EU Approach to Standard Essential Patents

By: Catherine Caspar and Elsa Benveniste

Our technological era is founded on multiple standards. For example, each and every mobile phone and computer depends on telecommunication standards to communicate with other devices. Standardized technology can—and often does—incorporate proprietary technologies covered by patent rights. Such patent rights are often designated as “Standard Essential Patents” (or “SEPs”) since implementation of the patented invention is essential to comply with the standard.

For a company that intends to produce a standard-compliant product, licenses on SEPs are mandatory. This gives the owner of an SEP a very powerful, possibly dominant, position with great potential for abuse within the meaning of Article 102 TFEU (Treaty on the Function of the European Union).

In order to limit the potential for abuse, companies that have declared a patent as potentially essential to a technical standard are generally subjected to a FRAND commitment. This commitment entails the SEP owner agreeing to license or at least to engage in negotiation with a willing licensee on terms that are Fair, Reasonable and Non-Discriminatory. The FRAND requirement is largely understood to limit to some extent the SEP owner’s right to seek injunctive relief against the standard implementer, otherwise the SEP owner could “hold up” the standard implementer and prevent him from commercializing standard-compliant products on the basis of one single SEP.

On 16 July 2015, Europe’s highest court, the European Court of Justice (CJEU), handed down its much anticipated judgment in the widely publicized Huawei/ZTE saga regarding standards-essential patents (SEPs). The question put before the Court was, under what circumstances a SEP owner may seek injunctive relief against an alleged patent infringer without violating EU competition law. Some answers were given such as:

  • Before requesting a prohibitory injunction or a recall of products, the SEP owner must issue a “notice or prior consultation” which designates the concerned SEP and specifies the way in which it has been infringed;
  • Once the alleged infringer has indicated willingness to conclude a FRAND license, it is up to the SEP owner to present a specific written FRAND offer specifying the amount of royalties due and the way in which it is to be calculated;
  • The alleged infringer must diligently respond to that offer and should promptly submit a specific FRAND counter offer to the SEP owner – in case of disagreement;
  • There may be a common agreement to request an independent third party to determine the amount of royalties due;
  • The alleged infringer cannot be criticized for challenging, in parallel to the licensing negotiations, either the validity of the patents in question, their essential nature, and/or their actual use.

However, the CJEU’s decision also left a number of questions unanswered. In order to begin answering these questions, on April 2016, the European Commission identified the main areas of the SEP licensing environment which needed improvement: inconclusive information regarding SEP exposure, unclear valuation of patented technologies reading on standards, the definition of FRAND and the risk of uncertainty in relation to the enforcement of SEPs. Given the standardization of 5G and the current development of the Internet of Things (IoT), they have now issued their highly anticipated communication in an effort to create a coherent framework. This communication (Hyperlink: Communication from the Commission to the Institutions on Setting out the EU approach to Standard Essential Patents) identifies four main goals:

Increasing Transparency on SEP exposure:

As information on the existence, scope and relevance of SEPs is vital for fair licensing negotiations, the essentiality declarations of the patent holders in the databases of the Standard Developing Organisations (SDOs) should provide more detailed information. For example, the patent holders should review the relevance of their declarations when the final standard is adopted, and when a final decision is reached on granting a patent. Furthermore, declarations should include enough information to assess patent exposure, for example by making reference to the relevant section of the standard. In addition, the Commission considers that there should be a higher degree of scrutiny on essentiality declarations, performed by an independent party having the technical capabilities.

Guidance on general principles for FRAND licensing terms:

Licensing principles: According to the Commission there is no one-size-fits-all solution as to what FRAND is, thus sectorial discussions are encouraged. The Commission does, however, set out a number IP valuation principles that should be taken into account. For example, licensing terms must bear a clear relationship to the economic value of the patented technology.

Efficiency and non-discrimination: Under FRAND, a SEP owner cannot discriminate between implementers that are ‘similarly situated’. Again, as FRAND is not one-size-fit-all, the Commission notes that solutions will differ from sector to sector, and will depend upon the relevant business models.

Patent pools and licensing platforms: The Commission considers that the creation of patent pools and other licensing platforms should be encouraged, within the scope of EU competition law, as they could address many SEP licensing difficulties by offering better scrutiny on essentiality, clarity on aggregate licensing fees and one-stop-shop solutions.

Exploiting and deepening FRAND expertise: The Commission will also monitor licensing practices, in particular in the IoT sector, and set up an expert group to improve knowledge of industry licensing practices, valuation and FRAND determination.

A predictable enforcement environment for SEPs:

The debate in the SEP area is often focused on the availability of injunctive relief. Such relief aims to protect SEP holders against infringers unwilling to conclude a license on FRAND terms. At the same time, safeguards are needed to protect against the risk that good faith technology users face when threatened with an injunction to accept licensing terms that are not FRAND, or in the worst case scenario, are unable to market their products. General guidance from national case-laws have been identified by the Commission concerning: FRAND offer, FRAND counter-offer, timelines for the counter-offer, proportionality of injunctive relief, alternate dispute resolutions such as mediation and arbitration, patent essentiality assertion by dedicated entities, etc. The Commission intends to further develop methodologies that allow efficient SEP litigation.

Open Sources and Standards:

Through studies and analyses, the Commission will also work with stakeholders, open source communities and SDOs to ensure successful interaction between open source and standardization. In the future, SEP holders will be faced with an increased number of constraints to manage their patent portfolios and enforce their patents. Since patent holders are usually also the patent licensees of the technology they develop, they will benefit from the clarifications and efficiency resultant of the development of tools and guidance for SEP declaration, identification, evaluation and licensing. The SDOs will assume the additional burden of implementing the appropriate databases and information systems, and also contributing to the SEP identification and assessment.

Harmonization of practices in different European countries is welcome and will provide a more secure and uniform framework for patent valuation and litigation in the growing EU digital market. This is especially important when considering the borderless component of the Internet world, and in view of the enforcement of the Unitary Patent treaty.”