Regional Court Munich – Preliminary Views on FRAND Licenses in the Supply Chain
The Regional Court Munich I held a first oral hearing on October 30th, 2019, in two first-instance patent infringement proceedings concerning standard essential patents (SEP). The proceedings (docket no. 21 O 3889/19 and 21 O 3891/19) are part of a larger dispute between Nokia (Plaintiff) and Daimler (Defendant) concerning the use of connectivity technology in cars with suits pending before the Regional Courts of Düsseldorf, Mannheim and Munich. Several suppliers of products potentially using the patented technology have joined the proceedings as intervenors on Daimler’s side, among them Robert Bosch, Continental and Huawei. Daimler has raised an antitrust compulsory license defense, alleging that Nokia is in breach of its obligations to license its SEP on fair, reasonable and non-discriminatory (FRAND) terms.
The hearing was particularly interesting as the Regional Court Munich is currently increasing its efforts to provide guidance on FRAND-related disputes. The explanations provided by Judge Dr. Schacht (who was filling in for Presiding Judge Pichlmaier) of the 21st Civil Chamber may allow some insight into the direction the Munich court is planning to take. As this may be decisive in future proceedings before the court, we would like to provide a short summary of our observations during the hearing.
I. Licensing agreements must consider supply chain to be FRAND
The Court discussed in particular whether companies in Daimler’s supply chain had already been licensed to use Nokia’s SEP portfolio. The Court explained that if an SEP-owner offered a license to the final retailer of a product, i.e. the car company, such a license offer would have to consider any existing license agreements with suppliers of the products concerned. Otherwise the SEP owner would profit financially from its patents more than once for the same product, which would not conform to the law.
However, the Court explained that if Nokia included a clause in their licensing offer which paid attention to this issue, the offer could still become FRAND in the Court’s eye. The Court thus confirmed that while both Plaintiff and Defendant in a FRAND dispute must follow the CJEU’s regimen laid out in Huawei v. ZTE, the parties may do so until the end of the last oral hearing of the infringement litigation.
Judge Schacht did not make any definitive statement on how exactly the licensing offer would have to be adjusted to properly consider licenses higher up the supply chain. He did, however, suggest a clause where the license fee paid by the retailer would be reduced if a supplier had already paid a license fee for the technology in question. While the Court made clear that such a clause was a mere suggestion, it stressed that the issue would somehow need to be considered commercially in the structure of the licensing agreement.
II. Suppliers may have claim for a FRAND license
The Court understood the facts of the case to be that Nokia offered a license agreement only to Daimler itself, not to Daimler’s suppliers. However, the Court did not make a definite statement on whether the suppliers themselves had a claim against Nokia to be licensed under FRAND terms. While the Court hinted that such a claim may exist, procedurally speaking only Daimler was being sued by Nokia, which meant that the Court would pay attention only to Daimler’s allegations of not having received a FRAND offer and not consider the supplier’s allegations to the same effect.
Huawei has launched a corresponding counter-claim against Nokia in a parallel proceeding before the Regional Court Düsseldorf (docket no. 4c O 17/19), asking the Court to order Nokia to offer a FRAND license. However, a first decision on this claim will not be rendered for quite some time, as the hearing at the Düsseldorf Court is currently set to be on September 3rd, 2020.
III. Further topics
1. Portfolio variance must be reflected in licensing offer
The Court also explained that a FRAND licensing offer would have to consider fluctuations in the licensed portfolio. If, for instance, a patent which is significant to the licensee expired, the offer may have to arrange for some sort of adjustment to the license fee. Such an adjustment may also be necessary to compensate for the expiry or invalidation of licensed patents. The Court explained that these issues could be dealt with by way of a fee-adjustment clause in the licensing offer, or by other means, as long as the licensing agreement remained flexible enough to account for such portfolio variance. However, the court remained open to future written explanations by the parties how such considerations may (or may not) have already been incorporated in the licensing offer during negotiations. Therefore, it remains to be seen whether the Court will, in the end, indeed require an actual adjustment clause for in a FRAND offer.
2. No third-party determination required
Daimler had suggested to Nokia that a neutral third party could determine the appropriate licensing conditions. Nokia has so far rejected this suggestion. As a result, Daimler alleged that Nokia’s dismissal of third party determination was not in compliance with FRAND principles. Judge Schacht made clear, however, that the Court does not consider such a refusal of third party determination an improper behavior by the SEP owner.
The oral hearing provided useful insight into the Regional Court’s current thinking on FRAND cases. However, the hearing was only the first of two oral hearings in the proceedings and did therefore not reflect the Court’s final views. Of course, we will be happy to keep you up-to-date on any new developments. Until then, we recommend our Kather Augenstein FRAND Database for a collection of relevant German court decisions on FRAND.