The Orange Book: The relationship between patents and standards

by admin on 11 June 2009

The relationship between patent protection and standards is fraught with problems. Most standard setting organisations require participants in standards development to either renounce their rights to patent protection or, more commonly, to agree to license any intellectual property on a FRAND basis (fair, reasonable and non-discriminatory) basis. But what happens when a company produces a product, which complies with the standard but does not have a licence to use the intellectual property?

The German Federal Court faced the issue recently in a case (KZR 39/06 of 6 May 2009) concerning CD-Rs. CD technology was developed many years ago jointly by the Dutch company Philips and Sony. The technical parameters were laid out in several different documents with various colours on the cover, including for CD-Rs in the so-called Orange Book. Philips and Sony agreed to license the IP (patents) on which their technology was based. Neither Sony nor Philips were interested in exclusive exploitation; their aim was to have CDs adopted widely. In this they clearly succeeded.

Image credit: CC-BY-SA Bobbiemac on Flickr

Image credit: CC-BY-SA Bobbiemac on Flickr

There are, however, a number of producers or blank CD-Rs who have made no effort to obtain a licence and Philips, at least, has regularly pursued such manufacturers in the courts and through the customs authorities. One company defended itself to the hilt and maintained that its products did not infringe the claim and, if they did, then it was entitled to a compulsory licence since Philips’ behaviour amounted to an abuse of its dominant position (in the CD-R market). This defence – sometimes called the Euro-Defence – is founded in Art 82 of the European Treaty that prohibits anti-competitive practices.

The German Federal Court in the end decided that the patent was indeed infringed and also that the defence of anti-competitive behaviour did not apply. In doing so they made a number of interesting observations, which will be relevant in future, cases.

Firstly the Court clearly accepted that there was a potential defence and therefore supported the arguments of some lower courts in Germany. The Court rejected an argument that the provisions of the Agreement on Trade Related Aspects of Intellectual Property (TRIPS) on compulsory licences prohibited the raising of the defence. The Court clearly noted that the safeguards foreseen by TRIPS to prevent the arbitrary grant of compulsory license were clearly upheld here – the Court was not making an administrative decision but a judicial ruling that could be challenged in an appeal.

The Court emphasised, however, that for the defence to apply two conditions had to be fulfilled. The first condition was that the potential licensee had to approach the licensor for a licence and make an unconditional offer. Secondly the potential licensee had to behave as if it were paying the licence fee. This would mean, for example, that the potential licence would have to pay a reasonable fee into a trustee account and renounce its right for return of the funds. Interesting the Court did not seem to think that merely making provision for possible payment of the licence fees in the company accounts was sufficient – it was necessary to actually deposit the money in an account.

The Court emphasised that the offer had to be unconditional and reasonable. It had to be an offer that the patent holder could not otherwise refuse without discriminating against the potential licensee. In the case in hand the manufacturer of CD-Rs had indeed made an offer, but it was conditional on a Court holding that the products did in fact infringe the patent. This was not sufficient to be able to assert the defence.

Interestingly the Court made little comment about whether the patent in question was an essential part of the standard or not. The decision of the lower court was accepted that the patent in question would need to be worked by anybody producing CD-Rs in accordance with the Orange-Book standard. Nor did the Court go into any detail about the submissions concerning the alleged lack of enforcement by the patent holder. The Court noted that these allegations were not relevant to the case in question, since the defendant could not assert the defence for other reasons. It remains to be seen whether these facts could be used against the patent holder in future.

So what does this mean in practice? The decision is, of course, a decision by a German court based in part on German law and is therefore only directly relevant to Germany. However, the discussion of the effects of Art 82 of the EU Treaty will be at least of interest to other courts in the European Union. Clearly the Court is saying to users of standards that if you want to use intellectual property associated with a standard, you must make an attempt to obtain a license. Only if you are offered unreasonable terms can you assert the defence. It is probably also advisable to pay the money into an escrow account, rather than merely building accruals in the company’s books.

Case Reference: KZR 39/06 of 6 May 2009; Appeal on a point of law from a decision of the Upper District Court of Karlsruhe.

Image credit with links: CC-BY-SA bobbigmac and available on Flickr.

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Relationship between Patents and Standards – the Dutch Case
03.28.10 at 10:56 am

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andrew watson 06.23.09 at 7:42 am

Interesting case give our experiences in the 2G and 3G licensing fields. The commercial distinction for the licensee of actually paying its best estimate of the license fee into a segregated account versus making an accrual may drive the behaviour of actively seeking a license. Overall it feels like a pro-big company decision.

I would have liked the court to have tried to put some definition around what FRAND means in practice. As we found in 2G, there is a European FRAND, a US FRAND and an Asian FRAND at very different rates and FRAND can swing wildly over time, giving later licensees a competitive advantage of being able to supply at larger margins.

Whilst I agree with the essence of the decision, I’m disappointed that the court would leave the meaning of FRAND to be arbitrarily decided by the licensor.

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