Is the licensing of Standard Essential Patents in the European Union about to undergo a drastic change?

On 27 April, 2023, the European Commission published a proposal that would drastically change licensing of Standard Essential Patents (SEPs) within the European Union (the Draft Regulation). The Draft Regulation and related materials are available online here.

The Draft Regulation had been the subject of discussion—and controversy—for many weeks after an earlier draft of the proposal was leaked. Although organizations such as the European Telecommunications Standards Institute requested that the European Commission delay publication of the Draft Regulation and enter into a fuller consultation period, the Commission declined, and instead released an amended version.¹

Background to the Draft Regulation

The European Commission recognizes the importance of standardisation in facilitating the development of advanced technologies, encouraging interoperability, and avoiding inefficient resource allocation, among other benefits. The Commission also recognizes, however, the power that is given to members of industry when standards setting organizations (SSOs) adopt technologies protected by patents in technological standards.

A company which supplies standard-compliant products, such a 4G enabled mobile phone, has no choice but to infringe the patents which are essential to that standard. If the owner of any one of those SEPs could obtain an injunction to stop that infringement without any requirement to grant a license, which would be the normal rule in many EU member states in non-SEP cases, then the whole system would be unworkable in practice. This is, in part, why many SSOs require holders of SEPs to undertake not to seek an injunction but instead to grant a license to any implementer who needs one on Fair, Reasonable and Non-Discriminatory (FRAND) terms. Of course, what constitutes FRAND license terms for a given portfolio of SEPs is highly controversial, and is a constant source of litigation all over the world.

Particularly as more products become connected—including for example connected IoT devices, automobiles, and medical devices—standardisation and disputes over SEPs are increasingly relevant to companies in industries that previously had little or no experience with these issues. The Commission seems particularly focused on the increasing impact on small businesses.

According to the Commission, the new regulation is necessary to:

1. Make available detailed information on SEPs and existing FRAND terms and conditions to facilitate licensing negotiations;
2. Raise awareness of SEP licensing in the value chain; and
3. Provide for an alternative dispute resolution mechanism for setting FRAND terms and conditions.

The Draft Regulation

The Draft Regulation would establish a new organization referred to as the Competence Centre, which would be part of the European Union Intellectual Property Office (the EUIPO). The Competence Centre will establish a register and electronic database of SEPs, and appoint “Evaluators” and “Conciliators” to carry out essentiality checks and make FRAND determinations.

The Draft Regulation has three important components.

1. SEP Register and Essentiality Checks: SEP holders and SSOs must notify the Competence Centre of standards and declared SEPs subject to FRAND commitments. If a patent is not recorded on the SEP Register in relation to a standard then the patent owner may not seek royalties or damages based on implementation of that standard in EU Member State courts until the point at which it becomes registered. Evaluators would also carry out so-called “essentiality checks” with a sample of patents from each SEP holder being selected annually by the Competence Centre to be checked. In addition to those selected by the Competence Centre, in any given year any SEP holder or implementer may propose up to 100 SEPs from different families to be subject to essentiality checks. The results of those checks would be published and recorded in the Register for each SEP.
2. Determination of an Aggregate Royalty: Groups of SEP holders may determine what they consider to be an “aggregate royalty” for implementation of a particular standard, which would constitute the maximum royalty due for infringement of all patents deemed essential to that standard. If SEP holders cannot agree, then a group collectively owning 20% or more of declared SEPs can ask the Competence Centre to appoint a Conciliator, who will publish a non-binding opinion of the aggregate royalty. The aggregate royalty will be entered into the SEP Register.
3. FRAND Determinations: An SEP holder or implementer may apply to the Competence Centre to appoint a Conciliator to determine a FRAND rate to license a declared SEP or, more likely, portfolio of declared SEPs. With limited exceptions, parties may not initiate infringement or FRAND determination actions in EU Member States before this process is complete (typically not more than nine months). The Conciliator may consider witness and expert evidence “provided that the evidence is necessary for the FRAND determination and that there is time to consider such evidence” and may conduct an oral hearing “if [he or she] considers it necessary.” According to the Draft Regulation, the default position is that the Conciliator’s FRAND rate would be global: “The FRAND determination shall concern a global SEP license, unless otherwise specified by the parties in case both parties agree to the FRAND determination or by the party that requested the continuation of the FRAND determination.”

Takeaways

The Draft Regulation leaves many questions unanswered. For example:

• It remains uncertain who would oversee this complex new regime at the EUIPO, and who would staff the important positions of Evaluators and Conciliators — judicial-type positions, with authority and responsibility for making highly-technical and complex SEP and FRAND determinations.
• There is no clarity as to what issues Evaluators would address when making essentiality determinations. For example, how would Evaluators construe the scope of claims and would they address the validity of proposed SEPs? If not, then the essentiality, aggregate royalty, and FRAND determinations will be questioned, as they would not ultimately opine on the actual strength or ultimate value of a patent or portfolio of patents. An invalid patent is neither essential nor valuable.
• It is not clear how the Conciliators would conduct a FRAND determination, but they are likely to lack the powers which make judicial FRAND determinations so potent. By way of example, in the recent UK decision in InterDigital v Lenovo, Mr Justice Mellor determined the FRAND licensing terms by analyzing 27 different licenses that InterDigital had signed with third parties in arms-length commercial negotiations. It is doubtful that the Conciliators would be able to do this, which calls the reliability and probity of any such valuation into question.
• Given the complexity of SEP and FRAND determinations, it remains unclear how quickly these new processes could move, particularly in complex disputes involving multinational companies with many thousands of declared SEPs. It is common for parties in FRAND license negotiations to accuse one another of diversion and delay, and the Draft Regulation provides another potential venue for parties to leverage and, potentially, to exploit.
• While the essentiality checks may serve to limit litigation in EU Member State courts, neither the aggregate royalty nor the FRAND determination would be legally binding, even in the EU. This means that if parties do not agree with the Conciliator’s determinations, then parties could commence court proceedings, which limits the usefulness and efficiency benefits of the entire regime.
• Nor is it clear whether this regime will apply to SEPs in all industries. For example, a new provision of the Draft Regulation states that the obligation to initiate a Conciliator FRAND determination before a court action “should not be required for SEPs covering those use cases of standards for which the Commission establishes that there are no significant difficulties or inefficiencies in licensing on FRAND terms.” Many are speculating that certain industries, such as telecommunications, will fall within this exclusion.
• Concerns have also been raised about whether the Draft Regulation is compliant with the EU Charter of Fundamental Rights. It was reported by ManagingIP that Klaus Grabinski, a senior German judge who will serve as President of the UPC Court of Appeal, raised this fear at a UPC inauguration event in Luxembourg on 30 May 2023. Mr Grabinski is reported to have said that “I fully support the commission’s aim to enhance transparency, but access to justice is a core fundamental right” although he did concede that “I have no doubt that the regulation will be fully compliant with the EU Charter of Fundamental Rights after it has gone through the [full] legislative process.”

While the Draft Regulation is still only a proposal and must pass through the Council of the European Union and the European Parliament before it becomes law, given the massive proposed changes to licensing of SEPs, both SEP holders and implementers should monitor it closely.

Footnotes

1 https://www.documentcloud.org/documents/23780757-dg-23-07_proposal-for-a-regulation-on-seps-etsi-views56.