On November 29th, 2017 the European Commission (the “Commission”) has published a Communication (the “Communication”) setting out the EU approach to Standard Essential Patents (or “SEPs”). With the Communication, the Commission offers a numbers of measures and sets out some key principles in order to promote a balanced, clear and predictable framework for the issuance of licenses of SEPs on fair, reasonable and non-discriminatory terms (or “FRAND”). The aim is to meet the growing needs for interoperability connected in particular to the development of the Internet of Things (“IoT”), trying to avoid some of the problems encountered in the current licensing practices of SEPs and facilitating access to standardized technologies, also by new operators from sectors other than traditional ICT.
The Commission stresses out that the digitalization of the economy creates great opportunities for EU industry. The estimated economic potential of IoT applications in devices for humans, homes, offices, factories, worksites, retail environments, cities, vehicles and the outdoors will be up to EUR 9 trillion per year by 2025 in developed countries. The digitalization of products and services can add more than EUR 110 billion in revenue to the European economy per year over the next five years.
The ability to connect devices and systems to work together is crucial for maximizing this economic potential. Without interoperability, enabled by standards, 40% of the potential benefits of IoT systems would not be reaped.
According to the Commission, the problematic licensing aspects of SEPs that need to be improved mainly relate to: (i) the transparency of information concerning the existence, scope and ownership of SEPs; (ii) the determination of the FRAND license terms; (iii) the regime for resolving disputes relating to SEPs.
In order to increase the transparency of essential patents, the Commission invites standard development organizations (“SDOs”) to take measures to improve the quality and accessibility of their databases, including through links with patent office databases, and to improve system of declarations, which should contain more up-to-date and precise information on essential patents and their holders. The Commission also intends to launch a pilot project, which will cover only a few key technologies (e.g. 5G), with a view to identifying and gradually introducing appropriate mechanisms to verify the essential nature of the related SEPs.
As regards the licensing terms, the Commission first of all underlines that the determination of the FRAND conditions must be entrusted to the good-faith negotiations between the parties and that the FRAND formula does not identify a univocal value, but conversely it varies over time and according to the sectors concerned (i.e., there is no “one-size-fits-all” solution and a case-by-case analysis is needed). In order to facilitate the launching of cross-industry dialogues and the development of common licensing practices by stockholders, the Commission sets out some general principles that should guide the licensing of SEPs.
In particular, the Commission suggests that the licensing conditions should reflect the economic value per se of the patented technology, regardless of its inclusion in the standard and of the success thereof. To this regard, the Communication seems consistent with the Commission’s 2011 Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the EU (or “TFEU”) to horizontal co-operation agreements (the “Horizontal Guidelines”), where the Commission first explained what in principle would constitute a FRAND royalty in licensing practices in connection with standardization agreements (see §§ 287-291 of the Horizontal Guidelines). More specifically, the Commission indicated the possibility to perform a before-and-after analysis, i.e. to compare the royalties applied by the involved company for the patents at stake in a competitive environment (i.e. prior to the lock into the standard) with the royalties applied after the standard setting process is finalized. However, this indication assumes that such a comparison can be made on a “consistent and reliable manner”, which is unlikely to occur at the fast-growing pace of the IoT industry.
However, the Communication further articulates the criterion to establish the reference economic value of SEPS by suggesting that “in cases where the technology is developed mainly for the standard and has little market value outside the standard, alternative evaluation methods, such as the relative importance of the technology in the standard compared to other contributions in the standard, should be considered”.
In addition, to determine the FRAND royalty the Commission recommends the following:
(i) to take into account the present value added of the patented technology, without taking into consideration the commercial success of the product that is not related to the value of the patented technology, which also entails discounting the value of the patented technology to the time passed since the conclusion of the licensing agreement (to factor in obsolescence in technologically fast moving business environments);
(ii) to ensure, at the same time, that the incentives to SEP holders are maintained in order to contribute to make the best technologies available to the standard;
(iii) to avoid royalty stacking, stating that in defining a FRAND value an individual SEP cannot be considered in isolation from other SEPs required to implement a certain standard, but parties of the negotiation need to take into account a reasonable aggregate rate for the standard, assessing the overall added value of the technology;
(iv) further, by endorsing certain statements made in the London High Court of Justice’s Unwired Planet v. Huawei judgment, the Commission suggests that, in principle, SEP holders’ offers to license their SEPs on a global scale rather than on a country-by-country basis can be characterized as FRAND on the ground of efficiency reasons, if the products that incorporate the technology are intended to circulate globally.
With reference to the point of “non-discrimination” in the FRAND formula, the Commission indicates that SEPs-holders cannot treat differently users of the standard that are “similarly situated”. To this regards, the Commission stresses that the meaning of FRAND is not univocal and may change depending on the industrial sector and business model.
The Commission also encourages SDOs and SEP holders to identify effective tools, such as patent pools or other platforms, for the licensing of a large number of users in the context of the IoT.
Indeed, according to the Commission, the creation of patent pools or other licensing platforms within the scope of EU competition law can address many of the SEP licensing challenges by offering better scrutiny on essentiality, more clarity on aggregate licensing fees and one-stop-shop solutions. For IoT industries, and particularly SMEs, newly exposed to SEP licensing disputes, this will bring more clarity to licensing conditions of SEP holders in a specific sector. This stance is consistent with the assessment criteria for patent pools set out in the Commission’s 2014 guidelines on the application of Article 101 of the TFEU to technology transfer agreements (see §§ 250-255), where it states that such pools, on condition that include complementary technologies rather than competing or unnecessary ones, may be deemed pro-competitive because they are likely to reduce transactions costs and generate efficiencies.
Finally, in relation to litigation and alternative dispute resolution regimes, the Commission stresses the need for a balanced and predictable enforcement environment for SEPs and reiterates the framework and principles for FRAND negotiations set out by the Court of Justice in the Huawei v. ZTE case. It confirms that effective remedies, such as in particular injunctive reliefs, should be granted against potential counterfeiters who are not willing to acquire a license under FRAND conditions, but the proportionality of such remedies should be carefully assessed on a case-by-case basis (e.g. by assessing spill-over effects of the injunction on third parties).
In addition, the Commission undertakes to promote the dissemination of alternative dispute resolution and mediation mechanisms, also in view of the future operation of the Unified Patent Court.
We cannot pass by without pointing out that important controversial aspects related to SEPs licensing remain out of the scope of the Communication. Indeed, its text has been released against the backdrop of lengthy discussions between the Directorate General for Competition of the Commission (“DG COMP”) and other DGs (industry, trade, research) on two key controversial elements: “use-based licensing” and “licensing to all”. “Use-based licensing” refers to licensing patents under differing conditions and rates depending on the prospected use and application of the underlying technology; while “licensing to all” refers to a licensing practice by which SEP holders are requested to license out their SEPs to any willing licensee, irrespective of where it sits in the chain of production.
Reportedly, DG COMP was more concerned of the interests of implementers/licensees of SEPs, thus pushing for endorsing the “licensing to all” principle in the Communication, whilst the other DGs were siding more with innovators/SEP holders, thus advocating for endorsement of the “use-based licensing” principle and contrasting the license-to-all approach. The compromise has been reached by expunging these two most controversial elements from the final text. For instance, the Communication makes no reference to a specific level of the value chain a licensing agreement should be concluded at, nor does it refer explicitly to “use-based licensing” as a criterion for determining FRAND royalties.
These issues create a lot of uncertainty in the industry, particularly for start-ups in the IoT field, because they were not addressed by the landmark judgement of the Court of Justice of the EU issued in July 2016 in the Huawei v. ZTE case (C-170/13), nor by that of April 2017 of the London High Court of Justice in the Unwired Planet v. Huawei case (which dealt with the conditions under which a SEP holder can seek injunctive reliefs against SEP users without committing an abuse of dominance in breach of Article 102 of the TFEU.
Apparently, the Commission has left such controversial elements to further discussions within an expert group of stakeholders, which will engage in debate with the industry to decide whether more measures or guidance is needed as licensing issues in the IoT space come up. Moreover, the agency expects all parties in a licensing negotiation subject to disputes to make use of the group as a dispute mediator to facilitate resolution. Nevertheless, while the exact composition and timing for the setting up of the group has not yet been decided, the Commission is understood not to be willing to have its own officials be a part of it or to mediate disputes.
Also, the Communication expressly states that it “does not bind the Commission as regards the application of EU rules on competition, and in particular Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU)”.
In conclusion, the Communication certainly contains some useful tips and a helpful framework for SEP holders and implementers willing to enter into negotiations for licensing of SEPs, which comply with EU competition law. However, it might not be likely to significantly reduce litigation resulting from SEP licensing since, as said, the most controversial issues have been left outside the Communication and remain open to diverging interpretations.
Moreover, the general approach to SEP licensing obligations set out in the Communication seems in contrast to an ostensive recent shift in the approach of the US Department of Justice (“DoJ”)’s antitrust division to the same matter. Indeed, in a speech held in November 2017 and largely diffused and commented by sectoral media and stakeholders, the DoJ’s Assistant Attorney General Makan Delrahim announced a crucial change of direction for policies involving SEPs by launching the strong message – both at home and abroad – that US antitrust law generally does not deal with the seeking or enforcing of injunctive relief or breach of a FRAND commitment. In addition, he also announced a shift in enforcement priorities from concerns about unilateral hold-up conduct by SEP holders (which might constitute an abuse of a dominant position) to collective hold-out conducts that might be pursued by implementers through colluding via SDOs (which might constitute a buying cartel affecting incentives to innovate, in breach of the ban on anti-competitive agreements).