EUIPO to Potentially Administer the EU Licensing Process for Standard-Essential Patents
The European Commission is working on a legislative proposal that would regulate the licensing regulations for standard-essential patents (SEPs). It is speculated that the proposed regulation will include a complete overhaul of the current SEP licensing system and will insert a new layer of bureaucracy in this area. This regulation, set to be presented in draft form on World Intellectual Property Day on April 26th, 2023, could have a significant impact on patent-licensing.
An SEP is a patent covering technology that is necessary to implement an industry standard. In other words, it is a patent that covers technology that is essential to a specific industry standard or technical specification. Standard-setting organizations (SSOs) such as the International Organization for Standardization (ISO), 3rd Generation Partnership Project (3GPP), and European Telecommunications Standards Institute (ETSI) may require companies participating in standardization efforts to license SEPs on "fair, reasonable, and non-discriminatory" (FRAND) terms to ensure that the technology is accessible to all market participants. FRAND licensing means that the patent owner agrees to offer licenses, typically based on reasonable royalty rates or a negotiated fees. By agreeing to FRAND licensing terms, patent owners can avoid antitrust violations and ensure that patented technologies are widely available for use in products that meet a covered standard.
Currently, companies working on the development of standards before SSOs are required to disclose patents believed to be essential to a standard and commit to licensing such patents on FRAND terms. For example, SEP licensing occurs both in bilateral negotiations between two parties and through patent pools, where each party contributes patents to the pool and agrees to license those patents to other parties. When engaging in bilateral negotiations, the involved parties must also reach a consensus on business-related aspects of licensing. These can include the determination of the royalty rate, methods for calculating the royalties, whether discounts will be offered, the number of royalties to be paid for previous sales, any provisions for cross-licensing, etc. The owners of SEPs may also submit patents to a pool and thereby license a collection in a single portfolio alongside other industry contributors. By doing so, patent pools can considerably decrease transaction costs for all involved parties and provide a convenient, all-encompassing solution for implementers. While the majority of licensing agreements are concluded amicably, disputes may arise and litigation could become necessary.
In cases where parties are unable to agree on licensing terms, they may resort to litigation. The EU member state courts have become experienced in handling patent disputes and have developed a body of case law on patent licensing issues. As a result, the EU courts are generally considered to be well-equipped to adjudicate patent licensing disputes and provide guidance on licensing practices. Further, the recently established Unified Patent Court (UPC) would have jurisdiction over disputes relating to European patents. One purpose of the UPC is to create a centralized court system improving efficiency for patent holders to enforce patent rights across the Europe Union.
The European Commission is working on a legislative proposal that would regulate the licensing regulations for standard-essential patents (SEPs). It is speculated that the proposed regulation will include a complete overhaul of the current SEP licensing system and will insert a new layer of bureaucracy in this area. This regulation, set to be presented in draft form on World Intellectual Property Day on April 26th, 2023, could have a significant impact on patent-licensing.
According to the proposal, the European Union Intellectual Property Office (EUIPO) may instead be tasked with establishing a register of standards and SEPs, conducting essentiality checks assessing whether disclosed patents are truly essential for a standard, providing the process to set up an aggregate royalty for a standard, and making individual FRAND royalty determinations. Currently, patent holders and licensees determine licensing prices, or prices may be determined through court rulings. The EUIPO is an agency of the European Union that manages the European Union Trademark (EUTM) system and the registered European Community Design (ECD) system. Its primary responsibilities include the registration, examination, and administration of trademarks and designs throughout the European Union. As such, EUIPO does not have experience in dealing with patents and patent licensing. Therefore, transferring the responsibility for resolving the patent licensing issues from the courts, which have a significant expertise in this area, to the EUIPO could have negative and unpredictable implications and consequences. Apart from ignoring the established expertise of the courts, this proposed regulatory scheme could impact the perception of the newly founded UPC.
Under the proposed regulation, parties contributing to a standard would be allowed to determine aggregate royalties for the standard. The purpose of aggregate royalty rates is to provide greater transparency for the overall cost of the standard, which would allow implementers to factor royalties into product pricing. Additionally, the use of aggregate royalties may potentially simplify SEP licensing and reduce costs, as the total royalty amount would be predetermined. The regulation could also permit various contributors to jointly express perspectives on the aggregate royalty. However, this could create further complications for implementers who may already be facing a confusing licensing landscape.
The proposed regulation includes provisions for evaluating the essentiality of patents that have been declared as essential for a particular standard. This measure is intended to enhance transparency in the SEP landscape and aid implementers in identifying which parties they need to license from. However, for implementers, it is not only crucial to know whether patents are essential for a standard, but also whether potential products would infringe the SEPs and whether those SEPs are valid. For essentiality checks, the EUIPO would select a sample of declared SEPs from each SEP owner and each specific standard annually. The Commission would theoretically devise an appropriate methodology to ensure that the selection process is fair, statistically valid, and capable of producing sufficiently precise results. Furthermore, each SEP owner would have the option to propose up to 100 claimed SEPs for essentiality checks for each specific standard. However, it is not clear whether the essentiality checks would help with licensing, as the parties may not accept the results, with the consequence continuing to be a dispute in court.
The introduction of such elaborate government regulation of SEP licensing could potentially have significant global implications. It is possible, perhaps even likely, that other nations may not welcome the idea of European regulators determining global FRAND royalty rates. Specifically, establishing aggregate rates for standards, which represent the joint effort of international companies, and enabling individual rates for individual company portfolios may erode the whole international standardization system. Further, it could lead to different jurisdictions setting different aggregate and individual royalty rates resulting in problems on a larger scale.
Further, although the intent of the plan of the European Commission is to bring down licensing costs, a deeper look into the matter shows that this regulation can hardly fulfill such expectations. Specifically, the cost of SEP registration and calculation of the aggregate royalty will burden the SEP owners. It is easy to conclude that the SEP owners, wanting to maintain similar levels of investment in innovation, will have to find ways to increase licensing income, finally affecting both big and small players alike.
In summary, the proposed regulation is likely to place substantial financial burdens on SEP owners who develop and contribute technologies to international standardization. Due to projected excessive costs and overregulation, companies may opt to abandon open and collaborative international standardization that is founded and relies on FRAND licensing. Instead, the SEP holders may be encouraged to treat the pursuit of IP in the EU as a lower priority and focus efforts elsewhere. Additionally, the focus on proprietary solutions within smaller industry groups in order to evade EU regulation may increase. However, whether this is a preferable alternative remains a topic of debate.
