UK: European Commission Sets Out Its Vision On Standard Essential Patents

The European Commission issued a Communication on 29 November 2017 setting out its vision on standard essential patents (SEPs) and its expectations from the stakeholders involved in the declaration, exploitation and enforcement of SEPs. Stakeholders include SEP holders, SEP implementers, Standard Developing Organisations (SDOs) and national courts of the member states.

The Communication draws on a number of points arising from various judicial decisions, such as the UK court's FRAND (fair, reasonable and non-discriminatory) decision in Unwired Planet v Huawei and the Court of Justice of the European Union's (CJEU) decision in Huawei v ZTE. The Communication also provides principles of general applicability and sets out specific recommendations and guidance. The Commission's recommendations and guidance are not binding and it remains to be seen what influence the Communication will have on stakeholders.

Background

The advent of 5G and the Internet of Things (IoT) has significantly enhanced the importance of connectivity and interoperability within the Information and Communications Technology (ICT) sector. Industry reports anticipate that the market for the IoT will grow to EUR 9 trillion by 2025 in developed countries, but that without interoperability such growth could be stunted substantially.

Therefore, a sustainable, efficient and fair standardisation ecosystem is critical to the success of IoT and digital technologies more generally. The Communication acknowledges that to achieve this goal it will be necessary to strike a balance between the two main objectives: allowing a fair and adequate return for SEP owners who develop technologies forming part of a standard; and creating fair access conditions for technology users/ manufacturers for wider adoption and dissemination of such technologies.

In April 2016, the Commission identified three key areas where it considered that the SEP ecosystem could be improved in order to achieve these objectives:

  1. availability of information to determine SEP exposure;
  2. clarifying the valuation principles for patented technologies reading on standards and the definition of FRAND; and
  3. risk and uncertainty in enforcing SEPs.

The November 2017 Communication issued by the Commission is aimed at addressing these three key areas.

Increasing transparency

The idea of increasing transparency around the entire process of declaring patents as standard essential appears to be the most important point in the Communication due to the potential impact it has on subsequent licensing negotiations between SEP holders and technology users. A two-pronged strategy is outlined by the Commission: (i) improving information held by SDOs; and (ii) developing tools to access that information with a view to assisting licensing negotiations. This includes greater scrutiny of essentiality claims. The proposed initiatives, if implemented, will benefit all those involved in the emerging technologies of 5G and IoT in the ICT sector.

General principles for FRAND licensing terms and IP valuation

The Commission has used its discretion judiciously and has left the field open for the stakeholders to develop tailored and sector-focussed FRAND terms while providing general guiding principles that should be kept in mind while conducting good faith negotiations and discussing FRAND terms.

The Commission adopts the position that:

  1. the non-discrimination element of FRAND means that SEP holders cannot discriminate between implementers that are "similarly situated";
  2. cross-licensing practices should be taken into account when determining the FRAND rate due to the efficiency gains arising from such practices; and
  3. global licencing of an SEP portfolio is likely to be more efficient than a country by country licensing approach where the products are in global circulation. The same approach was taken by Mr Justice Birss in the Unwired Planet v Huawei case.

The Commission also advocates that the following IP valuation principles should be taken into account when determining FRAND:

  1. the value of a patented technology must be derived without taking into account any element that results from its inclusion in the standard (this differs from the approach adopted in the Unwired Planet v Huawei case). However, in circumstances where a technology is solely developed for the purposes of the standard a different valuation model may be used.
  2. the FRAND rate should not take into account the market success of the product independent of the patented technology.
  3. the issue of royalty stacking needs to be considered in determining the FRAND rate. Therefore, instead of considering an individual SEP in isolation, the parties need to take a reasonable aggregate rate of the standard, assessing the overall added value of the technology, for determining the FRAND rate. This approach was also adopted by Mr Justice Birss in the Unwired Planet v Huawei case.

Enforcement of SEPs

The Communication follows and expands on the guiding principles and behavioural criteria set out in the case of Huawei v ZTE by the Court of Justice of the European Union (the CJEU) with a view to providing a predictable enforcement environment to SEP holders and implementers. These principles and behavioural criteria have an important bearing on whether or not injunctive relief will be granted and is an acknowledgement and reflection of the risks associated with patent hold-up (e.g. patent owners only willing to licence their products on excessively high royalty rates) and hold outs (e.g. technology implementers unwilling to take licences).

Concluding remarks

The statements released after publication of the Commission Communication by the two key lobbying groups, IP Europe and Fair Standards Alliance, suggest that the Commission has provided balanced and fair guidance that is widely welcomed within the standardisation ecosystem. However, some stakeholders may feel that the Commission should have taken a more proactive approach and addressed the issues of "use-based" licensing (a licensing model that requires the use of the underlying technology to be taken into account in determining the royalty) and "who to license in the chain". The Commission has adopted an evidence-based holistic approach in relation to these and other issues rather than being prescriptive, which is laudable, and it has not ruled out further specific action, if necessary.

The Commission Communication can be seen not only as 'nudging' stakeholders towards better practices, it also sets out the positive steps that the Commission intends to take in the near future to implement certain of the actions proposed in the Communication. An expert group will be created in 2018 to gather expertise and obtain further information on issues such as licensing practises, sound IP valuation and FRAND determination. The Commission will also launch a pilot project on the evaluation of essentiality of SEPs and has called upon the SDOs to urgently ensure that their databases comply with the "main quality features" set out in the communication to ensure transparency. Further specific action by the Commission appears likely.

It will be interesting to see how proactive the Commission becomes during the course of 2018 to implement these measures, what impact they have on the SEP ecosystem and what further intervention the Commission will deem necessary to achieve its stated aims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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