A large mobile phone provider A holds a patent on a special encryption method that is an integral part of the international LTE mobile phone standard. Every manufacturer of smartphones, routers, or base stations must use this method to produce devices that meet the standard and can therefore be used worldwide.
Instead of granting licenses on reasonable terms, A strategically exploits its position. It refuses to grant licenses to competitors such as the manufacturer B at all or demands excessive license fees that far exceed the standard FRAND (fair, reasonable, and non-discriminatory) terms. A's goal is to block competitors economically and thus dominate the market alone.
In principle, it is solely up to the patent holder to decide on the use of his invention (freedom of contract). They can allow others to use it through a license agreement, but they can also reserve the use of the invention for themselves and exploit their monopoly position.
In the case of the LTE patent, this means that A, as the patent holder, has the sole right to decide who may use their invention. They could voluntarily enter into license agreements with competitors such as B, but they would not be legally obliged to do so.
Without any special additional regulations, A would therefore not be required to grant any licenses. He could refuse competitors the right to use the invention and thus effectively prevent them from manufacturing LTE-compatible devices. If B were to use the technology without a contract, he would be committing patent infringement and could be sued by A for injunctive relief and damages.
This is precisely where general freedom of contract reaches its limits. Since the technology is essential for the LTE standard on the one hand, but is blocked by A on the other, A is exploiting its significant market power in this market segment to the detriment of competitors and consumers, who pay for this corporate policy with higher prices.
In addition to voluntary licensing, there are cases in which a third party has a right to be granted a compulsory license. This is the case, for example, if the patent holder does not make sufficient use of their invention and this impairs the supply of important goods. Such situations are particularly relevant in times of crisis, for example when there are shortages of medicines or medical equipment. In such cases, the patent office can order a compulsory license. The party wishing to use the invention may do so, but must pay reasonable compensation to the patent holder.
If A did not have a patent on LTE technology, but on a vital medicine that is urgently needed in an acute crisis situation, a similar problem would arise. If, in this situation, A attempts to control or slow down supply by charging unreasonably high prices, this also constitutes abuse of its dominant market position.
In such a case, a compulsory license could be ordered. This would allow other manufacturers to produce the drug and bring it to market in order to ensure supply. A would retain its patent, but would not be entitled to block the market through artificial shortages or excessive prices. Instead, it would receive reasonable compensation, while the general public would retain access to the vital drug through the compulsory license.
Another basis for compulsory licenses arises from antitrust law, particularly in the case of so-called standard essential patents (SEPs). SEPs are patents that are essential for compliance with technical standards. Anyone who owns an SEP is obliged to offer licenses on FRAND terms (fair, reasonable, and non-discriminatory). If the patent holder refuses to grant a license or demands unreasonably high fees, the party wishing to use the patent can sue for a compulsory license.
In the LTE example, this means that the patent held by A on the specific encryption method is a standard essential patent (SEP), as it is essential for compliance with the international LTE standard.
Every supplier of smartphones or network technology must use this method if they want to bring LTE-enabled devices to market.
Under antitrust law, A is therefore obliged to offer licenses on FRAND terms (fair, reasonable, and non-discriminatory). If A attempts to exclude competitors such as B from the market by refusing to grant a license or demands unreasonably high license fees, it violates this obligation.
In this case, B can sue for a compulsory license and use the technology despite the patent. As a result, A loses the possibility of taking action against B with a cease-and-desist claim. Instead, it will only receive reasonable compensation. This prevents A from abusing its dominant market position to eliminate competition or make market access unreasonably difficult.
The obligation of the prospective user to make a serious effort to obtain a license in advance is essential in this context. Only when these efforts have demonstrably failed can the courts intervene and grant a compulsory license. In this context, the patent holder's right to injunctive relief also lapses: if he refuses to grant a FRAND license or imposes unfair conditions, he can no longer demand that the party wishing to use the patent cease doing so.
B makes serious efforts to obtain a license for the standard-essential patent from A. Without this license, B cannot manufacture LTE-enabled devices and would effectively be excluded from the market. However, A simply refuses to grant him any license—he does not respond to the attempts at negotiation and thus blocks access.
For the legal assessment, it makes no difference whether A completely refuses to grant a license or whether he offers a license but demands economically unacceptable fees that far exceed the FRAND level. In both cases, A fails to fulfill his obligation to grant licenses on fair, reasonable, and non-discriminatory terms.
The consequence is the same: B can sue for a compulsory license. In addition, A's right to injunctive relief is waived – he can no longer demand that B cease use. Instead, B will be allowed to use the technology on reasonable terms, but will only have to pay reasonable compensation, which can be determined by a court or arbitration.
The compulsory license thus fulfills a balancing function: it prevents a patent holder from blocking access to the market through inaction or abusive behavior in connection with standards, but also prevents a prospective user from starting to use the patented invention without even contacting the patent holder and entering into negotiations. At the same time, the payment of a reasonable license fee preserves the legal position of the patent holder.
In the LTE example, the situation can also tip in the other direction: B as a potential user, you know that you need a license to manufacture LTE-enabled devices. He also enters into negotiations with A, but deliberately makes only unreasonably low license offers that are far below the market standard FRAND level. B uses this tactic (“hold-out”) to gain time, bring devices to market without a license, and drag out the negotiations.
In such a constellation, the legal situation changes significantly. This is because the obligation to make a serious effort to obtain a license also applies to the license seeker. If they fail to comply with this obligation by not submitting realistic offers, they lose their protection against coercive measures. In this case, A can very well assert a claim for injunctive relief and enforce in court that B cease using the patented LTE technology as long as no FRAND license has been concluded.
This shows that the compulsory license is intended to create a fair balance of interests—it protects the licensee from abusive behavior on the part of the patent holder, but also protects the patent holder from tactical abuse of the negotiation obligation by the licensee.
A compulsory license is never free. Although the licensee obtains the right to use the patented invention, they are obliged to pay the patent holder reasonable compensation. What is considered reasonable depends on market conditions and the principles of FRAND licensing. If the parties cannot agree on an amount, the compensation is determined by a court or an arbitration tribunal in case of doubt. This ensures that the patent holder is compensated for the use of their invention without being able to abusively restrict the market access rights of others.
In the LTE case, B makes a serious effort to obtain a license for the SEP held by A. B offers a sum based on standard FRAND terms. However, A believes that it is entitled to significantly higher license fees and refuses to reach an agreement. B calculates the usage and pays A a reasonable amount. Finally, A sues for an injunction and higher payments.
The court examines the case and finds that B has fulfilled its obligation to seriously seek a license and that its offer was within the FRAND criteria. Therefore, A's injunction is dismissed and B is awarded a compulsory license. The court also sets the remuneration at a binding rate. If the court considers that the amount proposed and paid by B is reasonable, it rejects A's higher claims.
