On April 27, 2023, the Commission presented its draft regulation on SEPs (“Draft SEPs Framework Regulation”, retrievable here).
Under the aegis of DG GROW, but in close consultation with DG COMP, the Commission seeks to address what some have perceived as lack of transparency and predictability in the licensing of SEPs. The Commission had previously expressed its concern in its Intellectual Property (IP) Action Plan of 2020 and 2017 Communication and suggested that this situation could lead to a cumbersome and costly licensing process for both owners and implementers of SEPs. The Commission sought feedback via a public consultation between February and April 2023.
The draft SEPs Framework Regulation would:
- Establish a Competence Centre to register SEPs at the European Union Intellectual Property Office (“EUIPO”) and an electronic register and database for SEPs that includes extensive information about SEPs;
- Oblige the owners of SEPs to register any claimed SEP in the database;
- Create additional essentiality checks through the Competence Centre;
- Establish an out-of-court procedure to determine fair, reasonable, and nondiscriminatory (”FRAND”) conditions and aggregate royalties for use of a given standard.
At a time of growing standardization, the Draft SEPs Framework Regulation has the potential to materially change the landscape of SEP licensing in the EU. It will impact both net licensors and net licensees alike, developing further the rules and procedures contained in precedential Commission case practice and EU case law (see European Commission in Samsung and Motorola and European Court of Justice in Huawei v. ZTE) and in the Horizontal Guidelines that are being revised (see here).
The potential impact of this legislation is further underscored by (i) the exponential growth of Artificial Intelligence (“AI”), (ii) the move from mobility to connectivity in the automotive sector, (iii) the move of telecommunications network interoperability technology from 2G (GSM), 3G (UMTS), and 4G (LTE) to 5G and 6G, and (iv) the further development of WiFi. Given that the holders of many of the relevant underlying patents are located outside of the EU, the legislation, if adopted, could have a global impact.
The success of a technology standard depends on its broad adoption, which necessitates licensing interested parties to use any patents that are essential to the standard. In many cases, a given standard can implicate hundreds or even thousands of patents, so individual negotiations between patent holders and those who want to use the standard can be burdensome and inefficient. Accordingly, Standard Setting Organizations (“SSOs”) (e.g., ETSI and IEEE) often adopt rules addressing the licensing of SEPs. These SSOs are private organizations that have addressed this issue in different ways. For example, many, but not all, SSOs require patent owners who participate in standard development to commit to license their SEPs on FRAND terms.
The Competence Centre that would be created by the Draft SEPs Framework Regulation and the myriad rules and broad upfront reporting obligations would signal a move away from the market-based approach of SSOs and toward a greater role for direct government regulation of SEP licensing negotiations.
Issues identified by the Commission
The Commission has expressed several concerns that it believes the Draft SEPs Framework Regulation is designed to address, including insufficient transparency concerning the essentiality of SEPs, FRAND licensing terms, and the ability of existing dispute resolution mechanisms to resolve FRAND-related disputes (see recital 2 Draft SEPs Framework Regulation). Because negotiations and licensing terms, including FRAND royalties, are often kept confidential by both SEP owners and implementers, the Commission seeks additional disclosure of information on the number of SEPs within a standard, their ownership, the features they cover, or the aggregate royalties paid to all of the SEP owners for a given standard (see recitals 15, 17 Draft SEPs Framework Regulation). The Commission has also argued that it is difficult for implementers of SEPs (including start-ups and small and medium-sized enterprises (SMEs)) to estimate costs of SEP licenses in advance.
The Commission recognizes that the European Court of Justice in its 2015 judgment in Huawei v. ZTE provided guidelines for the behavior of both SEP holders and implementers during the FRAND negotiation and licensing process, but the Commission nevertheless continues to believe that the determination of FRAND terms is accompanied by legal uncertainty, in part because national courts interpret both the concept of FRAND itself and the licensing negotiation process differently.
In the Commission’s view, these factors taken together led to additional administrative and transactional costs in the SEP licensing system.
Commission Proposals in the Draft SEPs Framework Regulation
The Commission seeks to address these issues in its Draft SEPs Framework Regulation through the following measures:
- The creation of a Competence Centre at the EUIPO to administer a SEP registry and database. The Competence Centre would provide detailed information on SEPs in force in one or more Member States, including essentiality check results, opinions, reports, case law from jurisdictions across the globe, rules relating to SEPs in third countries, and results of studies specific to SEPs.
- SEP holders would be required to register their SEPs within 6 months after the Competence Centre opened the registration process for SEPs relevant to a specific standard or after the grant of the relevant SEPs, whichever is first. Patent pools also would be required to provide the Competence Centre with information relating to SEP ownership, licensing, evaluation, or royalties. Further, National Member Courts and persons involved in alternative dispute resolution proceedings would need to inform the Competence Centre about their proceedings.
- The Competence Centre would administer new processes for essentiality checks and FRAND determinations. The Draft SEPs Framework Regulation proposes the appointment of evaluators for conducting essentiality tests and the appointment of conciliators to serve as mediators. Conciliators also would participate in FRAND determination processes by providing non-binding opinions on aggregate royalties (i.e. the maximum total license fee for using a standardized technology).
The Draft SEPs Framework Regulation would apply to all standards that are published after its entry into force. Standards published before the entry into force of the Regulation would only be subject to it if the Commission determines that “the functioning of the internal market is severely distorted due to inefficiencies in the licensing of SEPs” with respect to a particular standard.
Outlook Before the Commission’s draft SEPs Framework Regulation becomes legally binding, both the European Parliament and the Council of the European Union will have to agree on the text of the Regulation through the ordinary legislative process. While the timing of that process is uncertain, Commission officials indicated a desire to implement the Regulation within two years. It remains to be seen whether amendments will be introduced during the legislative deliberations.