Limiting SEP Licensing to End Product Manufacturers to the Exclusion of Component Suppliers: Abuse of Dominance?

The German Regional Court of Mannheim dealt in Case 2 O 34/19 dated 18 August 2020 with Daimler’s alleged infringement of Nokia’s Standard Essential Patents (‘SEPs’) and found that Daimler was using Nokia’s telematic control units (‘TCUs’) in its cars without a licence. Daimler, being an end-product manufacturer, asserted that it procures TCUs from upstream component suppliers and that, thus, these suppliers should obtain the licence. Eventually, the Court reasoned that Daimler never exhibited willingness to obtain a licence and granted Nokia sought injunctive relief. The arguments raised by both parties were pertaining to the legality of Nokia’s conduct to solely license end-product manufacturers to the exclusion of component suppliers. The Court tried to evade this intricate but significant issue and rather assessed Daimler’s willingness to enter into a licensing agreement.

1. CJEU Reference and Intervention by FCO

While the dispute was pending before the Mannheim Court, Daimler filed a complaint with the European Commission alleging that Nokia’s conduct is abusive since Nokia’s inclination to grant the licence only to the car manufacturers stems from its desire to obtain high royalties based on each car sold by Daimler. If component suppliers became the licensees, the royalties would have to be paid in accordance with the income from the suppliers’ sales of TCUs, which would be lesser than what could be procured from Daimler’s car sales. Thus, on the one hand Nokia is not intending to license the suppliers, while on the other hand it has initiated a patent infringement action against Daimler for using suppliers’ unlicensed components.

Consequently, even the Federal Cartel Office (‘FCO’) filed an amicus curiae brief before the Mannheim Court, recommending to make a reference to CJEU regarding competition concerns. The FCO’s brief suggested a referral question asking whether SEP-holders have the right to decide which entity within a supply chain they will license to and which ones will be excluded. However, the Court refused to make a reference.

2. Illegality of Refusal to License at Component Level

There is no EU competition law precedent, specifying whether a dominant SEP-holder is under an obligation to grant a licence to willing component suppliers and not just end-product manufacturers, raising novel and unfamiliar issues regarding application of Article 102 TFEU.

2.1 FRAND Commitments of SEP-holders

Standard Setting Organizations (‘SSOs’) formulate licensing policies, enabling SEP-holders to voluntarily register their technology as a standard and making it available to the manufacturers of standard-compliant products. Once the SEP-holders give a commitment to license the technology on fair, reasonable and non-discriminatory (‘FRAND’) terms, it should be “available to any potential user of the standard.” [emphasis added]

Since component suppliers also employ the SEP protected technology for manufacturing standard-compliant products, which are further supplied to the end-product manufacturers, the term ‘any potential user’ certainly encompasses component suppliers as well. Thus, SEP-holders cannot deny licences to the component suppliers.

There is no special obligation upon SEP-holders to make their patents available within the framework of an SSO. Therefore, once SEP-holders voluntarily register their technology as a standard with SSOs, it amounts to a wilful commitment to license the technology on FRAND terms. A subsequent refusal to do so is clearly a violation of that commitment.

Furthermore, an undertaking to grant licences on FRAND terms “creates legitimate expectations” [emphasis added] on the part of third parties that the SEP-holder will actually grant licences on such terms, a refusal to do so, in principle, constitutes an abuse within the meaning of Article 102 TFEU.

2.2 Indispensable Character of SEPs

A refusal by a dominant owner of an intellectual property right to grant a licence is abusive in exceptional circumstances, such as refusing to supply a product which is “indispensable for carrying out the business” [emphasis added] in a neighbouring market. Since an SEP is essential to a standard established by an SSO, its use is indispensable to all the competitors in the market who envisage manufacturing the standard-compliant products. Therefore, upon refusal to license component suppliers, SEP-holders deprive them of a component (eg TCUs by Nokia) that is indispensable for carrying out the business in a neighbouring market.

Nevertheless, an argument can be raised that in order to carry out the business in the neighbouring market, the SEP-holder can directly license the car manufacturers instead of the component suppliers. In that case, licensed automotive manufacturers such as Daimler, by exercising their ‘have made rights’, can order the suppliers to make the licensed components for their own use. However, this practice would restrict the component suppliers to produce the components only for the licensed automotive manufacturers, as and when directed. They would never be able to trade in an open and competitive market, where the SEP-holder would be the sole supplier.

2.3 Elimination of Effective Competition

Another exceptional circumstance is when the refusal excludes effective competition in the neighbouring market. Upon refusal of license, SEP-implementers bear the “risk of being permanently blocked” [emphasis added] from access to the market for SEP-holders can always prevent SEP-compliant products manufactured by implementers from appearing or remaining on the market.

For the purposes of application of Article 102 TFEU, the expressions ‘risk of elimination of competition’ and ‘likely to eliminate competition’ are used without distinction to reflect the same idea that Article 102 TFEU does not apply only from the time when there is practically no more competition on the market. It is not necessary to demonstrate that all competition on the market would be eliminated. Mere likelihood to eliminate all effective competition on the market is sufficient to establish an infringement of Article 102 TFEU.

By licensing only end-product manufacturers, SEP-holders have the ability to reduce competition. This mere likelihood of elimination of effective competition is sufficient for the practice of exclusive licensing to fall afoul of Article 102 TFEU.

Conclusion

The Nokia v Daimler dispute is a case of missed opportunity. The Mannheim Court could have finally determined the legality of SEP-holders’ liberty to cherry-pick their licensees in a supply chain. However, with the aid of existing jurisprudence it can be inferred that SEP-holders are under an obligation to license all willing SEP implementers, which includes component suppliers, and a refusal to do so may constitute an abuse of dominant position under Article 102 TFEU.

Nevertheless, disputes like Nokia v Daimler call for a more coherent body of case law, succinctly crystallizing the liability of SEP-holders vis-à-vis the component suppliers in a supply chain. In a separate pending Nokia v Daimler case (Case 4c O 17/19), the Düsseldorf Regional Court has recently rectified the Mannheim Court’s mistake and finally referred these unresolved Article 102 TFEU issues to the CJEU.  Long-awaited legal certainty on exclusionary SEP licensing practices can be expected at the soonest.

Prerna Raturi is a Legal Associate at Samvad Partners.