Before the end of 2017, the European Union Commission published a much-anticipated communication on standard-essential patents (SEPs).The communication includes guidance on SEP licensing.
In today’s hyper-connected world, interconnectivity and interoperability of digital technologies is crucial, and with the roll-out of 5G and the Internet of Things in the years to come, interconnectivity will be even more important for a wide range of new products that need to be interconnected, as to provide consumers with additional products and services (e.g. smart house appliances) and to create new business opportunities for European companies.
Many of the key technologies that are part of global technical standards today (such as WiFi, Bluetooth and 4G) are protected by so-called Standard Essential Patents (SEPs). A SEP is a patent that covers technology which must be used to comply with a technical standard (typically issued by a standard developing organization (SDO)). The capability of devices to work together depends on products and services complying with such standards, and a single device may often be covered by hundreds or even thousands of SEPs that cover parts of the technology.
Consequently, the inclusion of a patent in a technical standard may create a monopolistic advantage for the patent holder. However, in the modern world, it is critical that technological users can quickly get access to technology protected by SEPs and that disputes in licensing negotiations between technological users and holders of SEPs do not delay the widespread use of key standardised technologies, as this may hamper the development of interconnected products in Europe and ultimately affect the competitiveness of the EU economy.
In its new communication dated 29 November 2017, the Commission sets out EU’s approach to SEPs and outlines some key principles “that foster a balanced, smooth and predictable framework for SEPs”. The aim is to incentivize the development and inclusion of top technologies in standards by preserving fair and adequate return for these contributions and ensuring smooth and wide dissemination of standardized technologies based on fair access conditions. In other words, the communication offers some much- needed guidance on SEP licensing, and while the communication is not legally binding, it will most likely be cited widely and referred to by parties engaged in SEP licensing negotiations and litigation going forward.
The Commission recognises that information on the existence, scope and relevance of SEPs is vital for fair licensing negotiations. Presently, implementers of standards have a difficult time identifying the scale of their exposure to SEPs and the necessary licensing partners, as the only information on SEPs currently accessible can be found in declaration databases maintained by SDOs and often lacking transparency. In consequence, the Commission considers several structural and administrative changes aiming at improving the accessibility of SEP information recorded in SDO databases and transforming the current declaration system into a tool providing more up-to-date and precise information on SEPs.
These changes may include introducing “essentiality checks” on SEP declarations, i.e. a system where an independent party with technical capabilities checks whether the patented technology is indeed essential for complying with the standard, and modest fees for confirming SEP declarations after standard release and patent grants, to incentive SEP holders to revise and maintain only relevant declarations.
FRAND licensing of SEPs
The Commission acknowledges the divergent interests of SEP owners and implementers of standards, especially with regard to the valuation of SEPs. Further, it is affirmed that there is no one-size-fits- all solution to what constitutes ‘fair, reasonable and non-discriminatory’ (FRAND) licence terms, but the Commission recommends the following SEP valuation principles:
- Licensing terms must bear a clear relationship to the economic value of the patented technology with such value deriving from the technology itself, not its inclusion in a technological
standard. However, in cases where the technology has little market value outside the standard, alternative valuation should be considered.
- FRAND valuation should take into account the present value added of the patented technology. This value should be irrespective of the market success of the product which is unrelated to the patented technology.
- FRAND valuation should ensure continued incentives for SEP holders to contribute their best available technology to standards.
- To avoid royalty stacking (the situation where a licensee must pay royalties to multiple parties in order to commercialise a product), in defining a FRAND value, an individual SEP cannot be considered in isolation. Instead, parties must take into account a reasonable aggregate rate for the standard, assessing the overall added value of the technology.
The Commission affirms that the no-discrimination element of FRAND indicates that rights holders must not discriminate between implementers that are “similarly situated” meaning that such implementers should receive similar license terms. However, FRAND solutions may differ from sector to sector. Hence, the Commission suggests a case-by-case approach when assessing whether a licensing offer is compatible with FRAND.
The Commission encourages the creation of patent pools and other licensing platforms, as such platforms can address some of the SEP licensing challenges by offering better scrutiny on “essentiality” of aspiring SEPs, clarity on aggregate licensing fees and one-stop shop solutions. The Commission will monitor licencing practices, in particular in the Internet of Things sector, and will also set up an expert group with the view to deepening expertise on industry licensing practices, sound IP valuation and FRAND determination.
A predictable enforcement environment for SEPs
The Commission states that SEPs show a higher degree of litigation than other patents, which highlights the need for a clear and predictable enforcement environment.
The communication’s focus is on the availability of injunctive relief for SEP owners. In light of the European Court of Justice’s (the CJEU) decision in the case Huawei/ZTE (C-170/13), the communication considers the limits that EU competition law imposes on the use of injunctive relief, including under what circumstances a SEP licensor may seek an injunction against a potential licensee without abusing its dominant position.
The Commission endorses the CJEU’s Huawei v. ZTE decision and confirms that injunctive relief is available to SEP owners against parties that refuse to take up a license on FRAND terms provided that injunctive relief is proportionate in the specific case at hand. The CJEU established certain behavioural criteria to assess when a potential licensee can be considered willing to enter into a FRAND license.
Based on national case-law in applying the Huawei decision, the Commission provides additional guidance as to the specific requirements for making licensing offers and counter-offers, including that counter-offers must be specific, and should not merely reject the offered terms as “non-FRAND”.
Furthermore, the communication acknowledges that owners of patent portfolios may wish to offer licenses to more patents, including non-SEPs, but that a licensee cannot be required to accept a licence for such other patents in order to get a licence to SEPs. However, the Commission recognises the efficiency of licensing SEP portfolios and will “work with relevant stakeholders to develop and use consistent methodologies, such as sampling, which allow for efficient and effective SEP dispute resolution, in compliance with the industry practice of portfolio licensing”.