The EU's draft standard essential patents regulation: what you need to know

A European Commission draft regulation would, if enacted, drastically change the litigation and licensing of standard essential patents (SEPs) in the EU (with potentially global ramifications). The proposal has attracted controversy due to both the nature of the reform proposed and the fact that the document was leaked several weeks ahead of its official publication. What does the draft regulation propose, how would it change the SEP landscape and how might it work in practice?

Standardisation and SEPs

Standardisation involves the creation and implementation of technical standards: for example, the 4G standard for mobile telecommunications. Standards span a wide range of technologies and sectors, and are increasingly important in the context of the Internet of Things. As the Commission acknowledged, standardisation plays a key role in technological development, ensures interoperability of products and can increase competitiveness in the market.

A SEP is a patent that protects technology that is essential to implementing a standard. In order for a standard to be successful, it requires the best technical solutions, and widespread implementation and use. However, without using the inventions that SEPs protect, standard-compliant products cannot be made or sold. To tackle the potential issues this creates, standard setting organisations usually require patents that are or may be essential to a particular standard to be declared as such.

As part of this declaration, the patentee agrees to license the patent on fair, reasonable, and non-discriminatory (FRAND) terms. (In the case of some standards these may be known as RAND terms, but there is no material difference.) What amounts to FRAND terms is a matter of hot debate in the courts of many countries around the world, with different courts often disagreeing even where the facts are similar. This is what the Commission has sought to address in its proposal.

SEP licensing disputes: the background

The UK courts led the way in offering a solution to these global SEP and licensing disputes, with their jurisdiction and willingness to set global FRAND terms being confirmed in the UK Supreme Court (a case in which Osborne Clarke acted). Since this landmark decision, other national courts have shown a willingness to set global terms in FRAND disputes as well, for example, the courts of the People's Republic of China. In the UK, these cases were brought traditionally by SEP holders seeking licences from entities manufacturing and/or selling products that implement the relevant standard(s), but recently implementers have started to bring FRAND dispute cases of their own.

The increasing number of FRAND disputes in the UK courts prompted the UK Intellectual Property Office (UKIPO) to launch a consultation to seek views on whether the SEP ecosystem is functioning efficiently and whether there is a need for UK government intervention. The UKIPO's response to the consultation noted that there has been "considerable industry and sector interest" in the role of national courts setting global FRAND licensing rates but "reliance on courts to resolve such disputes can be inefficient and costly for users of technologies in which SEPs are embedded".

The response went on to suggest that the government would seek views on how best to "encourage and promote greater use of arbitration" and whether there should be government intervention. This echoes separate calls for a system of mandatory arbitration made by Lord Justice Arnold, an experienced IP judge, in the Court of Appeal's judgment in Optis v Apple (in which Osborne Clarke also acted).

By introducing the draft SEP regulation, the European Commission has sought to position itself and the EU market as a frontrunner in using alternative dispute resolution (ADR) to resolve SEP licensing disputes, though the draft has attracted significant controversy. (Post-Brexit, if enacted, the draft SEP regulation would only apply in the EU and not in the UK.)

What does the new regulation propose?

The Commission states that its proposed SEP licensing framework aims to create a balanced SEP licensing system, increase transparency, promote efficiency in licensing negotiations, and incentivise EU firms to participate in the standard development and implementation process. The Commission's position (at present) is that the draft SEP regulation achieves these aims by making detailed information on SEPs and existing FRAND licences available to facilitate licensing negotiations, and providing for an ADR mechanism for resolving any disputes over FRAND terms. The Commission's view is that these reforms will help to tackle both "hold-out" and "hold-up" by restoring balance in SEP licensing.

Hold-out is a term used to describe a potential licensee avoiding entering a licence for as long as possible while using SEPs, and hold-up is a term used to describe a potential licensor seeking to use the threat of litigation and/or injunctive relief to extract overly high royalties. Whether both hold-out and hold-up occur in practice is a matter of some debate on both sides.

There are a number of key aspects to the proposal, including a competence centre, a SEP register, essentiality checks, aggregate royalty, and FRAND determination

Competence centre and SEP register

A competence centre would be established at the EU Intellectual Property Office (EUIPO) to administer certain aspects of the proposal.

In order to further the transparency objectives, SEP holders would have to register SEPs subject to FRAND commitments with the competence centre (and notify it of the relevant standard(s)). The competence centre would then maintain a centralised register containing relevant information, such as the number of SEPs applicable to a standard, the parts of the standard covered by each SEP, any public standard SEP licensing terms or licensing programmes offered by relevant SEP holders, and the results of an essentiality check or peer evaluation (if any). If a SEP is not registered with the competence centre then the SEP holder would not be entitled to receive royalties or seek damages for infringement in the EU until it is registered.

Essentiality checks

On an annual basis the competence centre would select a sample of registered SEPs from different patent families for each SEP holder (excluding micro and small enterprises) and appoint an evaluator to conduct essentiality checks against specific standards in accordance with a methodology yet to be specified. The outcome of the check would not be legally binding, but it could be referred to before stakeholders, patent pools, public authorities, courts or arbitrators (for example, during an EUIPO FRAND determination process, as outlined below). Also on an annual basis, each SEP holder and any implementer could voluntarily propose up to 100 registered SEPs from different patent families to be checked for essentiality. The results would be published and recorded on the register.

Aggregate royalty

The proposal focuses on the use of aggregate royalty burdens (ARBs) as a means of determining FRAND rates. An ARB is the total royalty that should be payable for the use of all of the SEPs relevant to a particular standard. SEP holders' relative shares determine the share of the ARB to which they are entitled.

Groups of SEP holders would be able jointly to notify the competence centre of their proposed aggregate royalty for all of the SEPs covering a standard. As part of that process, SEP holders representing at least 20% of all SEPs of a standard may request that the competence centre appoints a conciliator to mediate discussions for a joint submission.

That said, SEP holders and implementers are entitled to request a non-binding expert opinion on a global aggregate royalty burden from the competence centre. Stakeholders would be able to request to participate in the process and the expert opinion would be published. However, it is worth noting that the European Parliament Committee on International Trade disagreed with this aspect due to potential competition law concerns.

FRAND determination

Ultimately, this is the heart of the proposal. A mandatory process is prescribed, requiring parties to use an EUIPO FRAND determination process. Parties would be unable to bring litigation during the process (which should not exceed nine months in duration), with there being a limited exception for seeking preliminary injunctions of a financial nature (that is, not including seizure of property or seizure/delivery up of allegedly infringing products). The responding party would have to indicate whether it intended to participate in the EUIPO's FRAND determination process.

In the case of non-participation then the requesting party could choose to either terminate or continue with the FRAND determination process. The conciliator would be able to hear witness and expert evidence and to conduct a hearing if it was considered necessary. The FRAND determination would be on a global basis unless specified otherwise, but would not be binding unless both parties agreed to that (though presumably it is hoped that it would have some persuasive force, at least before EU courts).

The FRAND determination would focus on the use of aggregate royalty burdens and relative SEP shares to reach a conclusion (this is not the method commonly used before the UK and other courts, which is to consider comparable licences).

For more information on this development, see our Insight on the European Parliament committees and the EPO issuing opinions on draft SEP rules and how these proposals would drastically change the landscape of standard essential patent licensing disputes in the EU.