Green-Orange-Red, the German Orange-Book decision is putting industry on alert

downtown stoplight 3 packThe recent German Federal Supreme Court ruling Orange-Book-Standard (BGH, 5/6/2009 – KZR 39/06) seems to be a strong attack on one of the core features of intellectual property rights: the provision of an injunctive relief in (patent) infringement proceedings. In the context of standardized technology the Federal Supreme Court concludes that an injunctive relief is exposed to the widely known “competition law defence” under special circumstances. It may result in Germany being a NPE walhalla. However, there is light at the end of the tunnel for industry.

Industry standards in ICT-Industries are minefields, if they are covered by essential patents, covering technologies that must be used when building a standard compliant product. Thus, producers which are manufacturing standard compliant products would probably run the risk of patent infringement, if they had not licensed all essential patents in advance. Otherwise, the proprietor of an essential patent is in a comfortable position. Knowingly that a standard complaint manufacturing is impossible without infringing his patents, he can adjust the royalties for licensing to an exorbitant level without worrying about loosing his (potential) licensees: not to license the essential patent means for the producers to abandon the market at all.

For this reason the licensing behaviour of proprietors of essential patents was an all time object of investigation under Article 82 EC – not only by antitrust authorities, but also by those courts which had to rule on patent infringement in the context of standardization. Besides the ECJ decision in the matter of IMS-Health (ECJ, 4/29/2004 – C-418/01) also the German Federal Supreme Court in its decision Standard-Spundfass (BGH, 7/13/2004 – KZR 40/02) has acknowledged the option of a so-called “competition law defence”. This remedy enables the defendant to claim a “compulsory license objection” against the action for patent infringement. In short, the defendant claims by this objection that the proprietor of the essential patent was obliged under competition law to license his patents under fair, reasonable, and non-discriminatory (FRAND) terms, and that the actual licensing behaviour of the proprietor was an abuse of a dominant position under Article~82 EC.

According to the recent decision, Orange-Book-Standard, the compulsory licensing objection could also be applied against an application for an injunction, if the defendant had behaved like a “real licensee”. In particular, it is required that the (potential) licensee

  • has made an irrevocably offer to license under fair, reasonable, and non-discriminatory terms which could not be rejected by the proprietor of the patent without committing an abusive conduct under Article~82 EC, and
  • pays the reasonable royalty to the hypothetical licensor or deposits it into an escrow account for the time he uses or has used the technology covered by the patent without a license.

While the first requirement seems to be fulfilled pretty easily in similar cases, the hypothetical licensee will face major problems to fit the second requirement. Currently it is anything but clear what FRAND does mean at all and in particular whether a royalty rate is reasonable or not. Also the Federal Supreme Court evaded this issue in his recent ruling by conjuring forth this second requirement, which was obviously not fulfilled for the case in question.

The Court admitted that the hypothetical licensee may have difficulties arising from determining a reasonable royalty rate. Astonishingly, it gives the responsibility for determining the reasonable royalty rate back to the licensor and puts the fox in charge of the henhouse. The patent proprietor just returns in his initial position. It’s not very likely that the hypothetical licensee would be able to prove a lower royalty rate as more reasonable than the royalty rate demanded by the licensor. Therefore, it is very likely that the licensor will act as he did previously: demanding an excessive royalty rate without being afraid of loosing the injunctive relief to a competition law defence strategy of the patent infringer. The “strong” attack to the injunctive relief turns out as a scratch on the surface due to its high requirements.

Stephan Dorn