Confidentiality in FRAND negotiations
The parameters set by German landmark decisions on FRAND terms post Huawei/ZTE.
18 July 2019
In the Huawei/ZTE decision of 2015, the Court of Justice of the European Union ("CJEU") held that FRAND (fair, reasonable and non-discriminatory) terms should be the European standard when negotiating licences for Standard Essential Patents ("SEP"). The decision started an ongoing discussion about how and when to apply FRAND terms. The patentee must now show the court (or arbitrators in arbitration proceedings), why he thinks a licence is FRAND. Thus, he has to provide valid evidence and reference points, such as licences already granted which potentially contain highly confidential material.
Although a concrete decision on the interpretation of FRAND has not been issued by Germany's Federal Court of Justice since its Orange Book Standard decision in 2009, recent trial and appellate court decisions give some guidance on how to handle FRAND negotiations in Germany. Both appellate court instances, the Higher Regional Court of Düsseldorf and the Higher Regional Court of Karlsruhe, have applied Huawei/ZTE in consecutive steps to test for FRAND conformity where a licence is negotiated.
Most cases involve an SEP owner discovering a potential infringement and then seeking the infringer to cease-and-desist or take a licence of the standard bearing patent. This article outlines the necessary steps in order to comply with FRAND terms under German Law. Each step will be framed with the question: "What information do I want or have to provide the opposing party with?"
After an SEP owner discovers an infringing action, he needs to notify the infringer of the patent standard in question and the infringing action. Merely indicating that the infringing party manufactures products by using the standard is insufficient. Instead the patent owner needs to describe the technical function of the infringing product which uses the standard protected by such patents with respective claim charts. This should include a so called "proud-list", listing the 10-15 strongest SEPs as being part of a portfolio.
If the alleged infringer shows a willingness to enter into a licence, it is up to the patentee to make a FRAND offer. This must include sufficient information to allow the alleged infringer to judge whether the licence is FRAND. The Higher Regional Court of Karlsruhe rejected the need for the patentee to ensure that the alleged infringer can understand (based on objective criteria) why the offer conforms with FRAND requirements. However, it is advisable that the patentee does proceed in a way that explains this. As the patentee decides on the appropriate licence fee, he will need to be able to sufficiently explain himself if the infringer denies the offer on the basis it is not FRAND compliant. The benchmarks used by the courts to decide compliance are hypothetical references to (i) how a licence would look like if the SEP owner did not have a market-dominating position, and/or (ii) comparable licences already granted in the relevant sector.
In deciding whether or not the negotiations and their results have been FRAND, the courts tend to refer to licences that have already been granted to other parties. However, the disclosure of pre-existing licences can be problematic. Oftentimes existing licences will be subject to non-disclosure agreements or contain confidentiality provisions to protect critical information, such as trade secrets pertaining to the subscribing parties. Understandably, it is in the interest of the patentee to limit the amount of disclosure of such information to an alleged infringer.
The methods advanced by the Higher Regional Court of Düsseldorf give an idea as to how a patentee can comply with its FRAND obligation. A patentee must be aware that he cannot limit his disclosure due to the existence of any third party non-disclosure agreement. A patentee cannot contractually bind himself in such a way to avoid disclosure when there is an antitrust object involving compulsory licences. Therefore, to protect his interests and those of existing third party licensees, a patentee should make a specific request for the special protection of any confidential information in the proceedings.
Protection of Confidential Information
Where special protection is conferred, the alleged infringer should agree that any "highly confidential" materials are to be provided to legal counsel only, who is not permitted to disclose this information to its clients. Further, the alleged infringer should agree to sign a cease-and-desist letter with certain content. The guidance given by the Higher Regional Court of Düsseldorf on 17 January 2017 (docket number I-2 U 31/16) is that the letter should include the following:
(i) Non-disclosure of the information, unless the material is used in proceedings before the courts or arbitration institutions.
(ii) Provision of a "clean team", which can include up to 4 persons (in addition to legal counsel) who are allowed to review the confidential material on behalf of the alleged infringer. The clean team is to come to a conclusion as to whether the licence offered is FRAND.
(iii) Cease-and-desist declarations that are subject to a penalty in case of violation (here EUR 1,000,000 per violation).
(iv) A clause stating when information is no longer a valid trade secret or falls within the public domain.
As Germany does not have private proceedings held before a judge, the solution of the Higher Regional Court of Düsseldorf seems efficient and a feasible way to prevent the claimant from "all or nothing situations" while staying within the CJEU's framework of the FRAND procedure. In the event the alleged infringer refuses to give any cease-and-desist order, a court or arbitrator can, as a neutral third party, render a decision determining what disclosure mechanisms are appropriate and bind the parties.
Although an alleged patent infringement may raise numerous, difficult legal questions, especially those concerning the sufficient provision of information, the decision of the Higher Regional Court of Düsseldorf gives a well-positioned compromise. It is important to note that these provisions on confidentiality only pertain to FRAND conditions, not to the requirement for the patentee to sufficiently inform a potential infringer about the alleged infringement of a standard. It is up to the parties to negotiate and compromise in order to agree upon a cease-and-desist letter, or alternatively allow a neutral third party to determine appropriate measures when negotiating FRAND licence terms.
Key Take-Away Points.
- The obligation to make a FRAND offer can oftentimes conflict with the potential disclosure of confidential information.
- Disclosing existing FRAND licence agreements can be problematic. Patentees should know that they cannot rely on a third party NDA to avoid disclosure of certain information when there are antitrust implications.
- To protect their own interests and those of existing third party licensees, patentees can ask for special protection of confidential information in proceedings.
- Where an alleged infringer refuses to provide a cease-and-desist declaration, a court or arbitrator can render a decision determining what disclosure mechanisms are appropriate and bind the parties.