SEP lessons learned from Huawei v ZTE

A patent owner generally is able to exclude others from unauthorized use of its property. As a form of intellectual property right, a patent is deemed a compromise between the patent owner's voluntary disclosure of the invention and society's concession to limited exclusionary rights. Until recently, the exercise of the right of exclusion has rarely raised significant antitrust concerns. But the advent of standard essential patents (SEPs) in the field of telecommunications and the license disputes between SEP owners and technology implementers have brought to the fore the inherent discord between patent rights and competition laws. Because of the SEP owners' supposed market power that comes with the standardization, some have called for restriction on their right to seek exclusion in a legal proceeding against infringing technology implementers.

The European Court of Justice (ECJ) tried to tackle this issue in a dispute, coincidently, between two Chinese heavyweights, Huawei and ZTE. In this case filed initially with a German court, Landgericht Düsseldorf, Huawei accused ZTE of infringing its SEPs, and asked for a court order to, among other things, enjoin ZTE from further infringement. The issue that came to the ECJ was, essentially, whether and when an SEP owner can seek injunction in an infringement proceeding without breaching European competition law. In its decision, the ECJ set up a guideline for hypothetical negotiations which, if not followed by the prospective licensee, will place it at risk of an injunction. According to the ECJ, the SEP owner has to send a prior notice to the infringer that specifies its SEPs and how they were infringed, and provide a written offer in FRAND (fair, reasonable and non-discriminatory) terms for a license for its SEPs that specifies the amount of royalties and how it was calculated. If the accused infringer fails to diligently respond to that offer in accordance with recognized commercial practice, or otherwise fails to act in good faith, it is then permissible for the SEP owner to seek injunction in an infringement proceeding. While the ECJ rule places certain obligations on both parties, the guidelines will need to be fleshed out in future cases before national courts, including perhaps in the ongoing German case between Huawei and ZTE.

SEPs and antitrust concerns

The antitrust issue is not unique to the license of SEPs. Even in a broader context, the exercise of patent rights may give rise to antitrust allegations in some circumstances, and courts in different jurisdictions generally apply the same antitrust analysis in patent-related disputes as in other cases. Although a patent owner can often exclude others from practicing the same invention, the availability of alternative technologies and many different forms of market restrictions, in combination with the patent right's limited period of exclusivity and public disclosure requirement, often effectively prevent the patent owner from possessing monopoly power in the market.

The situation does become somewhat complex in the presence of SEPs. On one hand, the patents need to be used by all technology implementers that manufacture the standard-compliant products. Some have argued that standardization thus may bring extra value to the SEPs that did not exist had the patents not been incorporated into the standard. On the other hand, the SEP owner relies on the expectation of adequate and fair compensation for the use of its technology adopted by the standardization body. The SEP owner's ability to abuse its bargaining power in a licensing negotiation may further be limited by the FRAND principle (or something similar). Thus, when the negotiating parties have difficulty reaching a license agreement, the technology implementer may claim foul against the SEP owner's alleged anti-competitive behavior, whereas the SEP owner may complain about the technology implementer's unwillingness to accept an offer on FRAND terms.

The balance of power in SEP licensing

The technology implementers have argued for restriction of the SEP owner's right to seek injunctions against infringement. The theory goes that an SEP owner would be able to force the implementer to accept supra-competitive license terms for license of SEPs with the threat of injunction in an infringement proceeding. But it is questionable that a petition for injunctive relief would in fact tip the negotiation power for a license to the SEP owner's favor.