The European Commission provides guidance on SEP licensing but leaves open issues

On November 29, the European Commission published its long-awaited “Communication setting out the EU approach to standard-essential patents” (SEPs). The stakeholders were expecting from the Commission in-depth guidance on the definition of fair, reasonable and non-discriminatory (FRAND) terms in the context of SEP licensing. However, the Commission did not address all the open issues, leaving room for continued legal uncertainty on the exact meaning of FRAND.

More transparency on essentiality and patent validity

In order to enhance transparency on essentiality and validity of SEPs and make the negotiation smoother, the Commission suggests that standard-setting organisations (SSO) should push their members to make court rulings regarding essentiality and validity of litigated SEPs accessible.

Moreover, SSO are encouraged to charge (modest) fees in case declarations of essentiality are confirmed after standard release and patent grants, so that SEP holders are incentivised to maintain only relevant declarations. Indeed, most of the SEP-holders submit their declarations of essentiality on the initial patent applications at the beginning of the standardisation process, and the patent claims under the final patent granted after adoption of the standard can differ considerably, as their content may change during the granting process. Since implementers, especially SMEs, are unlikely to dispute declarations of essentiality regarding SEPs, the Commission argues that the above policy might boost trust among the parties.

Ultimately, the Commission will launch a pilot project to introduce scrutiny mechanisms on the essentiality of SEPs. In this regard, patent offices may well be natural candidates for exploiting synergies and reducing cost. Depending on the outcome of this project, an independent European body could be tasked to proceed with SEP essentiality assessment.

General licensing principles

According to the drafts circulated prior to the release of the final version, the European Commission was supposed to explicitly allow SEP-holders charging different royalties for the same technology based on the value of the final product (so called “use-based licensing model”). However, the final version has been amended on this point and suggests that reasonable licensing fees should be calculated upon the value of the patented technology irrespective of the market success of the end-product.

Another major switch from the Commission occurred with reference to the non-discrimination principle. Indeed, while the early versions of the communication circulated in the past months included a provision forcing SEP-holders to license their technology at all levels of the value chain, and therefore also to component-manufacturers (so called “license-to-all” clause), the final version does not mention anything in this regard. This is a significant amendment, since otherwise, in light of the exhaustion principle, manufacturers of final products (i.e. smartphones, tablet) might have avoided getting licenses, opting to buy components including IP rights. The old version would have significantly devalued SEPs.

According to the new wording, SEP-holders should simply refrain from discriminating between implementers that are similarly situated.

Further to that, the Commission stresses that in defining a FRAND value, parties cannot consider an individual SEP in isolation and need to take account of a reasonable aggregate rate for the standard, also by means of tools like patent pools and licensing platforms.

Moreover, the guidelines endorse worldwide licences for SEPs covering products with a global circulation, since they may contribute to a more efficient approach and therefore can be compatible with the notion of FRAND. For these SEPs, a country-by-country licensing approach may not be in line with a recognised commercial practice in the sector.

Litigation

On this issue, the Commission essentially welcomes the findings of the CJEU in Huawei and of the High Court in Unwired Planet v. Huawei (here and here), both with regard to the steps to be followed during the negotiation and the availability of injunctive relief. Nothing more than what is stated in the above rulings is said on the timeliness of the potential licensee’s counteroffer. Indeed, the timeliness has to be assessed on a case-by-case basis, taking into account the number of asserted SEPs and the details contained in the infringement claim.

On another note, the choice of the Commission to endorse the recourse to alternative dispute resolution mechanisms appears rather controversial. Indeed, although this tool may speed the litigation pace and is already widely used by the main stakeholders in relation to SEP-related litigation, it is inconsistent with the effort made by the Commission to make public all the information concerning litigation. Arbitration is private by definition and the outcome is usually covered by contractual confidentiality obligations.

Conclusions

The Commission acknowledged once more the importance of technical standards allowing interoperability between complex technologies, particularly in view of the standardisation of 5G technology and of the incoming era of the “internet of things” (IoT), which might trigger the European GDP on a massive scale in the next decade.

However, the Commission made the choice not to regulate the struggle between SEP-holders and implementers on how one exactly defines FRAND, leaving room for market self-regulation or intervention of courts.

This seems to me a coherent choice by the Commission, which has always been sceptical towards regulatory “non-antitrust” interventions. However, looking at the IP policies adopted in the US by IEEE, there is a risk that also in the EU the stakeholders might collusively agree on a definition of FRAND within SSO at the advantage of one side (in the US, IEEE’s IP policies favoured technology users). In this case, the agreement should be assessed by the Commission under article 101 TFEU.

marco.lobue@belex.com

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