This blog has been updated to include reaction to the Communication from various groups representing the views of different stakeholders.
The European Commission’s long-awaited Communication on the licensing of standards essential patents was finally published this morning and on an initial read from this non-lawyer (please remember that!!), it looks like SEP owners have a fair amount to be pleased about – especially given how things were looking a couple of weeks back, when it seemed as if extensive lobbying from the implementer side was about to bear fruit. A subsequent delay in agreeing the final text of the Communication provided a hint that implementers might not get all they were after and today’s publication seemingly confirms that.
First off, as far as I can tell there is no prescription about what kind of approach to licensing the Commission favours. SEP owners had feared – and implementers had hoped – that the Communication would say that “license to all” was the preferred option. But it doesn’t. Instead, it states:
The Commission considers that the following IP valuation principles should be taken into account:
Licensing terms have to bear a clear relationship to the economic value of the patented technology. That value primarily needs to focus on the technology itself and in principle should not include any element resulting from the decision to include the technology in the standard. In cases where the technology is developed mainly for the standard and has little market value outside the standard, alternative evaluation methods, such as the relative importance of the technology in the standard compared to other contributions in the standard, should be considered.
Determining a FRAND value should require taking into account the present value added29 of the patented technology. That 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.
Finally, to avoid royalty stacking, in defining a FRAND value, an individual SEP cannot be considered in isolation. Parties need to take into account a reasonable aggregate rate for the standard, assessing the overall added value of the technology. The implementation of measures on SEP transparency can already support this objective. It can be addressed further, within the scope of EU competition law, by the creation of industry licensing platforms and patent pools, or based on indications by standardisation participants on the maximum cumulative rate that could be reasonably envisaged or expected.
Further on, there is this section:
In view of current developments, the Commission considers that SEP licencing should be based on the basis of the following principles:
- There is no one-size-fit-all solution on what FRAND is: what can be considered fair and reasonable can differ from sector to sector and over time. Efficiency considerations, reasonable licence fee expectations on both sides, the facilitation of the uptake by implementers to promote wide diffusion of the standard should be taken into account.
- Determining a FRAND value should require taking into account the present value added of the patented technology. That value should be irrespective of the market success of the product which is unrelated to the value of the patented technology.
- In defining a FRAND value, parties need to take account of a reasonable aggregate rate for the standard.
- The non-discrimination element of FRAND indicates that rightholders cannot discriminate between implementers that are 'similarly situated'.
- For products with a global circulation, SEP licences granted on a worldwide basis may contribute to a more efficient approach and therefore can be compatible with FRAND.
The Commission calls on SDOs and SEP holders to develop effective solutions to facilitate the licensing of a large number of implementers in the IoT environment (especially SMEs), via patent pools or other licensing platforms, while offering sufficient transparency and predictability.
The Commission will monitor licencing practices, in particular in the IoT sector. It will also set up an expert group with the view to deepening expertise on industry licensing practices, sound IP valuation and FRAND determination.
Essentially, as far as I can tell (as a non-lawyer, remember), the Communication is an endorsement of the CJEU’s judgment in Huawei v ZTE. There is a clear recognition that there is no one size fits all approach to licensing possible and that, crucially, the ability for SEP owners – whether operating companies or NPEs – to get injunctions should not be ruled out. The emphasis throughout the document is on balancing the needs of both originators and implementers, and in leaving as much as possible to those doing the negotiating and to the courts if things do not work out. That said, the Communication also states that the Commission will be watching developments closely – so there is the clear implication that if it feels there are problems it will step in to provide some more activist solutions.
With the caveat, yet again, that I am not a lawyer and could have misread this completely, my guess is that SEP owners are going to be feeling a great deal of relief today. The Commission has acknowledged that while the rapid and efficient diffusion of technology at the lowest cost possible is vital, those who do the innovating need to be incentivised to carry on – and that means they have to feel they will receive adequate reward for the investments they make.
On the other side of the coin, though, while disappointed they did not get “license for all”, implementers will be pleased that the Commission did not endorse the used-based licensing approach favoured by many SEP owners. They will also welcome the Communication’s call for much greater transparency in FRAND/SEP licensing. In a sense, therefore, what we have is a classic Euro-fudge in which no side wins, but neither loses either. When it comes to creating a fit-for-purpose licensing regime, that is probably no bad thing.
That said, I can’t help feeling SEP owners will believe November 2017 has been pretty kind to them. They should certainly be able to live with today’s news, even if they have not got everything they wanted; while across the Atlantic, the speech earlier this month by new Department of Justice antitrust chief Makan Delrahim clearly marked a definite and more pro-patent shift in the US regulatory environment. After a few years of being in retreat, originators are beginning to see signs that the playing field is levelling out. It’s now up to them to show that they can come up with licensing structures that work for the world of IoT and will keep the regulators in the US and Europe off their backs.
UPDATE - The balanced nature of the Communication is reflected in the positive reactions it has received from organisations representing both SEP owners and implementers.
On the owners' side, this is from Francisco Mingorance, executive secretary of IP Europe:
Despite suggestions of industry winners or losers in the media, standardisation is at its heart an exercise in balance and collaborative innovation. We are pleased that today’s Communication recognizes that vital role that standards play in supporting innovation and growth in Europe as well as the Digital Single Market.
Today is a good day for consumers around the world, as well as the many businesses – small and large – that will rely on ‘fair reasonable and non-discriminatory’ access to the 5G open technology standard to create new products and services for the upcoming Internet of Things.
IP Europe’s members welcome any initiative that will lead to smoother licensing negotiations. We note that this is particularly important for our SME members because they need as much support in the licensing process as the SME implementers.
Where opportunities to find negotiated outcomes have been exhausted, our position remains that courts are the best venue to enforce Intellectual Property Rights, including to find remedies for growing marketplace trends such as ‘patent freeriding’ by implementers that use our innovations without taking a license or paying royalties.
Meanwhile, on the implementer side, Morgan Reed, president of ACT | The App Association, states:
It is a positive outcome. We appreciate the clear recognition the Commission gives to the role that SMEs and startups play in the innovation process. We applaud the Commission for providing transparent and predictable conditions for SEP licencing, and preserving the value of open standards built to protect intellectual property for all, while and at the same time respecting everyone's intellectual property.
In particular we welcome the Commission's conclusion that the value of SEP licences should be irrespective of the market success of the product. This is a clear dismissal of attempts to introduce use-based pricing of licences in Europe.
This Communication is a powerful signpost for licensing SEPs and it will help to unlock the potential of 5G and the IoT in Europe. Credit must be paid to the Commission and to the SMEs who made their case over the past six months."
We continue to vigorously invest in and protect the system of collaborative open standards development, which can place Europe as a frontrunner in the global race for 5G and the IoT, and benefits consumers and the open technology ecosystem. The alternative would be proprietary connectivity systems dominated by a few IoT gatekeepers.
It's the same from another group on the implementer side. Here's Fair Standards Alliance chairman Robert Pocknell:
The FSA welcomes today’s SEP Guidelines from the European Commission which do not include any language endorsing ‘use-based’ licensing as a model for the IoT. Today’s decision is a victory for all European consumers and innovative businesses – especially Europe’s car industry and the hundreds of SMEs active in the growing IoT sector which back European and internationally recognised ‘licensing for all’ principles for standard essential patents. It is also a clear signal to SEP holders to abide by commitments to transparent, fair and reasonable licensing, and to refrain from using the notion of ‘use-based’ licensing as a justification for creaming extra profit off the downstream innovation of other companies.