On November 29, 2017, the European Commission (EC) released a Communication titled Setting out the EU approach to Standard Essential Patents (SEPs). In this Communication, the EC set out to address three key concerns:

  • The prevalence of opaque information on SEP exposure;
  • Unclear valuation of patented technologies included in standards and the definition of fair, reasonable, and non-discriminatory (FRAND) licensing; and
  • The risk of uncertainty in enforcement of SEPs.

The EC noted that its Communication is intended to establish key principles that (1) incent the development and inclusion of top technologies in standards by preserving fair and adequate return for SEP contribution; and (2) ensure the dissemination of standardized technologies based on fair access conditions.

The EC’s Communication also addressed numerous issues within the SEP ecosystem, which we have broken down by section below.

1. Increased Transparency on SEP Exposure

The EC suggested that standard development organizations’ (SDOs’) declaration databases of available SEPs are not adequately transparent, which particularly impacts small- and medium-sized entities (SMEs). The EC believes that an increase in transparency will allow stakeholders to better navigate the databases to ensure accessibility for potential licensees and provide notice when a technology is subject to FRAND obligations. This effort includes (1) improving quality and accessibility of information recorded in SDO databases; and (2) developing new transparency tools to facilitate licensing negotiations. Specifically, the database can provide more up-to-date and precise declarations, more detailed essentiality checks that will protect against over-broad declarations, and a certification that a party has met a SDO’s transparency criteria.

The EC noted that it supports further analysis of these solutions and their ability to ensure effectiveness and proportionality. The EC also announced a plan to launch a new pilot project for “SEPs in selected technologies with a view to facilitating the introduction of an appropriate scrutiny mechanism.”

2. General Principles for FRAND Licensing Terms for SEPs

Noting that “the parties are best placed to arrive at a common understanding of what are fair licensing conditions and fair rates, through good faith negotiations,” the EC stated that ambiguity and disagreement on the meaning of FRAND hurts licensing practices, particularly in the context of SEP valuation. The EC offered “guiding elements” to provide “a more stable licensing environment, guide parties in their negotiations and reduce litigation.”

The EC further noted that “[b]oth parties must be willing to engage in good faith negotiations, with the view to establishing licensing conditions that are [FRAND],” and suggests the development of “sectoral discussions with a view to establishing common licensing practices,” based on this Communication’s guidance.

The EC also outlined the following SEP valuation principles:

  • Licensing terms must “bear a clear relationship to” the economic value of the patented technology and should “focus on the technology itself and in principle should not include any element resulting from the decision to include the technology in the standard.” In instances where the technology is developed primarily “for the standard and has little market value outside the standard,” licensors should use other metrics, like “the relative importance of the technology in the standard compared to other contributions in the standard.”
  • Deciding a FRAND licensing value should “[take] into account the present value added of the patented technology” notwithstanding “the market success of the product which is unrelated to the patented technology.”
  • FRAND valuations should incent SEP holders to contribute their technologies to standards.
  • To prevent royalty stacking, individual FRAND valuations of SEPs should “assess[] the overall added value of the technology” which the EC’s transparency measures can adequately address. “Industry licensing platforms and patent pools” are also suggested as possible solutions.

The Communication briefly explored the non-discrimination element of FRAND and stated that right-holders cannot discriminate against implementers that are “similarly situated,” citing the landmark Unwired decision in the United Kingdom. The EC again noted that “solutions can differ from sector to sector and depending on the business models in question,” and that “a country-by-country licensing approach may not be efficient and may not be in line with a recognised commercial practice in [a particular] sector.”

The EC reiterated its belief that “patent pools or other licensing platforms, within the scope of EU competition law” should be encouraged because they will benefit SMEs within industries increasingly affected by the growth of the internet of things (IoT). The EC committed to take further action if patent pools and other licensing platforms prove “ineffective” in the IoT context.

Finally, the EC encouraged the presence of more expertise in FRAND valuation practices and committed to create an “expert group” to “gather[] industry practice and additional expertise on FRAND licensing.” At this juncture, it is unclear how the EC will develop this expert group.

3. Enforcement

The EC noted the need for a clear dispute framework if and when licensing negotiations fail. The framework should address the availability of injunctive relief, litigation based on patent portfolios, alternative dispute resolutions (ADRs), the increasing role of patent assertion entities (PAEs) in the SEP licensing space, and “awareness raising.”

Injunctive Relief

The EC based its injunctive relief analysis on Court of Justice of the European Union’s (CJEU’s) 2015 decision in Huawei v. ZTE. Using this case’s rationale, the EC clearly stated that SEP holders may not seek injunctions against those who are willing to be FRAND licensees, lest the SEP holder run afoul of Article 102 Treaty on the Functioning of the European Union. The EC endorsed the elements of consideration within the Huawei decision regarding a SEP holder’s ability to seek an injunction. These elements are as follows:

  • Before bringing the injunction action, the proprietor has first alerted the alleged infringer of the action against them, and specified how the proprietor’s rights within their SEP have been infringed;
  • The alleged infringer has agreed to be subject to a license under FRAND terms, and the proprietor has given the alleged infringer a specific, written offer to license, which includes a clearly articulated royalty rate; and
  • The alleged infringer continues to use the technology without diligently responding to the offer, thus using the SEP-encumbered technology without a license.

The EC has stated that assessing the above requires clear explanations on “the essentiality for a standard, the allegedly infringing products of the SEP user, the proposed royalty calculation and the non-discrimination element of FRAND.” Additionally, consistent with the Huawei decision, the EC believes any counteroffer must be “concrete and specific,” and response time dependent on the totality of circumstances and the transparency practices of the SDO’s SEP declarations.

Notably, the EC addressed injunction proportionality. The Communication stated that courts are bound by Article 3(2) of the IPR Enforcement Directive when assessing the availability of injunctive relief, which requires injunctive relief to be “effective, proportionate and dissuasive” and determined carefully in consideration of the “broad impact” an injunction can have on “businesses, consumers and on the public interest, particularly in the context of the digitalized economy.” This consideration should include “the relative relevance of the disputed technology for the application in question and the potential spill-over effects of an injunction on third parties.”

To assure equity of protection for downstream users, the EC stated that “the amount [of security required of the SEP holder seeking the injunction] should be fixed at a level that discourages patent hold-out strategies.” They have deferred to industry to assess what this means and have recommended courts approach this on a case-by-case basis, particularly on claim proportionality considerations.

Litigation on the Basis of Patent Portfolios

The EC suggested that courts, when assessing whether licensing a patent portfolio with SEPs is FRAND-compliant, must consider the general commercial practices of the field. However, the EC noted that, in the instances where a patent portfolio contains both SEPs and non-SEP technologies, a court could find a bad faith negotiation where the proprietor of the patent portfolio refuses to license all of its SEPs because the potential licensee refuses to accept a license for all of its non-SEP technology too. The EC noted that “the licensing of all SEPs that a licensee needs can be particularly efficient” and committed to work with stakeholders to develop related methodologies to assist dispute resolution.

Alternative Dispute Resolution (ADR)

The EC supports the use of ADR practices (e.g., mediation or arbitration) because they are cost and time effective. However, it maintained that there are outstanding transparency issues and suggested that the EU’s Unified Patent Court should provide an ADR mechanism for SEP disputes that will use “specialised judges, thus ensuring high quality and efficient proceedings, coherent practice and limited scope for forum shopping.” The EC noted its ongoing work with EU’s Intellectual Property Office to map intellectual property (IP) mediation and arbitration tools with “the view to facilitat[e] the further roll-out of IP mediation and arbitration services, for [small- to medium-sized businesses] in particular.”

Patent Assertion Entities (PAEs)

The EC briefly noted that PAEs “are becoming increasingly involved in the SEP licensing market.” They state that the same requirements placed on other stakeholders in the SEP licensing context should address PAE’s “harmful effects” on the EU. The EC committed to continue to monitor this discrete topic, particularly once the EU’s Unified Patent Court is operational.

Awareness Raising

The EC committed to promote “awareness of the FRAND licensing process and its implication,” particularly for SMEs, in future actions.

4. Open Source and Standards

The EC noted that open source software (OSS) implementation is “also driving innovation, and is becoming increasingly widespread, including in the area of ICT standards.” The “integration between open source projects and standards development processes” is viewed as a “win-win situation,” because OSS can speed standard development and improve uptake while technical standards promote interoperability. The EC committed to “promote an effective relationship between standardisation and open source” through “fund[ing] studies to analyse complementarities, ways of interacting and differences between the two processes, and recommend solutions for smooth collaboration between the two communities.”