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Background
3 June 2024

Proposed SEP Regulation in Europe

Introduction

A patent is a standard essential patent (SEP) if implementation of the relevant technical standard requires the use of technology protected by that patent. There is a balance to be struck between the generally restrictive nature of patents and the more co-operative, interoperable nature of technical standards. SEP licensing can help to provide this balance.

The European Commission has proposed a Regulation to reform SEP licensing within the EU (Proposed SEP Regulation). In April 2024, this was accepted by the European Parliament; thus the proposed Regulation has passed its first legislative hurdle.

This article explores the background to the proposal, asks whether reform is needed, and considers whether the proposed reform is likely to achieve its aims.

SEP Licensing

A feature of most technical standards is that contributors to the standard agree to licence their SEPs to others on request. Thus, SEP implementers can avoid the risk of infringing patents that have been declared to be essential to the standard by obtaining licenses. Indeed, many standards bodies require SEP holders to offer their SEPs to SEP implementers on Fair, Reasonable and Non-Discriminatory (FRAND) licensing terms.

The principle of licensing SEPs on FRAND terms is well-established and generally accepted. However, the practicalities of agreeing a SEP licence under FRAND terms is not trivial.

Is there a problem?

In a 2023 Impact Assessment (Impact Assessment Report), the Commission identified the following key problems:

  • Insufficient transparency regarding SEP ownership and essentiality (e.g. which patents are relevant, who owns them, and are they essential).
  • Lack of information about FRAND royalties (e.g. what is a reasonable royalty in the circumstances).
  • Litigation in relation to SEPs is costly, both financially and in terms of time.

SEP licensing between parties of a similar nature generally works well, but the Commission argues that the “information asymmetry” that sometimes exists between SEP owners and SEP implementers can reduce access to standardised technology by such SEP implementers.

SMEs in particular can find it difficult to obtain SEP licences on reasonable terms. More discussion of this issue can be found in the following article: Navigating Standards Essential Patents as an SME – Venner Shipley.

What is the proposed solution?

The main provisions of the proposed Regulation are in the following areas:

  • SEP Register. SEP holders who wish to licence SEPs in the EU would need to register the SEPs. The Register would be managed by the EU Intellectual Property Office (EUIPO).
  • SEP Essentiality Checks. Non-binding SEP essentiality checks conducted (on a “sampling” basis) to determine whether patents included on the register are actually essential to the relevant standard.
  • FRAND determination. An independent conciliator can be asked to help the parties to reach mutually acceptable FRAND licensing terms. SEP holders would be prevented from launching litigation until this process had been followed.
  • Aggregate royalties. SEP holders or implementers could ask conciliators to participate in determining appropriate aggregate royalties (i.e. the maximum total licence fee for using a standardised technology).
  • Establishing the EUIPO as a central “Competence Centre” to offer assistance to SMEs, such as free advice/training on licensing negotiations.

The Commission argues that these processes will support SEP licensing negotiations by making detailed information regarding SEPs and existing FRAND licences available to SEP implementers (thereby addressing information asymmetry), and by facilitating discussions between the relevant parties.

Is the Regulation Needed?

The Regulation seeks to ensure that end users benefit from products based on the latest standardised technologies whilst also making the EU an attractive place for innovation and standard development. This is a difficult balance to strike.

Courts around Europe have developed case law to address problems with SEP licensing, including “hold-up” (e.g. where a SEP holder uses the threat of litigation to extract overly high royalties) and “hold-out” (e.g. where a SEP implementer uses negotiations to avoid a licence of as long as possible). Whilst far from perfect, a framework has been developed within which SEP owners and SEP implementers should operate. Failure to do so has consequences, such as a refusal to grant an injunction to a SEP owner.

Although it can be difficult for parties of very different sizes to conduct SEP licensing negotiations and to agree FRAND terms, this is true of many areas of business. Overall, whilst there are good reasons to introduce rules to address some of the problems identified by the Commission, it is not clear that the scale of the proposed changes is necessary.

Do the Reforms provide the right solutions?

As currently proposed, the reforms place significant administrative burdens on users of the system. SEP implementers, for example, may find it difficult to engage with the EUIPO only occasionally, and SEP owners may find it expensive and time-consuming to engage with multiple SEP implementers via the EUIPO.

Moreover, many of the initiatives produce non-binding outcomes, which risks adding an extra step in negotiations, rather than streamlining SEP licensing negotiations.

A further concern is that the Regulation is intended to be self-financing. There is a risk that the costs of using the system will be significant, which could impact take-up of the proposed system.

EUIPO as Competence Centre

A key part of the proposal is to establish the EUIPO as a Competence Centre to administer the various elements of the proposal (including SEP registration, essentiality checking, FRAND determination, and SME support services).

The EUIPO has very little expertise regarding either patents or technical standards. It seems unreasonable to expect the EUIPO to have the required expertise and capacity to drive this process initially. Teething problems seem likely.

Even if the longer term, implementation of many aspects of the Regulation will require skills that may be difficult for the EUIPO to access. This could lead to delays, which would be counter to the objectives of the Regulation.

Final Remarks

The European Commission has identified an area of difficulty, but there are many potential problems with the proposed solutions.

The non-binding nature of many of the proposals, concerns over the ability of the EUIPO to carry out the work, and the self-funding requirement could lead to a system that adds delay, cost, and administrative burdens, without significantly increasing access to SEP licenses on reasonable terms. Accordingly, there are many reasons why the Regulation may not meet its stated goals.

Legislation within the European Parliament and Commission is a lengthy process having technical and political aspects. There is clearly a significant amount of lobbying going on behind the scenes. This seems likely to lead to substantial, and substantive, discussions. Delays and changes can be expected.

There is much that can happen between now and any possible implementation of the Regulation. Interested parties should “watch this space”. Venner Shipley will monitor developments and keep you posted!

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