SEP-users: take action now – EU Commission consults patent holders and users of standards regarding standard-essential patents
The European Commission is currently conducting a public consultation on standard-essential patents (“SEPs”) (see link). The Commission also issued a call for evidence for an impact assessment concerning the main problems identified by it as affecting the licensing of SEPs. These consultations will lay the groundwork for the Commission’s intended regulation of SEP licensing and enforcement. Both procedures will run until 9 May 2022.
The Commission defines SEPs as patents that protect technology essential to a standard. In order to include a patent in a standard, the respective patent holders must commit to licensing the technology protected by the relevant SEP to others on fair, reasonable and non-discriminatory (“FRAND”) terms and conditions.
Conflicts between SEP holders and standard users (SEP implementers) have steadily increased over the last decade. It is to be expected that these conflicts will continue to increase and escalate when it comes to IoT/5G. The Commission is now examining the issue and has launched a public consultation and a call for evidence for an impact assessment. With this initiative, the Commission has set itself the goal of creating a new framework for SEPs that provides fair and balanced general conditions for licensing. It aims to achieve this by combining legislative measures, such as a regulation, with non-legislative measures. The Commission already identified a need for action in its 2017 Communication setting out the EU approach to Standard Essential Patents (see link) (for more details, see also Gleiss Lutz, "Die EU-Guidelines zur Nutzung von standardessenziellen Patenten für das Internet of Things (IoT)" at link).
The Commission addresses the obvious problem that there are no databases with detailed, up-to-date and easily accessible information on SEPs. This leads to uncertainty about whether a patent is actually essential to the standard and which SEP is essential for which part of the standard. This uncertainty primarily affects SEP implementers, as they often do not know, when developing and launching their products, for which – and for whose – patents they would have to acquire a licence at all. This means that it is not possible – or very difficult – to determine the amount of any royalties beforehand or to factor these into the cost of product development.
The Commission therefore raises the question of whether and, if so, what information should be made publicly available by both sides (SEP holders and SEP implementers). For instance, the SEP holder could publicly provide information on possible changes of holder, product categories that use the standard, licensing programmes or standard FRAND terms and conditions. Patent pools could also make information publicly available – for example, the standards that form part of the pool, a list of certified SEPs, licensed products, existing SEP holders or licensees.
The Commission also points out that there is currently no “quality control” by independent third parties, for example to determine whether the patent is (still) essential. It therefore aims to establish to what extent checks by such independent third parties of whether a patent is in fact essential could be useful and beneficial and which authority or body would be best placed to carry these out.
A further objective is to eliminate uncertainties about which licensing terms and conditions qualify as FRAND. For SEP implementers, the lack of publicly available information on FRAND licensing terms and conditions makes it difficult to factor licensing costs into their business models. It also makes it harder for SEP holders to forecast their potential revenue.
The Commission therefore proposes granting judges and arbitrators access to confidential licence agreements in order to better determine FRAND royalties. It also aims to identify what impact implementing the same standard in different ways may have on FRAND terms and conditions – and, for example, what type of discounts could be granted without being discriminatory.
Where in the value chain should licensing take place?
The Commission explicitly addresses the question of where in the value chain licensing should take place and the potential consequences that may arise from choosing to license at a given stage. It looks at various potential structures, for example licensing at the beginning/end of the chain, at a given component level, or at the product level at which the most functions of the standardised technology are relevant, etc.
Insight into licensing negotiations
The Commission also wants to understand how licensing negotiations between SEP holders and SEP implementers take place. The first aspect concerns the length of licensing negotiations – that is, the time between first contact and the licensing of the patent – and the problems that arise during this period. In this context, the Commission also focuses on the different stages in licensing negotiations established in case law (declaration of interest in concluding a licence agreement under FRAND terms and conditions; written offer of FRAND terms and conditions from the SEP holder; response from the SEP implementer; etc.) and aims to establish how long each stage lasts and at which stages or under which circumstances there is still a need for clarification.
The Commission is also seeking information on the costs associated with determining which or how many SEPs potential implementers require (for example, the costs of searching patent databases, assessing the enforceability, validity and ownership of the SEP and whether or not it is essential). The question also arises as to why SEP implementers then decide not to use a standard (for example, because there are alternative technologies available under better terms and conditions, because royalties are too high, because the SEP holder refuses to grant a licence, or because the costs of negotiation and possible legal disputes are too high).
The Commission explicitly addresses “hold-out” (the opportunistic behaviour of SEP implementers who, for example, delay the conclusion of a licence agreement as long as possible or refuse to pay royalties until they are ordered to do so by a court) and “hold-up” (the opportunistic behaviour of SEP holders who exploit their market power to obtain excessive royalties or conditions). In practice, it is not always clear when a given situation can be considered “hold-out” or “hold up” behaviour, and the Commission describes a range of potential scenarios.
Finally, the Commission addresses the question of whether sufficient legal protection is available (in particular against “hold-out” and “hold-up”) and, if so, what practical problems may arise in connection with dissenting court rulings or injunctions. Ultimately, different courts may adopt different interpretations of both the concept of FRAND itself and the process for negotiating FRAND terms and conditions. The Commission also sees a risk of high enforcement costs or inefficient enforcement of SEPs.
The public consultation and call for evidence as part of the Commission’s impact assessment should be welcomed. They offer users of standards a good opportunity to draw attention to issues around SEP licensing negotiations and the legal disputes that may follow. Companies that are or may be affected should therefore participate in the consultation process while this is still underway to ensure that their concerns are heard. All major SEP holders are likely to take part in the consultations. It is therefore all the more important for SEP implementers, the users of the standards, to share their own experiences and contribute suggestions for improvement to ensure a balanced solution. We therefore strongly recommend that all users of technical standards complete the Commission’s questionnaire or respond to its requests for feedback.