Dominant Licensor Must Grant License In Germany
(but still holds the Ace of Trumps)

The Federal Supreme Court has confirmed (KZR 39/06 – Decision of the Federal Supreme Courts of Justice, 6.05.2009) that a defendant subject to patent infringement proceedings from a company holding a dominant position in a market, may validly maintain a so-called “compulsory licence defence” against issuance of an injunction, should the patent infringement involve technology essential to an industry standard, subject to the defendant having made an unconditional and reasonable attempt to obtain a licence.

In this case, a number of  manufacturers (Master & More, SK Kassetten, Global Digital Disks) of writable and re-writable CDs made use of a patent which Philips refused to licence to them. The patent covered the so-called Orange-Book industry standard for recordable optical memory device. Philips instigated patent infringement proceedings to which the defendants retorted with the defence that a compulsory licence should be granted on the grounds that there was no alternative to the patented technology necessary for their products to conform with the industry standard.
The defendants therefore insisted that Philips’ refusal to licence constituted an abuse of their dominant position within the common market, as stipulated under sections 19 and 20 of German competition law and Article 82 of the EC Treaty.

The Court acknowledged that such market-dominant patent owners are not permitted to discriminate against other companies, but held that such defendant companies may not automatically proceed in making use of the patent without providing compensation to the patent owner. Rather, should a licence not be agreed on, the patent users are nevertheless under obligation to behave like a proper licensee. The conditions for this laid out by the Court were that the compensation paid to the patent owner must be reasonable and that, in the event that direct payment cannot be made, such hypothetical licence fees should at least be deposited in an account accessible to the patent owner.

Applying this rationale to the present case, the Court deemed the offer of 3% of net sales, which was considered an appropriate royalty rate by the defendants, as not constituting “reasonable” compensation.

Furthermore, since the defendants had not even paid, let alone deposited any such funds, no further decision regarding the possible abuse of Philips’ dominant market position was required. Hence, the Court deemed the injunction against the defendants to be justified.

This decision outlines the German approach to enforcing Article 82 of the EC Treaty, but obviously bears relevance to other EU Courts.

Comment

It remains unclear as to what may be considered to be a “reasonable royalty” in future proceedings to comply with competition law and the relationship, if any, between such royalty rates and the “fair, reasonable, and nondiscriminatory” (FRAND) licence terms expected of the patent owner under agreements with standards bodies. Whether the decision is balanced is also contentious since as much as it is up to the patent owner to ensure that they adhere to competition law and demand a reasonable amount for a licence, it is equally down to a user of such patented standard-essential technology to meet or exceed these unknown expectations in order for their competition law defence to hold any validity. In practice a patent user is still in the dark about how close he has to go to match the patent holder’s licence demands in order to arm himself with a strong basis for proving that his offer is reasonable. In any case, such licence disputes may in future be resolved in separate proceedings to the patent infringement.