In our previous post, Top-Down Returns: Judicial SEP Royalties vs Economic Reality, we explored Munich I Regional Court’s (Landgericht München I) methodology for calculating FRAND (Fair, Reasonable, and Non-Discriminatory) rates on the basis of a top-down approach. Today, we turn to a more procedural but equally impactful aspect of the recent judgment (case no. 7 O 5007/25): the court’s expectations regarding accounting provisions (Rückstellungen) for SEP use.
The Court’s Stance on Provisions
In its ruling, the 7th Civil Chamber addressed the issue of "settlement of past use" (Abgeltung für die Vergangenheit) and established a notable expectation for market participants. The court proceeded from the assumption that professional market participants understand that the use of standards like Wi-Fi 6 requires licensing.
Consequently, the court stated that, as a rule, companies can be expected to form provisions as soon as they begin using technology without a licence.
Judicial Reasoning: Prudence vs Refinancing
The court's reasoning for this expectation as well as the limits that apply to claiming licence fees for past acts of use are rooted in commercial diligence, yet the judgment simultaneously acknowledges a significant economic hurdle for patent users regarding refinancing.
- Manufacturers can typically only refinance licence costs by factoring them into the sales price for customers.
- For sales that are already completed, such a cost pass-through arrangement is no longer possible.
- A certain degree of protection for the SEP user is therefore warranted until the patent holder issues an unequivocal demand for payment.
The Link to the Infringement Notice and Public Signalling
A pivotal point in the judgment is the limitation of back-dated claims. The court found that for the period prior to a qualified demand for payment as well as for a subsequent reasonable period for price adjustments, licence fees cannot be demanded in full.
However, the court introduced a caveat: this protection may not apply if a patent holder has publicly signalled their intent to license, e.g. through industry publications or trade fair presence. From a legal and accounting perspective, this raises a critical question: are such "public signals" sufficient to establish the probability of a claim, which is what is required for a provision to be formed?
In many cases, general industry announcements are broad and do not target specific SEP users. If the court holds that back-payments are limited unless such signalling occurs, a company must assess whether these signals create an obligation that is concrete enough to justify a balance sheet entry before a notice of direct infringement or demand for payment is received.
Accounting Realities: The Basis in Sec. 249 German Commercial Code
The judicial expectation for early provisions of expected royalties for the use of SEPs must be weighed against the statutory requirements of commercial law. For this comment, we are limiting our analysis to Sec. 249 German Commercial Code (HGB), other accounting standards probably include very similar rules. Sec. 249 German Commercial Code reads:
Sec. 249 Provisions
(1) Provisions are to be formed for contingent liabilities and for anticipated losses on pending transactions. Furthermore, provisions are to be formed for:
- Expenditures for maintenance and repairs not performed in the financial year, insofar as they will be incurred retroactively within the first three months of the subsequent financial year, or expenditures for the removal of overburden that will be incurred retroactively in the subsequent financial year,
- warranty services provided without a legal obligation.
(2) Provisions may not be formed for other purposes than those set out in subsection (1). Provisions may be reversed only insofar as the reason for which they were formed has ceased to exist.
Based on these principles, the requirements for a provision in the context of use of SEPs are:
- Obligation to a third party: A potential claim for damages or licences must exist, which in patent cases usually stems from the unauthorised use of protected technology.
- Economic causation: The use of the patent (the "infringement") must have occurred before the balance sheet date.
- Probability of outflow: The claim must be probable, meaning it is more likely than not (over 50%) that the company will be held liable.
Under Sec. 249 (2) German Commercial Code, a company is prohibited from forming provisions for purposes other than those specified, such as purely internal, vague risks or general business risks. If the court suggests that claims for the period before an infringement notice are "generally not fully enforceable," the "probability" of a financial outflow for that period may be legally insufficient to justify a provision under accounting law.
Conclusion: A Solution-Oriented Alignment
From a solution-oriented perspective, it appears that the infringement notice under Huawei vs ZTE or a qualified demand for payment should serve as the decisive cut-off date for both patent law and accounting purposes.
Before this notice, the lack of "probability" of a claim, especially considering the court’s own restrictions on back-payments, makes forming a provision difficult on the basis of accounting standards. Once a qualified notice is received, the uncertainty transforms into a sufficiently concrete liability. Aligning the judicial expectation of forming provisions with the formal notice date would provide companies with the legal certainty needed to reflect these risks accurately in their balance sheets without violating the strict prohibitions of Sec. 249 German Commercial Code.
It is also noteworthy and welcome that the court has finally dispensed with the almost mantralike but hardly defensible dogma in the SEP context that a patent user must proactively seek a licence before commencing use. The court has now clarified that it is the responsibility of SEP holders to enforce their rights. This is appropriate: by submitting a FRAND declaration, the SEP holder makes it unequivocally clear that it desires immediate use of the standardised technology covered by its SEPs, with licensing questions to be addressed subsequently, as the desired fast and widespread adoption of a standard would not be attainable otherwise.
It remains to be seen whether this also signals a complete departure from the notion of negligence based on commencing use of a yet unknown SEP without prior licensing in the SEP context, a possibility that the decision does at least hint at. Such a development would be highly welcome from an implementer’s perspective, given that the often substantial and challenging to refinance past-release-payments demanded by SEP holders are typically the main obstacle to swift licence negotiations.
