Appendix – National Law Considerations for Monetary FRAND Damages
Under § 139 of the German Patent Law (PatG), a patent owner may recover monetary damages from an infringer that intentionally or negligently makes use of the respective patent in the sense of §§ 9, 10 PatG.182 In order to determine the specific amount of monetary damages to be paid by the infringer, the patent owner can select between three different calculation methods pursuant to § 139(2) PatG. These ways of calculating damages can, however, neither be aggregated nor mixed.183
The first calculation approach, pursuant to § 139(2) PatG in conjunction with §§ 249, 252 of the German Civil Code (BGB), refers to the “difference in wealth” of the patent owner caused by the infringement (“Differenzmethode”).184 In order to be compensated, the patent owner has to show a financial loss and causality between this loss and the infringement.185 If the action seeks to recover lost profits, it is for the patent owner to prove that it could have obtained the amount of profits claimed in the absence of the infringing activity.186
The second calculation method, laid down by the third sentence of § 139(2) PatG, often called the “objective calculation of damages” and being widely used in practice,187 refers to the reasonable royalties that could be obtained from a third person for the use of the patent.188 The approach is based on the assumption that the infringer should compensate for the pecuniary benefits it obtained from using the patent-in-suit. The precise calculation should follow the hypothetical contractual terms that would have been agreed upon by reasonable parties taking into account all relevant factors for the determination of the patent value, such as a potential monopolistic position of the patent owner, the economic importance of the patent, customary royalties, royalties already agreed upon, or standardized licensing agreements.189
The third approach, formulated in the second sentence of § 139(2) PatG, concerns the recovery of the infringer’s profits. Since it is only a calculation method and not a stand-alone claim, it must be proven that the patent owner incurred actual losses.190 Furthermore, the owner can claim only those profits that effectively resulted from the patent infringement.191 As a general rule, the profits are calculated by subtracting the costs related to the patent infringement from the revenues of the infringer.192 However, according to the German Federal Court (BGH) the infringer is not allowed to deduct any fixed costs together with the production costs that are directly related to the manufacturing of the infringing product.193 Fixed costs can only be considered if they are exclusively related to the infringement.194 Other costs (“business-as-usual-costs”) that occur irrespective of the volume of production and supply as a consequence of the general business activity of the infringer are not relevant. The necessary evidence has to be provided by the infringer.195
Irrespective of the calculation method, courts are permitted to estimate the damages to be paid pursuant to § 287 of the German Code of Civil Procedure (ZPO) if the patent owner is not able to substantiate its financial losses.196 As a consequence, damages can be related to the royalties under a FRAND license, in particular where the patent owner selects the “license analogy method” instead of other available calculation methods. However, the patent owner is not prevented from claiming further damages exceeding FRAND royalties, under the condition that they correspond to the enrichment of the infringer.197
Important aspects of the relation between the level of royalties under a FRAND license and monetary damages for patent infringement were illustrated by the Düsseldorf District Court in Unwired Planet v. Samsung.198 As noted above, the Huawei obligations do not hinder a SEP holder from bringing an action for damages against an implementer and it can freely choose between said calculations methods.199 However, the CJEU requirements indirectly influence the extent to which compensation for past acts of infringement can be sought. If the implementer, having demonstrated its willingness to take a license, is able to raise a counterclaim according to § 33 of the German Competition Act (GWB), in conjunction with Article 102 of the TFEU, because the SEP proprietor, having made a FRAND declaration for the patent-in-suit, abusively refused to grant a license, monetary damages can be limited to the maximum amount of FRAND royalties for the period after the refusal.200 In Unwired Planet, no such cap on damages applied, because the standard implementer did not express his readiness to conclude a licensing agreement.201 In contrast to actions for injunction, abusive behavior of the SEP holder will not be assumed if it fails to provide an infringement notification.202
1 Legal Status of FRAND Commitments under Swiss Law
A Swiss court deciding the issue of damages for FRAND-committed SEPs will first have to assess the legal nature of the FRAND commitment that is made by the SEP holder to the relevant SSO under the applicable contract law that governs such commitment. By way of illustration, the ETSI IPR Policy203 provides a FRAND commitment by which the owners of standard-essential patents204 commit to make their patents available to willing licensees under FRAND terms.205 Section 6.1 of the ETSI IPR Policy provides that “[w]hen an ESSENTIAL IPR relating to a particular STANDARD or TECHNICAL SPECIFICATION is brought to the attention of ETSI, the Director-General of ETSI shall immediately request the owner to give within three months an irrevocable undertaking in writing that it is prepared to grant irrevocable licenses on fair, reasonable and non-discriminatory (“FRAND”) terms and conditions under such IPR .… ” Appendix A to the ETSI IPR Policy (entitled “IPR Licensing Declaration Forms”)207 contains different forms208 to be completed and signed by the owner of the relevant IP rights under which such IP owner is invited to make a formal and binding statement according to which “it and its AFFILIATES are prepared to grant irrevocable licenses under its/their IPR(s) on terms and conditions which are in accordance with Clause 6.1 of the ETSI IPR Policy … ”209
These documents provide that their “construction, validity and performance … shall be governed by the laws of France.”210 The legal issue is consequently to analyze the nature and the enforceability of the commitments (“undertaking”)211 that are made by the owners of the relevant SEPs to the SSOs under the applicable governing law.
By stating that the owners of SEPs are “prepared to grant irrevocable licenses”212 under their SEPs to third party implementers (in their formal undertaking that they make to the SSOs), the issue is whether third party beneficiaries can request the performance of such obligation, which in turn depends on whether these potential licensees (which have not directly entered into any contract with the owner of the relevant SEPs) can be considered as third party beneficiaries. This issue, which obviously depends on the interpretation of the relevant declaration under the applicable law, remains disputed,213 it being noted that granting – by contract – rights to a third party is generally admitted from a transnational perspective.214 Under French law, which is of particular relevance here (given that it is the law that governs the ETSI Declarations), the view has been expressed that the commitments made by owners of SEPs under the ETSI Declarations can qualify as “stipulation pour autrui” within the meaning of Article 1121 of the French Civil Code.215
Assuming that willing licensees (implementers of the technology standards covered by the SEPs) could be considered third party beneficiaries of these commitments under the relevant law, the next issue would be to define precisely the legal nature and the scope of the commitments made by the owners of SEPs: i.e., what is the contractual obligation that the owners of SEPs have accepted to perform for the benefit of the potential licensees and that such licensees could directly enforce as third party beneficiaries? The specificity and the difficulty of this analysis results from the finding that the relevant obligation does not consist of a straightforward – i.e., easy to identify and thus to enforce – contractual obligation.216 Quite to the contrary, the owners of SEPs commit to be prepared to license out their patents to third party licensees on FRAND terms and conditions, whereby there remains considerable room as to what shall constitute FRAND terms and conditions.217
Under Swiss law (assuming that it would apply), the commitment could be considered as an “agreement to conclude a contract” within the meaning of Article 22¶ 1 of the Swiss Code of Obligations (SCO), which provides that “[p]arties may reach a binding agreement to enter into a contract at a later date.” Pursuant to this provision, one contracting party can promise to its contracting party that it shall enter into a contract with a third party, so that such third party can subsequently request the performance of this obligation (as a third party beneficiary), i.e., it can request that the contract shall be entered into or claim damages for breach of such obligation.218 The validity of such a preliminary contract (i.e., the contract by which one party agrees to enter into another future contract) depends on whether the object of the contract is determined or is at least determinable.219
From this perspective, the enforceability of the obligation against an owner of SEPs (to execute a license agreement with a third party licensee) will depend on whether such obligation is sufficiently determinable in order to qualify as a valid contractual obligation, the performance of which could be requested and enforced.
If a Swiss court considers that (as a result of its interpretation of the FRAND commitment on the basis of the law that shall govern it) the FRAND commitment constitutes a binding obligation that could be enforced by an implementer against the patent owner and that would further prevent the patent owner from initiating any patent infringement litigation against an implementer including an action for damages, a FRAND commitment could limit or affect a patent holder’s ability to recover monetary damages from an infringing implementer of a standard. The reason would be that by bringing an action for damages against an implementer, the patent owner would be in breach of its contractual obligation resulting from the FRAND commitment and would thus be liable for the damages resulting from such contractual breach.220
2. Patent Damages under Swiss Law
As reflected in the Swiss case law221 and legal literature,222 Swiss law is characterized by the lack of a special legal regime that would specifically regulate the damages resulting from the infringement of IP rights. Under Swiss law, the financial consequences of an infringement of an IP right are governed by general tort law,223 which is regulated in the Swiss Code of Obligations (“SCO”).224 An IP infringement constitutes a tort that triggers the obligation to pay damages under the general principles of Swiss civil law, and specifically under Article 41 ¶ 1 SCO, which provides that “[a]ny person who unlawfully causes loss or damage to another, whether wilfully or negligently, is obliged to provide compensation.”225
According to case law, there are three methods to calculate damages resulting from an IP infringement under Swiss law:226 The first method requires the showing of an effective or direct damage (“effektiver oder direkter Schaden” according to the German terminology); the second method is based on the so-called license analogy (“Lizenzanalogie”); and the third method is based on an analogy to the income of the infringer (“Analogieschluss aus dem Gewinn des Verletzers”).
The first method – based on the showing of an effective or direct damage – generally presupposes to show that the income of the victim has declined as a result of the infringement activities.227
The second method – license analogy – means that the infringer has to pay damages that correspond to the level of royalties that reasonable contracting parties would have agreed upon in a license agreement.228 As reflected in case law, the second method aims at assessing the lost profits of the victim.229 The victim has the burden to show the damage in the form of lost license royalties that it has suffered as a result of the IP infringement. The victim must consequently establish or at least make it probable that it has lost licensing royalties as a result of the infringing activities. Quite interestingly, the Swiss Federal Court has specified that the amount of the royalties based on a hypothetical agreement between the licensor and the licensee must be established without reference to the appropriateness of the royalties:230 What counts in other terms is the royalties that the parties would have (subjectively) agreed upon in the relevant circumstances and not whether such royalties are (objectively) appropriate.231
The case law of the Swiss Federal Court is however very restrictive so that the method of license analogy for calculating the damages for IP infringement is extremely difficult to apply successfully for the victim/IP owner. In the leading case,232 the Swiss Federal Court refused to award damages for lost royalties in a case in which the IP owner had offered a license for a flat fee of CHF 90,000 to the infringer and in which the infringer refused such offer and subsequently started to infringe the patent. In this case, the Swiss Federal Court held that the victim/IP owner had not established with sufficient probability the damage that it would have suffered, i.e., it had not established that it could have obtained the license royalties.
The third method – analogy to the income of the infringer – is not based on damage suffered by the victim but is rather based on the disgorgement of profits made by the infringer.233 This method is based on Article 423 SCO, which provides (in the chapter “Agency without authority”)234 that “[w]here agency activities were not carried out with the best interests of the principal in mind, he is nonetheless entitled to appropriate any resulting benefits.”
On this basis and in light of the case law of the Swiss Federal Court defining the calculation of damages for patent infringement based on the method of the license analogy, monetary damages for patent infringement based on a license analogy could theoretically be granted even if such damages are not “appropriate”235 or reasonable. This could for instance be the case if the patent owner had successfully negotiated (but not yet signed) a license agreement with a third party with a very high royalty payment (which might not be appropriate or reasonable by objective standards) and if the infringing activity had caused such license agreement not to be entered into (for instance because the negotiating licensee would have stopped the negotiation because of the sudden appearance of infringing products on the market). If the IP owner could prove such facts with a sufficient level of probability, it could obtain damages in the amount of the lost royalties even if such royalties would not be appropriate or reasonable.
As noted above, a FRAND commitment can imply a contractual obligation for the IP owner for the benefit of the implementers (as third party beneficiaries). The key substantive element of such commitment is the obligation to license the relevant patents on fair, reasonable, and nondiscriminatory terms. On this basis, the first source for defining the meaning of “reasonable” is the FRAND commitment itself, which must be interpreted according to the methods of interpretation that apply under the law that governs the FRAND commitment (which may make it possible to take into account other sources that can be relevant for interpreting a contract/a contractual term). Under Swiss contract law, what prevails is the subjective intention of the contracting parties as reflected in Article 18 ¶ 1 SCO, which provides that “[w]hen assessing the form and terms of a contract, the true and common intention of the parties must be ascertained without dwelling on any inexact expressions or designations they may have used either in error or by way of disguising the true nature of the agreement.”
Assuming that Swiss law would apply to a FRAND commitment and that a dispute would be submitted to a Swiss court in order to decide the royalties to be paid under a FRAND license, the Swiss court would have to define the term of “reasonable” (as used in the FRAND commitment) by application of the usual methods of contract interpretation under Swiss contract law. As a result, a patent owner would have the right to receive FRAND royalties from an implementer at the level the court would consider “reasonable” based on its interpretation of the meaning of “reasonable” as used in the FRAND commitment. The Swiss court may in this respect be inspired to look at sources of international law236 or of foreign law from which it may be tempted to draw analogies in order to define the concept of “reasonable” royalties under a FRAND commitment.
In any event, in contrast to damages for patent infringement based on the method of license analogy, which may diverge from appropriate (or reasonable) royalties (see above), the royalties due under a FRAND license are in essence supposed to be “reasonable” (or appropriate). On this basis, it is unlikely that royalties paid under a FRAND license would be the same as monetary damages for infringement of the same patent and that “reasonable” royalties for FRAND purposes shall be the same as standard monetary damages for patent infringement under Swiss patent law in the scenario in which the FRAND commitment constitutes a valid contractual obligation. This reflects the difference between a contract-based royalty fee that is supposed to be “reasonable” under the FRAND framework and a tort-based damage corresponding to a lost royalty fee that is supposed to compensate the victim for the actual damage that it has suffered, whereby the damage may not be objectively “reasonable” provided that it can be established that such damage was incurred/was likely to have been incurred.
Unlike the United States, the typical measure of damages in Korean patent infringement suits is “total profits of the infringer” rather than “a reasonable royalty.” And when damages are calculated in the form of total profits of the alleged infringer, it is difficult to distinguish FRAND-committed SEPs from non-SEPs. This issue arose in Samsung Electronics Co. Ltd. v. Apple Korea Ltd.237 As long as total profits of the infringer are concerned, it is difficult for a court to reflect a FRAND commitment in calculating damages. Even in the case of “total profits of the infringer,” however, a general principle of remedies law requires the plaintiff to show some causal relation between the infringer’s profits and the infringement. Accordingly, the amount of actual damages is limited to the infringer’s total profits that are caused by infringing patents only. Once we take into account the causal relation between the infringer’s profits and the infringing patents, we have to face a difficult question of apportionment. The Supreme Court of Korea has struggled to determine what proportion of the whole product the infringing patents cover in terms of their quantity, quality, and price. It is difficult to prove the proportional quantity, quality, and price of one out of so many patents in a multicomponent product whether or not the patent is a FRAND-committed one.
Theoretically, royalties paid under a FRAND license may be the same as monetary damages for infringement of the same patent. Unfortunately, however, there is no judicial decision yet on this issue. As Seoul Central District Court noted in Samsung Electronics Co. Ltd. v. Apple Korea Ltd., it is almost impossible to get enough data on reasonable royalties for FRAND purposes simply because most licensing agreements are subject to an obligation of confidentiality and prohibited from disclosure of their terms and conditions.238
In Samsung v. Apple Japan, the Japanese IP High Court analyzed the patent infringement damages to which Samsung was entitled due to Apple’s alleged infringement of Samsung’s SEPs covering the ETSI UMTS standard.239 In its decision, the court held that Samsung was entitled to recover damages from Apple only up to the level of a FRAND royalty.240 Seeking damages in excess of a FRAND royalty could constitute an abuse of right unless a SEP holder demonstrates that the implementer had no intention of obtaining a license on FRAND terms, in which case damages in excess of the FRAND rate may be available.241
With respect to the FRAND level of royalties, the court first determined the percentage of the total value of the infringing products contributed by the UMTS standard.242 It then determined that an aggregate royalty rate of 5 percent should be applied to all patents covering the UMTS standard, based on an analysis of industry practices and prior royalty commitments made by the parties and other industry participants.243 It then found the FRAND royalty for an individual SEP by dividing the total royalty for UMTS by the number of UMTS SEPs identified by an independent third party (529 out of the total 1,889 SEPs declared to be essential to the standard).244
Thus far, courts in China have rendered judgments in three cases involving FRAND-committed SEPs. The first was the 2013 decision of the Shenzhen Intermediate People’s Court in Huawei Tech. Co., Ltd. v. InterDigital Commc’ns, Inc.,245 which involved InterDigital’s portfolio of Chinese patents essential to the WCDMA, CDMA2000, and TD-SCDMA 3G wireless communication standards. After negotiations between the parties failed, Huawei filed two complaints against InterDigital, one for violation of China’s Anti-Monopoly Law, and another requesting the court to set a FRAND royalty.246 The court concluded that InterDigital had breached its obligation to license its patents on FRAND terms and that, based on the royalty rates Samsung and Apple had paid InterDigital for similar licenses, a FRAND royalty rate for the patents-in-suit would be 0.019 percent of end-product prices. The decision was affirmed on appeal by the Guangdong High Court.247
Second, as discussed in Section 5.3.5 above, in Iwncomm v. Sony, the Beijing IP court issued an injunction for the infringement of a FRAND-committed SEP covering the Chinese WAPI standard relating to wireless networking.248 In addition, the court issued an award of monetary damages to Iwncomm, the SEP holder, in the amount of RMB 8,629,173. On the issue of monetary compensation, according to Shen and Ge:
The court fully adopted Iwncomm’s damages theory, citing the fact that the invention is a basic invention in the WLAN security field and that Sony was at fault during the negotiation. The court did not analyse in detail whether the licenses in evidence are comparable, merely noting that the territorial scope and duration of these licenses suggest that they can be referred to. Further, despite the fact that Iwncomm’s four licenses are all licenses for a portfolio of patents, the court held that the rate of 1 RMB per unit would be applicable for a single WAPI patent at issue.249
The court then (1) multiplied this rate by the number of infringing devices, and (2) trebled the resulting amount as permitted under Article 21 of China’s Patent Trial Guidelines.250 So understood, the decision does not appear to involve a judicial determination of a FRAND royalty as such, but rather simply a damages award.
Finally, as discussed in Section 5.3.5 above, the Shenzhen Intermediate People’s Court recently issued an injunction for the infringement of two FRAND-committed patents essential to the 4G standard in Huawei v. Samsung.251