In November The European Commission issued a communication setting out its vision on standard essential patents (SEPs) and outlining its expectations from stakeholders involved in the declaration, exploitation and enforcement of SEPs. Stakeholders include SEP holders, SEP implementers, standard developing organisations (SDOs) and national courts of the member states.
The communication draws on a number of points arising from various judicial decisions, such as the U.K. court’s decision in Unwired Planet v. Huawei on what constitutes fair, reasonable and non-discriminatory (FRAND) licensing terms and the Court of Justice of the European Union’s (CJEU) decision in Huawei v. ZTE. The communication also provides principles of general applicability and sets out specific recommendations and guidance.
The Commission’s recommendations and guidance are not binding and it remains to be seen what influence the communication will have on stakeholders, including on the conduct of parties involved in FRAND negotiations, on the requirements imposed on patentees by SDOs when declaring patents asserted to be essential to a standard, and on a court’s or antitrust regulators’ evaluation of whether a party has conducted negotiations in “good faith.”
The advent of 5G mobile standards and the Internet of Things (IoT) has significantly enhanced the importance of connectivity and interoperability in the information and communications technology (ICT) sector. Industry reports anticipate that the market for the IoT will grow to 9 trillion euros ($10.76 trillion) by 2025 in developed countries, but without interoperability such growth could be stunted substantially. Therefore, a sustainable, efficient and fair standardisation ecosystem is critical to the success of IoT and digital technologies more generally in the future.
The communication acknowledges that to achieve this goal it will be necessary to strike a balance between two main objectives: allowing a fair and adequate return for SEP owners who develop technologies that form part of a standard, and creating fair access conditions for technology users and manufacturers to enable wider adoption and dissemination of such technologies.
In April 2016, the Commission identified three key areas where it felt the SEP ecosystem could be improved in order to achieve these objectives:
1. Availability of information to determine SEP exposure; 2. Clarifying the valuation principles for patented technologies reading on standards and the definition of FRAND; and 3. Risk and uncertainty in enforcing SEPs.
The Commission’s recent communication seeks to address these three key areas.
The “Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee: Setting out the EU approach to Standard Essential Patent,” sets out the Commission’s key recommendations for addressing the areas of concern identified above. The communication is part of the initiative announced in the 2015 “Single Market Strategy” document – a roadmap to harness the full potential of the Single Market in the European Union.
The Commission’s solutions and recommendations can be grouped into three key areas:
1. Increasing transparency on SEP exposure; 2. General principles for FRAND licensing terms and IP valuation; and 3. Enforcement of SEPs.
The idea of increasing transparency around the entire process of declaring patents as essential to a technological standard appears to be the most important point in the communication, due to the potential impact it has on subsequent licensing negotiations between SEP holders and technology users. The communication outlines a two-pronged strategy to achieve this: (i) improving information held by SDOs and (ii) developing tools to access that information with a view to assisting licensing negotiations. This includes greater scrutiny of essentiality claims. The proposed initiatives, if implemented, will benefit all those involved in the emerging technologies of 5G and IoT in the ICT sector.
The communication envisages that SDOs will maintain databases that are easily searchable and have up-to-date information on SEPs, including information on patent status, ownership, and transfer. It also suggests certain key improvements regarding the declaration process, including putting an onus on declarants to update their declarations in the light of finalised standards and granted patents, and requiring declarants to include sufficient information to assess the claim of essentiality, for example, by citing the relevant section of the standard that the patent relates to.
The communication also calls for increased access to information on litigation relating to a particular standard, and for essentiality claims to be scrutinised, for example, by an independent party.
Further suggestions include the introduction of (modest) fees for confirming SEP declarations after standard release and patent grants and for national patent offices to undertake essentiality checks.
These measures, if implemented, should assist licensing negotiations by providing greater certainty, clarity and better information to stakeholders.
It is worth pointing out that the ideas proposed in the communication are a significant departure from the procedure and policies currently followed by most, if not all, SDOs.
At present, it is normal for patent holders to declare their patents essential to a standard based on “self-assessment.” There is no scrutiny of their claims and the declarations do not identify a part of the standard to which the patent is declared to be essential. There is also no up-to-date information available at the SDOs as regards patent status, its ownership and transfer.
Furthermore, most of the declarations are filed based on patent applications or when the initial versions of the standards are being discussed. These aren’t updated once those applications are granted or once the standards are finalised. This is important as the final standards or the claims of the granted patents may be different, resulting in the patent not being essential to the standard.
FRAND Licensing Terms and IP Valuation
In this area, the Commission has used its discretion judiciously and has left the field open for the stakeholders to develop tailored and sector-focused FRAND terms while providing general guiding principles that should be kept in mind while conducting good faith negotiations and discussing FRAND terms.
With regard to FRAND terms, the Commission adopted several positions.
First, the non-discrimination element of FRAND means that SEP holders cannot discriminate between implementers that are “similarly situated.” This point was considered at length by Justice Colin Birss of the High Court of Justice of England and Wales in Unwired Planet v. Huawei, who was of the view that the FRAND rate should be applicable to all licensees seeking the same kind of license. He was not receptive to the notion that a small new entrant to the market should be required to pay a higher royalty rate in comparison to an established large entity.
The Commission also said that cross-licensing practices should be taken into account when determining the FRAND rate due to the efficiency gains arising from such practices. It also noted that global licensing of an SEP portfolio is likely to be more efficient than a country-by-country licensing approach where the products are in global circulation, a point Birss J also made in Unwired Planet.
The Commission also advocated that the following IP valuation principles should be taken into account when determining FRAND.
First, the value of a patented technology must be derived without taking into account any element that results from its inclusion in the standard, which differs from the approach adopted in the Unwired Planet case. However, in circumstances where a technology is solely developed for the purposes of the standard, a different valuation model may be used.
The FRAND rate also should not take into account the market success of the product independent of the patented technology.
What’s more, the issue of royalty stacking needs to be considered in determining the FRAND rate. Therefore, instead of considering an individual SEP in isolation, the parties need to take a reasonable aggregate rate of the standard, assessing the overall added value of the technology, for determining the FRAND rate. This approach was also adopted in the Unwired Planet.
The Commission also suggested other measures aimed at expediting licensing negotiations to provide greater certainty, clarity and better information to stakeholders. These include the use of patent pools and licensing platforms to provide “one-stop-shop” solutions and greater clarity on aggregate licensing fees, which are thought to be particularly beneficial for SMEs providing technology related to the IoT.
The Commission also advocated setting up an expert group to study industry practices and deepen industry expertise on FRAND licensing. In this context, the inclusion of the license as an appendix to the Unwired Planet v. Huawei judgment is particularly noteworthy as it makes the license terms available to third parties, including new entrants with relatively little FRAND licensing experience.
Enforcement of SEPs
The communication expanded on the guiding principles and behavioural criteria set out in the case of Huawei v. ZTE by the CJEU with a view to providing a predictable enforcement environment to SEP holders and implementers. This has an important bearing on injunctive relief due to the risks associated with patent hold-up (e.g. patent owners only willing to license their products for excessively high royalty rates) and hold outs (e.g. technology implementers unwilling to take licenses).
While acknowledging that the exact behavioural requirements would vary on a case-to-case basis, the communication highlighted several points.
First, SEP owners must provide sufficiently detailed and relevant information to determine the relevance of the SEP portfolio. This could include explanations on the essentiality for a standard, allegedly infringing products of the SEP user, the proposed royalty calculation, and the non-discrimination element of FRAND.
The counteroffer from SEP implementers should also be concrete and specific and must not simply dispute the SEP holder’s offer and include a general reference to third party determination of the royalty. It should also include information on the exact use of the standard in the specific product.
The communication also sets out that the willingness of the parties to submit to third-party FRAND determination could indicate FRAND behaviour in the event that the offers and counter-offers are found not to be FRAND.
The Commission’s guidelines also highlighted the need for solutions that address the specifics of each particular case. It noted that it is difficult to set a timescale within which a putative licensee has to respond with a counter-offer. The timescale is essentially dependent on a number of factors including the number of asserted SEPs, the details contained in the infringement claim, and the information initially provided by an SEP holder in the initial offer.
Drawing from Article 3(2) of the IPR Enforcement Directive that an injunction should inter alia be proportionate, it asks the court to undertake the proportionality assessment on a case by case basis. The Commission feels that appropriate consideration must be given to the relative relevance of the disputed technology for the application in question and the potential spill-over effects of an injunction on third parties.
The Commission also said that patent assertion entities (PAEs) should be subject to the same rules as other SEP holders, including the application of proportionality assessment when injunctive relief is sought by PAEs. The communication considers that the rules and procedures of the Unified Patent Court system provide sufficient safeguards to protect against potentially harmful effects of certain PAEs in the EU.
The Commission is also in favour of encouraging alternate dispute resolution mechanisms, such as mediation and arbitration, to resolve FRAND-related disputes. This is thought to be particularly beneficial for SMEs.
In addition to the above areas, the communication also focused on the importance of integrating open source projects and standard development processes within the ICT sector. The communication considers that such integration: (i) will speed up the standardisation process and the take-up of ICT standards (especially for SMEs); and (ii) result in the wider dissemination and use of open source software implementations if standards can provide for their interoperability. In fact, the press release accompanying the communication acknowledges that FRAND terms and royalty free licenses are not necessarily incompatible within the context of open source projects and standardisation.
The recent statements by the two key lobbying groups, IP Europe and Fair Standards Alliance, both of which are heavily involved in lobbying the Commission on SEPs, suggest that the Commission has provided balanced and fair guidance that has been widely welcomed within the standardisation ecosystem. However, some stakeholders may feel that the Commission should have taken a more proactive approach and addressed the issues of “use-based” licensing (a licensing model that requires the use of the underlying technology to be taken into account in determining the royalty) and “who to license in the chain.” However, the Commission has adopted an evidence-based holistic approach in relation to these and other issues rather than being prescriptive, which is laudable, and it has not ruled out further specific action, if necessary.
The current driving force behind the communication is the Commission’s desire to promote the emerging technologies of 5G and IoT and to maintain Europe’s competitiveness in these fields. However, most, if not all, of the proposals are not limited to these fields. They are indicative of the Commission’s desire to become more involved in the general process of standardisation and the licensing of SEPs on FRAND terms.
The communication can be seen not only as ‘nudging’ stakeholders towards better practices- it also sets out the positive steps that the Commission intends to take in the near future to implement certain of the proposed actions. An expert group will be created in 2018 to gather expertise and obtain further information on issues such as licensing practices, sound IP valuation and FRAND determination. The Commission will also launch a pilot project on the evaluation of essentiality of SEPs and has called upon the SDOs to urgently ensure that their databases comply with the “main quality features” set out above. Further specific action by the Commission appears likely.
This article was first published at Bloomberg Law.