Much attention is recently paid to the proceedings of VoiceAge EVS v. HMD pending with the Munich Appeals Court (docket no. 6 U 3824/22 Kart) over patents declared essential to the speech-coding standard EVS, particularly since the European Commission filed an amicus curiae brief in an attempt to impact the generally patentee-friendly Munich FRAND case law.
Recently on October 30, 2024, i.e. one day before the oral hearing the court issued an order summarizing the court’s position on the FRAND defense. We summarize the court’s views and its implications for German SEP litigation and beyond.
Overview of Munich Appeals Court’s position
The court takes position on several aspects of the “FRAND dance” provided by the CJEU’s Huawei v. ZTE landmark decision, which requires the following steps:
- Infringement notice by patentee
- Implementer’s expression of willingness to conclude a license
- FRAND offer of patentee
- FRAND counter-offer of implementer
- In case counter-offer is rejected, adequate security by implementer
The Munich Appeals Court takes position on questions concerning several of these steps. In particular:
Earlier non-compliance with the obligations of the parties can be remedied later on to a greater extent than was previously accepted by, e.g. the Munich Regional Court. For example, filing a complaint for damages and information on past infringement is sufficient as infringement alert according to step (1) . Also, in case the patentee provides a first offer (step 3) the implementer can remedy the failure to express willingness (step 2) by reacting to the patentee’s offer and providing a counter-offer (step 4) and negotiating with the patentee. The patentee’s first offer (step 3) does not necessarily have to be FRAND if it starts a negotiation that leads to a FRAND offer later on.
A key message of the court’s order concerns the amount of “adequate” security to be provided according to step (5). According to the court a valid FRAND defense would be secured if it reflects the royalty amount according to the patentee’s last offer. If this offer was made for a global portfolio license and/or a lump sum, then the amount to be deposited has to cover the corresponding royalties. If the implementer has not provided such security then the court considers step (5 not fulfilled and will not review, whether the patentee’s offer was in fact FRAND.
Consequences for SEP holders and implementers
On the one hand the Munich Appeals Court has now clarified what many critics have long asked for: The very strict approach of the first instance Munich District Court does not hold. So far, the FRAND defense was in most cases dismissed because of the defendant’s alleged unwillingness to license. The Appeal Court’s new emphasis on the possibilities of rectifying the omission of earlier steps at a later stage will allow shifting the discussions away from defendant’s willingness towards whether the plaintiff’s license terms (and royalty amounts) are actually FRAND.
Whether a security actually has to be based on the patentee’s last offer – irrespective of this being FRAND– raises a number of questions. Practically, depositing such security may be very costly and burdensome. If the underlying royalty request turns out to be not FRAND, this leads to discussions on damages for the excess amount and the costs for this excess amount. Moreover, patentees may try to abuse this requirement to burden defendants with disproportionally high security requirements by making excessive royalty demands in their initial offer.
The aspect of the security deposit puts pressure on the implementer: A FRAND defense will work reliably if the security deposit is provided based on the amount of the patentee’s last offer. From an implementer’s perspective, this makes negotiation (particularly before the trial) especially important, since they can lead to a reduced offer from the patentee and thus also reduce the required security deposit.
Outlook: Decision on merits, UPC and EU Regulation
A judgement of the Munich Appeals Court, which may confirm the above-mentioned position of the court, is expected at the beginning of February 2025. Despite a certain change of the Munich approach to FRAND with this decision, this will likely not keep patentees from choosing this venue for SEP actions.
In parallel, the UPC is expected to develop case law on its SEP and FRAND approach and is expected to become an important venue in parallel to the German national courts.
Another parallel development is the draft EU regulation on SEPs, which was passed by the EU Parliament earlier this year and is expected to be discussed by the EU council in 2025. If passed as currently drafted, this EU regulation as such will likely not change the Munich’s approach to SEP cases.
Read the court decision in German
Read machine translation of the court decision
