First Decision of the UPC on FRAND Defense and FRAND Counterclaim in Panasonic v. Oppo: Setting New Standards in SEP Litigation?

On November 22, 2024, the Unified Patent Court local division of Mannheim (German original: UPC LD Mannheim, CFI_210/2023, machine translated English: UPC LD Mannheim, CFI_210/2023) issued its long-awaited first judgment on the FRAND defense and a FRAND counterclaim in a case between Panasonic and Oppo concerning patent EP 2 568 724, which was allegedly standard-essential for 4G. This decision provides a first insight how the UPC may approach FRAND determinations in SEP litigation.

I. Overview of the first UPC-Decision regarding FRAND Defense

The LD Mannheim (the “Court”) provides first insights on how the UPC may seek to apply the guidelines and assess the various steps in the “FRAND dance” established by the Court of Justice of the European Union (CJEU) Huawei v. ZTE.

Notably, the decision follows the approach of German and Dutch courts in many aspects and cites decisions of the German Federal Court of Justice, the Karlsruhe Higher Regional Court and the Court of Appeal of The Hague. It emphasizes the implementers’ obligation to act as willing licensee and make serious efforts to conclude a license.

Below, we summarize possible implications of this decision for SEP litigation before the UPC.

1. Infringement Notice

The Court emphasized that the infringement notice (step 1) should not be assessed in a formalistic manner. In the case at hand, the SEP owner had not provided a claim chart for the asserted patent, but merely for a Chinese counterpart. The Court found this sufficient, noting that any misunderstandings should have been promptly raised by the implementer.

2. Willingness to Take a License

The Court agrees with the European Commission’s amicus curiae brief that the implementer’s willingness to take a license marks the starting point for further negotiations and must be clearly communicated. However, it criticizes the strictly sequential approach in the brief, which advocates for a rigid step-by-step assessment of the negotiation processes.

The decision says that whether the implementer is willing to take a license must be assessed based on an overall evaluation of the circumstances and not in a formalistic manner. If the implementer shows serious willingness to enter into serious negotiations, the SEP owner has reason to provide an initial FRAND offer. Unlike in the UK, the implementer does not have to commit to be bound by a court-determined FRAND license.

3. Review of the FRAND Offers: Focus on both Parties’ Conduct

Regarding the SEP owner’s initial FRAND offer (step 3), the Court held that the offer must include substantive arguments why the requested rate is regarded as FRAND and not just provide a mathematical formula. While the offer need not be a finalized at this stage, it must present clear and comprehensible economic terms that enable the implementer to engage in meaningful negotiations.

The Court further emphasizes that its review of the SEP owner’s conduct will be based on the objections raised by the implementer during the negotiation process and the information provided by the implementer to the SEP owner. Delayed objections may be held against the implementer.

In the present case, the SEP owner’s offer was found to be FRAND-compliant. Even though key sections in the judgment regarding the license terms are redacted, the unredacted part shows that the Court placed significant emphasis on the implementer’s lack of willingness to engage in good-faith negotiations. For example, the implementer raised objections against the SEP owner’s offers for the first time during the proceedings, rather than addressing them earlier in the negotiation process.

The Court also found that at the relevant stage of negotiations, the SEP owner was not obliged to disclose comparable licenses. Moreover, the comparable licenses disclosed in the proceedings provide no indication that the SEP owner’s offer violated FRAND principles. The Court stated that FRAND represents a range or “corridor” of acceptable rates. The SEP owner is not required to offer the lowest rate within this corridor but must avoid deviations that cannot reasonably be justified.

Finally, the implementer’s counteroffer (step 4) was assessed and determined not to be FRAND-compliant. Details regarding the specific terms of this counteroffer remain redacted in the published decision.

4. Adequate Security and Implementer’s Obligations

In line with German case law, the Court clarified that an implementer must provide adequate security if its counteroffer is rejected (step 5). This also includes providing sufficient information on the extent of the use of the disputed SEPs, so that the sufficiency of the security can be confirmed by the SEP owner. In the case at hand, the bank guarantee provided by the implementer also suffered formal deficiencies, as the Court found that it did not protect the SEP owner’s claims in case the implementer becomes insolvent.

II. Dismissal of the FRAND Counterclaim

The implementer also filed a FRAND counterclaim, asking the Court to order the SEP owner to accept the implementer’s license offer or to submit a specific license offer or, in the alternative, to issue declaratory ruling confirming the implementer’s right to a license. While the FRAND counterclaim was found admissible, it was dismissed as unfounded because the implementer’s offer was not FRAND-compliant. The offer was not calculated based on the actual use of the patent and the limitation of the license to sales in the UPC territory was also deemed not FRAND-compliant.

The Court derived its jurisdiction from Article 32(1)(a) UPCA, reasoning that the core of the claim pertains to the right to defend against a patent by asserting a counterclaim grounded in antitrust law, which can override the enforcement of patent rights. Whether the admissibility of such FRAND counterclaims before the UPC will generally be acknowledged remains to be seen. The UPC’s reasoning in this field will likely be closely watched, given the interplay between patent and competition law.

III. Consequences of the Decision

This first UPC decision of the local division of Mannheim on FRAND defenses and counterclaims provides important insights into the approach the UPC may take with FRAND cases. If an appeal of the case is pursued, a UPC Court of Appeal decision would bind all UPC local divisions.

This first UPC decision grounds its reasoning in EU law, though it does not apply strictly the sequential assessment proposed by the European Commission. While the judgment is in line with German and Dutch case law to some extent, it introduces its own emphases, particularly in attempting to balance the behavioral obligations of both parties and assessing both offers.

The approach in this first UPC decision shows that an implementer can be injuncted if it fails to meet its FRAND obligations and the SEP is held valid and infringed. This possibility provides leverage in out-of-court negotiations and may lead to more SEP cases being brought in the UPC.