The European Commission's ("EC") Proposal for a Regulation of the European Parliament and of the Council on Standard Essential Patents COM(2023) 232 final (27 Apr 2023) (the "Proposed Regulation") was issued by the Commission as the first step in the EU's legislative process. After the release of the proposal, the Commission solicited feedback from stakeholders (those affected by the proposal like patent holders and implementers) until August 10, 2023. This update explores what the Proposed Regulation would mean for standards development groups and for companies that are participating in standards development, and offers an analysis of the future of the Proposed Regulation based upon a recent conversation with the unit within the European Commission responsible for the Proposed Regulation, the Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs ("DG GROW"). A Standard Essential Patent or "SEP" as used in this update is a patent that is technically essential to a technical standard, or put another way, is a patent necessarily infringed by an implementer of that standard. Of note, standards organizations with royalty-free licensing obligations appear to be outside of the scope of the Proposed Regulation.1 This update is not legal advice, is provided for informational purposes only, and the author is not licensed to practice law in the European Union.
Introduction
The Proposed Regulation, if enacted, would be nothing short of transformative, with impacts ranging far beyond the EU. In describing the background and reasons for the Proposed Regulation, the EC makes salient arguments about the need to improve transparency and accessibility of standardized technology and to remove or reduce barriers or friction that can be created by the current patent licensing framework. Under the Proposed Regulation the following would be established: (A) a SEP register with essentiality checks; (B) a "Competence Centre", under the aegis of the EU Intellectual Property Office ("EUIPO"), that manages the registry, the essentiality checks and provides objective information regarding aggregate royalty rates to implementers; (C) conciliation procedures that are required before launching patent infringement litigation for SEPs; and (D) a process for the determination of an aggregate royalty for using a standard, before or shortly after its publication.
There are several concerns often raised by implementers of technology standards regarding the existing SEP licensing framework. Three of the most frequently cited concerns are (1) a lack of transparency regarding who owns SEPs and what the royalty rate will be for implementers; (2) the difficulties when a single technology specification has many different licensors or multiple patent pools with differing royalty rates (e.g., HEVC)2; and (3) the expense of negotiating with licensors, together with (4) the prospect that some of the licensors may be non-practicing entities (often called "patent trolls" in the media) whose sole interest is royalty revenues. The EC appears ready to upend the existing patent licensing framework to promote the use of technology standards by emerging EU technology companies (many of which are small and medium sized enterprises ("SMEs")), and the participation in the standards development process by those companies, all in furtherance of improving the EUs ability to compete globally in the technology arena. As a result of the Proposed Regulation, the EC also anticipates a significant benefit to consumers in the form of reduced prices of products and services as cost savings are passed down because of lower royalties due to SEP owners.
What the Proposed Regulation Means for Standards Development Organizations
The Proposed Regulation calls for standards organizations to notify the Competence Centre when they publish a new technology standard. There are thousands of technology standards published each year. In addition, organizations often publish errata or addenda, which may contain normative requirements, and presumably, a notice would also be required when each such document is published. It is unclear how the actual published technical specification would be made available to the Competence Centre. While this does not seem like a large burden on the standards organizations, this could present issues with standards development organizations that only publish their specifications to their members. It is unclear whether the EC will require that the technology specifications be made public because if the obligation to disclose SEPs is imposed on all purported SEP holders (not just members of the group that developed the technical standard), then it is likely that the final regulations would need to require that when a standards organization submits a technical standard that it also will be made public. Lastly, it is unclear how the determination of an aggregate royalty would impact standards development timetables given the lengthy, difficult, and contentious process for setting royalty rates, and the extent to which at the end of the day this will be an opt-in regime for determining aggregate royalties. The EC has explicitly indicated that its intent is not to slow down the standards development process and one of the goals of the Proposed Regulation is to foster the speedy commercial introduction of new standards-based products and services.
What the Proposed Regulations Mean for SEP Owners
One of the most significant measures in the Proposed Regulation is that a patent holder may not assert its SEP in litigation in an EU Member State (and presumably before its Unified Patent Court) without first registering the SEP with the Competence Centre and engaging in the conciliation process established by the Proposed Regulation. The registration requirement alone may be considerable as very few standards development organizations have a mandatory SEP disclosure policy3, and therefore members of standards development organizations with no SEP disclosure requirement will need to develop a new practice of identifying and registering their SEPs if they wish to license them in the EU. The Proposed Regulation is strongly opposed by patent licensors, who argue that their fundamental ownership rights in their patents are being curtailed. They argue that the right to file a patent infringement lawsuit is a fundamental right, and critical to getting licensees to agree to pay royalties.
Where does the Proposed Regulation go from here?
After a discussion with a source at the European Commission, the understanding is that the Proposed Regulation is still on schedule for adoption in 2024 even though EU parliamentary elections are scheduled for mid-2024. When asked about whether the EC had considered how it would coordinate with standards development organizations it was relayed that the idea is not to delay the adoption of standards, quite the opposite, and that if there are problems or difficulties with complying with the SEP regulations that the Competence Centre may be able to provide information or assistance.
Many respondents during the Proposed Regulation's consultation period focused on the planned resources budgeted in the Proposed Regulation being inadequate. Through a discussion with a source at the EC it was confirmed that the 12 employees that the Proposed Regulation cites are the initial staff to organize the registry, which will grow to approximately 30 employees when operational. The EUIPO will handle this part of the administration function and establish the Competence Centre. However, the validation of the SEPs (the technical essentiality check), and the conciliation procedures will require outside experts, which will be hired by the Competence Centre. It may establish a roster of qualified personnel, for example, patent attorneys, that would be hired to conduct the essentiality checks on the purported SEPs.
Conclusion
The Proposed Regulation will have significant impact on the member policies of standards organizations, including how the policies treat SEP disclosures and the extent to which new standards organizations may choose royalty-free licensing policies to avoid some of the EU requirements (for both standards organization and SEP holder). In addition, it will be interesting to see if there are any new developments in other jurisdictions around the world and whether they will look to put in place new alternative patent licensing frameworks similar to what is being considered for the EU. If the Proposed Regulation is adopted then there is a good chance we might see a phased approach to implementing the various elements of the new SEP framework for the EU, given the breath and scale of the changes.
Footnotes
1 Proposed Regulation, Explanatory Memorandum page 12. "It does not apply to SEPs that are subject to royalty-free intellectual property policy of the SDO that has published the standard."
2 See "HEVC Royalty Stacking and Uncertainty Threaten VVC Adoption" published on ipwatchdog.com by Craig Thompson, August 13, 2021. Also, see C Eltzroth & J Cary, "Fostering of Patent Pools Covering Cable Technology: Lessons from VVC Pool Fostering," A Technical Paper prepared for SCTE(2021), available at https://ssrn.com/abstract=3949545.
3 The EU already has indicated that it is best practice for purposes of EU Competition Law that a standards organization requires the disclosure of SEPs. See Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements C(2023) 3445 final (1 Jun 2023), para 457.
4 The EC argues that the Proposed Regulation is lawful claiming "Limitations on the exercise of IP rights are allowed under the EU Charter of Fundamental Rights, provided that the proportionality principle is respected. According to settled case law, fundamental rights can be restricted provided that those restrictions correspond to objectives of general interest pursued by the EU and do not constitute, with regard to the aim pursued, a disproportionate and intolerable interference which infringes the very essence of the rights guaranteed." Proposed Regulation, page 10 (Explanatory Memorandum, Impact Assessment: Fundamental rights). The Commission cites several cases in this line of reasoning including e: Judgment of the Court of Justice of 13 December 1979, Hauer v. Land Rheinland-Pfalz, C-44/79, EU:C:1979:290, para. 32.r v. Land Rheinland-Pfalz, C-44/79, EU:C:1979:290, para. 32.
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