An SEP is a 'patent essential to a standard': it is impossible for competitors to make products that comply with that standard without using the patented technology. The owner of any SEP has undertaken to give licenses to third parties on fair, reasonable and non-discriminatory (FRAND) terms.
The owner must therefore write to potential infringers laying out those licensing terms and specifying the royalties due. It cannot bring an action for an injunction against infringement of the patent, or for the recall of products made using the patent, before making this written offer, or it will be at risk of being seen to abuse its dominant position, the CJEU said.
In return the potential infringer will only be able to argue that an injunction is abusive after it has responded "diligently" with a specific counter-offer if it does not accept the terms, it said.
In the case of Huawei Technologies v ZTE Corp, Huawei is the owner of a European SEP that is essential for 4G, or Long Term Evolution (LTE), mobile networks. In taking out the patent in 2009 Huawei agreed to grant licenses to other parties on FRAND terms.
In 2010, Huawei contacted ZTE about the alleged infringement of its patent, having found that ZTE was marketing products in Germany that use the LTE standard but was not paying a royalty. Huawei proposed "what it considered to be a reasonable royalty", the court said.
However, ZTE responded with a proposed cross-licensing agreement between the companies, and no offer was reached on a licensing agreement, the CJEU said.
Huawei then brought a case before the German Landesgericht Düsseldorf court for the infringement of its patent through ZTE's supply and marketing of LTE base stations in Germany. It asked for an injunction prohibiting the infringement of the patent, plus the recall of products, the rendering of ZTE's accounts to Huawei and an award of damages from the company.
The German court then passed the case to the CJEU for a preliminary ruling to help clarify whether Huawei was abusing its dominant position by bringing this action.
In its ruling, the CJEU said that an "appropriate and fair balance" has to be found, recognising that the parties have "equivalent bargaining power".
"The positions of the proprietor of an SEP and of the infringer ought not to make it possible for them to obtain excessively high royalties (a ‘hold-up’ situation) or excessively low royalties (a ‘reverse hold-up’ situation)," it said.
If the parties cannot agree following a counter offer, "the parties may, by common agreement, request that the amount of the royalty be determined by an independent third party, by decision without delay," the court said.
The case will now go back to the German court. The CJEU does not decide on a dispute itself, it said. "It is for the national court or tribunal to dispose of the case in accordance with the court's decision, which is similarly binding on other national courts or tribunals before which a similar issue is raised," the CJEU said.