Climate Change in SEP Licensing? - The European Commission’s Newly Released Draft of an SEP Regulation
Following last minute changes to a prior leaked version, the first official version of the European Commission’s draft of an SEP Regulation (“SEP Draft Regulation”) was presented on April 27, 2023. It still contains highly controversial provisions such as new competencies for the EUIPO and dispute resolution mechanisms that strengthen the parties’ chances of achieving a FRAND license agreement but which may also require additional effort on the part of patent holders to obtain an injunction in the European Union.
I. Legislative Impetus: Lack of Mechanisms to Establish FRAND SEP License Rates
The issues that the SEP Draft Regulation is trying to resolve are as old as standardization in the patent world itself: SEP holders and implementers often have different views about which and how many patents of a portfolio are actually standard essential. Even if that can be established, fair, reasonable and non-discriminatory (FRAND) license conditions remain extremely difficult and time-consuming to determine given that the market for SEP licensing is plagued by a lack of transparency. Finally, suitable dispute resolution mechanisms are seldom available to the parties. These deficits impede the fairness and efficiency of the SEP system and lead to excessive administrative and transactional costs.
To address these issues, the SEP Draft Regulation is putting forward both institutional reforms and new mechanisms to more efficiently establish patent essentiality and FRAND licensing rates. For SEP holders, these reforms may entail obligations that come on top of existing FRAND obligations under antitrust law (such as obligatory pre-litigation dispute resolution before an EUIPO “conciliator”), but could also help them license their patents more efficiently. The SEP Draft Regulation may also lead to an increase in transparency in SEP licensing. This increase in transparency and the additional dispute resolution mechanisms proposed by the draft could also help to bring implementers to the table and resolve licensing disputes before any litigation is filed.
II. A Competence Center for Determining Standard Essentality and FRAND Rates
A centerpiece of the SEP Draft Regulation is a “Competence Center” which would be established at the European Union Intellectual Property Office (EUIPO). The Competence Center would set up a register for SEPs for recording information on relevant standards, essentiality, SEPs in force in the EU, FRAND terms and conditions as well as licensing programs.
The SEP Draft Regulation also provides options both for SEP holders and implementers to produce information that is essential for setting the SEP license rate. On the one hand, contributors to a standard could jointly inform the Competence Center of an aggregate royalty for the standard which they had agreed upon themselves or request a conciliator to help them determine the aggregate royalty. On the other hand, the Competence Center will be able to provide a non-binding expert opinion on the appropriate aggregate royalty upon an implementer’s or SEP holder’s request.
Further, the Competence Center would also be tasked with conducting “essentiality checks” through independent evaluators to determine whether registered SEPs are in fact standard essential. According to the SEP Draft Regulation, these essentiality checks would either be conducted randomly based on a sampling from SEP portfolios or after a proposal of up to 100 registered SEPs annually from any single SEP holder or implementer.
Finally, the Competence Center will also provide a FRAND determination procedure, which can be initiated by both SEP holders and implementers and would result in a confidential decision by an EUIPO conciliator, which under certain circumstances can be binding for the parties. According to earlier leaked draft versions, the FRAND determination procedure was designed to be a de facto requirement for the filing of imitating litigation before the Unified Patent Court or EU national courts. The version published now does not require a FRAND determination procedure prior to the filing of an SEP lawsuit by one party, if the other party does not commit to comply with the outcome of the procedure within a set deadline.
III. Pros and Cons: The SEP Draft Regulation’s Potential for Implementers, Patent Holders and Other Market Participants
The version of the SEP Draft Regulation which was leaked in March has faced significant criticisms, especially from patent holders. This criticism focusses on issues such as a lack of expertise at the EUIPO in patent or SEP matters and the fact that (obligatory) dispute resolution proceedings at the EUIPO could significantly delay patent infringement litigation. Another source of criticism focusses on the fact that patents that are declared as not standard-essential by the EUIPO could create even bigger problems for implementers, given that FRAND rules under antitrust law do not apply when such patents are litigated and a FRAND defense would therefore not be available.
Still, the SEP Draft Regulation’s potential should not be underestimated. Essentiality checks at the EUIPO promise increased transparency and may help avoid a potential over-registration of SEPs. In the long term, they could have a substantial impact on per-standard license fees, which may also lead overall to reduced prices on downstream markets and for consumers.
Similar effects may be achieved if the SEP Draft Regulation’s concept of establishing aggregate royalties per standard succeeds. Considerations that go into such a fee determination may well take into account top-down-calculation principles, which would satisfy many implementers’ requests for more balanced and predictable license fee calculations, especially when compared to the current approach based on “comparable license agreements” that is prevalent in FRAND rate determinations in particular before German courts.
Finally, the highly criticized FRAND determination procedure before a conciliator at the EUIPO also provides substantial benefits. Apart from setting the stage for a potential settlement, it could prevent premature litigation and allow more time for license negotiations. This could substantially reduce the pressure to settle that is typically created through speedy patent litigation and often very detrimental to establishing a FRAND license rate.
The official release of the SEP Draft Regulation on April 27, 2023 only sets the scene for further heated discussions on the topic of regulating SEP licensing. As indicated by the criticism levelled against the previously leaked draft version, heavy lobbying for changes to the content of the SEP Draft Regulation will certainly continue. To what extent this will shape the final version of the legislation in the coming months, and whether the European Commission will be able to substantially resolve the prevalent issues in the SEP licensing space through this piece of legislation remains to be seen.