In November 2020, the European Commission issued the Action Plan IP to outline its strategy for the protection of intellectual property in the EU and to facilitate access to knowledge, data and technology.
For the European Commission, a key component of technological development is access to standardised technology. Such technology is known, for example, from the mobile communications sector in the form of Long-Term Evolution (LTE) or 5G communication standards. The importance of such standardised technology in technological development is immense since interconnected products, especially concerning the Internet of Things (IoT), require uniform communication standards.
Standardised technology not only relieves product manufacturers of developing their own technology, but it also creates interoperability: ensuring that products on the market are compatible with each other. Without interoperability, IoT products cannot be integrated into uniform technological "ecosystems". If, for example, the systems of connected vehicles cannot communicate with each other because they only use the manufacturer's proprietary technology, an intelligent traffic infrastructure and autonomous driving would be difficult to implement.
The advantages of standardised technology, however, can only be exploited if every product manufacturer has access to it.
Access to standardised technology with a FRAND licence
Standardised technology is rarely in the public domain. Current technology standards are largely based on proprietary technology of companies and administered by standardisation organisations (e.g. ETSI, IEC). Often patents protect this technology (i.e. "standard essential patents" or SEPs). Those who want to manufacture standard-compatible products need licences for their SEPs that protect standardised technology.
SEP holders are obliged to grant SEP licences to any willing licensee on terms that are fair, reasonable and non-discriminatory (FRAND). In most cases, this follows from the requirements of the administering standardisation organisation. In addition, the licensing obligation of SEP holders may result from antitrust law if the SEP conveys to its holder a dominant market position.
Against this background, one could assume that FRAND licences would make standardised technology accessible for everyone. In practice, however, it is apparent that unresolved legal issues and factual challenges hamper fair, reasonable and non-discriminatory access to technology.
Unresolved legal issues in FRAND licensing of SEPs
In 2015, the European Court of Justice (ECJ) established the first basic framework for the licensing obligations of SEP holders and SEP implementers through its decision in the Huawei/ZTE case. Nevertheless, numerous legal questions have arisen in connection with the FRAND licensing of SEPs, which can make licensing negotiations difficult or even impossible.
The question whether a SEP holder is entitled, with a view on a supply chain in the automotive sector, to grant a FRAND licence only at the level of the end product manufacturer and to refuse a licence at the supplier level led to numerous legal disputes in Germany, which are known as the "Connected Car Disputes". One dispute led to another referral to the ECJ, which was ultimately solved by a settlement of the original dispute without a preliminary ruling on the merits. As a consequence, the referred questions remain unresolved.
Further legal questions arise on the conduct that a previously unlicensed SEP implementer must demonstrate to obtain a licence offer from a SEP holder. In this context, the German Federal Court of Justice recently issued the internationally recognised decisions FRAND-Einwand I and II.
In jurisdictions allowing far-reaching injunctions based on SEPs, further questions have arisen on the proportionality of the enforcement of SEPs by Non-Producing Entities (NPE). In Germany, this led to the introduction of a proportionality test in the second German Patent Law Modernisation Act.
Actual challenges with FRAND licensing of SEPs
In addition to legal issues, there are also factual challenges in licensing SEPs.
It is often difficult for a SEP implementer to determine the licences needed to implement a technology standard. Most technology standards provide for a systematic list of patents declared as SEPs. However, the SEP declaration does not convey a guarantee that the patent is indeed standard-essential. It is often not clear to SEP implementers whether a declared SEP protects the basic functionality of the standard (i.e. a "genuine" SEP), merely one of several possible implementations (i.e. an "implementation patent") or did not find its way into the used standard version at all or later fell out of its scope.
The latter may be the case if the standard specifications of the original SEP-protected functionality have been changed over time so that the standard version used by the product manufacturer lies outside the scope of SEP protection. For implementation patents or SEPs that only protect functionalities of certain standard versions, the product manufacturer only needs a licence if his product makes use of the SEP-protected technology.
In traditional product development, where only a single patent or a handful of third-party patents may collide with the product, an FTO analysis can often clarify whether the product makes use of the third-party patent.
A patent grant also does not provide a guarantee that this patent will prove to be legally valid. In traditional product development, a product manufacturer would therefore check if opposition or nullity proceedings are able to challenge a conflicting patent. If such a challenge may be successful, the product manufacturer would pay no or – based on economic reasons – a small royalty.
Unlike with traditional product development, the manufacturer of a standard-compatible product can be confronted with several thousand potentially relevant patents per standard. In these cases, a manufacturer will have difficulties determining with reasonable effort, which declared SEPs he needs to license and whether these patents are legally valid.
A product manufacturer who can neither assess the use (i.e. the standard essentiality) nor the legal validity of the declared SEPs is not in a position to determine the appropriate SEP licences to be acquired and the FRAND licence fees to be paid. Accordingly, licence negotiations can drag on and lead to litigation between SEP holders and product manufacturers, which can inflate the transaction costs of SEP licences.
Due to technological development, especially in the field of IoT, many new product manufacturers with no experience in the acquisition of patent licences for standardised technology require SEP licensing. Small and medium-sized enterprises or start-ups often have limited resources to handle licensing. A thorough examination of the standard essentiality and legal status of the alleged SEPs is hardly feasible. The high transaction costs for SEP licensing make it all the more difficult for these companies to gain access to standardised technologies at FRAND conditions.
European Commission to create transparency and reduce transaction costs
With its Action Plan IP, the European Commission recognizes that licensing of SEPs may be cumbersome and costly. In particular, the European Commission identifies the complexity of the SEP landscape and the lack of transparency as major barriers to fair, reasonable and non-discriminatory access to standardised technology.
The European Commission has therefore set itself the goal of creating a clearer and more predictable framework for the licensing of SEPs, which should reduce the transaction costs of SEP licensing and discourage litigation.
The European Commission has pursued this approach for some time. In its November 2017 Communication to the European Parliament, the Council and the European Economic and Social Committee on the EU's approach to standard-essential patents, the European Commission noted that transaction costs of SEP licensing are too high due to a lack of transparency.
The Commission states in this communication that the declaration of a patent as a "SEP" can sometimes lack transparency since this declaration is made early on the basis of a patent application. However, the scope of protection of the later patent may still change significantly during the grant procedure. At the same time, adjustments to the standard are often made during the standardisation process. However, a later revalidation of the SEP declaration based on the final patent and the final standard does not take place. This can lead to an over-declaration of SEPs, which unilaterally shifts the transaction burden in favour of the patent owner since the SEP declaration usually leads to a presumption that the patent is indeed standard-essential. In licensing negotiations, it is then up to the potential licensee to verify and, if necessary, disprove standard essentiality.
In its communication from November 2017, the European Commission called on standardisation organisations to make the process for declaring SEPs more transparent and comprehensible. At that time, the European Commission proposed that SEPs should be checked in the declaration process for their standard essentiality by external third parties.
This proposal for the introduction of an independent third party essentiality-assessment system is now also reflected in the IP Action Plan (as the only specifically identified measure). In addition, the European Commission aims to improve the "legal framework" for the filing, licensing and enforcement of SEPs on the basis of the November 2017 Communication.
The European Commission has already announced the initiative "Intellectual property - new framework for standard-essential patents" on its website. The public consultation announced for Q3/2021 has been delayed. In the IP Action Plan, the measures on SEPs are planned to be issued in Q1/2022.
The European Commission's focus on simplifying SEP licensing for the benefit of technology development is a welcome step. However, the Action Plan IP remains extremely vague and so far only sets programme goals for SEP licensing. The concrete form of the European Commission's initiatives remains to be seen.
That the European Commission wants to create more transparency in SEP licensing and oblige standardisation organisations to do so is in line with its previous approach, which is expressed in the Communication of November 2017. The Action Plan IP follows this line but does not identify the concrete (legislative) measures expected in the future.
The creation of more transparency in the licensing process also focuses on the actual level. In contrast to the Communication of November 2017, the Action Plan IP does not comment further on the open legal questions. Both SEP holders and SEP implementers have criticised this. While advocates of free access to technology state EU measures do not sufficiently counteract the exploitive dominant position of SEP implementers, SEP holders fear that future measures will make it more difficult to enforce their intellectual property rights against unauthorised use.
It therefore remains to be seen which path the EU will take to facilitate access to standardised technologies.
For more information on the EU Action Plan IP and how it could affect your German business in the field of SEPs, contact your CMS partner or local CMS experts: