The German Federal Supreme Court (BGH)’s ruling in IP Bridge v HTC (X ZR 123/20), issued at the end of January 2023 and recently published, will have significant implications for patent licensing in the cellular and IoT industry. The decision will shake up German law on patent exhaustion, and will very likely be of importance beyond just Germany, particularly at the Unified Patent Court (UPC).
In recent years, a number of patent holders have sought to limit exhaustion from the contractual agreements by which they grant companies upstream in the supply chain, such as chipset manufacturers, rights under their patents. By doing so, patent holders aimed to grant rights upstream and collect payments there, while at the same time retaining the freedom to conclude licenses downstream for the use of patents at the end level of supply chains, for example in smartphones or cars.
Covenants-not-to-sue and covenants-to-sue-last
After US courts decided that a so-called "covenant-not-to-sue" is ultimately nothing but a patent license when it comes to patent exhaustion, and thus is not suited to achieve that goal, certain patent holders looked for other workarounds. One idea practitioners came up with was a so-called "covenant-to-sue-last". With such a covenant, the patent holder promises to go after any other alleged infringer first, before taking aim at its contractual partner. The beneficiary of a covenant-to-sue-last gets promised that it will be the last one to be sued, hence the name. Particularly in the field of standard essential patents (SEPs) for cellular standards, certain patent holders and chipset manufacturers have adopted a regular practice of agreeing to covenants-to-sue-last, while the patent holders still sought licenses from OEMs downstream.
Some have questioned the fairness of this practice, and even if it should be possible: the practice of covenants-to-sue last would appear to lead to the patent holder receiving double compensation for the use of its patents from different levels of the same supply chain – which is precisely what the principle of patent exhaustion would seek to prevent. In Germany, one of the hotspots for SEP enforcement over the last decade, the issue has recently been litigated in a number of cases brought by Japanese non-practicing entity IP Bridge.
IP Bridge v HTC ruling
In the first case from these litigation campaigns to reach the BGH, Germany’s highest civil court has now called into question this practice of covenants-to-sue-last. In its decision of IP Bridge v HTC, the BGH decided that a covenant-not-to-sue has exhaustive effect and in that context draws level with US case law.
More importantly, the BGH also decided that even the “workaround” of a covenant-to-sue-last can lead to patent exhaustion. For each covenant-to-sue-last one would have to assess whether the patent holder would promise not to assert its rights against the chipset manufacturer. This assessment would require looking at the course of events normally to be expected and not just theoretical possibilities. If the question had to be answered with "yes", even a covenant-to-sue-last would have exhaustive effect. And that exhaustive effect could not only cover the respective chipsets marketed by the chipset manufacturer that signed the respective covenant-to-sue-last, but also end products, such as smartphones or connected cars that implement the respective chipsets.
However, the BGH did not decide what this will mean for IP Bridge’s covenants-to-sue-last with certain chipset manufacturers. Rather, it referred the case back to the second instance, the Higher Regional Court of Karlsruhe, to reassess the scope and content of the particular covenant-to-sue-last at issue. The industry will be watching closely what the Higher Regional Court of Karlsruhe has to say on these specific covenants-to-sue-last at issue in IP Bridge’s litigation campaigns.
