We recently reported on the European Commission’s leaked draft regulations concerning the fair, reasonable and non-discriminatory (FRAND) licensing of standard essential patents (SEPs). Since the publication of that piece, we have reviewed a 245-page Impact Assessment Report from the European Commission that offers further context on the draft regulations and reveals an interesting feature that was considered but ultimately not included in the leaked draft.
At a high level, the draft regulations would establish a new FRAND regulatory regime with the following features:
A “competence center” at the European Union Intellectual Property Office that will provide information on FRAND negotiations, relevant case law, etc.
A SEP registry and essentiality checks conducted by the competence center. Registration would be mandatory before the patent owner could enforce or license its SEPs in Europe, but an essentiality check would not be.
A mediation-style determination of the FRAND rate that applies between a specific SEP owner and implementer (known as “conciliation”). This would also be mandatory before enforcement in a European court.
A process to determine the aggregate FRAND royalty for an entire standard, largely driven by the SEP owners.
The report refers to those features as Options 1 through 4, ordered “from the least to the most ambitious.” The four options are incremental—that is, each subsequent option combines with and incorporates the previous one. The European Commission analyzed the impact of each option on SEP owners, implementers, courts and patent offices and ultimately settled on Option 4 as the preferred choice.
The report also discusses a further option that was not included in the draft regulations: Option 5, which would establish a “SEP clearing house” to act as “a one-stop-shop facility for implementers” by giving the aggregate royalty determination of Option 4 a binding effect. According to this option, any implementer could obtain a license from all SEP owners on a given standard by depositing royalty payments into an escrow account. SEP owners would be tasked with determining a fair apportionment of the royalties among themselves. Although the report does not state exactly why Option 5 was not included in the draft, it notes several downsides that likely influenced this decision. As to implementers, the European Commission worried that the aggregate royalty would be too high and that the ease of obtaining royalties through the clearing house would encourage greater participation among SEP owners, thus increasing the effective royalty burden on implementers. As to SEP owners, the European Commission expressed skepticism that SEP owners would ever reach an agreement on apportionment.
Although ambitious, the Option 5 clearing house is not without precedent. As the report acknowledges, the clearing house would essentially serve as a single patent pool for a given standard. Numerous patent pools exist to license SEPs on a wide variety of standards, and they are often touted as offering convenience and relative certainty. (Indeed, the fact that so many pools have successfully negotiated apportionment among their SEP owners indicates that the European Commission’s skepticism on such negotiations is likely overblown.) Option 5 also adopts characteristics of an intriguing litigation-based solution proposed in a 2017 paper by Jason Bartlett and Jorge Contreras titled, “Rationalizing FRAND Royalties: Can Interpleader Save the Internet of Things?” Like the Bartlett and Contreras proposal, Option 5 would apply a top-down approach and allow implementers to discharge their liability with a single royalty while SEP owners duke it out over the proper apportionment.
It will be interesting to see how the various stakeholders react to the report’s discussion of Option 5 and whether this option makes its way into future drafts.