In late March 2023, there was news that the European Commission was drafting comprehensive regulations on the licensing of standard essential patents (SEP). Commentators predict a draft could be released in April. Experts who had the opportunity to review the regulations provided preliminary comments on this early draft, which is subject to changes.
Details of the draft regulations
In its current form, the new regulatory framework will encourage greater transparency in SEP licensing through a number of new policies and procedures. In particular, the regulation will establish a “Centre of Competence” at the European Union Intellectual Property Office (EUIPO) as a clearinghouse for SEP issues, including technical and economic issues. EUIPO does not currently have patent expertise, and European patents currently fall under the purview of the European Patent Office (EPO), which is independent of the EU and has members from countries outside the EU.This competence center will undertake the following tasks:- Maintain a database on SEP case law and “fair, reasonable and non-discriminatory” (FRAND) provisions and royalty decisions;-Assess the importance of SEP;-Responsible for determining the total amount of FRAND royalties;-Responsible for the determination of each FRAND rate.Importantly, before any European court (including the Unified Patent Court) can enforce their SEP, the SEP owner will be required to register its SEP with the EUIPO and obtain an assessment of the FRAND rates from the EUIPO – although the current draft has Several loopholes may allow SEP owners to avoid the latter requirement in certain circumstances. SEP registration will be a fairly simple matter. However, determining the FRAND rate will be a formal conciliation-style process, chaired by two "mediators" and involving limited evidence, written submissions, witnesses (including experts) and possible oral hearings. The draft stipulates a time limit of nine months for the determination of FRAND rates, and the relevant costs will be borne by both parties.EUIPO will also conduct a materiality review of selected SEP claims. Such inspections will be conducted by an anonymous evaluator. SEP owners can submit a review of the importance of up to 100 of their SEPs, and EUIPO will select a sample of SEPs from each owner and each criterion for review each year. During the materiality review process, the SEP owner may have multiple opportunities to submit comments and responses to third-party comments. However, the role of third parties (such as potential implementers of the standard) will be limited to providing opinions on SEPs that have been selected for materiality review, with a requirement for a "peer evaluation" of the results. The SEP owner will bear the cost of the materiality review. Although not legally binding, the regulations clearly provide that the materiality review can be used as evidence in subsequent negotiations and litigation. However, a materiality review will not be a prerequisite for the execution of a SEP. Interestingly, the draft regulation will require EUIPO to register a pre-existing materiality review carried out by an independent assessment body.The process of determining the total FRAND royalties applicable to the entire standardized technology will be driven largely by the SEP owners. An unspecified number of "standards contributors" may notify EUIPO of issues regarding the total royalty by submitting specified information, including the proposed total royalty, within 90 days of publication of the standard. The SEP owner may amend the notice at a later date. In addition, EUIPO will conduct a coordination discussion on the total usage fee if requested by 10% of all contributors to the standard within a specified time after the publication of the standard. At least 5% of the contributors and/or 5 implementers can request EUIPO to issue a non-binding expert opinion on the total royalties. Relevant standards development organizations and stakeholders (including SEP owners and implementers) will be notified of such requests, and any stakeholder may participate in the process (e.g., submit information to a panel of moderators designated to issue comments ). The regulations clearly provide that SEP owners should consider granting more favorable conditions to micro, small and medium-sized enterprises, however, these conditions will not be taken into account when determining the FRAND of large entities. At this point, the regulations appear inconsistent with the promise that FRAND licenses are non-discriminatory and that every licensee, regardless of size, will be treated similarly. For example, in the recent case of InterDigital v Lenovo, the UK High Court explicitly rejected the SEP owner's differential treatment of small and large entities as inconsistent with FRAND terms.Comments on the impact of the draft regulationsOverall, both SEP owners and implementers will benefit from the increased transparency these regulations bring to FRAND negotiations. Certain aspects are beneficial to SEP implementers. For example, SEP owners need to obtain EUIPO's decision on FRAND before claiming FRAND royalties or executing their SEPs, which will increase delays and risks in the implementation process. By requiring SEP holders to agree to a total royalty, the European Commission has signaled its preference for the top-down FRAND royalty calculation method, which is often preferred by implementers as it allows them to calculate when implementing a particular standard. Total royalties to be paid. For these reasons, the new regulations may cause SEP owners to stay away from the European market.Nonetheless, the draft also provides benefits to SEP owners. The proposed nine-month FRAND rate mediation timetable is much faster than most SEP licensing negotiations. The materiality check and the determination of the total FRAND royalties are mainly driven by the SEP owners, and the implementers can only provide limited input.This is an interesting development, but one thing to keep in mind is that this draft is still in its early stages. Whether it will come into effect, and whether it will include any amendments, is difficult to predict. Commentators have pointed out potential constitutional issues with the draft that will need to be addressed in the coming months, if not years. Nonetheless, SEP owners and implementers appear to have become active in lobbying European legislators to support and/or criticize these regulations.
