Standard Essential Patents (SEP): is EU interventionism the solution, to ensure licencing negotiations on FRAND terms?

Standard Essential Patents SEP

Standard Essential Patents (‟SEPs”), despite only representing 2 percent of the total population of patents currently in force, are critical to the development of international standards, relating to technologies such as 4G, 5G, Wi-Fi, computer, audio/visual, in the ‟Internet of Things” ecosystem. Yet, SEP licencing is archaic, often requiring lengthy and draining court litigation to agree terms of Fair, Reasonable And Non-Discriminatory (‟FRAND”) use between SEP holders and SEP implementers. Of course, Small and Medium Entreprises, which increasingly implement standards based on SEPs in the ‟Internet of Things” ecosystem, are priced-out, and cannot negotiate FRAND terms with cash-rich SEP holders (think about all those royalties SEP owners are currently collecting right and left!). This state of affairs stifles innovation and breaches competition and antitrust law. So the European commission took the matter into its own hands, and passed its proposal on Standard Essential Patents in April 2023, which was then adopted by the European parliament in February 2024. Proposing ‟revolutionary”, yet state-controlled, sweeping reforms, such as setting up a competence centre at the EUIPO tasked with administering a SEPs’ registry and database, forcing SEP holders to register their SEPs in such EUIPO’s competence centre and mandating the EUIPO with carrying out essentiality checks and setting FRAND criteria, the proposed regulation is bold. So, how much market freedom and contractual freedom are SEP stakeholders prepared to collectively sacrifice, in order to increase transparency regarding SEPs ownership and FRAND royalties, as well as agency during negotiations of SEP licencing on FRAND terms?

1. What are Standard Essential Patents (‟SEP”)?

1.1. Background: what is a patent?

First things first: what is a patent?

Patents are governmentally awarded monopoly rights over new inventions that are industrially applicable. Products or processes may be patented but irrespective of the form of the patent, the product or process must satisfy the substantive criteria of the United Kingdom’s (‟UK”) Patents Act 1977 (‟PA 1977”). These are:

  • Restrictions as to subject-matter. There must be an invention, but not ‟as such” inventions or non-patentable inventions (Sections 1(2), 1(3) and Sch. A2, para. 3 PA 1977);

The same criteria exist under French law, pursuant to article L. 611-10 1. of the French intellectual property code, which provides ‟are patentable, in all technological domains, new inventions implying an inventive activity and susceptible of industrial application”. To these three positive conditions to the patentability of an intellectual asset (i.e. industrial character, novelty and inventive activity), a fourth condition must be added, which is the sufficiency of the description (since the non-compliance with this fourth condition triggers the invalidity of the patent title, which is the same sanction than in case of non-compliance with the three above-mentioned fundamental patentability criteria).

At the European level, the 1973 Munich convention, called ‟European Patent Convention” (‟EPC”), established a uniform patenting system for all countries signatory to the EPC (including the UK and France, which have both been signatories since 1977). In addition to providing a legal framework for the granting of European patents, via a single, harmonised procedure before the Munich-headquartered European Patent Office (‟EPO”), article 52 EPC provides that ‟European patents shall be granted for any inventions, in all fields of technology, provided that they are new, involve an inventive step and are susceptible of industrial application”.

In the UK, a UK patent lasts 5 years, renewable every year after the first 5 years’ period, up to a maximum of 20 years.

In France, a French patent can also be renewed for a maximum term of 20 years, but it is renewable each year at the anniversary date of the patent application provided that some annual renewal fees are paid.

At the European level, the maximum term of a European patent is also 20 years from its filing date. The patent may lapse earlier if the annual renewal fees are not paid (or if the patent is revoked by the patentee or after opposition proceedings, of course).

1.2. The rise and rise of Standard Essential Patents (‟SEP”)

A Standard Essential Patent (‟SEP”) is a patent that protects technology which is essential to implementing a technical standard.

A standard is an agreed or established technical description. It is also referred to as a ‟technical standard” or ‟technical interoperability standard”. These descriptions can cover ideas, products, services or ways of doing things and make sure different technologies can interact and work together. For example, mobile phones, wireless connectivity, navigation systems in cars and smart meters all use technical standards.

Technical standards are usually produced by Standard Development Organisations (‟SDOs”), such as the International Organization for Standardization (‟ISO”), the International Electrotechnical Commission (‟IEC”) and the International Telecommunication Union (‟ITU”), established for the purpose of creating standards, with inputs from industry and technical experts. Trade bodies, government organisations and similar entities can also create technical standards.

For example, regional standards bodies include:

Once a technical standard has been agreed, manufacturers are required to make their products standard-compliant.

In some cases, these standards require the use of specific technologies protected by patents. A patent that protects technology which is essential to implementing a standard is known as a SEP.

Without using the methods or devices protected by technical standards and SEPs, it is difficult for a manufacturer (or ‟implementer” of the standard) to create standard-compliant products, such as smartphones or tablets.

Intellectual property offices, such as the UK IPO, are looking at SEPs because not only are these offices responsible for granting patents – including SEPs, those patents that end up being declared essential to a technical standard -, but they also want to work hand-in-hand with their respective governments to foster an intellectual property framework which enables creativity and incentivises innovation, to become – or remain – global leaders of innovation.

So, patent holders are incentivised to declare their patents as essential to a technical standard, in order to gain access to the market and generate royalties. This could provide significant power to the SEP holder and to balance this, these SEP owners are obligated to offer their SEPs on Fair, Reasonable And Non-Discriminatory (‟FRAND”) licencing terms.

2. What is Fair, Reasonable and Non-Discriminatory (‟FRAND”)?

If a patent is declared essential to a standard (i.e. it is a SEP), the SEP owner agrees that the patent is subject to the FRAND declaration, i.e. that licences to the SEP will be granted on a Fair, Reasonable And Non-Discriminatory basis.

These FRAND terms denote a voluntary licencing commitment that SDOs often request from the owner of an intellectual property right (usually a patent) that is, or may become, essential to practising a technical standard.

In other words, a FRAND commitment is a voluntary agreement between the SDO and the SEP holder. Because a patent, under most countries’ legal regimes, grants its owner an exclusive right to exclude others from making, using, selling or importing the invention, a SDO generally must obtain permission from the patent holder to include their patented technology in its standard. So, the SDO will often request that a patent holder clarify their willingness to licence its SEPs on FRAND terms. If the patent holder refuses upon request to licence their patent that has become essential to a standard, then the SDO must exclude that technology.

Viewed in this light, the FRAND commitment serves to harmonise the private interests of SEP holders and the public interests of SDOs.

However, various judiciary courts have found that, in appropriate circumstances, the implementer of a standard – i.e. a firm or entity that uses a standard to render a service or manufacture a product – is also an intended third-party beneficiary of the FRAND agreement, and, as such, is entitled to certain rights conferred by that agreement.

3. Why are FRAND terms so contentious?

3.1. Anti-Suit Injunctions (‟ASI”)

In the case of SEPs, the first issue that confronts the patent holder and the company implementing the SEP is whether a licence has been asked, offered and/or granted on FRAND terms, and how the licence fee should be determined.

The judiciary court tasked with resolving such a dispute will often deal with multinational companies with worldwide operations and a worldwide interest in the determination of FRAND terms and the licence fee, not only in the country where the relevant court is located, but also worldwide.

Therefore, the court may determine licence fees on FRAND terms limited to the country in which it is located and the patents enforceable there, or it may determine licence fees on FRAND terms applicable worldwide between the parties.

In such cases, the common view of the courts in Europe and the United States of America (‟USA”) is that, since FRAND disputes are essentially contractual disputes, a global rate for the entire patent portfolio licenced under the contract in question can be determined by a single court.

In 2018, in the Unwired Planet v Huawei case, the UK supreme court held that it had jurisdiction to determine the terms of a global FRAND licence agreement between the parties, covering not only the SEP holder’s UK patents, but also foreign patents valid in other countries covered by FRAND commitments.

Similar judgments regularly continue to be issued, by China’s, the UK (such as the InterDigital v Lenovo judgment handed down in March 2023 and the Optis v Apple judgment handed down in February 2024) and US courts alike, where such courts have decided that they have jurisdiction to determine global FRAND terms and conditions in specific cases, even without the consent of both parties, which may have an impact on the European Union (‟EU”) industry.

However, the fact that the court of a certain country determines the licence terms that apply globally for the parties has led to the operation of different legal mechanisms. Indeed, in such disputes, while a dispute regarding the licence under FRAND terms is pending before a court in one country, the patent holder may file an infringement action in another country claiming infringement of the same patents. And while the parties have not yet resolved the ongoing litigation over a licence fee on FRAND terms, a preliminary injunction grounding on patent infringement may be granted by a court in another country. The legal mechanism that has started to be used for such situations is the Anti-Suit Injunction (‟ASI”), which we hear of frequently, especially in decisions of European and US courts. The ASI prevents the patent owner from filing a lawsuit in foreign countries or enforcing the preliminary injunctions granted by foreign courts in favour of the patent holder, pending the outcome of the litigation in the court in charge of determining the licence under FRAND terms, in first place.

The first notable ASI decision in a case concerning the determination of a licence fee on FRAND terms was handed down by the US district court for the state of Washington in Microsoft v Motorola case, in 2012. Microsoft alleged that Motorola breached its commitment to offer Microsoft a licence on FRAND terms. While this case was pending, Motorola filed a patent infringement lawsuit against Microsoft in Germany. The German court upheld the patent infringement claim and enjoined Microsoft from selling the infringing products in Germany. In response to the German court’s judgment, Microsoft applied to the US court just before the judgment was enforced and sought an ASI decision to prevent Motorola from enforcing the judgment in Germany. The US court granted the ASI to Microsoft, which prevented Motorola from filing a lawsuit that would enforce the judicial decision it obtained against Microsoft in Germany for patent infringement.

Crucially, ASI judgments are ‟in personam”, i.e. they bind the parties, not the courts. In the above example, the US court has issued an ASI that binds Motorola and has the power to impose sanctions on it within the authorisation and jurisdiction of the USA, in case of non-compliance.

In addition to this territorial limitation of ASI judgments, the parties litigating in the courts of another country may request the court deciding a FRAND case involving a global FRAND rate, to enjoin the filing or execution of its ASI – i.e. by obtaining an anti-anti-suit injunction (‟AASI”). Therefore, the extraterritorial effects of both ASIs and AASIs may unduly impede court proceedings. While ASIs and AASIs may in certain cases legitimately protect the interests that sovereign states have in undisturbed court proceedings, self-restraint should be exercised because each ASI/AASI contains the risk of escalation. There is rising awareness among policymakers that it is high time to implement internationally binding rules which ease these conflicts.

3.2. Existing situation: a combination of uncertainty and high transaction costs, according to the EU

There are no specific EU or national rules on SEPs, and so far they have only been subject to competition law limitations.

Meanwhile, market dynamics are changing. Standards based on SEPs traditionally used by producers of telecommunications equipment, mobile phones, computers, tablets and TV sets are increasingly implemented by small and medium-sized enterprises (‟SMEs”), active in the internet of things (‟IoT”) ecosystem. As a result, SEPs licencing is now more strongly oriented towards the growing IoT market, including automotive, smart energy (smart meters and smart grids), payment terminals, tracking devices, drones, medical devices, wireless charging stations and other products. Although SEPs represent only approximatively 2 percent of the population of the patents that are currently in force, SEPs licencing is increasingly crucial for those industries – such as communications, computer technology and audio/visual – in which technical standards have become ubiquitous.

In addition, while cross licencing is traditionally done by companies (i.e. companies are licencing their SEPs to each other), in recent times, pure SEPs holders and pure SEPs users have been entering the market at increasing rates. Indeed, some companies are incorporating standards into their products (without owning SEPs covering such standards) and others are focusing on licencing their SEPs (without making products incorporating such standards).

Within the EU, SEPs licencing and FRAND determination have been governed by rules and procedures developed in EU case law (including the Samsung, Motorola and Huawei v ZTE cases) and in the recently revised European commission guidelines on horizontal agreements.

However, in its 2020 intellectual property action plan, the European commission (the ‟Commission”) highlighted the existing dispute and litigation issues surrounding the licencing of SEPs, which is often a cumbersome and costly exercise for both patent holders and technology implementers (especially SMEs). Thus, the Commission announced that it considered reforms to further clarify and improve the framework governing the declaration, licencing and enforcement of SEPs. In addition, the SEPs Expert Group, set up by the Commission in 2021, found that some key policy questions – such as how to bring greater clarity to the SEPs’ landscape and how to develop FRAND terms and conditions, need thorough examination.

Against this background and following multiple public consultations in 2022, the Commission highlighted in its 2023 impact assessment that the overarching problem – a combination of uncertainty and high transaction costs – affects differently the behaviour of SEPs holders and SEPs implementers. SEPs holders, on the one hand, in particular those who pursue bilateral licencing, face two main challenges: lengthy negotiations prior to obtaining a SEP and a costly SEP licencing procedure. Implementers, on the other hand, encounter great uncertainty and prospects of much-higher-than-anticipated costs associated with the use of standards, potentially discouraging the implementation of these new technologies.

According to the Commission, there are a number of main drivers of the above problems, such as:

  • there is insufficient transparency regarding SEPs ownership (who owns the patents). Furthermore, it is not certain that all patents sought to be licenced are really necessary for implementing a standard (essentiality);
  • there is a lack of information about FRAND royalties, i.e. implementers with little or no expertise or resources find it impossible to assess the reasonableness of a SEP holder’s royalty demand, and
  • proceedings before national courts are time – and cost – intensive and are not adapted to FRAND determination.

The Commission believes that the above-mentioned problems have a strong impact on the market. First, existing SEPs holders face more price pressure and need to adapt their licencing model to the competition that new contributors (particularly Asian companies) bring to the standardisation process. Second, SEPs licencing in the IoT market may prove difficult and expensive, as IoT industries are not familiar with the principles of SEPs negotiations and FRAND determination.

In addition, the Commission points to different approaches taken by EU national courts (and UK courts) and concludes that it is difficult for them to handle SEPs-related cases and make detailed and consistent FRAND determinations, given the lack of transparency and the complexity of the issues at stake (for example, the essentiality checks).

As a result, both SEPs holders and implementers are likely to experience the following problem: loss of incentives to innovate; impaired sustainable competitiveness and impaired supply chain security.

4. What is the proposed SEP regulation from the European commission?

On 27 April 2023, the Commission published its proposal for a regulation on standard essential patents (the ‟Proposed regulation”).

The Proposed regulation aims to facilitate SEP licencing by increasing transparency about SEPs, reducing information asymmetries between SEPs holders and SEPs implementers and facilitating the agreement on FRAND licences. It would have a harmonising effect within the EU and consists of three main components:

  • setting up a competence centre at the EU Intellectual Property Office (‟EUIPO”), tasked with administering a SEPs’ registry and database, where SEPs holders would have to register their SEPs, on which the EUIPO would carry out essentiality checks and set FRAND criteria (the goal is that this will allow SEPs implementers to better understand the SEP ‟landscape”, possibly before putting relevant products on the market);
  • setting up a procedure to determine aggregate royalties for use of a given standard: SEPs holders would have an option to notify a proposed maximum total royalty (covering of SEPs holders) for a given standard, while SEP holders and implementers may request a third-party to make a non-binding recommendation as to the total royalty rate. It is hoped that this would create additional transparency and facilitate business planning, and
  • setting up a procedure to determine FRAND conditions: an expert-led out-of-court FRAND determination that would be mandatory (in the sense that one party can unilaterally impose it on the other) but non-binding in terms of its outcome. This process, which would be administered by a panel of third-party conciliators, would last for a maximum of nine months. During this procedure, but not thereafter, ASI injunctions are to be ‟off the table” in the EU, which, it is hoped, will facilitate FRAND negotiations. An important innovation of this process is that, unlike a typical court-based FRAND determination, it can be imposed by the implementer on the SEP holder.

Under the Proposed regulation, SMEs are exempt from essentiality checks. Whenever SMEs are SEPs holders, they may request a limit to the territorial scope of the FRAND determination of their SEPs. Furthermore, all other SEPs holders are encouraged to offer more favourable FRAND terms and conditions to SMEs, and to consider discounts or royalty-free licencing for low sales volumes (irrespective of the implementer’s size). Finally, the EUIPO’s competence centre would also provide training, support and general advice on SEPs to SMEs and raise awareness of SEPs licencing.

On 28 February 2024, the Proposed regulation was approved by a large majority at the European parliament.

While the Proposed regulation does not contain any potentially binding rules on the level of the value chain at which licencing should take place, the European parliament added, in what would be a non-binding interpretative recital, a statement that a FRAND licence should be available to any party seeking one, irrespective of the position of the potential licensee in the respective value chain.

For the Proposed regulation to become law, it still needs to be negotiated and approved by the 27 EU member-states, who will vote on a ‟qualified majority” basis, rather than on a ‟unanimity” basis. Therefore, potentially significant modifications to the Proposed regulation may still take place. As there is no fixed timetable for these discussions, the initiative may advance swiftly if there is broad consensus among EU member-states. But the Proposed regulation is controversial and will probably be subject to intense debate before EU member-states, which would delay the adoption process.

While SMEs and SEP implementers support the Proposed regulation, and its proposed measures to address the lack of transparency and fairness in SEP licencing, many SEPs holders are up in arms about such EU intervention in the SEPs/FRAND ecosystem by means of binding legislation which they find illegitimate. For example, Ericsson warns that the Proposed regulation departs from the inclusive consensus-driven approach by imposing different, new and untested procedures and could result in regional fragmentation as regards standards. Nokia believes that the Proposed regulation is flawed and would result in a lack of predictability and in reducing SEPs royalties, thus ultimately proving detrimental to EU leadership in 5G/6G. Even some academics have expressed criticism, with some of them calling the Proposed regulation unnecessary, disproportionate, likely to harm both EU innovators and the EU’s technology leadership on the global stage. Other experts welcome the Proposed regulation, which, in their view, will significantly increase transparency in licencing negotiations. They rebut the argument that it would reduce innovation and that the EUIPO is not up to the tasks for which it has been designated.

It seems to us, at Crefovi, that the Proposed regulation is a delicate balancing act, between the wants of the SEPs holders, and the needs of SEPs implementers – and in particular SMEs – with a view of boosting innovation and access to essential patented technologies without incurring draining litigation fees. Like the Digital Markets Act and the Digital Services Act, the EU Proposed regulation – if it is adopted – would have a significant ripple effect around the world (even in China, the UK and the USA), substantially impacting how FRAND terms are negotiated and agreed between stakeholders worldwide, even when such stakeholders are the ‟little guy”.

Crefovi’s live webinar: Standard Essential Patents (SEP) – is EU interventionism the solution? – 26 April 2024

 

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