Last April, the European Commission presented three regulatory proposals arising out of the IP Action Plan adopted in November 2020, which we discussed in a previous publication (https://vidalquadrasramon.com/en/essentiality-assessment-of-seps-and-plans-of-the-commission/). One of such proposals relates to standard-essential patents (SEPs).
Technical standards implemented worldwide, such as those relating to the different generations of mobile phone technologies (2G to 5G), rely to a large extent on patented technology. In order to achieve the widest possible dissemination of standardised technologies, SEP owners are encouraged to commit to license their patents on fair, reasonable and non-discriminatory (FRAND) terms and conditions. In return, SEP implementers shall pay a royalty for using the patented technology. This maintains a balance between the interests of SEP holders, which get a return on their investment, thus encouraging reinvestment in innovation and standards development, and those of SEP implementers, which get fair access to the patented technology and contribute to its dissemination.
The parties agree upon what constitutes a FRAND license for a certain portfolio of SEPs through bilateral negotiations. In most cases, these negotiations are successful. However, in some instances, parties resort to litigation to determine what FRAND terms and conditions would be in that case. The CJEU, in the landmark Huawei v ZTE (C-170/13) decision, established a legal framework for the resolution of these disputes that national courts have interpreted on a case-by-case basis. Despite this, the European Commission highlights in its proposal a lack of consistency in the rulings of courts of the Member States. According to the Commission, said inconsistency, together with the new challenges arising from the Internet of Things (IoT) and the problems that small and medium-sized enterprises (SMEs) in particular would experience in this context, justifies a new Regulation that, in fact, tries to solve an old problem: the lack of transparency and certainty in the SEP ecosystem.
The new regulatory proposal aims to incentivise innovation and the development of technical standards in the EU by adopting the following measures:
(i) The creation of a new Competence Centre within the EUIPO, with the objective of promoting transparency in the SEP ecosystem through the creation and maintenance of an electronic register and a database of SEPs (Arts. 3 et seq. of the proposed Regulation):
- Unregistered SEPs would not be enforceable before EU courts, and the SEP holder would not be entitled to receive royalties or seek damages for infringement (Art. 24).
(ii) The establishment of a system for conducting patent essentiality checks in which a sample of registered SEPs from different patent families with regard to each specific standard would be analyzed (Art. 3.2. c)).
(iii) The establishment of a system for determining the aggregate royalty for a standard, including the issuance of a non-binding expert opinion on the global aggregate royalty (Art. 3.2. f)).
(iv) The set up and administration of a procedure for the determination of FRAND terms and conditions (Art. 3.2. d)). This procedure would result either in an agreement between the parties or in a non-binding report from a third party (conciliator) determining what the FRAND terms and conditions would be. Such determination would be a mandatory preliminary step if the parties wish to take legal action:
- In the case of the SEP holder, prior to bringing a SEP infringement claim before a court in an EU Member State.
- In the case of the SEP implementer, prior to any request for the determination of FRAND terms before a court in an EU Member State.
In a nutshell, the Commission’s position is the following: greater certainty and transparency on SEP licensing would lead to more innovation in interconnected devices, thus boosting the economic growth of European companies, including SMEs. While these objectives are very laudable, the measures proposed by the Commission to achieve them, and therefore whether they would actually be effective, pose greater doubts.
In particular, we believe that an increase in transparency through the set up and administration of an electronic register and database of SEPs within the EUIPO should be welcomed. Such register may serve as a reference at the European level, allowing everyone to know which patents belong to which patentees, thus paving the way for smoother FRAND licensing negotiations.
However, prohibiting the patent holder from exercising the rights conferred by a certain SEP if it has not been registered is a different and much more controversial topic of discussion. This issue deserves an in-depth analysis that goes beyond the scope of this article.
In any case, this proposed Regulation would represent a sharp change in the way FRAND licenses negotiations are carried out in the European Union, especially in relation to perhaps the most important aspect: the price determination. Until now, the price (royalty) of FRAND licences was agreed in market-driven bilateral negotiations by the parties, who could resort to litigation in case an agreement could not be reached.
The new regulatory proposal provides an alternative FRAND determination, which would no longer be carried out through mere bilateral negotiations between the parties. Rather, a third party, in this case a mediator appointed by the EUIPO, would issue a report at the end of the FRAND determination procedure indicating what FRAND terms and conditions would be. It should be highlighted that, unless otherwise agreed by the parties, said report would not be binding. Likewise, the reports on the aggregate royalty rate and the essentiality checks performed would neither be binding. Therefore, the actual legal consequences that would be derived from such reports remain to be seen.
There are two aspects that we would like to highlight above all.
First, this FRAND determination procedure is aimed at favouring smoother FRAND license negotiations between the parties involved and avoiding the possibility of speedy patent litigation and, therefore, of “hold-up”, i.e., the possibility that SEP holders may extract excessive royalties from implementers due to the threat of obtaining injunctive relief. However, in our view, this Commission’s concern is already addressed by the CJEU in Huawei v ZTE by setting out the conditions under which an injunction should be granted and establishing that injunctive relief is not to be granted against willing licensees.
Second, this (mandatory) procedure that would take place at the EUIPO could significantly delay the possibility of bringing a patent infringement action, allowing SEP infringers to engage in “hold-out” behaviour, i.e., delaying the signing of a FRAND licence while using the patented technology.
In our view, if the European Union intends to maintain its role as a global leader in innovation in the ICT sector, and to achieve the goals of boosting innovation and economic growth, it should implement policies aimed at striking a proper balance between the interests of both parties, i.e., SEP holders and SEP implementers.
In any case, for the time being, only a proposal for a Regulation has been released, and it still needs to be reviewed and discussed by the Parliament and the Council. Therefore, the introduction of modifications or even a complete withdrawal of the proposal cannot be ruled out.