IP Bridge v TCT

21 August 2020 - Case No. 2 O 136/18

http://caselaw.4ipcouncil.com/german-court-decisions/lg-mannheim/ip-bridge-v-tct

A. Facts

The Claimant, IP Bridge, declared the patent-in-suit as (potentially) essential to the practice of the 4G/LTE cellular standard, which was developed by the European Telecommunication Standards Institute (ETSI). ETSI requires that right holders commit to make standard essential patents (SEPs) accessible to users on fair, reasonable and non-discriminatory (FRAND) terms and conditions. The defendants are the parent company and a German affiliate of the TCT group (TCT) with headquarters in China. TCT distributes and sells 4G-enabled cell phones globally, including in Germany.

On 15 December 2014, IP Bridge informed the parent company of the TCT group (parent company) about its SEP portfolio. In the respective letter, two US patents – but not the (German) patent-in-suit – were exemplary mentioned. TCT did not respond. IP Bridge sent reminders to the parent company in January and April 2015, which, however, remained unanswered. The patent-in-suit was not expressly mentioned in these reminders either.

On 1 February 2016, IP Bridge sent a license offer to the parent company. Attached to the offer was a list of patents which included the patent-in-suit. IP Bridge also provided a claim chart concerning the patent-in-suit (along with further claim charts referring to other portfolio patents).

On 29 February 2016, IP Bridge filed an infringement action against TCT before the District Court of Mannheim (Court).

On 11 March 2016, the parent company informed IP Bridge that negotiations could start after the parties had exchanged infringement and invalidity contentions in parallel proceedings pending in the United States. On 22 March 2016, legal counsel representing TCT in the German proceedings rejected IP Bridge’s license offer, but indicated that TCT was ‘nevertheless’ willing to ‘negotiate, respectively conclude’ a licence on FRAND terms.

On 19 May 2017, IP Bridge made another license offer to TCT. No agreement was signed.

On 30 April 2018, IP Bridge provided TCT with an amended offer. IP Bridge offered TCT a choice between a running royalty and a lumpsum payment. For both options, the royalties were calculated according to the so-called ‘top-down’ method. The price per unit offered to TCT was calculated in US Dollars on basis of a global, industry-wide average selling price (ASP) of handsets during the period 2011-2016. TCT rejected this offer as well.

On 7 August 2018, TCT received a further offer by IP Bridge with almost identical content. This offer was also rejected.

In October 2019, the Court communicated to the parties that according to its (preliminary) view the global industry-wide ASP for the years 2011-2016 could not serve as a basis for the calculation of royalties for future uses.

In December 2019, IP Bridge shared a modified offer with TCT. In this offer, IP Bridge relied again on the ‘top-down’ method and a global industry-wide ASP. In contrast to the previous offers, the ASP should be determined separately for each calendar year, in which the licence would be in force. TCT rejected this offer.

On 31 January 2020, the parent company made a counteroffer to IP Bridge. A slightly modified version of this counteroffer was shared again on 11 March 2020. Apart from the fact that TCT calculated the royalty based on the actual annual global ASP of its own handsets, the counteroffer was, basically, to a large extend identical to IP Bridge’s last offer. On 19 March 2020, IP Bridge rejected the counteroffer.

On 7 April 2020, TCT placed security for past uses in form of a bank guarantee.

With the present judgment, the Court dismissed the claims for injunctive relief, recall and destruction of infringing products asserted by IP Bridge. [1]
 

B. Court’s reasoning

The Court found that the patent-in-suit is infringed. [2]

Nevertheless, the Court dismissed IP Bridge’s claims for injunctive relief, the recall and destruction of infringing products for the time being. The Court found that the assertion of said claims constituted an abuse of a dominant market position in violation of Article 102 of the Treaty on the Functioning of the European Union (TFEU). [3] In particular, the Court held that TCT had made a FRAND counteroffer to IP Bridge, whereas , on the other hand, IP Bridge had failed to make a license offer on FRAND terms to TCT. [4]
 

Abuse of market dominance – Huawei v ZTE

According to the Court, IP Bridge has a dominant position in the relevant market for the licensing of (patent) rights, which are needed for successfully competing in the field of cellular handsets. [5]

The Court explained that legal action filed by a market dominant patent holder, who has committed towards a standardisation body to grant licences on FRAND terms, may constitute an abuse of dominance, if and to the extent that standard-compliant products could be prevented from entering or remaining on the market. [6] That said, the Court noted, however, that Article 102 TFEU does not per se prohibit an SEP holder from seeking injunctive relief against patent infringement; standard-essentiality of the patent does not alter the fact that the right holder is obliged to ‘tolerate’ the use of its patent only when it has permitted such use or should have done so, in light of the duty to refrain from an abuse of its market dominant position. [7]

The enforcement of the right to injunctive relief is not abusive, when the SEP holder has followed the conduct duties established by the Court of Justice of the EU in Huawei v ZTE (Huawei judgment or framework) [8] (summary available here). [9] Under the Huawei judgment, the patent holder must notify the implementer about the infringement before filing a lawsuit and – provided that the latter has expressed willingness to sign a FRAND licence – make a written license offer on such terms. [10] An implementer that has refused the SEP holder’s offer, cannot invoke a ‘FRAND-defence’, unless it has submitted a counteroffer on FRAND terms to the SEP holder in due course. In case the counteroffer is rejected, the implementer needs to provide appropriate security for using the SEP. [10]

The Court highlighted that the above scheme requires from the implementer, who either intends to use a patent or already uses a patent without a licence, to be willing to sign an agreement with the SEP holder on FRAND terms and conditions. [11] If this is not the case, the SEP holder must be able rely on the claims arising from patent infringement, given that there are no legal means for forcing an implementer to obtain a licence. [11]

On the other hand, when the infringer is willing to take a licence, it is the obligation of the SEP holder to make sufficient efforts towards that end. [12] In case that the implementer has made an unconditional offer on terms that the patent holder cannot reject without violating the prohibition of abusive and discriminating practices, filing a suit asserting claims for injunctive relief constitutes a violation of Article 102 TFEU. [12]

Against this background, the Court concluded that by seeking for an injunction, the recall and the destruction of infringing products, IP Bridge had abused its market dominant position. [13]
 

Notification of infringement

The Court found that a sufficient notification of infringement was made by latter dated 1 February 2016. [14]

The purpose of the infringement notification is to call infringer’s attention to the patent infringement and the possibility (and necessity) to obtain a licence: The patent, the way it is infringed, as well as the infringing embodiments should be designated; detailed technical and legal analysis is, however, not required. [15] Providing claims charts will, as a rule, be sufficient, although not mandatory. [15]

According to the Court, the above requirements were met – for the first time – by IP Bridge’s letter dated 1 February 2016, which expressly mentioned the patent-in-suit and also included a claim chart concerning this patent. [16] On the contrary, the previous letters sent to TCT in 2014 and 2015 were not sufficient, since they did not contain a reference to the patent-in-suit. [16]
 

Willingness

The Court held that TCT has adequately expressed willingness to obtain a licence – both in terms of content and timing – through the letter sent to IP Bridge by its outside counsel on 22 March 2016. [17] What is more, TCT had remained ‘willing’ also in the meantime. [17]

After receipt of an infringement notification, the implementer must ‘clearly and unambiguously’ declare its willingness to obtain a FRAND licence from the SEP holder and, subsequently, engage in license negotiations in a ‘target-oriented’ manner. [18]

In terms of timing, the Court explained that an infringer, who stays silent ‘for several months’ after the infringement notification, regularly indicates that it has no interest in taking a licence. [19] Nevertheless, the infringer should be given enough time for consideration: Two months will usually be enough, unless special circumstances justify a longer or shorter time period. [19]

In the case at hand, the Court found that the statement of 22 March 2016, according to which TCT was ‘nevertheless’ willing to ‘negotiate, respectively conclude’ a licence on FRAND terms was a sufficient declaration of willingness in terms of content. [20] The use of the word ‘nevertheless’ made clear that TCT was prepared to sign a licence, irrespective of the outcome of the pending proceedings. [21] On the other hand, the fact that TCT declared willingness to ‘negotiate, respectively conclude’ a licence was not considered to be harmful: Although the sole willingness to negotiate is usually not sufficient, the Court saw no problem with the above wording, since besides being prepared for negotiations, TCT had also expressed willingness to sign an agreement. [21]

The Court further explained that TCT had expressed willingness in a timely manner. [22] The letter dated 22 March 2016 was sent to IP Bridge approx. 1 ½ months after receipt of the letter dated 1 February 2016, a time period which the Court did not consider as excessive under the present circumstances. [23]

In addition, the Court held that TCT had subsequently remained ‘willing’. [24] The fact that TCT submitted a counteroffer only in 2020 (that is after almost four years and during pending litigation) did not ‘eliminate’ TCT’s willingness to take a licence. [25] Considering that in other proceedings between the parties the Court had communicated that IP Bridge’s license offers were not FRAND, TCT had every reason to assume that – in accordance with the case-law of the Court – it was under no obligation to make a counteroffer earlier. [26] When the Court later on asked TCT to respond to the revised offer of IP Bridge, TCT reacted in a timely manner by making a further counteroffer. [26]
 

Implementer’s counteroffer

Having found that TCT had acted as a ‘willing’ licensee, the Court moved on to evaluate TCT’s counteroffer. According to the Court, when the SEP holder has made a license offer and provided sufficient information to its counterpart (as it had been the case here), courts should prioritise and deal with the implementer’s counteroffer first (that is before examining the SEP holder’s offer). [27]

In the eyes of the Court, the implementer’s duty to present a counteroffer to the patent holder is triggered, when a (specific) offer and sufficient information have been provided by the latter: it is not required that the patent holder’s offer is actually FRAND. [28] This interpretation is in line with the notion underlying the Huawei judgment that the parties are best situated to form FRAND through good faith negotiations. [29] Negotiations would, however, not commence (or proceed only very slowly), if an implementer that has been provided with sufficient information would be required to respond with a counteroffer, only if the preceding license offer of the patent holder was actually FRAND in every aspect. [30] Accordingly, the implementer cannot invoke the abusive nature of a court action launched by the patent holder, unless it has made a written FRAND-counteroffer itself. [31] This is also true, when the patent holder’s offer does not meet FRAND-requirements. [31] Placing such burden on an implementer that has expressed unconditional willingness to obtain a licence is justified: in the eyes of the Court, it can be expected from the implementer to formulate a counteroffer corresponding to patent holder’s FRAND obligations based on the offer and the accompanying information received by the latter. [32]

Having said that, the Court took the view that TCT’s counteroffer dated 31 January 2020 / 11 March 2020 was FRAND. [33]

The Court noted that FRAND is usually a range: there can be more than one set of contractual arrangements or license rates that meet FRAND criteria. [34] In the present case, besides the amount of the royalties payable under the licence, the offer and counteroffer at hand are almost identical. [35] The sole fact that the amount offered by TCT significantly deviates from the amount requested by IP Bridge does not by itself make TCT’s counteroffer ‘un-FRAND’. [36]

The Court stressed that calculating the royalties on basis of the co-called ‘top-down’ method (which both parties had used) did not raise legal concerns. [37] The total aggregate royalty burden of 8,8% for 4G/LTE used by TCT for the royalty calculation was seen as reasonable, particularly since it was close to the respective figure used by the UK High Court of Justice in Unwired Planet v Huawei [38] summary available here. [9] IP Bridge’s share of 4G-related SEPs was not in dispute, because TCT had relied on the same percentage as IP Bridge. [39]

TCT had, however, utilized a different royalty base in its counteroffer: TCT calculated the royalties on basis of the annual global Average Selling Price (ASP) of its own handsets, whereas IP Bridge had applied a global ASP of all 4G-enabled handsets on the market. [40] In the view of the Court, the royalty base used by TCT was, in principle, FRAND-compliant. [40] The patent holder shall, as a rule, receive a reasonable share of what the implementer can objectively extract from the patented invention considering its business operation, respectively its ‘specific product and customer orientation’. [40]

The fact that TCT focused on the middle-priced and lower-priced segment of the handset market (and the ASP of its products was, thus, lower that the industry-wide ASP) was not considered as harmful by the Court. [41] The Court recognised that using very low ‘dumping’ prices as basis for the royalty calculation would deprive the patent holder of the share of the value extracted by the implementer from the patent. [42] This was, however, not the case here. [41] In this context, the Court noted that patent holders cannot request from implementers to market products in the higher-priced segments, when this is not in line with the corporate strategy of the latter. [43]
 

SEP holder’s offer

The Court, lastly, looked at IP Bridge’s license offer. In case that implementer’s counteroffer was found to be FRAND, courts shall then examine SEP holder’s offer: if that offer is ‘un-FRAND’, then the claim for injunctive relief will be dismissed. [44] The question of how courts should decide, when SEP holder’s offer is FRAND as well was not answered here, since the Court found that IP Bridge’s offer was not FRAND. [45]

According to the Court, the use of an annual worldwide industry-wide ASP as basis for the royalty calculation was unfair and unreasonable with regard to implementers like TCT, which sell handsets in the lower-priced segments of the market to prices significantly lower than the industry-wide ASP. [46]

What is more, by using the industry-wide ASP for the royalty calculation, IP Bridge favours licensees doing business in the higher-priced segments over licensees selling lower-priced handsets. [47] The Court acknowledged that relying on the actual selling price can result in licensees from the premium segments having to pay much higher royalties for the same technology, although non-technological features (e.g., camera; quality finishing and design; operating system etc.) may drive the higher selling price of the handsets. [48] Nevertheless, the conflict of interest between licensees in the higher-priced and the lower-priced segments cannot be solved ‘one-sidedly to the detriment’ of the latter. [49] To achieve balance, the Court suggested that IP Bridge could establish lower and upper limits (floors and caps) per unit sold. [50]

Finally, the Court clarified that, even though this was not the case in the present proceedings, a licence based on an industry-wide per unit royalty regime is not per se excluded in the field of wireless technology. [51] Patent holders can have a ‘justified interest’ in applying ‘inclusive terms’, which could allow the reference to ‘average figures’ also in connection with the ‘top-down’ method. [51] It should, however, be avoided that certain manufacturers suffer one-sided disadvantages, as it was the case with the manufacturers of low-priced 4G-enabled handsets here. [51]

• [1] IP Bridge v TCT, District Court of Mannheim, judgment dated 21 August 2020, Case No. 2 O 136/18 (cited by juris).
• [2] Ibid, paras. 89-146.
• [3] Ibid, paras. 147 et seqq.
• [4] Ibid, para. 147.
• [5] Ibid, para. 149.
• [6] Ibid, para. 151.
• [7] Ibid, para. 152.
• [8] Huawei v ZTE, Court of Justice of the EU, judgement dated 16 July 2015, Case No. C-170/13.
• [9] IP Bridge v TCT, District Court of Mannheim, judgment dated 21 August 2020, para. 152.
• [10] Ibid, para. 153.
• [11] Ibid, para. 154.
• [12] Ibid, para. 155.
• [13] Ibid, para. 156.
• [14] Ibid, paras. 157 et seqq.
• [15] Ibid, para. 158.
• [16] Ibid, para. 159.
• [17] Ibid, para. 160.
• [18] Ibid, para. 161.
• [19] Ibid, para. 169.
• [20] Ibid, paras. 162 et seqq.
• [21] Ibid, para. 163.
• [22] Ibid, para. 168.
• [23] Ibid, para. 170.
• [24] Ibid, paras. 164-165.
• [25] Ibid, para. 165.
• [26] Ibid, para. 166.
• [27] Ibid, para. 172.
• [28] Ibid, para. 177.
• [29] Ibid, para. 180.
• [30] Ibid, para. 181.
• [31] Ibid, para. 178.
• [32] Ibid, para. 179.
• [33] Ibid, para. 182.
• [34] Ibid, para. 183.
• [35] Ibid, para. 184.
• [36] Ibid, para. 185.
• [37] Ibid, para. 186.
• [38] Unwired Planet v Huawei, UK High Court of Justice, judgment dated 5 April 2017, Case No. [2017] EWHC 711 (Pat);
• [39] Ibid, para. 187.
• [40] Ibid, para. 188.
• [41] Ibid, para. 189.
• [42] Ibid, paras. 190 and 205.
• [43] Ibid, paras. 191 and 205.
• [44] Ibid, para. 194.
• [45] Ibid, paras. 194 and 206.
• [46] Ibid, para. 196.
• [47] Ibid, paras. 197-199.
• [48] Ibid, para. 200.
• [49] Ibid, para. 201.
• [50] Ibid, para. 202.
• [51] Ibid, para. 203.