September 9, 2014
– Industry standards are indispensable for today’s technology driven economies. Every time we use a mobile phone to place a call, or connect a computer to the Internet at a café, we rely on standardized technology. Most standards are developed over years through the collaboration of numerous engineers from different companies — the result is a technical document explaining how to make products that can ‘interoperate’ with one another. As EU Commissioner Neelie Kroes put it: ‘Standards are the foundation of interoperability.’ Having products with the ability to interoperate is a huge benefit to product manufacturers and consumers, as long as standards are open and accessible for reasonable costs.
Unnoticed by the wider public, the Court of Justice of the European Union (CJEU) in the case Huawei v. ZTE will be hearing argument on 11 September on an issue important for the continued viability of open standards. The case will examine conditions under which an owner of a patent covering one aspect of the standard essential technology can seek an injunction which will most likely result in the entire standard becoming blocked. The CJEU’s ruling may have far-reaching impact not just on the telecommunication standard at issue, but also on technology available to consumers.
This is a complicated legal issue. In principle, agreements to standardize a technology restrain competition because picking one technology that all must use eliminates competition between alternative technologies, which on the surface violates EU competition law. However, EU competition law also acknowledges that standards are necessary and, on balance, beneficial — as long as they remain open to all users. This can pose a problem, if patents need to be used to comply with a standard. Such patents are known as standard essential patents or SEPs. As standards usually contain numerous technologies, they often affect hundreds or even thousands of SEPs held by a great number of owners. Theoretically, the holder of one single SEP can try to exclude everyone, including competitors, from using his patent — and thus the entire standard. The effect would not be theoretical, but have direct impact on consumers. Injunction orders would prohibit the sale of devices that use the patented technology, which means that established products could vanish from the market. Manufacturers would have to pass on their losses, and higher consumer prices would be the consequence. All achievements of the standardization process could be undone. In order to prevent that, standard setting organizations generally require SEP holders to commit themselves to license all users of the standard on terms that are fair, reasonable and non-discriminatory (FRAND). To keep the standard open, this commitment usually is a prerequisite, essentially a trade-off, for having a patented technology become part of a standard.
The pivotal question being presented to the CJEU is this: Can an SEP holder who made a FRAND commitment as part of a standardization process thereafter seek to block a user’s access to his standard-essential technology, if that user has declared its willingness to negotiate and take a license on FRAND terms.
Up to this point, courts have generally been reluctant to restrain patent holders’ freedom to decide whom they let use their protected technologies. As the core right of any patent holder, exclusivity is not to be dismissed light handedly. On the other hand, FRAND-committed SEPs present a special case. Were a court to prohibit the use of an SEP, standardized technology would no longer be ‘open’, thus breaching Art 101 TFEU and voiding the standardization agreement in the first place. Furthermore, the SEP holder, by the very nature of any technology standard, is a dominant undertaking under Art 102 TFEU and must grant FRAND-licenses. Applying for injunctive relief against someone who is willing to negotiate and accept a FRAND license would be an abuse of the SEP holder’s market power. It also would be inconsistent with the SEP holder’s past promises. After all, he or she provided a FRAND commitment upon which all SEP users had more than good reason to rely.
Under these circumstances, even the threat of an injunction would put SEP users under a Sword of Damocles and (thus) significantly shift the parties’ bargaining positions. To safeguard the legitimate interests of SEP holders, the law needs to make sure that SEP holders receive fair and reasonable royalties and that their obligations to grant FRAND licenses cannot be taken advantage of. Most importantly, SEP holders as well as standard users need a safe harbor for their negotiations. License applicants, who are negotiating honestly and faithfully, should not be exposed to injunctions. At the same time, SEP holders should have the right to apply for injunctions if they can prove that said applicants have not been willing to accept conditions that are objectively determined to be FRAND. These are the rules that should prevail throughout the EU. The CJEU should not miss this chance to put them in place.
(By Philipp Maume)