Security deposits and (partial) payment of licence fees in SEP litigation before German and other Courts

In its guidance order, the Munich Regional Court addresses many questions of the FRAND defence and develops its own approach which will likely shape the future of SEP litigation. 
The following article is an analysis of the court’s approach to the implementer’s obligation to deposit a security in course of negotiation. We will assess the necessity of partial payments of licence fees for the undisputed amount, as proposed by the Regional Court, and the potential shortcomings and practical implications of this approach.

The implementer’s obligation to deposit a security

According to the landmark decision CJEU’s Huawei v. ZTE dating back to 2015, the following applies: Where the implementer is using the teachings of the SEP before a licensing agreement has been concluded, it is for that implementer, from the point at which its counteroffer is rejected by the patentee, to provide appropriate security, in accordance with recognised commercial practices in the field, for example by providing a bank guarantee or by placing the amounts necessary on deposit. The calculation of that security must include, inter alia, the number of the past acts of use of the SEP, and the implementer must be able to render an account in respect of those acts of use. The Munich Higher Regional Court in VoiceAge vs. HMD recently adopted this approach and further required that implementer provides security for worldwide past and future sales based on the SEP holder’s demand.

The Munich Regional Court’s approach to security

In its guidance order, the Munich Regional Court claims that the deposition of a security was not a mandatory requirement under all circumstances for the implementer to be regarded as a willing licensee. On the other hand, the Munich Regional Court argues that the deposition of a security alone may not be sufficient in cases when it is undisputed between the parties that the implementer is obliged to pay licence fees and only the amount of such licence fees is disputed between the parties. In such cases, the Regional Court in its guidance order introduces the obligation for the implementer to make (partial) payment towards the patentee in the amount of the undisputed amount. The Regional Court argues that such obligation was in line with the CJEU’s Huawei v. ZTE judgment since the judgment would not expressly exclude payment of undisputed base amounts of licence fees. As to the Regional Court, depositing a security alone would not be sufficient in these circumstances since, among other grounds, the patentee could not use the deposited security for (further) investments in research and development. Interestingly, the Munich Regional Court, expressively states that it does not require the security amount covering worldwide past and future sales based on the SEP holder’s demand, as the Munich Higher Regional Court does. It leaves open, however, how the sufficient security amount is to be determined.

How would the UPC decide?

The UPC generally adopted the requirement for providing a security as set out in Huawei vs. ZTE in a decision by the UPC Mannheim Local Division dated 22 November 2024 (Panasonic vs. Oppo) and in a second decision by the UPC Munich Local Division dated 18 December 2024 (Huawei vs. Netgear). In line with Huawei vs. ZTE, according to the UPC, the implementer is obliged to provide information / to render accounts as well. Both decisions, however, do not further specify the precise amount to be covered or the basis for determining it. Neither of the decisions require (partial) payment of licence fees to be made by the implementer. However, it seems likely that the UPC would let the deposit of a security suffice and not require the implementer making partial payments to prove its willingness to license, as the UPC is bound to the application of the antitrust law in SEP cases as set out in Huawei vs. ZTE.

As far as can be seen, the UPC’s Court of Appeal has not yet dealt with the issue of depositing a security but it is to be expected that it will follow the approach taken by the Local Division Mannheim.

Viability of the Regional Court’s approach and outlook

From a legal point of view, the approach of the Munich Regional Court taken in the guidance order seems questionable for several reasons, inter alia:

• The Munich Regional Court's position that the Huawei vs. ZTE case does not preclude the payment of undisputed amounts may not fully acknowledge the fundamental antitrust basis of the FRAND defence. The appropriate question is not whether Huawei vs. ZTE allows partial payment of undisputed amounts. The pertinent question is whether the SEP holder can lawfully reject a suitable security instrument that meets the FRAND demand, without violating antitrust law. Huawei vs. ZTE provides a definitive response regarding the suitable security instrument for securing the FRAND licence fee: The instrument of choice must be in accordance with recognized commercial practices in the field. These practices include deposits and bank guarantees, such as the German instrument "Bürgschaft", according to Huawei vs. ZTE.
   
• The deposit of a security under German law is treated as having fulfilment effect (i.e. as if payment would have been made), if the debtor waives its right of withdrawal. This instrument is perfectly suited to a situation where the parties are in dispute about the amount of payment but not about the underlying obligation to pay. In its landmark decision Orange-Book-Standard, the German Federal Supreme Court required the implementer to fulfil the obligations of an actual licensee. That, according to the Federal Supreme Court, was necessary to avoid the unlicensed implementer benefitting from late payment. Rather, the unlicensed implementer should be no better off than the actual licensee paying the licence fees for actual use of the patent. This can be only reached by money (finally) leaving the implementer’s pocket.
   
• The Munich Regional Court turns this rationale when it now states that that licence fees serve the purpose of financing patentee’s investments in ongoing research and development. Licence fees, in a first place, however, serve the purpose of compensating for investments already made in research and development which ultimately resulted in granted patents for which the patentee is awarded licence fees. The licence fee remunerates the patentee for the use of the licensed technology. How the earned profits are used depends heavily on the business model of the SEP holder. Standards and SEPs do not serve the mere purpose of earning licensing fees for funding new research. It is thus not convincing that the court makes the necessity of payment depending on the concrete business model of some SEP holders and disregard the business model of other standardisation participants who contribute to standardization as there is a technical need and market demand for the standard.
   
• Therefore, the introduction of an obligation to make partial payment of licence fees is not legally advantageous compared to the deposit of a security, nor does it sufficiently reflect the legitimate interests of stakeholders in standardized technology and product markets. This issue becomes particularly controversial when two implementer SEP holders seek reciprocal licences under each other's SEPs.
   
• The guidance order merely states that it does not demand the requirements established by the Munich Higher Regional Court, according to which the amount of security to be deposited by the implementer shall be oriented towards a licence fee for the entire world. Besides, the Regional Court does not clarify what amount should be covered by an “appropriate security”. It remains unclear whether the Regional Court would let the deposit of a security suffice which would only cover licence fees for the EU or even for Germany alone. This is particularly true given that the Regional Court emphasises the importance of the rule that a SEP Holder cannot, by bringing proceedings before a national court, compel the implementer in territories outside the jurisdiction of such national court.

On top of these legal issues, the obligation to make partial payment of licence fees comes with several practical issues, inter alia:

• The partial payment of licence fees would have to be made without any (written) contract / licence agreement being concluded which will likely cause severe compliance concerns, considering the high amounts which would have to be paid to fulfil even partial payment obligations.
   
• Moreover, it is unclear what the equivalent value of the payment could be. Is it a partial licence? If so, what acts of use would be covered and why would the SEP holder accept such payment?
   
• Further, the Regional Court does not precisely determine under which circumstances partial payments of licence fees shall be due. According to the Regional Court, it depends on the degree of probability that payments of licence fees will be made. Such payments may be assumed in the case of large patent pools and offers by implementers involving substantial amounts. The Regional Court does not elaborate further what it deems to be “large patent pools” or “substantial amounts”. Hence, it is unclear when exactly the Regional Court would recognize an obligation to make partial payments fostering (legal) uncertainty.

Considering these legal and practical issues, it seems questionable whether other German Courts, let alone the UPC’s Local/Regional Divisions or the Court of Appeal respectively will adopt the Munich Regional Court’s approach. The UPC is strictly bound to the European Law, to which the UPCA refers first as source of law. In fields where the CJEU already ruled on the interpretation of the European Law, it will be difficult for the UPC to deviate from the CJEU’S interpretation without again referring questions to the CJEU. However, the German Courts as well as the UPC divisions will very likely discuss the concept developed by the Munich Regional Court which adds a further (legal) issue and increases complexity of the already highly complex field of SEP litigation.

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To read the full text order click here.