commission (and potentially the FCO).