Consultation of the EU Commission on standard-essential patents and FRAND

Background

On 14 February 2022, the EU Commission (Directorate-General GROW) opened an impact assessment consultation and a public consultation on a new framework for standard-essential patents (more on the initiative here. Standard-essential patents (SEPs) are patents that protect technologies that are indispensable for some industries and have therefore become, in a sense, a "standard". According to now well-established case law (see, inter alia, the ECJ judgment of 16 July 2015, Case C-170/13), patent holders of such SEPs may be obliged to grant licences for their protected technologies to users.

These licenses must be "Fair, Reasonable and Non-Discriminatory" (FRAND). In its decision, the ECJ developed a kind of "ping-pong procedure" for the course of negotiations on how parties must behave in the context of licensing negotiations on the use of a standard-essential patent. In doing so, the ECJ clarified that both parties were equally responsible for concluding a FRAND licence: First, the SEP holder shall point out the alleged infringement to the alleged user of the patent, whereupon the latter shall declare his/her willingness to license on FRAND terms. Finally, the SEP holder shall make a licence offer to the user of the patent, stating how the licence fee would be calculated, to which the user then shall respond in good faith in accordance with the accepted commercial practices and principles in the relevant field. However, what the ECJ actually means by FRAND conditions has not yet been fully clarified. Rather, it is up to the national courts to interpret and apply the FRAND criteria. 

In its first FRAND decision after the ECJ ruling, the "FRAND I" decision, the German Federal Court of Justice (“BGH”), among other things, set a strict standard for the content of the declaration of willingness to license (BGH, judgement of 5 May 2020, Ref. no. K ZR 36/17, on the FRAND I decision cf. here here. Accordingly, a clear, serious and unambiguous statement of willingness to license must be made. The requirements of the ECJ in the case Huawei . /. ZTE should not, however, lead to a schematic formalisation of the negotiation process. 

In its FRAND II judgement (BGH, judgement of 24 Nov 2020, Ref. no. K ZR 35/17), the BGH put the requirements for the willingness to license in concrete terms: "In principle, the willingness of the infringer to license, just as the willingness of the patent holder to license, may not exhaust itself in the one-time expression of the interest in licensing or the submission of a (counter) offer". Furthermore, the court stated that in the absence of the licensee's willingness to license, a patent infringement suit by the SEP holder did not constitute an abuse of market power. 

Ultimately, the FRAND rulings of the Federal Court of Justice do not bring much clarity for practice, especially with regard to the central question of which practices and licensing agreements are fair, reasonable and non-discriminatory in individual cases.

The legal challenges associated with the licensing of SEPs also arise in the other EU member states. The relevance of SEPs is currently higher than ever before. The number of registered SEPs as well as the number of users is continuously increasing. A frictionless licensing system has become indispensable. However, uncertainties due to unclear FRAND criteria, lack of disclosure of licensing negotiations and a lack of verification of the essentiality of the patented technology when applying for a patent, among other things, lead to inefficient licensing practices and thus also to obstacles in the development and enforcement of standards in Europe.

With the latest consultation, the EU Commission wants, among other things, to shed some light on the issue. The aim is to achieve a fair and balanced framework for licensing. To this end, legislative and non-legislative measures can be combined.

Contents of the consultation

The aim of the consultation is to increase legal certainty and transparency and to reduce fragmentation and transaction costs. 

The 65-page consultation questionnaire is divided into seven sections:

1. General questions 
   
   The first section looks at the impact of SEP licensing and FRAND court proceedings on start-ups and SMEs.
2. Licensing procedure 
   
   The questions relating to the licensing procedure aim to capture the scope and duration of such a procedure in spatial and temporal terms. The focus is on the costs involved and the motives of the parties.  
3. Problems in connection with the licensing of SEP 
   
   In this section, the typical problems in licence negotiations as well as exclusion criteria for the use of a standard are determined. To this end, hold-up behaviour on the part of SEP holders and users shall be specified. Such hold-up behaviour on the part of the SEP owner can be, for example, a refusal to disclose the licence conditions with other companies, a refusal to grant a licence or a refusal to offer a licence at a certain price. Possible hold-up behaviour on the part of the user may include requesting an unreasonable amount of information, ignoring notifications from the SEP holder or repeatedly requesting information.
4. Transparency 
   
   Questions are raised here about the way in which information is disclosed by the SEP holder, the user and so-called patent pools. In addition, the main issue here is the possible creation of a register of licensing agreements. For this purpose, the benefits of such a register, access rights to the register (e.g. judges, arbitrators, mediators, lawyers or authorities) as well as the scope of information (e.g. on licence terms, calculation methods for licence fees, payment agreements, licensed SEPs and products, geographical scope and applicable law) are queried.
5. Essentiality
   
   In connection with "essentiality", the questionnaire deals with a possible introduction of a so-called essentiality test. It asks about possible benefits/advantages (for example, in terms of negotiating a licence fee or facilitating licence agreements), responsibilities (such as the European Patent Office, national patent offices, specialised law firms or a combination of several bodies) and typical challenges of such an implementation. In addition, the Commission identifies proposals on how and to what extent the filed SEP families can be reviewed regarding their essentiality.
6. FRAND 
   
   The aim of this section is to make the licensing procedure more efficient, transparent and predictable, to concretise the FRAND criteria, which have so far been rather vague, and to find out to what extent the parties concerned are aware of the FRAND case law of the European Court of Justice. 
   
   The questions are manifold. For example, should the assessment of a fair and reasonable licence be based on the added value of the technology or is the function of the standard decisive? Should the definition of fair and reasonable criteria be based on the individual case or should uniform standard criteria be developed? When do non-discriminatory price ranges and licensing conditions exist? Are different companies already in a similar position when they acquire a licence in the same period or only when they are active at the same stage in the value chain and use the same function of the standard? At what level should licensing take place or would SEP holders even be allowed to refuse licensing altogether? This is only part of the questions this section addresses, among others. 
   
   Further attention is paid to the willingness to license, the declaration of willingness to license as well as the "negotiation procedure" developed by the ECJ. In addition, it is asked whether it seems advisable to introduce a time limit for each phase within this procedure.
7. Enforcement
   
   The last section is dedicated to the meaning of court and arbitration proceedings in FRAND disputes. The focus here is first on determining the jurisdiction of an arbitration body and the applicable procedural rules. Examples of competent arbitration bodies include the World Intellectual Property Organization (WIPO) arbitration body, the International Court of Arbitration of the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), a future patent mediation and arbitration centre at the new Unified Patent Court, or ad hoc arbitration based on a list of impartial arbitrators approved by an authority. In addition, it is intended to assess how comprehensive the judicial competences in relation to the review of FRAND conditions should be in the future. Furthermore, participants are asked to indicate under which conditions they would be most likely to resort to arbitration and how this could be designed in a transparent manner. Lastly, participants are asked about the possible impact of SEP licensing on innovation.

Outlook

The EU is focusing on strengthening European patent law. Promoting SEP licensing on a global scale, enabling frictionless access to standardised technologies and cooperating with other regions and third countries, including Japan and the US, are important tools in this regard. The aim is to implement a sustainable ecosystem for SEP licensing. The consultation will run until 9 May 2022.