German Federal Supreme Court decides in landmark case on competition law defence

01 October 2009

Dr Jörg Witting

This is an update following our article entitled “Landmark case on cartel law defence pending before German Federal Supreme Court” which was included in our Spring 2009 bulletin.  On 6 May 2009, the German Federal Supreme Court rendered its landmark decision in the matter of Orange Book Standard.  According to the Court, a compulsory licence defence based on competition law can be raised successfully in patent infringement proceedings if certain requirements are fulfilled: in particular, if the patent owner has inadmissibly rejected the defendant’s licence offer and if the defendant has acted in anticipation of its obligations of a future licence agreement.

Accordingly, the patent owner's claim for an injunction may be opposed by the defendant on the grounds of abuse of a dominant position.  The competition law defence is based upon the principle that, if the relevant patent is essential to the manufacturing and marketing of an end product, the patent owner must not block access to the respective product market by requesting excessive royalties or discriminating against a licence-seeking undertaking by charging it higher royalties than other licensees.  Whether or not such competition law arguments were admissible in German patent infringement proceedings had been highly disputed.  The main argument against its admissibility was that an undertaking manufacturing in accordance with a patented industry standard but without a licence could, in the case of an alleged abuse of a dominant position by the patentee, enforce its claim for a licence in separate antitrust proceedings.  Hence, the competition law defence had been acknowledged by the Federal Supreme Court only with respect to damage claims of the patent owner (KZR 40/02– Standard-Spundfass).

In the matter of “Orange Book Standard”, Philips had filed cease and desist claims against a manufacturer of recordable and re-writable compact discs (CD-R and CD-RW).  The patent in suit had become a standard in the so called “Orange Book” being part of the "Rainbow-Books": a set of technical standards officially admissible when producing CDs.  The Orange Book Standard includes patents that every producer of commercial CD-R or CDRW inevitably needs to make use of and which therefore puts Philips into a dominant position as regards the upstream licensing market.  Philips had granted patent licences to several undertakings on the basis of a standard licence agreement.  The defendant, however, produced and marketed CD-R and CD-RW without a licence, raising the defence that the royalties demanded by Philips were excessive and discriminating as other undertakings allegedly had received better conditions.

The Regional Court and Higher Regional Court had ordered the defendant to cease and desist from its infringement of the patent and the Federal Supreme Court upheld this decision.  The Federal Supreme Court, however, went on to lay down the principles of the competition law defence subject to certain preconditions, although in the case at hand these preconditions were not met by the defendant. Accordingly, in order to substantiate the defence, the Court held that:

a) the defendant must demonstrate that the patent owner holds a dominant position in the licensing market (i.e. that there is no alternative technology to the relevant patent);
b) the defendant has offered a licence at adequate terms in advance;
c) which the patent owner rejected;
d) and thereby discriminated against the defendant without objective justification.

This would constitute a violation of German and/or EU competition law.

However, such an abuse of a dominant position does not automatically result in the defendant’s right to make use of the patent in suit without compensation.  Rather, the Federal Supreme Court ruled that, in order for the competition law defence to be well founded and the ongoing usage of the relevant patent to be lawful, the defendant must act in anticipation of its obligations under a future licence agreement.  The defendant is required to report on the usage of the patent to the patent owner and pay adequate royalties.  Payment can be made to the patent owner or may be deposited.

Since the defendant may face difficulties when assessing the adequate licence rate to be paid or deposited, the Court has found it sufficient to leave open the licence rate in the defendant’s licence offer and leave the exact determination to the equitable discretion of the patent owner, subject to possible additional litigation in separate proceedings.  However, when doing so, the defendant must at the same time deposit adequate royalties. In this case, the claim for cease and desist can be dismissed by merely ordering that the patent owner is obliged to accept the defendant’s undetermined licence offer and to determine the exact licence rate according to its equitable discretion.

Conclusion
In summary, the decision can clearly be seen as a landmark case in that the Federal Supreme Court clearly considers the cartel law defence to be admissible in patent infringement and injunction proceedings.  However, it remains to be seen how patent courts will apply the preconditions for a successful cartel law defence that were set out by the Federal Supreme Court.

It is doubtful, though, whether these preconditions comply with EU competition law as they could be seen as an unjustified obstacle for the application of European competition law in general, and Art. 82 EC specifically.  Furthermore, it seems questionable that the preconditions set up by the Federal Supreme Court could apply also to important industry standards developed by standard-setting organisations where hundreds or thousands of patents by a large number of patent owners are involved.  Finally, the decision does not refer to a licence defence based on resulting contractual claims (e.g. such as FRAND commitments issued by patent owners during the standardisation process).  Therefore, a number of highly important aspects have not yet been clarified and it remains to be seen how the principle set out by the Federal Supreme Court will be applied by the competent patent courts in the future.

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