NLO Fortify no. 7 2017/2018
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no. 7 | volume 5 | fall/winter 2018

A balanced IPR framework

Standard Essential Patents

Granting a patent holder exclusive, albeit temporary, rights to a technology may seem strange in a society that adheres to the principles of capitalism and free markets. In fields such as telecommunications, therefore, where devices from competing manufacturers have to adhere to a common standard in order to communicate, it has long been recognized that patentees’ rights have to be balanced against other interests.

After all, someone holding a patent on a small but essential part of a standard has in principle the power to prevent anyone else from applying that patent and thus from deploying the standard. The fact that there are thousands of patents on a telecom standard, and dozens if not hundreds of sometimes major patent holders, means there is a real possibility that, from a legal perspective, standardized technology could become completely deadlocked.

In order to prevent companies from blocking each other from applying key parts of a standard, and so creating deadlock across the entire telecom market, standards-setting bodies such as the European Telecommunications Standards Institute (ETSI) require holders of patents on standards administered by that body to announce their patents and to offer licences to other parties on Fair, Reasonable and Non-Discriminatory (FRAND) conditions.

In other words, if you have a patent (a ‘Standard Essential Patent’ or ‘SEP’) on part of a telecom standard, you have the advantage of easily being able to prove whether others are infringing your patent. You just need to check whether the competing product claims to adhere to the relevant standard. The disadvantage, however, is that you have slightly less freedom to enforce that patent than under a ‘normal’, non-standard-related patent. In the case of an SEP, for example, you cannot choose to license the patent to affiliated companies at low royalty rates, while simultaneously refusing a licence to competitors or charging them absurdly high royalties. That would neither be fair nor reasonable, and would also be discriminatory.

Case law slowly developing

While the above example of a FRAND violation is relatively clear-cut, many questions can arise in practice. There is not yet, for instance, a standard way to determine whether specific licensing conditions are FRAND, while only limited guidance is available on the efforts that parties must undertake to agree a FRAND licence deal before starting litigation.

In 2015, the Court of Justice of the European Union (CJEU) shed some light on SEPs and FRAND conditions in the Huawei v. ZTE judgment by specifically putting the onus on the patentee to at least offer a licence under FRAND conditions before being allowed to obtain an injunction against an infringer of an SEP. However, this clarification, while welcome, did not define what is meant by FRAND conditions.

In 2017, the English High Court outlined a way, in the Unwired v. Huawei judgment, to calculate FRAND royalty rates. Whether this judgment will continue to stand remains to be seen as while appeals have been filed, it is unclear, against the background of Brexit, whether these appeals will ultimately end up at the CJEU.

Proliferation of standard-based technology

Coming back to the original topic, we can see how SEPs have become increasingly important in recent years. This has everything to do with the development and deployment of new communications-enabled technology, also referred to as the ‘Internet of Things’ (IoT). Whether it is a smart fridge with internet connectivity, a car communicating with other road users to share data, or a healthcare device uploading medical data to a doctor’s computer, standard-based technology is invading all fields of technology, and the importance of SEPs now, therefore, extends far beyond their original area of mobile phones.

European Commission’s involvement

Having recognized the proliferation of SEPs, the European Commission (EC) published a Communication on 29 November 2017 outlining its opinions on the issue. In this Communication the EC concluded that “[A] balanced IPR framework is needed that supports a sustainable and efficient standardization ecosystem and SEP licensing environment” and attempted to set out “key principles for SEP licensing taking into account how industrial sectors are organised as well as efficiency considerations.”

We subsequently asked the EC a few more questions on how it plans to achieve results on SEPs.

Amaryllis Verhoeven

interview with Amaryllis VERHOEVEN

Head of Unit in charge of Intellectual Property and Fight against counterfeiting, DG for Internal Market, Industry, Entrepreneurship and SMEs of the European Commission.

There is an urgent need to set out key principles “to foster a balanced, smooth and predictable framework for SEPs”,  said the European Commission in its Communication setting out the EU approach to standard essential patents (SEPs), published on November 29 last year.

Why does the EC feel this is urgent?

Numerous SEPs are becoming important outside of the ICT sector: They mainstream into the Internet of Things, the digitalised economy, especially in sectors such as automotive or home appliances. The digitisation of products and services can add more than €110 billion revenue to the European economy per year over the next 5 years. In order to make the Digital Single Market a success and allow EU enterprises to seize these new opportunities, we need to facilitate the licensing of SEPs.

What is the EC’s position on (regulation of) FRAND?

FRAND has the advantage of being flexible enough to accommodate a changing economic and technological environment, however this lack of definition can be very challenging, especially for smaller players. The EC already provided some signposts on FRAND in its Communication. In addition, we will launch an expert group on SEP licensing and valuation in the next few months, in order to gather additional insights that may help us, to inform any policy measures that may be required to ensure a smooth licensing of SEPs.

In relation to question 1 and the sense of urgency, does the EC notice an increase in litigation cases related to SEP’s and/or FRAND or are various standardisation organisations urging for guidelines and directives from the EC? (Presently some guidance case law Huawei vs ZTE (EUCJ)).

Since the EUCJ’s landmark decision in the Huawei vs ZTE case, national jurisprudence is further developing elements to the question when injunctive relief may be appropriate or not. Litigation is not very high in numbers, but important in impact. The SEPs Communication of the European Commission offered a general EU approach to SEPs, beyond national divergences, levelling up certain clarifications.

Indeed stakeholders had expressed the need for more clarity on different aspects for SEPs. We have run several public consultations and engaged in an intense stakeholder dialogue, in addition to a number of studies. It became obvious that the time was ripe for the Commission to come forward with an EU perspective on SEPs.

Where does the EC draw the line between EC regulation and industry competition? For example: Will the EC implement a policy for FRAND so that all parties at any point/level in a particular supply chain may have fair access to SEP’s?

FRAND is not one-size-fits all and solutions can differ from sector to sector. The Communication considers that the parties are best placed to arrive at a common understanding of what are fair licensing conditions - through good faith negotiations, on a case by case basis. The Commission calls on stakeholders to pursue sectoral discussions with the view to establishing efficient licencing practices. In addition, an expert group is created to dig deeper into the FRAND licensing issues. The findings of this group will inform possible future policy decisions.

Is current IP regulation strong and flexible enough to regulate the (potentially) powerful position of SEP holders whose technology becomes ‘locked-in’ and other manufacturers – complying with the EC standards – run the risk of being sued by the SEP holder for infringing their patent(s)? Now, to avoid this risk, a manufacturer might be forced to buy an expensive licence for a complete portfolio. Some Standard portions are obligatory, but not implemented. Some Standard portions are optional.

SEPs indeed have a high value and implementers need them to comply with concerned standards. That is why there are special rules surrounding them, including with respect to competition law. However, it is also important to keep the balance and allow implementers to get fair access to the technology, but also incentivise innovation and the contribution of best technology to the standardisation process.

Portfolio licensing is in many cases efficient. We support for example the creation of patent pools and other licensing platforms, of course within the scope of EU competition law. Portfolios, even worldwide portfolios can be compatible with FRAND. A country-by-country licensing approach may not be efficient and may not be in line with a recognised commercial practise in the sector.

How does the EC preferably see the implementation of a transparent declaration system?

Information on SEP exposure should be correct, complete and up-to-date. We are working with certain SDOs on this, and intend to launch a pilot project for an essentiality check, hopefully still this year.

The EC has suggested a transparent licensing information database. Also the rapid growth of SEP’s requires an accessible declaration database which is up to date.  This database should contain multiple types of SEPs. The EC suggests an independent EU body to control this database; how should this type of EU body be implemented in the EC-structure? Should it be tied to an institution such as the European Patent Office, an EU-body or should it operate alone?

We will launch a pilot project for essentiality check of SEPs. This project should exactly address the questions you raise. Patent offices appear to be interesting parties to perform such essentiality checks, but we need to analyse this more carefully.

The EC proposes “Patent holders should review the relevance of their declarations when the final standard is adopted and revised, to reflect the fact that technical solutions in standards negotiations evolve.” Transparency of essentiality declaration system seems difficult; it is tough to get your technology in the Standard and your patent validated. Who would control these patent owners? What mechanisms should be installed to make sure this control is carried out correctly and who should have the authority to issue warnings or even fines?

While we want the patent thicket and over-declaration to be reduced, it is also important to avoid forgetting relevant SEPs, which could lead to an ambush situation. SEP owners and Standard Setting Organisations have to play a key role in this.

How to deal with the sale of SEPs to other patent owners who don’t agree on FRAND principles and/or aren’t members of any SSO?

The SEP commitment should travel with the transfer. For example, ETSI’s IPR policy has clarified this.

How will SME’s deal with litigation costs? As the EC states; the courts should determine whether a price is FRAND. However, smaller companies don’t have the money to go to court for these kind of matters. This seems to conflict with the objective to create an open market for new participants/smaller companies. Especially in the Internet-of-Things industry many small companies are active.

We are very much aware that the costs of IP litigation in general for SMEs are difficult to bear, and this has been an important factor in the preparation of the SEP Communication. For SEPs in particular, upfront transparency is very important. SMEs should however remain careful to fit into the definition of a “willing licensee”, in order to avoid injunctions. Patent pools could also be an attractive offer for SMEs, as they are one-stop-shops that have the advantage of having done some essentiality checks upfront.

As companies also have to deal with uncertain injunctions, what is the EC’s view on alternative dispute resolution regarding SEP related issues?

ADR can be an attractive offer that remains underexploited. A potential licensee may show some willingness by agreeing to third party FRAND adjudication. However, ADR lacks transparency and can often not contribute to the development of jurisprudence. It would be yet better if at least the methodology applied by the arbitrators for FRAND valuation was published.

How does the EC perceive the situation in the EU compared to other markets such as Asia and (North) America? Should collaboration with these overseas markets increase with respect to SEP’s? (Is that even possible?).

The EC has come forward with a holistic and balanced approach to SEPs, and this approach is supported by the EU Member States (who adopted specific Council conclusions in this respect). We are in contact with other markets to share our approach and consider potential common approaches, after all this is a global issue.

Final thoughts by Harm van der Heijden

In conclusion: the EC has identified a number of key areas:

  • Transparency (the public should be able to easily find out which patents cover which technology);
  • Value (the debate around the value of licences should be supported);
  • Certainty (the way standard-related patent conflicts are resolved should be standardized – no pun intended).
Harm van der Heijden
Harm van der Heijden, Partner & Dutch and European Patent Attorney at NLO

The EC thus also recognizes that a balance has to be struck between rewarding patentees for their innovative work, while also ensuring that the overall presence of patents on standard-related technology does not become so burdensome that it prevents the technology from being implemented. Rather than something that can be resolved immediately, this is something that must be worked out over the coming years in consultation with the stakeholders and in line with the evolving technology.

The EC has so far decided to avoid wading into what is currently one of the major debates among SEP parties: whether the licensing fee should be a single price, the same for every device regardless of what it does or how often it uses the technology, or whether the way the device uses the invention can play a role (‘use-based licensing’). Differences in licensing costs can become very significant, especially for more expensive devices such as smartphones and cars.

One thing is certain. For SEPs and patented technology in general, some very interesting years lie ahead.