In late March, news broke that the European Commission was drafting sweeping regulations on the licensing of standard essential patents (SEPs). Commentators predict the draft will be released in late April. McDermott has had the opportunity to review the regulations and, although this is an early draft that will likely evolve, we offer the following initial observations.
DETAILS OF THE DRAFT REGULATIONS
In its current form, the new regulatory framework would encourage increased transparency in SEP licensing through several new policies and procedures. In particular, the regulations would establish a “competence center” at the European Union Intellectual Property Office (EUIPO) to act as a sort of clearinghouse for SEP issues (both technical and economic). The EUIPO does not currently have patent expertise; EP patents are currently the purview of the European Patent Office (EPO), which is separate from the European Union and includes non-EU members.
The competence center would be tasked with:
- Maintaining a register of SEPs
- Maintaining a database of SEP case law and determinations of “fair, reasonable and non-discriminatory” (FRAND) terms and royalties
- Assessing the essentiality of SEPs
- Administering aggregate FRAND royalty determinations
- Administering individual FRAND rate determinations.
Importantly, before enforcing its SEPs in any European court (including the Unified Patent Court), a SEP owner would be required to register its SEPs with and obtain an assessment of the FRAND rate from the EUIPO (although the current draft includes loopholes that could allow a SEP owner to avoid the latter requirement in certain circumstances). SEP registration would be a rather straightforward matter. The FRAND rate determination, however, would be a formal mediation-style process presided by two “conciliators” and involve limited discovery, written submissions, witnesses (including experts) and potentially an oral hearing. The draft places a nine-month time limit on the FRAND rate determination and the costs would be borne by both parties.
The EUIPO will also conduct essentiality checks of select claimed SEPs. Such a check would be performed by an anonymous evaluator. A SEP owner may propose up to 100 of its SEPs to be checked for essentiality, and the EUIPO will annually select a sample of SEPs from each owner and each standard for checks. The SEP owner may have multiple opportunities to file observations and responses to third-party observations during the essentiality check process. The role of third parties (such as potential implementers of a standard), however, would be limited to filing observations on SEPs already chosen for an essentiality check and requesting “peer evaluation” of the results. The SEP owner would bear the cost of essentiality checks. Although not legally binding, the regulations explicitly state that an essentiality check can be used as evidence in subsequent negotiations and litigation. An essentiality check would not, however, be a prerequisite for enforcing a SEP. Interestingly, the draft regulations would require the EUIPO to register preexisting essentiality checks conducted by an independent evaluator.
The process of determining an aggregate FRAND royalty to apply to the entire standardized technology would be largely driven by SEP owners. An unspecified number of “contributors to a standard” can notify the EUIPO about an aggregate royalty by submitting specified information, including a proposed aggregate royalty, within 90 days after the release of the standard. This notification can later be revised by the SEP owners. Additionally, on request of 10% of all contributors to a standard within a specified timeframe after the release of the standard, the EUIPO will mediate discussions for an aggregate royalty. At least 5% of contributors and/or five implementers can request a nonbinding expert opinion on the aggregate royalty from the EUIPO. The relevant standard-setting organization and stakeholders (including SEP owners and implementers) would be notified of such a request and any stakeholder could participate in the process (e.g., by submitting information to the panel of conciliators assigned to issue the opinion). The regulations explicitly state that SEP owners should consider giving micro-, small- and medium-sized enterprises more favorable terms, however, terms would not be considered in determining FRAND for larger entities. On this point, the regulations appear to be inconsistent with the commitment that FRAND licensing be non-discriminatory and that each licensee (whether large or small) be treated similarly. For example, in its recent InterDigital v. Lenovo opinion, the UK High Court of Justice explicitly rejected a SEP owner’s disparate treatment of small and large entities to be non-FRAND.
COMMENTS ON THE DRAFT REGULATIONS’ IMPACT
Overall, both SEP owners and implementers would benefit from the increased transparency these regulations could bring to FRAND negotiations. Some aspects favor SEP implementers. For example, the requirement that a SEP owner would need to obtain a FRAND determination from the EUIPO before demanding FRAND royalties or enforcing its SEPs would add delay and risk to the enforcement process. By requesting that SEP holders agree to an aggregate royalty, the European Commission is signaling a preference for a top-down FRAND royalty calculation, which is typically preferred by implementers because it allows them to calculate the total aggregate royalties that will need to be paid when implementing a particular standard. For these reasons, the new regulations could steer SEP owners away from European venues.
That said, the draft also offers benefits to SEP owners. The proposed nine-month timeline for FRAND rate mediation is substantially faster than most SEP license negotiations. The essentiality checks and aggregate FRAND royalty determination are driven primarily by SEP owners, with only limited input from implementers.
This is an interesting development, but it is important to remember that the draft is in its early stages still. Whether it will come into force, including with any amendments, is rather unpredictable. Commentators have already flagged potential constitutional issues with the draft that will need to be sorted out in the coming months (and years). Nevertheless, it appears that SEP owners and implementers are already mobilizing in an effort to lobby European legislators to support and/or critique the regulations.