On April 27 2023, the European Commission proposed regulations which would transform the licensing of standard-essential patents (SEPs). This far-reaching and very flawed proposal is now pending before the European Council and the European Parliament.
There are plenty of reasons why the European Commission’s proposed SEP Regulation should be withdrawn and reconsidered. These include: the lack of empirical evidence justifying regulatory intervention; the lack of evidence that the proposed SEP Regulation will achieve its goals; the clear lack of balance; the failure to consult with industry and Commission stakeholders; the fact that it is not proportionate.
The very premise of the proposed SEP Regulation is also flawed. The are four main elements to the proposed SEP Regulation. First, there is a SEP register to count SEPs. Second, there are essentiality checks to eliminate false SEPs. Third, there is a process for aggregate royalty determinations. Finally, there are FRAND determinations which will allocate that aggregate royalty according to the share of SEPs that a SEP holder has. All of these functions will be managed by a competence center, the European Intellectual Property Office (EUIPO).
In other words, this is a simple exercise of dividing a pie according to each party’s share of SEPs. It is also an extraordinarily inaccurate method of valuation of SEP portfolios because it treats every SEP as having equal value. This is simply not true. Some SEPs cover fundamental technologies, others just engineering expedients. That is why such counting is not used in commercial SEP license negotiations and is frowned upon by courts.
We support the Commission’s objectives to provide greater transparency and predictability to the licensing of SEPs, but do not believe the proposed SEP Regulation will deliver on the Commission’s stated goals. In fact, we believe it will be an own goal for Europe. But the purpose of this article, however, is not to criticize the proposed SEP Regulation or its flawed premise. Rather it is to demonstrate how all four elements of the proposed SEP Regulation could be achieved in a way that is more practical, efficient, and effective while less costly and less disruptive to European innovators.
1 A counterproposal
1.1 Competence center
The European Commission has decided to create a competence center for SEPs at the European Intellectual Property Office (EUIPO). The EUIPO is poorly suited for this role.
The EUIPO is regional. Creating a regional competence center for: registrations; essentiality checks; aggregate royalty determinations; and FRAND determinations will prompt other regions to create parallel proceedings. This will unnecessarily multiply the administrative burden and costs of these procedures. It would be far more efficient to have a single, global competence center. In this regard, Standards Development Organizations (SDOs), which are global in nature, are much better suited to host a competence center. A global SDO like the European Telecommunications Standards Institute (ETSI) would not create regional fragmentation.
ETSI already maintains a database of SEPs. It would be a relatively simple task to upgrade the ETSI declaration database to include only SEPs which members believe are essential. This would require the members to update their database entries after the issue of essentiality becomes clear. Typically, this is after the standard is finalized and after the patent has been issued.
1.3 Essentiality checks
It is far from clear that essentiality checks will make SEP licensing more efficient. Essentiality checks are a necessary part of every patent pool to comply with competition law. If essentiality checks are a panacea for efficient licensing that the Commission suggests, then patent pools would be an overnight success. In fact, the Avanci pool for automotive licenses to cellular SEPs, which was launched in 2016, took several years to onboard a critical mass of licensees, even though essentiality checks were part of the process from the outset. And, by the time Avanci announced its expansion to cover over 80 auto brands in September 2022, the portfolios and rates had been validated in litigation.
Given the expense and administrative burdens of essentiality checks and given the lack of evidence of their utility and effectiveness to promote efficient licensing, we should adopt an incremental approach to such a procedure. Such checks should be voluntary. If they prove useful, they will be used.
1.4 Aggregate royalty determinations
To be clear, aggregate royalty determinations are not an exercise in transparency, they are governmental price setting. Nevertheless, if we want to produce an accurate aggregate royalty, there is a better way.
Aggregate royalties should be based upon the value that the standardized technology creates in a product. For example, one can look at the price of tablets or smart watches with and without cellular connectivity. That price difference will be indicative of the value of cellular connectivity for that product. Similarly, one can look at how much car companies charge their customers to use cellular technology in their vehicles as indicative of the value of that technology.
Thus, what is needed is annual information regarding the value a standard provides to various products. This is something that could be produced annually by the EU’s Joint Research Centre.
1.5 FRAND determinations
FRAND determinations are the final step in the proposed SEP Regulation for the determination of FRAND royalty rates. This is when the aggregate royalty is allocated according to the relevant share of SEPs. During this nine-month process the SEP holder cannot enforce its patents.
There is simply no reason why FRAND determinations cannot run in parallel to SEP enforcement proceedings. Modern courts are very flexible in the way they manage their dockets. If the proposed FRAND determinations produce valuable information, courts can choose to stay their proceedings if necessary. But it is more likely, however, that courts will first determine the technical merits (essentiality, infringement, and validity) while the FRAND determination proceedings run in parallel. Courts can then consider the FRAND determination in the damages phase of an enforcement action which generally occurs after the technical merits have been concluded.
As noted in the introduction, the European proposed SEP Regulation is problematic and should be withdrawn. Even if it is not withdrawn, there are simple changes that could be made to make it less disruptive to SEP holders.
First, the competence center should be moved to ETSI. This will prevent fragmentation. Second, the ETSI declaration database should be updated, as and when appropriate, to include more precise information about essentiality. Third, essentiality checks should be made voluntary. Fourth, aggregate royalty determinations should be replaced with annual reports produced by the JRC concerning the value that various standards provide to various products. Finally, FRAND determinations should be allowed to run in parallel with court proceedings.