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Conversant v Huawei

27 August 2020 - Case No. 4b O 30/18

http://caselaw.4ipcouncil.com/german-court-decisions/lg-dusseldorf/conversant-v-huawei

A. Facts

The plaintiff, Conversant, is a non-practicing entity that holds a portfolio of patents declared as (potentially) essential to the practice of various wireless telecommunication standards (standard essential patents, or SEPs) developed by the European Telecommunications Standards Institute (ETSI). Conversant offers bilateral licences to its SEP portfolio and is also member of the “Multi-Generation-Pool”, a patent pool administered by Via Licensing.

The defendants are the parent company as well as two German subsidiaries of the Huawei group (Huawei), which is headquartered in China and is active worldwide.

Conversant made a commitment towards ETSI that it will make SEPs, including the patent in suit, accessible to standards users on Fair, Reasonable and Non-Discriminatory (FRAND) terms and conditions.

On 29 April 2014, Conversant notified Huawei of the infringement of its patents. It presented examples of allegedly infringing products and indicated the patents used by such products. After that initial notice, the parties had negotiations between 2015 and 2017.

In July 2017, Conversant brought an action before the High Court of England and Wales (UK High Court) against Huawei. It requested from the High Court, inter alia, to set the terms for a worldwide license on FRAND terms for Conversant’s SEP portfolio and grant an injunction against Huawei, in case that the latter refused to commit to the court-determined terms. At the same time, Conversant sent an offer to one of the German affiliates of Huawei, in which the royalties were calculated as a percentage of the net sales price of the standard-compliant end-products. Different rates were offered based on the implemented standards (2G, 3G and/or 4G) and the geographical markets (‘Major Markets’ and ‘Other Markets’, which included China). Conversant explained that this offer was FRAND, since it corresponded to terms previously confirmed as such by the UK High Court in the matter Unwired Planet v Huawei. [975]

In the beginning of 2018, Huawei filed an action against Conversant before the Nanjing Intermediate People’s Court (Nanjing Court) in China, requesting the Nanjing Court -among other things- to determine the rates for the Chinese part of Conversant’s SEP portfolio.

Subsequently, Conversant brought an infringement action against Huawei before the District Court of Duesseldorf (Court). In September 2019, the Nanjing Court delivered a decision, in which several Conversant’s Chinese patents were found to be either invalid or not infringed. The Nanjing Court also determined the rates payable for the Chinese SEPs held by Conversant. Conversant appealed this decision.

On 12 March 2020, Huawei shared so-called ‘Key Offer Terms’ with Conversant. According to Huawei, the rates included in those terms were extracted from a licensing agreement with a third party. Huawei denied further information regarding the proposed royalties with reference to a Non-Disclosure Agreement (NDA) entered with the respective licensee.

With the present judgement, the Court found in favour of Conversant and -inter alia- granted an injunction against Huawei [976] .
 

B. Court’s reasoning

The Court found that the patent in suit was infringed and standard-essential. [977]

It further rejected Huawei’s ‘FRAND’ defence under competition law. [978] Huawei had argued that by asserting claims for injunctive relief, Conversant abused its dominant market position in violation of Art. 102 of the Treaty on the Functioning of the EU (TFEU), especially since it had failed to meet the conduct requirements imposed on SEP holders by the Court of Justice of the EU (CJEU) in Huawei v ZTE [979] (Huawei decision or framework).
 

Market dominant position

The Court held that Conversant had a dominant market position. [980]

It pointed out that the mere ownership of a patent, even a standard-essential patent, does not automatically confer a dominant position to the patentee: for this, accessing patent should be necessary for entering a (downstream) market. This was the case here with respect to Huawei’s standard-compliant mobile phones. [981]

In this context, the Court explained that Conversant’s FRAND commitment towards ETSI does not restrict its dominant market position. Although it is true that the ETSI FRAND undertaking limits market power as far as the SEP holder is obliged to license its patent on FRAND terms, this limitation has no real effect until a licence has actually been granted. [982] The alternative licensing option offered by the ‘Multi-Generation-Pool’ could not, in the eyes of the Court, per se exclude Conversant’s dominant market position either. [983]
 

Abuse of dominant position

The Court held, however, that Conversant had not abused its dominant market position in violation of Art. 102 TFEU. [984] Conversant had complied with its obligations under the Huawei framework, whereas Huawei had failed to do so. [985]

In the eyes of the Court the Huawei framework establishes mutual conduct duties for SEP holders and implementers that build upon one another. Accordingly, the consequent duty is only triggered, when the other party has fully met its preceding obligation. [986]
 

Notification of infringement

Having said that, the Court found that Conversant’s letter to Huawei dated 29 April 2014 constitutes a sufficient notification of infringement. [987] In terms of content, the notification should indicate the patent infringed (including the patent number), the infringing embodiment and the infringing use; a detailed technical or legal analysis is, however, not required at this stage. [988] The Court clarified that the SEP holder is not obliged to provide claim charts with the notification of infringement. [989] What is more, if the implementer is already aware of the infringement, a respective notification could be dispensable (‘useless formality’): however, courts should apply a strict standard when assessing whether a notification was needed at all or not. [990]

Looking at Conversant’s aforementioned letter to Huawei, the Court did not consider the fact that the patent in suit was not explicitly mentioned therein to be harmful. In the letter, Conversant had referred to the infringement of its entire portfolio and indicated several patents as examples. This made clear to Huawei that Conversant assumed that other patents not mentioned in the letter were infringed as well. [991] In addition, the Court took into account the fact that Huawei had already concluded a licensing agreement with the legal predecessor of Conversant, so that it should have been aware of the patent portfolio in question in detail. [991]
 

Willingness to obtain a licence

Considering Huawei’s overall behaviour, the Court found that even though, at first, Huawei appeared to have been willing to get a licence, its subsequent actions evidenced the opposite [992] . At the end of the infringement proceedings, it could no longer be assumed that Huawei was willing to obtain a FRAND licence from Conversant. [993]

The Court explained that, in terms of content, the implementer’s declaration of willingness should not be made subject to ‘high standards’; even a ‘blanket’ and ‘informal’ declaration can suffice. [994] The implementer’s behaviour should, in any case, indicate the ‘clear intention’ to sign a licence. This intention should ‘guide’ the implementer throughout the subsequent licensing negotiations. [994]

Given that after receipt of Conversant’s notification of infringement the parties exchanged claim charts and held several meetings to discuss the technical merits of Conversant’s SEP portfolio, the Court was satisfied that Huawei had, initially, been willing to take a FRAND licence. [995] However, Huawei’s later behaviour contradicted this assumption.

The Court saw an indication of missing willingness in the fact that Huawei had made the signing of a licence subject to the condition that pending patent infringement proceedings against two other mobile phone manufacturers in the US would be decided in favour of Conversant.Ibid, paras. 239 & 241. The Court said that even though the implementer has an interest to be informed about rulings concerning the validity and essentiality of patents included in the negotiated license, it is not acceptable to make the outcome of such proceedings a precondition for the conclusion of a licence, especially since it is possible to address court rulings invalidating portfolio patents by means of an adjustment mechanism integrated in the agreement with the SEP holder. [997]

Furthermore, the Court criticized the fact that Huawei did not sufficiently elaborate the (extremely low) rates (counter-)offered to Conversant on 12 March 2016, which -according to Huawei- were based on a licence with a third licensor. [998] Huawei had insofar invoked an NDA entered with the third licensor. The Court held that Huawei’s behaviour was insofar inconsistent as it had disclosed the royalty rate agreed with the third licensor but refused to share further information, particularly with respect to cross-licensing elements of the respective agreement. [999] It further highlighted that confidentiality concerns could be addressed by an NDA between Huawei and Conversant, which the latter had been willing to sign. [1000]

Another indication of unwillingness was the fact that, approximately three years after the beginning of the negotiations with Conversant, Huawei had made the continuation of the negotiations subject to the conclusion of an NDA. [1001] Considering that Huawei had itself stopped discussions on a draft NDA back in 2013, the Court held that by insisting on the signing of an NDA several years later, Huawei primarily intended to delay the licensing negotiations. [1002]

Additionally, the Court noted that Huawei attached complementary conditions to the conclusion of a licensing agreement with Conversant without justification [1003] . In particular, Huawei had denied to take a licence to the Chinese part of Conversant’s SEP portfolio before at least ten other large Chinese mobile phone manufacturers had respectively done so. [1004]

Based on Huawei’s overall conduct, the Court rejected the notion that Huawei’s statements during the pending proceedings that it was (still) prepared to obtain a licence to ‘valid’ SEPs could ‘undo’ the missing willingness demonstrated by Huawei up to that point in time. [1005] The same was true with respect to Huawei’s counteroffer dated 12 March 2020, which did not contain a sufficient justification with regard to the clearly low licensing rates suggested. [1006]
 

SEP holder’s offer

Since Huawei failed to adequately express willingness to obtain a licence, the Court explained that Conversant’s obligation under the Huawei framework to make a FRAND licensing offer had not been triggered in the present case. [1007] Notwithstanding this, the Court found that Conversant’s offer of July 2017 met the respective requirements in terms of both form and content. [1008]

According to the Court, in terms of form, SEP holder’s offer must be in writing and specify the royalty, the relevant calculation parameters (e.g. licensing rate, reference value) and the method of calculation. [1009] A ‘mathematical derivation’ of the rates is not needed; the SEP holder can rely on assumptions and valuations. [1009] Regarding the non-discrimination (ND) element of FRAND, the SEP holder shall demonstrate that the defendant is treated equally as other existing licensees, or elaborate the reasons why a different treatment is justifiable in the individual case. [1010]
 

Comparable agreements

The Court highlighted that comparable licensing agreements are an ‘important indicator’ of the reasonableness of the terms offered. [1009] The patentee is, however, not obliged to produce all licensing agreements at its possession: in particular, agreements, which are not relevant for the assessment of whether the terms offered are unreasonable and/or discriminatory, do not have to be disclosed. [1011] The Court could not identify that a comprehensive disclosure of all third-party agreements is common in practice. [1012]

Against this background, the Court held that Conversant had provided sufficient information on truly relevant comparable agreements. [1013]

On the other hand, the Court found that Conversant was not obliged to elaborate on the terms of agreements that were not comparable to the licence offered to Huawei. [1014] 44 This was true with regards to licences covering implementation patents (and not SEPs) held by Conversant. [1015] Agreements entered (on relatively low rates) by Conversant with implementers that were about to exit the market were not considered to be comparable either. [1016] In any case, the Court found that there was no need to disclose such agreements, since they could have no impact on Huawei’s competitiveness, given that the licensees were no longer direct competitors of Huawei in the relevant product markets. [1017] The same applies to licensing agreements that have expired: such contracts cannot impair the position of Huawei towards its competitors in the market anymore either. [1018] The Court also noted that agreements with cross-licensing elements are, as a rule, not directly comparable with licences which shall not include such considerations. [1018]

Furthermore, the Court held that, in the present case, Conversant was not obliged to elaborate on licensing agreements signed by the previous holder of the SEPs at stake. [1018] The case-law of the Duesseldorf courts indicates that the FRAND commitment of the legal predecessor of the SEP holder is binding for the latter also in terms of the conditions offered to licensees. However, there was no need to provide Huawei with information on the terms of agreements previously entered into by Conversant’s predecessor, because Huawei had itself concluded an agreement with the latter. [1018] What is more, Huawei had formed the counteroffer made to Conversant in March 2017 on basis of said agreement. [1018]
 

Relevant court decisions

In addition to the above, the Court found that Conversant had properly presented court decisions concerning the validity and standard-essentiality of its patents as well as the FRAND-conformity of its licensing agreements during the trial. [1019]

The Court reiterated the position expressed by Duesseldorf courts that –in addition to the relevant comparable agreements– SEP holders shall, as a rule, also present decisions dealing with existing licensing agreements. [1020] Conversant had done so by pointing out to certain court proceedings involving patents included in its portfolio and providing information on their outcomes.
 

Fair and reasonable terms

Having said that, the Court further confirmed that Conversant’s licensing offer was FRAND in terms of content as well. [1021]

The Court explained that not only the licensing rates, but all terms of the licence (e.g. covered patents, territorial scope, etc.) must be fair and reasonable. [1022] Looking particular at the licensing rates, the Court highlighted that not every rate exceeding the objectively fair rate is considered exploitative and unreasonable under Art. 102 TFEU; there must be an evident gap between the two fees that hinders the competitiveness of the licensee in the downstream market. [1022]

In this regard, the Court took the view that a considerable number of already concluded licences with identical terms can be an indication that the terms offered are, indeed, fair and reasonable, unless said agreements were concluded under exploitation of a market dominant position. [1022]

Court-determined licensing terms and conditions (although they lack evidentiary effect) are also an aspect to be considered for the assessment of FRAND-conformity, if the court which delivered the respective decision comprehensively considered all relevant factors. [1023] Court rulings originating from other European jurisdictions are, in any case, relevant as expert opinions. [1024] It is, however, required to ‘trace-back’ the FRAND assessment criteria derived from court decisions to the actual facts of the individual case, since those mirror the value of the SEP portfolio to be actually licensed. [1025]

Taking the above into account, the Court found that Conversant had presented sufficient indications that its offer to Huawei was fair and reasonable. [1026] Conversant had particularly elaborated that the calculation of the royalties offered to Huawei followed the method used by the High Court of Justice of England and Wales (UK High Court) in a 2017 decision originating from a dispute between Huawei and a third SEP holder. [1027] Given that the portfolios involved in both cases were comparable [1028] and that Huawei had not substantially contested the further calculation parameters considered by the UK High Court [1029] , the Court found that the aforementioned ruling offers sufficient indications confirming that Conversant’s offer was reasonable. [1030]

In this context, the Court noted that there is a presumption that all patents included in a portfolio are valid. Consequently, patent validity is no decisive factor for the royalty calculation, unless there are decisions at hand, which invalidate a portfolio patent. [1031] However, the invalidation of a portfolio patent does not necessarily make the offer ‘unreasonable’; for this, a ‘noticeable’ change in the portfolio is required. [1032]

The Court held that Huawei had not shown that the invalidation of eight Chinese patents included in Conversant’s portfolio rendered the offer of the latter ‘unreasonable’. [1033] 69 It had further failed to show which patents have expired (if any) and how this would have been significant for the licensing rate calculation [1034] , or to which extent portfolio patents were not actually standard-essential. [1035] Since Conversant had presented a significant number of claim charts, Huawei should have provided detailed pleadings contesting essentiality of relevant patents, which had not been the case: insofar, it was not sufficient to just to take recourse to foreign court decisions dealing with essentiality. [1036]

Moreover, the Court was satisfied by the fact that Conversant’s offer contained an ’adjustment clause’ providing for a mechanism for reducing royalties, in case that the number of portfolio patents decreases. [1037] The Court noted insofar, that a FRAND offer requires such mechanism. [1038] Including an ’adjustment clause’ is, however, not mandatory: changes in the portfolio can also be addressed by agreeing on a shorter duration of the licensing agreement, so that the expiration of portfolio patents during the term of the contract can be considered. [1038]

The Court further took the view that Conversant’s offer could not be considered as unreasonable, because it did not take into account the parallel proceedings pending in Nanjing, China, subject matter of which was the determination of FRAND-compliant royalties. [1039] Foreign court decisions determining FRAND royalties have not necessarily a formal binding effect, either when they refer to the ‘national’ market of the court rendering the decision or (and particularly) when they refer to other markets abroad. [1040] Accordingly, the Court highlighted that it is not prevented from deciding whether the terms of a global portfolio licence covering also foreign jurisdictions were FRAND or not. [1041]
 

Implementer’s counteroffer

Finally, the Court pointed out that Huawei’s ‘Key Offer Terms’ dated 12 March 2020 did not constitute a FRAND-compliant counteroffer, particularly since those terms did not address all elements, on which the parties must agree in order for a licensing agreement to be concluded. [1042]
 

  • [975] Unwired Planet v Huawei, High Court of Justice, 5 April 2017, [2017] EWHC 711(Pat).
  • [976] Conversant Wireless v Huawei Technologies, District Court of Düsseldorf, judgment dated 27 August 2020, Case-No. 4b O 30/18 (cited by Düsseldorfer Entscheidungen, Nr. 3055, www.D-Prax.de).
  • [977] Ibid, para. 124 and paras. 129-210.
  • [978] Ibid para 124.
  • [979] Huawei v ZTE, Court of Justice of the EU, judgment dated 16 July 2017, Case No. C-170/13.
  • [980] Conversant Wireless v Huawei Technologies, District Court of Düsseldorf, judgment dated 27 August 2020, paras. 221 et seqq.
  • [981] Ibid, para. 217.
  • [982] Ibid, para. 223.
  • [983] Ibid, para. 224. The parallel option to license the same patents through a pool could, however, eventually rule out an abuse of a dominant market position, particularly when the terms offered by the patent pool are FRAND.
  • [984] Ibid, paras. 212 and 225 et. seqq.
  • [985] Ibid, para. 225.
  • [986] Ibid, para. 227.
  • [987] Ibid, para. 231.
  • [988] Ibid, paras. 231-232.
  • [989] Ibid, para. 235.
  • [990] Ibid, para. 232.
  • [991] Ibid, para. 234.
  • [992] Ibid paras. 236 and 238.
  • [993] Ibid paras. 236 and 266.
  • [994] Ibid, para. 237.
  • [995] Ibid, para. 238.
  • [996] Ibid, paras. 239 & 241.
  • [997] Ibid, para. 241.
  • [998] Ibid, para. 245.
  • [999] Ibid, para. 245. The Court further questioned that Huawei could successfully withhold relevant information by invoking confidentiality obligations, see paras. 385 et seqq.
  • [1000] Ibid, para. 246; see also paras. 389 et seqq.
  • [1001] Ibid, para. 251.
  • [1002] Ibid, para. 257.
  • [1003] Ibid, para. 258.
  • [1004] Ibid, paras. 259 et seq.
  • [1005] Ibid, paras. 261-266.
  • [1006] Ibid, paras. 266.
  • [1007] Ibid, para. 269.
  • [1008] Ibid, para. 267.
  • [1009] Ibid, para. 272.
  • [1010] Ibid, para. 273.
  • [1011]  Ibid, para. 296.
  • [1012] Ibid, para. 297.
  • [1013] Ibid, para. 275.
  • [1014]  Ibid, paras. 277 et seqq. and 296.
  • [1015] Ibid, para. 280.
  • [1016] Ibid, para. 282.
  • [1017] Ibid, paras. 286 et seqq.
  • [1018] Ibid, para. 300.
  • [1019] Ibid, para. 304.
  • [1020] Ibid, para. 305.
  • [1021] Ibid, paras. 308 et seqq.
  • [1022] Ibid, para. 311.
  • [1023] Ibid, para. 363.
  • [1024] Ibid, para. 365.
  • [1025] Ibid, para. 367.
  • [1026] Ibid para 368.
  • [1027] Ibid, paras.378 et seqq.
  • [1028] Ibid, para. 379.
  • [1029] Ibid, paras. 393 et seqq.
  • [1030] Ibid, para. 374.
  • [1031] Ibid, para. 396.
  • [1032] Ibid, para. 396 et seq.
  • [1033] Ibid, para. 414.
  • [1034] Ibid, para. 420.
  • [1035] Ibid, paras. 414 et seqq.
  • [1036] Ibid, para. 419.
  • [1037] Ibid, para. 397.
  • [1038] Ibid, para. 423.
  • [1039] Ibid, paras. 457 et seqq.
  • [1040] Ibid, para. 460.
  • [1041] Ibid, para. 461.
  • [1042] Ibid, paras. 464 et seqq.