Federal Supreme Court Rules in Orange Book Standard

Industry Standards and the Competition Law Defence
Acting Like a 'True Licensee'
Comment


On May 6 2009 the Federal Supreme Court rendered its judgment in the Orange Book Standard proceedings (KZR 39/06). While the grounds are yet to be published, it may be inferred from the court's press release that the decision will prove a leading decision regarding the competition law defence in patent infringement proceedings.

Industry Standards and the Competition Law Defence

Manufacturers of products that are required to comply with patented industry standards (eg, CDs or DVDs) inevitably risk infringing the rights of third parties. If the product is required to be standard compliant in order to be interoperable and saleable, it is likely that the subject matter of patents which are essential to the industry standard will be used. In recent years there have been a number of high profile cases in which the defendants did not seriously deny using the subject matter of such essential patents. Rather, their defence strategy relied upon the so-called 'competition law defence'.

In doing so, the defendants claimed that no patent infringement had occurred since, under competition law, they are entitled to a licence under fair, reasonable and non-discriminatory (FRAND) terms. Nevertheless, contrary to the prohibition against abuse of a dominant position, the patent owners had allegedly refused to grant licences under such terms and were therefore barred from asserting claims for patent infringement.

While consensus has been reached that reliance on the competition law defence is, in principle, permissible in patent infringement proceedings, the requirements for so doing are highly contentious. How detailed should the offer of the company seeking a licence under FRAND terms be? In particular, is it necessary to determine what constitutes a reasonable licence fee? If so, how? With its recent Orange Book Standard decision, the Federal Supreme Court went some way towards answering these questions.

Acting Like a 'True Licensee'

The court conceded that a licence seeker may have difficulties determining a reasonable level for the licence fee. It therefore held that offering the patent owner a licence fee to be determined at the owner's reasonable discretion may be considered a reasonable proposal in terms of the competition law defence. However, at the same time the court pointed out that merely making an offer does not entitle a party seeking a licence to use the subject matter of the patent. The alleged infringer may therefore rely on the competition law defence only if it acts as though a licensing agreement has already been concluded.

According to the guidelines set by the court, this implies that the party seeking a licence must:

• determine the reasonable licence fee objectively (ie, presumably based on common practice in the relevant industry or market intelligence);
• regularly render accounts; and
• pay, or at least deposit, (eg, into an escrow account) hypothetical licence fees.

Comment

In taking this pragmatic approach, the court wishes to spare patent dispute divisions from having to decide whether a licence fee may be deemed reasonable within the context of infringement proceedings. The issue of whether the actual fee demanded by the patent owner is reasonable can be resolved in subsequent proceedings. One thing is clear, however: a company seeking a licence is not permitted to use the subject matter of the relevant patent without first making an offer and, moreover, making or depositing reasonable licence payments. If the alleged infringer wishes to rely on the competition law defence it must act like a true licensee.

For further information on this topic please contact Thorsten Vormann or Anette Gärtner at Clifford Chance LLP by telephone (+49 69 7199 01) or by fax (+49 69 7199 4000) or by email (thorsten.vormann@cliffordchance.com or anette.gaertner@cliffordchance.com).