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IP Bridge v TCT

2 February 2022 - Case No. 6 U 149/20

http://caselaw.4ipcouncil.com/german-court-decisions/olg-karlsruhe/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 Telecommunications 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 mentioned in these reminders either.

In July 2015, IP Bridge filed an infringement suit against companies of the TCT group in the United States (US proceedings).

On 1 February 2016, IP Bridge sent a (first) 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 action against TCT before the District Court of Mannheim (District 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 the US proceedings and requested more information about the portfolio of IP Bridge. 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 (second) license offer to TCT. No agreement was signed.

On 30 April 2018, IP Bridge provided TCT with an amended (third) offer. IP Bridge offered TCT a choice between a running royalty and a lumpsum payment. For both options, the royalties were determined 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 another (fourth) offer by IP Bridge with almost identical content. This offer was also rejected.

In May 2019, shortly after it had prevailed in the US proceedings, IP Bridge made a further (fifth) offer to TCT, to which the latter did not respond.

In October 2019, the District 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.

On 12 December 2019, IP Bridge shared a modified (sixth) 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 (first) counteroffer to IP Bridge. Apart from the fact that the royalty was calculated based on the actual annual global ASP of TCT’s own handsets, and that a lower total aggregate royalty burden was used, the counteroffer was, basically, to a large extend identical to IP Bridge’s last offer.

On 4 March 2020, IP Bridge made an amended (seventh) offer to TCT, which particularly took the sales figures mentioned in TCT’s counteroffer into account.

On 11 March 2020, TCT made a slightly modified (second) counteroffer to IP Bridge, which was based on the same royalty calculation as the previous counteroffer of 31 January 2020. On 19 March 2020, IP Bridge rejected this counteroffer. On 7 April 2020, TCT placed security for past uses in form of a bank guarantee.

On 7 August 2020, IP Bridge made a further (eighth) offer to TCT. On 18 August 2020, TCT rejected this offer and shared another (third) counteroffer with IP Bridge. No agreement was, however, reached.

On 21 August 2020, the District Court dismissed the claims for injunctive relief, recall and destruction of infringing products asserted by IP Bridge. [370] (cited by juris; summary available here) IP Bridge filed an appeal before the Higher District Court of Karlsruhe (Appeal Court).

With the present judgment, the Appeal Court overturned the ruling of the District Court, granted an injunction against TCT, and ordered the recall and destruction of infringing products. [371] (cited by http://lrbw.juris.de/cgi-bin/laender_rechtsprechung/list.py?Gericht=bw&Art=en)
 

B. Court’s reasoning

The Appeal Court confirmed the finding of the District Court that the patent-in-suit is infringed. [372]

In contrast to the District Court, the Appeal Court found, however, that TCT could not raise a so-called ‘FRAND’-defence in the present case. [373] TCT had argued that by asserting claims for injunctive relief as well as the recall and destruction of infringing products, IP Bridge abused its dominant market position in violation of Article 102 of the Treaty on the Functioning of the European Union (TFEU).

The Appeal Court agreed with the District Court’s view that IP Bridge had a dominant position in the market for the licensing of the patent-in-suit. [374] From a technical viewpoint, it is necessary to use the patent for complying with the relevant standard; it was not shown in the trial that a technical alternative to the teachings of the patent-in-suit existed. [374]

Nevertheless, in the eyes of the Appeal Court, IP Bridge had not abused its market dominance. [375] The fact that IP Bridge was not prepared to enter into an agreement on terms other than those offered to TCT, did not entail an abuse in terms of Article 102 TFEU, since TCT had been unwilling to sign a FRAND licence. [375]
 

Notification of infringement

The Appeal Court held that IP Bridge made a proper notification of infringement by the letter dated 1 February 2016. [376] The preceding letters sent to TCT in 2014 and 2015 were deemed as insufficient, as they did not contain an explicit reference to the patent-in-suit. [376]

In view of the great number of SEPs needed for complying with the standard at hand, the notification should call infringer’s attention to the infringement of the specific patent-in-suit. [376] The Appeal Court explained that the patent holder should narrow down the information in both factual and territorial terms, so that the implementer is allowed to assess the merits of the infringement allegation. [376] These requirements were met – for the first time – by the letter of 1 February 2016, which expressly mentioned the patent-in-suit and included a claim chart concerning this patent. [376]
 

Willingness

Contrary to the view taken by the District Court, the Appeal Court found that TCT did not adequately express willingness to obtain a licence. [377]

Following the case-law of the German Federal Court of Justice (Bundesgerichtshof) in Sisvel v Haier [378] (Sisvel v Haier summary available here, Sisvel v Haier II summary available here), the Appeal Court explained that an implementer must ‘clearly and unambiguously’ declare its willingness to obtain a licence on whatever terms are in fact FRAND and, subsequently, engage in license negotiations in a ‘target-oriented’ manner. [379]

According to the Appeal Court, ‘willingness’ is no ‘static’ position: the finding that the implementer was willing (or unwilling) at a certain moment in time does not remain unchanged henceforth. [380] What is more, a ‘continuous willingness’ to obtain a licence is required. [380] Absent such ‘continuous willingness’ on the side of the implementer, the allegation that the SEP holder abused its market dominance would be ‘devoid of meaning’. [380]

The Appeal Court explained that the concrete, detailed requirements of ‘willingness’ cannot be made subject to a ‘general definition’. [381] The relevant criterion is the following: What would a ‘reasonable party’ interested in a successful outcome of the negotiations serving the mutual interests do in the specific negotiation phase to achieve this objective. [381] For the respective assessment, a case-by-case analysis is needed. [381] The Appeal Court noted that expressing willingness to negotiate does by itself not guarantee that the respective statement is meant seriously; on the contrary, it can be part of ‘delaying tactics’ applied by the implementer. [382] To safeguard the interests of both the patent holder and the implementer’s competitors, ‘delaying tactics’ cannot be tolerated. [382]

Whether the implementer engaged in delaying tactics must be assessed based on ‘objective criteria’ under consideration of its behaviour following the infringement notification or a license offer received from the SEP holder. [383] A ‘willing and upright’ implementer would seek to sign a licence as soon as possible, to shorten the time, in which the patent (or portfolio) is used without payment of fees. [383] Such implementer would rather ‘urge’ the patent holder to fulfil its obligations and not think how the SEP holder’s duties could be utilised for defensive purposes in infringement proceedings. [383]

Accordingly, the Appeal Court found that an implementer is obliged to react even to an ‘un-FRAND’ license offer of the patent holder. [384] In ‘complex’ circumstances, like those typically present in SEP licensing, it is regularly not clear which terms are reasonable, so that it is the task of negotiations to ‘articulate’ the mutual interest of the parties and address any legal issues. [384] This is particularly true, given that FRAND is a ‘range’ and that the SEP holder can, as a rule, take the ‘justified interests’ of the implementer into account, only after respective insights are gained in negotiations. [384] The Appeal Court highlighted that the implementer should communicate any concerns as early as possible and not wait until proceedings are launched. [384]

In this context, the Appeal Court stressed that the implementer is (still) obliged to engage in the negotiation process, even when the SEP holder’s offer is ‘evidently’ not in line with FRAND. [385] In this case, it is, however, sufficient to indicate the reasons why the offer is ‘evidently’ not FRAND. [385] The implementer must address all concerning aspects towards the SEP holder. [385] The principle of good faith requires that all open issues are placed ‘on the table’ promptly; the implementer cannot focus on one ‘evident’ element which conflicts with FRAND and stay silent with respect to other aspects it equally considers as ‘un-FRAND’. [385] This applies especially to obvious aspects, e.g., the basic structure of the royalty calculation. [385]

Exceptionally, the implementer is not obliged to react at all, when the SEP holder’s offer conflicts with FRAND principles to a degree that – from an objective viewpoint – one can assume that it was ‘not meant seriously’. [386] For this, however, it will regularly not suffice that one single clause of the offer is ‘evidently’ non-FRAND; the Appeal court requires an ‘overall assessment’ considering all relevant facts. [386]

Against this background, the Appeal Court held that TCT had not been willing to sign a FRAND licence. [377] Although TCT had claimed that it was prepared to do so, its subsequent behaviour showed that the respective statements were not meant seriously and that TCT’s intention had been to delay negotiations and the signing of a licence for as long as possible. [377] In the view of the Appeal Court, the overall behaviour of TCT indicated that it gradually raised concerns against the offers received based on purely tactical considerations with the goal to delay the proceedings. [387]

The Appeal Court noted that TCT criticized the basic royalty calculation used by IP Bridge only after the (third) license offer of 30 April 2018, even though it had received a detailed presentation on the relevant parameters along with the first offer dated 1 February 2016, which was followed by further information afterwards. [388] According to the Appeal Court, there were no reasons why concerns against the royalty calculation were raised only (more than) two years after the first license offer was made. [389] The fact that the (third) offer of 30 April 2018 introduced the ‘top-down’ approach did not mark a new starting point in the negotiations, given that several calculation parameters (e.g., ASP, uniform rate for all licensees) remained the same. [390] Moreover, every new offer cannot ‘reset’ the negotiations back to the start, making the conduct of the implementer up to that point in time irrelevant for the assessment of willingness. [390]

What is more, the fact that, initially, TCT predominantly contested just one contractual provision concerning the adjustment of royalty rates was seen by the Appeal Court as a sign of unwillingness. [391] The Appeal Court did not finally decide whether said adjustment clause was FRAND or whether a single problematic provision could render the entire offer ‘un-FRAND’ (what the Appeal Court doubts), because an implementer like TCT, whose criticism of the SEP holder’s offer is limited to a single clause, violates the duty to engage in negotiations. [391] TCT was under such duty in the present case, irrespective of the fact that the District Court had indicated during the first instance proceedings that the adjustment clause in dispute was not FRAND. [391] The District Court’s remark did not release TCT from the duty to engage in negotiations with IP Bridge. [391]

Looking at TCT’s counteroffers, the Appeal Court observed that the latter was not prepared to negotiate with IP Bridge respectively to make economic concessions. [392] TCT used the (lower) ASP of its own handsets as the basis for the royalty calculation in all counteroffers made to IP Bridge. By insisting on this ‘maximum position’, TCT confirmed that it was not seriously willing to take a licence. [393] This did not change by the fact that in the first instance proceedings and ruling the District Court had supported TCT’s approach on the ASP: TCT was, nevertheless, not released from the duty to negotiate. [394]
 

SEP holder’s offer

The Appeal Court explained that, even if one would – for argument’s sake – consider TCT as a willing licensee, an abusive behaviour in terms of Article 102 TFEU on the side of IP Bridge would be ruled out anyway, since the (seventh) license offer of IP Bridge dated 4 March 2020 was, in any case, FRAND. [395]

First, the ‘top-down’ methodology applied for the royalty determination raised no legal concerns. [396] The same is true, according to the Appeal Court, also with the running royalties calculated on a per-unit basis offered by IP Bridge. [397] Licensing fees calculated based on the sales results of the licensee (price per-unit; fees based on revenue or earnings) are, in principle, ‘neutral’ from a competition law angle and, thus, acceptable. [397]

On the contrary, the Appeal Court stressed that ‘cost-based’ methods are rather unsuitable for the calculation of FRAND rates. [398] On the one hand, it is difficult to assess the costs associated with the development of a patent or a bundle of patents. [398] On the other hand, the costs incurred for the development of an invention are, in general, not appropriate for measuring its value: ‘Cost-based’ methods ignore that a decisive factor leading to an invention is mostly the ‘creative act’ of the inventor, not the costs. [398] The Appeal Court noted in this context that the price paid for the acquisition of an SEP cannot be qualified as costs for the production of the patent. [398]

Furthermore, the Appeal Court emphasized that the assessment of FRAND-conformity does not consist in an ‘isolated review of individual calculation parameters’ but should focus on whether the final license rate is FRAND. [399] The Appeal Court had no doubts that the rates offered by IP Bridge are FRAND, particularly since IP Bridge had concluded agreements on the same rates (including the identical volume discount regime) with three licensees. [400] The respective licences could be used as a benchmark, given that they were signed without litigation. [401] The fact that all existing licensees, which had very different sales figure, accepted the volume discount regime indicated that it was neither exploitative nor discriminating. [402]

In addition, the Appeal Court explained that the individual calculation parameters used by IP Bridge were FRAND as well. In contrast to the District Court, the Appeal Court raised no objection against the fact that IP Bridge used the annual worldwide industry-wide ASP as basis for the royalty calculation. [403] Features not linked to the wireless technology, such as the manufacturer’s prestige, brand, design, or high production quality are, indeed, included in the industry-wide ASP. However, particularly low-priced handsets are included as well, such as devices sold on dumping prices, or prices not considering SEP license fees. [404] The aggregate total royalty burden used for the royalty calculation was also not problematic, since it moved within the range previously accepted as FRAND by other courts. [405] Even if other SEP holders apply a lower percentage, there were no indications that the aggregate rate used by IP Bridge was exploitative. [405]

Furthermore, the Appeal Court saw no flaws in the way, in which IP Bridge calculated its own share of 4G-related SEPs. [406] IP Bridge had formed an average based on two different SEP landscape studies. The Appeal Court found that this was acceptable, given that both studies delivered similar results; what is more, IP Bridge was not under an obligation to rely on the study with the lowest result. [406]

The Appeal Court further accepted the fact that IP Bridge did not offer different rates for specific countries/regions, depending on the extent of patent coverage. [407] The uniform global rates proposed by IP Bridge did not render the license offer per se exploitative, since there were good reasons for choosing this option, for instance, an easier contract management. [408] The Appeal Court noted that it was irrelevant, whether an offer on such conditions could disfavour implementers, which have high sales in regions with low patent coverage: The SEP holder meets the duty to negotiate, if its offer is FRAND with respect to the 'average licensee’. [409] Only when the absence of different rates per country/region leads, in general, to ‘exploitative’ rates, an abuse could occur. [409] In the eyes of the Appeal Court, there were no indications that this was the case here, particularly since IP Bridge’s three other licensees had accepted the offer in the respective form. [409]

Besides that, the Appeal Court held that the volume discounts suggested by IP Bridge were also FRAND. [410] SEP holders are not obliged to offer a ‘uniform tariff’ to all licensees. [411] Discounts based on sales volumes lead to higher fees per-unit for implementers with lower sales, are, however, allowed when ‘factual justification’ exists. [411] The Appeal Court recognised that the SEP holder can have an interest to incentivise implementers to strive for higher sales, to achieve a broader dissemination of the standard and, consequently, acquire more licensees. [411] It can also be justified to offer particularly favourable discounts to ‘large and reputable’ implementers, since agreements signed with such companies could motivate other licensees to sign agreements as well. [411]

Looking at the royalty adjustment clause included in IP Bridge’s offer, the Appeal Court confirmed that this clause was FRAND. [412] Said clause allowed the licensee to contest the validity, essentiality and use of licensed patents and provided for a royalty adjustment, when ‘substantial changes’ (in both directions) occurred with respect to the licensed portfolio. That the adjustment mechanism was triggered only in case of ‘substantial changes’ was justified by the interest of the parties to avoid adjustments for negligible grounds, which the Appeal Court considered as worthy of protection. [412] Based on similar considerations, the Appeal Court accepted that a clause providing for an adjustment of the annual industry-wide ASP underlying the running-royalty fee model offered to TCT was equally in line with FRAND. [403]
 

Implementer’s counteroffer

Finally, contrary to the view taken by the District Court, the Appeal Court found that TCT’s counteroffer dated 11 March 2020 was ‘evidently’ not FRAND. [413]

In the present case, IP Bridge had repeatedly outlined its ‘general licensing model’ based on a per-unit royalty regime throughout the several offers made to TCT and had also shown that it had signed respective agreements with third licensees. [414] The Appeal Court held that, in such constellation, a counteroffer which requires from the SEP holder to fundamentally change the ‘licensing model’ is not FRAND. [414] In the license contracts signed, the SEP holder has agreed to specific conditions, which it must consider in negotiations with new licensees, in order to adhere to its dominant market position. [414] Indeed, according to the Appeal Court, the SEP holder could be accused of discriminating existing licensees, if it would agree a fee structure with a new licensee, which is fundamentally different than the model offered and used in license agreements so far. [414] Moreover, due to its dominant market position, the SEP holder could be obliged to offer the new license fee structure also to existing licensees, what would cause a complete shift of the ‘licensing model’. [414] The Appeal Court expressed the view that the SEP holder is under no duty to accept such fundamental change. [414]

Moreover, the Appeal Court noted that implementers do not need additional protection in this context. On the one hand, the acceptance of SEP holder’s ‘licensing model’ by other licensees indicates prima facie that it is in line with market conditions. [414] On the other hand, the SEP holder’s ‘licensing model’ must be FRAND with view to the specific licensee. This means that the implementer can contest all conditions of the ‘licensing model’, irrespective of whether other licensees have agreed to them already. [414] The implementer cannot, however, demand that the patent holder accepts a fundamentally different type of licence fees, even if its own (counter)offer is otherwise FRAND. [414]
 

  • [370] IP Bridge v TCT, District Court of Mannheim, judgment dated 21 August 2020, Case No. 2 O 136/18.
  • [371] IP Bridge v TCT, Higher District Court of Karlsruhe, judgment dated 2 February 2022, Case No. 6 U 149/20.
  • [372] Ibid, paras. 116-170.
  • [373] Ibid, para. 171.
  • [374] Ibid, para. 172.
  • [375] Ibid, para. 174.
  • [376] Ibid, para. 173.
  • [377] Ibid, para. 184.
  • [378] Sisvel v Haier, Federal Court of Justice, judgment dated 5 May 2020, Case No. KZR 36/17, summary available here; Sisvel v Haier II, Federal Court of Justice, judgment 24 November 2020, Case No. KZR 35/17, summary available here.
  • [379] IP Bridge v TCT, Higher District Court of Karlsruhe, judgment dated 2 February 2022, para. 176.
  • [380] Ibid, para. 177.
  • [381] Ibid, para. 178.
  • [382] Ibid, para. 179.
  • [383] Ibid, para. 180.
  • [384] Ibid, para. 181.
  • [385] Ibid, para. 182.
  • [386] Ibid, para. 183.
  • [387] Ibid, para. 185.
  • [388] Ibid, paras. 186 et seq.
  • [389] Ibid, paras. 188 and 190.
  • [390] Ibid, para. 190.
  • [391] Ibid, para. 193.
  • [392] Ibid, paras. 197 et seq.
  • [393] Ibid, para. 199.
  • [394] Ibid, paras. 199 et seqq.
  • [395] Ibid, paras. 203 et seq.
  • [396] Ibid, para. 206.
  • [397] Ibid, para. 207.
  • [398] Ibid, para. 208.
  • [399] Ibid, para. 210.
  • [400] Ibid, paras. 220 and 210.
  • [401] Ibid, para. 223.
  • [402] Ibid, para. 221.
  • [403] Ibid, para. 209.
  • [404] Ibid, para. 211.
  • [405] Ibid, para. 212.
  • [406] Ibid, para. 213.
  • [407] Ibid, paras. 215 et seqq.
  • [408] Ibid, para. 216.
  • [409] Ibid, para. 217.
  • [410] Ibid, paras. 218 et seqq.
  • [411] Ibid, para. 218.
  • [412] Ibid, para. 228.
  • [413] Ibid, para. 232.
  • [414] Ibid, para. 234.