This blog was originally posted on the ACTonline website. It can be viewed here.

On November 29, 2017, the European Commission (EC) issued a highly-anticipated Communication on the licensing practices for standard essential patents (SEPs). The EC issued the Communication to provide a “balanced, smooth and predictable framework for SEPs” that will contribute to “the development of the Internet of Things and harnessing Europe’s lead role in in this context.” For more details on the Communication, we’ve written a comprehensive summary here.

We know that open standards provide an unparalleled foundation for innovation and entrepreneurship, and the cornerstone of their success are the voluntary fair, reasonable and non-discriminatory (FRAND) commitments made by the owners of SEPs. This rings true for startups and small and medium sized enterprises (SMEs) that rely on the interoperability of open standards to compete on a level playing field with tech giants around the globe. Our members depend on open standards to develop and drive the next generation of internet of things (IoT) devices that can interact across platforms and will transform enterprises and industries.

ACT | The App Association acknowledges the Communication’s effort to build upon existing policies to better promote transparent and predictable SEP licensing practices that are consistent with the global SEP policy consensus we have long supported (examples here and here). Through this Communication, the EC helps ensure Europe remains a global leader in establishing pro-innovation standards and SEP policies, and a global contributor to innovation.

In our effort to help app developers, innovators, and SMEs understand the Communication and its impact, we have identified three key takeaways from the document. Though the Communication addresses a variety of issues, including patent pooling and open source software, the following issues are representative of the significant work we’ve accomplished with the EC this year.

  • The Commission recognized the significant contributions of SMEs to innovative IoT solutions, and the critical role of standards in empowering SMEs to compete with industry giants. Throughout the Communication, the EC lauds SMEs for developing innovative IoT solutions across industries. More than any other stakeholder group, SMEs depend on a healthy and fair standards ecosystem to create innovations and jobs in Europe and around the world. We appreciate, and applaud, the Commission’s recognition of the integral role SMEs and startups play in the innovation process.

 

  • The Commission reinforced the license to all obligation of FRAND-committed SEP holders. The EC’s 2011 Horizontal Guidelines clearly established SEP holders’ requirement to offer licenses to “all third parties” on FRAND terms. It is well known that SEP holders increase their market power when their patent is incorporated into a standard, and as a result of their FRAND commitment, they cannot refuse a license to any willing third party. In the new Communication, the EC reiterates that the Court of Justice of the European Union (CJEU) confirmed in the landmark Huawei decision of 2015 that efforts “to grant licenses on FRAND terms creates legitimate expectations on the part of third parties that the proprietor of the SEP will in fact grant licenses on such terms.”

    SEP holders that refuse to offer FRAND licenses to willing licensees, particularly SMEs or competitors, present a clear threat to competition, innovation, and interoperability. In fact, competition regulators from North America to Europe to Asia have either developed policies, or brought enforcement actions, based on the concept that SEP holders must offer FRAND licensees to any willing licensee. This approach has also been adopted by leading standard development organizations, including the European Telecommunications Standards Institute. Despite this understanding, several stakeholders pushed the Commission to embrace the nebulous term “access for all” that would allow SEP holders to argue and defend a decision to refuse to license to some parties, even if their potential licensees were willing to negotiate on FRAND terms. We congratulate the EC for their judicious choice in support of their long-established position, and their work to confirm that SEP licenses must be made available to any willing licensee, including a competitor.

 

  • The Commission rejected the dangerous “use-based pricing” model. In the leadup to the final Communication, the Commission considered a new pricing scheme proposed by large SEP holders that would allow SEP royalty determinations to be based on (1) unconnected SEPs and other innovations brought into the standard development process by unrelated parties and (2) the ingenuity of downstream innovators that depend on open standards to compete in the market. Despite heavy lobbying, the Commission ultimately rejected the “use-based pricing” model that would have allowed SEP holders to inflate license fees based on the value created by other innovators, or factors unrelated to the patent.

We have long argued that use-based pricing schemes would give SEP holders an unfair boost, and allow them to capture a larger proportion of the value of the products that implement the standards. If the use-based pricing model were approved, SEP holders would have the autonomy to demand higher licensing fees if they perceive their patent will be used in an end product they consider to be more valuable. For example, different licensing fees would be charged when the same technology is used in a €1 million medical device that saves lives versus when implemented in a mid-range commercial-use smartphone. In other words, under the use-based pricing model, an SEP holder would be permitted to charge a higher royalty from a licensee that creates a smartwatch covered in 24 karat gold than from a licensee that creates the same watch made of stainless steel, even though the SEP contributed no additional value to the smartwatch.

ACT | The App Association led a chorus of European SME voices to make clear to the Commission that use-based pricing jeopardizes the ability to innovate, compete, and raise venture capital. The efforts were successful, and the work paid off as the Commission wisely chose to move forward without any endorsement of use-based pricing. The Commission specifically stated that “[d]etermining a FRAND value should require taking into account the present value added of the patented technology” and that such value should be “irrespective of the market success of the product which is unrelated to the patented technology.” In the same vein, the Commission prudently stated that royalty stacking, a practice with harmful effects on end users in the consumer and enterprise context, should be avoided.

On the whole, the App Association values the Commission’s openness to dialogue, and receptiveness to the views of European SME innovators, throughout the development of the Communication. In the year ahead, we remain committed to assisting the Commission on SEP issues to advance Europe’s leading role in open standards. We look forward to future engagement formally —through frameworks like the SEP licensing expert group announced in the Communication—and informally, as a resource for innovation policy. We believe our continued engagement and collaboration will be vital to create more clarity and understanding in the SEP licensing ecosystem.