EU: European Commission provides guidance on SEP licensing issues

The end of November saw the announcement of the highly anticipated Communication of the European Commission on the EU approach on Standard Essential Patents (SEPs). The licensing practices and negotiations related to SEPs have given rise to some intense litigation between SEP holders and SEP users often spanning multiple EU jurisdictions. Competition law also plays a vital role in these conflicts, even more so since the Huawei judgement of the Court of Justice of the EU (CJEU) in which the CJEU sets out a framework of rights and obligations for both SEP holders and SEP users when negotiating SEP licenses. If a SEP holder does not comply with said framework they could be considered to have abused a dominant position in the sense of article 102 of the TFEU, which might bar them from obtaining injunctions against parties potentially infringing the relevant SEPs.

In this article we identify the key takeaways from the Communication. The Commission does not define clear-cut obligations or rights for SEP holders or SEP users in the Communication (which would be the wrong place for such definition in any case), but the Communication does provide some interesting thoughts about how the standardisation process functions at present and how this could be improved to reduce uncertainty for all parties involved. Interestingly enough, the Commission not only refers to the Huawei judgement, but also draws heavily from a number of national court judgements that interpreted Huawei, most notably the Unwired Planet judgement of the High Court in the UK.

The Commission briefly outlines the importance of standardisation, in particular in the context of the Digital Single Market, one of the key focus areas of the Commission in recent years. The importance of standards in stimulating the development of the IoT is also emphasized. The Commission refers back to a previous communication on standardisation priorities for the single market where it identified three main areas for improvement of SEP licensing: 1) transparency of the existence, scope and relevance of SEPs; 2) the definition of FRAND terms and calculation of FRAND value of SEPs; and 3) uncertainty surrounding the enforcement of SEPs.

SEP transparency

The Commission describes the practices of Standard Developing Organisations (SDOs) and the databases they maintain to register SEPs that are essential to a standard (or in any case, are declared to be by patent holders). The Commission notes that these databases are far from transparent and also lack a scrutiny test of the patents as to whether they are essential for the standard for which they are registered. Some notable figures: the ETSI database contains more than 23,500 patents that have been declared essential to the GSM and 3G standard. However, studies show that only 10 to 50% of patents claimed to be SEPs actually turn out to be essential to the standard.

The Commission is also critical of the way the declaration systems of SDOs work at present: the current system allows patent holders to indicate that their patent is essential to a certain standard. As the Commission puts it, these systems are “not geared towards future SEP licensing”, but rather focus on the technical standard setting process. Currently the SDOs’ databases are a platform where SEP owners can document their willingness to grant licenses to patent, which could become essential to a new standard. Therefore the focus of these databases is to capture potentially relevant patents, patent applications and corresponding FRAND declarations in as broad a manner as possible to ensure their availability for the implementation of the standard. After the standard is established, however, SEP users need a different kind of database, which is focused on the SEPs that are actually valid and essential for the standard. One suggestion for the Commission is to transform the current SDO databases into a tool to facilitate licensing of existing standards and include in SDO databases the final (positive and negative) decisions related to the validity and essentiality of specific SEPs. The Commission is also critical of the de facto presumption of essentiality that is associated with an essentiality declaration. The Commission urges SDOs to consider implementing scrutiny tools related to the essentiality of declared patents, for instance by introducing a certification system. According to the Commission, patent offices would be obvious candidates to perform such essentiality tests in a cost-effective manner. However, since patent offices are not concerned with determining infringement, this might be an optimistic view. The set-up of a separate European entity assessing SEP essentiality is also an option being considered by the Commission.

Defining FRAND

The question that has probably given courts the most headaches in the context of SEPs is how to determine the FRAND value of a specific SEP or SEP portfolio and also how to assess if individual license terms discussed between SEP holders and users are FRAND. Although the Commission by no means intends to give definitive answers to this question; its views are useful nevertheless. According to the Commission FRAND value:

• should be determined on the actual economic value of the patented technology and should not include elements that relate to the decision to include the technology in the standard. If the technology has little value outside of the standard, then the relative importance of the technology within the standard should be compared to other contributions;
• cannot relate to the market success of the product which incorporates the patented technology, but should be based on the present value added by the patented technology itself, which means also including a discount taking into account the age of the patent as its value drops over time;
• must contribute to providing incentives for SEP holders to provide their best technologies to the standards; and
• should take into account the issue of royalty-stacking by not considering SEPs in isolation but calculating reasonable aggregate rates.

The Commission notes that FRAND should also ensure that SEP holders cannot discriminate between parties that are similarly situated and, with reference to the Unwired Planet ruling, confirms the High Court’s view that global licenses are preferred for products with global circulation over country-by-country licenses. The establishment of patent pools could also improve current licensing practices especially for SMEs that are new to the SEP licensing context. Furthermore the Commission is planning to set up an expert group to gather expertise on FRAND licensing.

Some hot topics were not mentioned by the Commission, most notably whether SEP owners can limit licenses to certain classes of licensees like e.g. manufacturers of branded end user products, or whether any SEP user is entitled to a license under FRAND terms (license to all). While the Huawei judgment of the CJEU and the cases cited therein (such as IMS Health) were concerned with licenses between direct competitors, the Commission did not confirm that licenses have to be granted on this level, e.g. between competing manufacturers of chips or other components.

Enforcement

The Commission refers to the framework set out in Huawei and adds some interesting thoughts to the duties of SEP-holders and users. First of all with regards to the obligations of the SEP-holder to explain why his license offer to a potential licensee is FRAND (a SEP-holder is obliged to make such an offer before starting injunction proceedings), the SEP-holder is in the view of the Commission also obliged to explain the essentiality of its patents for the relevant standard, alongside explaining which products infringe, how the FRAND royalty is calculated and why the offer is non-discriminatory. The SEP-user in turn, when making a counteroffer should not limit itself to contesting the SEP holder’s offer, but should also be transparent about the exact use of the standard by the alleged infringing products.

The Commission notes that its transparency improvement suggestions in relation to the current SDO system would also positively impact enforcement issues. The Commission also refers to the IPR Enforcement Directive and emphasises the importance to always assess the proportionality of an injunction measure (also in terms of the relevance of the technology which is under dispute and the spill-over effect an injunction might have on third parties). This statement is remarkable, since it is not in line with the understanding of the Enforcement Directive in important jurisdictions like Germany, where remedies such as injunctions are generally not subject to judicial discretion or proportionality and do not take into account the interests of third parties. The Commission also comments on the practice of portfolio licensing, which it considers an effective manner to deal with SEP disputes, provided that the portfolio is limited to the SEPs that the licensee needs to market its product. In the context of alternative dispute resolution the Commission seems to point to the Unified Patent Court as a well-placed and experienced body to resolve SEP license disputes, when it enters into operation.

The final paragraphs of the Communication contain some more general remarks on Patent Assertion entities, better known under their less positive denominator of patent trolls; the need for raising awareness with SMEs on SEP issues; and the relationship between standards and open source software.

Conclusion

All in all, the Communication presents a valuable insight in the Commission’s current thinking on the market for SEP licenses. One obvious objective of the Commission seems to be a more active role of SDOs in licensing, which most SDOs have so far carefully avoided. This is remarkable, because with members, who are competitors in the same market or have opposing views on FRAND principles, most SDOs have so far tried to stay neutral and have avoided getting involved in licensing discussions.

The final notable aspect of the Communication is the Commission’s silence on a number of hot topics, which indicates that the Commission might not have found a common position on how conflicting objectives of market participants could be reconciled.