I have previously posted in depth on the EU’s “Proposal for a Regulation of the European Parliament and of the Council on standard essential patents and amending Regulation (EU) 2017/1001” (“Proposal”) and recently gave an update on the passage by the EC’s Legal Affairs Committee (“JURI”) of a modified version of the Proposal.[1] I wanted to take a deeper dive into the modifications to the Proposal (“MP”) considered by JURI.[2] I’ll start by focusing on those aspects of the Proposal which I have previously discussed and then take up a few other changes that are worth mentioning.
1. What Standards are Subject to the Regulations?
In A Greener Future - EU Proposal Part Two (sepessentials.com), I urged the Commission to identify existing standards that are important to green economy companies and clarify that the Proposal applies to such existing standards.
On this one, the MP partially clarifies when the regulation will apply to patents for new standards (e.g. standards that are published by an SDO after entry into force of the regulation), but also adds additional complexity about what standards, both new and existing, are subject to the regulation. With respect to application of the regulations, the MP provides that the regulation will apply to any patents in force in any Member State that a patent holder “claims” are essential to a standard, regardless of whether those claims are correct, and regardless of whether the SEP holder has made a FRAND commitment.
On the other hand, the MP provides (via new Articles 65a, 65b and 65c) that, upon the “reasoned request” of any SEP holder or implementer, the Commission is empowered in certain circumstances to (i) exclude some or all of a new standard, or certain types of implementation under a new standard or (ii) include some or all of an existing standard or certain implementations under an existing standard. In particular, new Article 65a provides that the Commission is authorized to determine whether:
(a) the SEP licensing negotiations on FRAND terms and conditions do not give rise to significant difficulties or inefficiencies affecting the functioning of the internal market as regards identified implementations of certain standards or parts thereof within 1 month of the publication of the standard by the Standard Development Organisation;
(b) the functioning of the internal market is severely distorted due to significant difficulties or inefficiencies in the licensing of SEPs for particular existing implementations of standards or parts thereof within 12 months of the entry into force of this Regulation
If the Commission determines that (a) is met, then the regulations will not apply to a new standard (or potentially just to some types of implementation of that new standard). If the Commission determines that (b) is met, then it can find that some or all of an existing standard, or certain implementations under that standard, is subject to the regulation. That is an incredibly confusing benchmark for determining whether the regulations will apply to any given standard. It is hard to know whether this is just a sop to certain licensors or is intended to have real bite. Either way, these new provisions add unnecessary uncertainty and complexity about when the regulation will apply.
2. Collection and Dissemination of Information
In The Devil is in the Details: EU Proposal Part Three - Transparency (sepessentials.com), I urged the Centre be authorized to engage in proactive collection of information, including information on ownership and existing licenses whether such information is public or non-public.
First let me start with the plus side. In the MP, a party seeking confidentiality for certain information (see revised Article 6 for example) must now provide “a reasoned statement justifying this confidentiality.”
On the other hand, the MP mostly remains static or even moves backwards when it comes to the collection and dissemination of information. The MP does not really change the types of information to be collected, and there are numerous places in the MP where the collection and dissemination of information has now explicitly been limited only to what is publicly available. For example, the register of SEPs need only contain “publicly available” standard terms and conditions. Similarly, it does not need to contain information about prior essentiality checks if such inclusion is “not possible due to contractual restraints agreed upon by the parties.”
Nor does the MP change Article 58 which provides that “the competence centre shall keep confidential the determination of FRAND terms and conditions, any proposals for determination of FRAND terms and conditions submitted during the procedure and any documentary or other evidence disclosed during the FRAND determination which is not publicly available, unless otherwise provided by the parties.” The MP also does not change the various other Articles that mean that key portions of individual FRAND determinations made by the Centre will, for the most part, be kept confidential.
Two stated goals of the Proposal are transparency and efficiency. These goals can only be met with the collection and dissemination of more and better information. We are in the current boat in large part because of the lack of such information. This is an area where the MP only half accomplishes its stated goals. I hope that, as we move forward, the Centre is empowered to collect and disseminate more and better information than is currently provided in the MP. That being said, it is better to have half a goal accomplished than none at all so, despite the failure to improve these sections, the MP still is an improvement over the entirely opaque system currently in place today.
3. Aggregate Royalty Determinations
In EU Proposal Part 4 - Fairness, Setting an Aggregate Royalty and a Word on Non-Discrimination (sepessentials.com), I urged that any setting of an aggregate royalty must include both SEP holders and implementers, not just SEP holders (this involved Articles 15-18).
The MP now specifies that both “SEP holders and SEP implementers should be able to request the competence centre for a non-binding expert opinion by an independent third party on an aggregate royalty.” But, the MP takes this even further, making a number of changes so that any aggregate royalty determination will involve not only SEP holders and implementers, but also potentially "other stakeholders" (one wonders if these undefined "other stakeholders" are intended to include the SDOs/SSOs themselves and/or government regulators). And this expert opinion must explicitly recognize and balance the impacts of the aggregate royalty on innovation by both SEP holders and implementers:
The expert opinion on the aggregate royalty should contain a non-confidential analysis of the expected impact of the aggregate royalty on the SEP holders and the stakeholders in the value chain. In this respect, it would be important to consider factors such as, efficiency of SEP licensing, including insights from any customary rules or practices for licensing of intellectual property in the value chain and cross-licensing, and impact on incentives to innovate of SEP holders and different stakeholders in the value chain.
Although Articles 15-17 (which I proposed should be dropped in favor of Article 18) have hung in with only a few changes from the original draft, the MP makes much clearer that the intent of these Articles is just to get a proposal from enough SEP holders on what an aggregate royalty should be, not to actually set an aggregate royalty. Paralleling the other changes that are sprinkled throughout the MP, the MP makes clear that all holders of SEPs should be included, whether or not they have made a FRAND commitment. The MP also clarifies that participating SEP holders should propose an aggregate royalty to cover all SEPs for a given standard, not just for the collection of SEPs owned by those participating SEP holders. But, if the participating SEP holders cannot agree on an aggregate royalty within 6 months, then the process of setting a proposed aggregate royalty by the SEP holders is terminated. Note that requests under MP Articles 15-17 involve a single conciliator.
The MP makes significant changes to Article 18. Modified Article 18 makes clear that all stakeholders have the right to participate in the determination of what is now explicitly a “non-binding” aggregate royalty amount for a standard. First, modified Article 18 allows implementers to make a request to set an aggregate royalty (in the original Proposal, it was only SEP holders). It also requires that all relevant stakeholders (i) be notified of any aggregate royalty determination request; (ii) may request to participate and (iii) may provide information about any relevant existing or potential implementation of the standard.
Also, in the revised Article 18, if at least 20% (by estimate) of SEP holders OR implementers holding at least 10% relevant market share in the Union OR at least 10 SMEs or start-ups request to participate in an aggregate royalty determination, the Center must appoint a panel of three conciliators having experience in the relevant field of technology to make such a determination. The modified Article 18 also provides that, although SEP holders still will go first in submitting their proposal for an aggregate royalty, after the SEP holders submissions, the panel must permit the other participants to submit responses to those submissions. The Panel must consider all of the submissions in making their determination. SEP holders are also required to provide evidence “to assist the panel in determining an opinion on aggregate royalty.”
These are welcome changes which will make the Centre’s “non-binding” aggregate royalty determination a more reasoned one, and therefore a more useful and persuasive benchmark for licensors and licensees, as well as courts, regulators and other decisionmakers, to use when evaluating individual royalty requests related to a given standard.
4. FRAND Determinations
In EU Proposal Part 5 (Final Post on the EU Proposal) - Determination of a FRAND License (sepessentials.com), I urged the Commission to clarify that FRAND determinations (under Title VI) should be local only (e.g. the Centre should only make determinations on EU SEPs and EU sales) unless both parties agree to a world-wide determination; decisions of the conciliators should be appealable; parties should be allowed to do some discovery and there should be required disclosures; parties should have the option of a three-conciliator panel and there should not be termination as of right in the event of parallel proceedings (article 47). The MP make a number of changes to Title VI which cover some of these issues, and makes other changes as well.
First, on the issues I discussed, most significantly the MP now provides for three conciliator panels (rather than a single conciliator) in all FRAND determinations, with each party selecting one conciliator and the third appointed by the Centre. The MP also states that unless otherwise specified by the parties any determination will be for a global SEP license, but now provides that SMEs and startups may request to limit the territorial scope of any FRAND determination. The MP also makes clear that only the “other” party (which is a bit unclear but I assume means either the non-requesting party or possibly the non-filing party) may request termination of a proceeding in the event of parallel proceedings. The MP additionally beefs up the Panel’s ability to seek evidence, but does not explicitly provide for party discovery or broad, upfront disclosures.
The MP also makes other changes to Title VI. One unexpected change is that the modified Article 34 now provides that any FRAND determination “shall not apply to existing licensing agreements during their term.”[3] On a more positive note, several Articles in the modified Title VI now allow participation in a FRAND determination without agreement to be bound by the result (but parties may at any time declare that they will commit to comply with the outcome). The MP also now states that there should be rules and procedure for identifying and addressing conflicts of interest among the conciliators. The MP also now allows an accused infringer to provide a bond as an alternative to an injunction (or preliminary injunction – this is not clear). But it is not clear whether the Centre has the ability to enforce this provision against national courts in the event the implementer provides such a bond.
5. Other Changes to Note:
a. The Proposal continues not to apply to royalty-free standards except when such patents are part of a larger portfolio that is being licensed for royalties.
b. SEP holders may voluntarily submit their SEPs for essentiality checks.
c. Patent pools are now responsible for providing “accurate and updated” information to the Center and must provide information on aggregate royalty rate for the pool and royalty calculations for each SEP holder in the pool. The Centre must verify the information and update it at least yearly.
d. The MP makes much clearer that the Centre and EUIPO must periodically sample and verify the information provided to it. For example, Article 12 now states that the “competence centre shall collect and promptly publish in the database, after having it duly verified, information on any SEP related rules in any third country.” Article 22 now states: “The EUIPO shall annually check a sample of SEP registrations in order to verify their completeness and correctness.” Words in bold are the additions in the MP.
e. There are several places in the MP where SMEs and startups receive special consideration – which is appropriate given that lessening the burden on SMEs is one of the stated goals of the Proposal. For example, the MP requires the Centre to set up and manage a SEP Licensing Assistance Hub for SMEs and startups (see Article 61). It also adds the following statement:
the competence centre should offer assistance to SMEs and start-ups. The setting up and administering of a system for essentiality checks and processes for aggregate royalty determination and FRAND determination by the competence centre should include actions improving the system and the processes on a continuous basis, including through the use of new technologies. In line with this objective, the competence centre should establish training procedures for evaluators of essentiality and conciliators for providing opinions on aggregate royalty as well as on FRAND determination and should encourage consistency in their practices.
6. Conclusion
Net, net the MP makes a number of useful changes, particularly for SMEs and startups, and some less helpful ones. As I have said before, it is by no means a perfect proposal, even as revised. But, let me also repeat again, let’s not let the perfect be the enemy of the good. Overall, the MP is a worthwhile step in the right direction to help fix a system that all of us who work in that system acknowledge is broken. And, because the current system is neither efficient nor transparent, no one really knows to what extent the FRAND commitments made by so many SEP holders are actually being met, how burdensome the overall licensing amounts demanded or obtained by SEP holders are within the framework of a given standard, the extent those amounts and demands are dissuading implementers (particularly SMEs and startups) from using a given standard and the list of unknowns and partial knowns goes on and on.
It is my understanding that the next step in the Proposal’s path to becoming an EU regulation is a vote (currently set for February 27) by the European Parliament. I urge all of you readers to do what you can to move the ball forward for adoption of the MP to bring much needed light (even if imperfectly) to the SEP licensing system.
[1] Here are links to all of the related posts:
EU Proposal Part 4 - Fairness, Setting an Aggregate Royalty and a Word on Non-Discrimination (sepessentials.com)
EU Proposal Part 5 (Final Post on the EU Proposal) - Determination of a FRAND License (sepessentials.com)
Legal Affairs Committee Votes to Adopt Updated Version of SEP regulations - EU Proposal – Part Six (sepessentials.com)
[2] You can find the modified Proposal as considered by JURI here: 15_Votinglist_SEPs_EN.pdf (europa.eu).
[3] Note for those drafting license agreements, you may want to provide that such determinations do apply to your existing license agreements.