EU Commission proposes a new licensing framework for standard essential patents

The European Commission published on 27 April 2023 various proposals for legislative changes related to patents. One of these concerns the introduction of a new licensing framework for standard essential patents (“SEPs”), aimed at tackling perceived failings under the current regime for SEP licensing. The proposed framework includes measures to introduce a register of SEPs and including essentiality checks to tackle the problem of over-declaration of SEPs. It will also require both SEP holders and prospective licensees (“implementers”), prior to initiating legal proceedings, to engage in mandatory conciliation, which will be mediated by a newly established ‘Competence Centre’ at the EUIPO – a body whose remit currently does not include patents.

SEP-licensing negotiations and disputes involve balancing the interests of both SEP holders and the implementers who wish to make use of the inventions protected by the SEPs. The rules of the main standard setting organisations, such as ETSI, state that patents may be declared as being essential to a standard. If a patentee wishes to have their patent included in a technical standard, it must make an undertaking committing itself to license its SEPs to implementers who would want to use those SEPs. Such licences must be on fair, reasonable and non-discriminatory (“FRAND”) terms. A SEP holder benefits greatly from having their patents included in a standard. This is because if an implementer wishes to make a device that complies with a standard, they can only do so by using the SEP holder’s patent. Therefore, implementers must either pay the SEP holder a licence fee/royalty or not manufacture the product incorporating the standard. Partners Caitlin Heard and Toby Sears of our London team would be happy to answer any questions on how these proposals might impact your own SEP licensing plans.

Aims of the proposal

The new proposed framework aims to address the following problems in the current SEP licensing system:

1. A lack of information available to implementers (due to confidentiality arrangements) causes implementers to complain that they cannot assess their exposure to future licence fees far enough in advance when planning their product businesses. The extreme lack of transparency means that implementers might have almost no ability to determine whether they are getting a fair/reasonable deal as compared with their competitors.
2. SEP holders, however, complain about the length and cost of negotiations with implementers even before proceedings are brought, and in particular with large implementers. Implementers may infringe a patentee’s SEPs for many years, establishing market share and earning profits, before they pay their first royalty (if at all). For example, in the recent landmark High Court case of InterDigital v Lenovo, 11 years elapsed between the first contact between the parties and the issue of proceedings by InterDigital.
3. It is not clear that all patents over which FRAND licences are sought are in fact necessary. In fact, over-declaration of SEPs is a known issue in the industry.

The framework is intended to address these problems by: i) providing more clarity on who owns SEPs (including whether the patents are actually essential); ii) providing greater clarity on FRAND terms, including licence fees; and iii) facilitating the resolution of SEP disputes.

The proposed framework

The Commission has outlined the following options for a proposed licensing framework. These options are cumulative, with each option being implemented in addition to the previous ones. In its proposal, the Commission favours points 1-4 below, but identifies point 5 as a further option.

1. The publication of non-binding guidance on SEP licensing. A new ‘Competence Centre’ would be established in the EUIPO, which would provide free advice to SMEs on licensing negotiations, monitor the SEP market, conduct studies on SEP licensing and promote alternative dispute resolution.
2. The introduction of a SEP register and essentiality checks. This would require patentees to register their SEPs before licensing them. Independent evaluators would then conduct essentiality checks on the patentee’s patents to ensure that only standard-essential patents are included in the register. It is unclear whether all registered patents would be checked for essentiality or a small random sample registered by each SEP holder, although the Commission favours the latter approach.
3. The establishment of a mandatory conciliation procedure. This would mean that prior to launching patent infringement proceedings, parties must go through mandated conciliation, whereby an independent conciliator would seek to help the parties agree FRAND terms. Where the parties fail to agree, the conciliator would issue a non-binding report with recommendations on the FRAND rate (which would include both confidential and non-confidential elements). The independent conciliator would have sight of confidential past FRAND determinations to assist their decision-making. Where one party commits to accepting the outcome of conciliation and the other does not, only the committed party may issue proceedings against the other.
4. The creation of processes for determining an aggregate FRAND royalty for SEPs (i.e. a maximum total price). This would be determined before or shortly after publication of the standard. SEP holders would be expected to agree on this royalty (potentially with the assistance of an expert opinion), while both implementers and SEP holders could request an expert opinion on the aggregate royalty. The aggregate royalty could be determined as part of conciliation at point 3 above. The aggregate royalty, although non-binding, would be published on the SEP register.
5. The establishment of a SEP clearing house. This would be a ‘one-stop-shop’ for implementers to obtain SEP licences by paying an aggregate royalty to the Competence Centre. SEP holders would determine among themselves how the Competence Centre should allocate the royalty between them, failing which they would not be able to collect their royalty payments. SEP holders would then sign a licence with any implementers who make a deposit.

Based on the above, implementers would be provided information concerning who the relevant SEP holders are for particular standards, how many SEPs they have registered, their approximate essentiality rate and, importantly, what maximum licence fee they would pay for using the technology. The SEP registration process would be triggered when a party notifies the Competence Centre of a standard and/or an aggregate rate for a standard and specific implementations of it. The Centre would publish a notice inviting patentees to register within 6 months, failing which, they would be unable to seek royalties and damages until they register.

Comment

The Commission’s proposed SEP-licensing framework is certainly ambitious, and several questions arise immediately. The first concerns the availability of relevant technical experts to assist in the new framework. Technical experts will be required for the essentiality checks, the mandatory conciliation procedure and the calculation of an aggregate licence fee. Moreover, the proposal states that in relation to the essentiality checks (which the Commission itself admits is “a very difficult technical task”), these will be carried out by those with expertise in the technical field “whose independence is beyond doubt.” When considering the likely reduced availability of technical experts following the launch of the Unified Patent Court in June, one wonders whether this framework will be able to achieve its ambitious target timescales (determination of FRAND terms within 9 months).

A related question is also whether the EUIPO, which currently has no involvement in patent matters, could be adequately resourced and prepared for dealing with highly complex technical disputes. The proposals certainly favour implementers, who would gain access to more relevant information. However, the proposed framework may also lead to more forum shopping among SEP holders, which might prefer to bring actions in jurisdictions with less strict upfront transparency requirements than in the EU, such as the UK.

The proposed licensing framework will need to follow the usual legislative procedure of being amended and adopted by both the European Council and EU Parliament, which could take years. Although the framework has the aim of boosting innovation in the EU, it remains to be seen whether it causes SEP holders to bring proceedings outside the EU, or whether the EUIPO will have the required level of technical expertise to resolve future SEP licensing disputes.