“To proceed as before would be a mistake”

At the end of March, a draft of the EU Commission’s proposals for regulating standard essential patents (SEPs) in Europe was leaked. The main cornerstones are the registration of SEPs, a third-party essentiality check and a FRAND determination before stakeholders can file patent lawsuits. A new competence centre at the European Union Intellectual Property Office (EUIPO) in Alicante is to be the linchpin.

The EU Commission is thus breaking new ground. Its primary aim is to create greater transparency in SEP licensing and fair opportunities for all parties involved.

The commission is serious

The proposals have been causing a great deal of agitation in the global SEP industry for weeks, especially among SEP holders. Yesterday the commission released its final version, which will now go into the legislative process.

Despite massive interventions on the part of industrial companies, interest groups and organisations such as ETSI, the EU Commission did not change the fundamental aspects of its reform. It is clear the commission is serious about implementing real change and balancing all interests – from small companies needing a mobile communications licence for the Internet of Things, to large SEP holders such as Nokia and InterDigital – and the various SEP interest groups will now have to get used to this.

Massive criticism

So far, there have been accusations that the proposal is “unbalanced” and too implementer-friendly. In recent weeks, many critics have claimed this spells the end for Europe as a hub of technology. They accuse the EU Commission of sloppy work and fear that SEP holders will move to other jurisdictions for their litigation in the future.

It is in the nature of change that someone is always dissatisfied. But this is especially true for such a complex and lucrative market as SEPs – not least due to the strong fragmentation of the market with numerous participants on both the patent holder and implementer sides. Intransparent licence determination, lack of clarity as to who in the chain should take a licence, and lack of essentiality checks have led to a sharp rise in SEP legislation in Europe in recent years.

The battle for connected cars has shown that, in the course of the Internet of Things, industry suppliers – among them many SMEs – are increasingly getting caught up in the struggle for SEP licences. However, they often do not have the necessary market power or the financial resources to negotiate for years with powerful SEP holders for favourable licence agreements.

Therefore, government agencies and regulation must ensure a level playing field. In this respect, the EU Commission fulfilled its responsibility yesterday. Now, however, it must ensure clear conditions and a fair balance of interests.

Incompetent competence centre

The planned competence centre at the EUIPO has chiefly met with fierce criticism from the global SEP industry. This is because the EUIPO does not have any particular expertise in patents or SEPs.

The centre is to maintain a mandatory SEP registry as a prerequisite to enforcing SEPs. In principle, there is nothing wrong with having a central register for SEPs for a technology standard. But it is not entirely clear why the existing structures of ETSI were not used for this purpose. It is possible that the SEP holders which operated ETSI missed the opportunity to agree on an appropriate solution.

It is also possible, however, that those behind the new SEP legislation want the new competence centre to do more – a one-stop shop for all questions relating to SEPs. After all, the centre will have more tasks than simply maintaining a registry.

Essential or not – that is the question

The centre will also perform essentiality checks, although these will be non-binding. The industry has called for essentiality checks by a third party for years – and rightly so. Up to now, the patent holders themselves have decided which of their patents are essential for a standard. This creates problems; there is a tendency to over-declare SEPs and implementers have to clear up any potential doubts as to whether a patent is really essential to a standard in court proceedings.

If all stakeholders are to accept essentiality checks by the centre, well-trained experts must carry them out. The fact that the EUIPO has so far been responsible for trademarks and design but not SEPs need not be a problem – provided the EU Commission provides it with appropriate resources.

The commission needs to invest

According to the proposal, the EUIPO estimates that set-up costs for the competence centre and register, including IT infrastructure, will amount to around €2.4 million. Running costs will require around €2 million annually. This will probably not be enough if the EU Commission wants to staff the centre with the best technical experts, economists and lawyers. The competition for talent is fierce. In the future, however, AI could do some of the work.

If SEP holders do the proper groundwork, submit solid and high-quality patents to a standard and ensure the essentiality of their patents, highly qualified experts at the centre should come up with good results.

Mandatory FRAND determination

In addition to a central registry, the EU Commission also proposes that mediators at the competence centre carry out an obligatory FRAND determination before parties can initiate litigation in UPC countries. The commission claims this would create greater transparency, but the measure has received much criticism.

Some critics see this as a weakening of the Unified Patent Court even before it opens its doors. However, few market participants expect the UPC judges to determine a specific FRAND rate. And many mobile communications experts forget that the UPC is more than just an SEP court. In any case, representatives of other industries fear that many SEP suits filed from 1 June could lead to the establishment of a pure case law on mobile communications.

If, on the other hand, well-trained mediators at the EUIPO have the time and information to weigh up the various aspects of a FRAND rate, this non-binding FRAND determination could be a guideline for further negotiations – or even for court decisions. In the end, if all negotiations fail and SEP holders and implementers are unable to reach an agreement, they will still have the option to go to court.

The stakes are high

SEP holders in particular are very critical of the EU Commission’s reform package. This is understandable, as legislators are demanding what SEP holders consider to be huge concessions, namely third-party essentiality checks and greater transparency in licensing negotiations.

However, the European Council and the EU Parliament still have to approve the reform. And with SEP licences worth billions, the stakeholders will undoubtedly now step up their lobbying in Brussels and Strasbourg.

This is another reason why the EU Commission and the EU states must make further investments – to prove that reliable third-party essentiality checks are possible and that they are serious about transparency.

Furthermore, the stakeholders must demonstrate that they are willing to make concessions in order to achieve the reform they have always wanted. Otherwise, the lasting impression will be that, for many parties, the current system of intransparent licensing conditions and supposed hold-outs is not so bad after all.