On 28 February 2024, the European Parliament approved the EU Commission's proposal (COM(2023)0232) for a Regulation on standard essential patents (SEPs). The Regulation is intended to improve transparency in the licensing of SEPs and provide an institutional and organisational framework that can help all parties involved with the licensing of SEPs. The legislative proposal is to be welcomed. Due to the paramount importance of interconnectivity in IoT and Industry 5.0, more and more companies require SEP licences. This includes companies that are active in markets and industries in which SEP licensing has previously not played a major role, and that therefore have not yet had to deal with this complex special issue. The planned Regulation will not be able to solve all SEP licensing problems. However, it lays the right foundation.
To which patents should the Regulation apply?
The Regulation shall only apply to standard-essential patents. In this regard, the only decisive factor shall be whether the patent has been declared essential to a technical standard by its holder (Article 2(1), no. 1 of the draft SEP Regulation). Whether the patent actually is standard essential is irrelevant in this context. Nor shall it matter whether the SEP holder has made a FRAND declaration for the patent, i.e. has undertaken to license the SEP on fair, reasonable and non-discriminatory (FRAND) terms.
In terms of timing, the Regulation shall apply to all standard versions published by a standardisation organisation after the Regulation comes into force (Article 1(2) of the draft SEP Regulation). The Regulation shall only apply to a standard published before the Regulation enters into force if the EU Commission identifies a distortion of the internal market due to significant difficulties or inefficiencies in connection with the licensing of SEPs for this standard.
More transparency due to an SEP register and database
The fundamental problem with SEP licence negotiations is the asymmetry of information between SEP holders and implementers. Up to now, it has been difficult for implementers to obtain information on key SEP licensing issues from independent sources and without having to rely on SEP holders: which patents are essential to which standard, which SEP holders are to be addressed, which royalty rates apply to which SEP portfolio, what proportion of the total number of relevant SEPs is accounted for by a particular SEP portfolio, how should different SEP portfolios be weighted in relation to each other, etc.? Innovative companies are confronted with such questions already at an early stage in the development of new products that make use of standards (e.g. because they are WLAN capable). This is because the subsequent burden of licence fees must be taken into account in the company's own pricing.
In order to improve transparency, the draft Regulation provides for the establishment of a central electronic SEP register and a central electronic database (Article 4 et seq. draft SEP Regulation), which shall contain, among other things, information on:
- the respective patent declared essential (including patent number, country of registration), its holder and the holder’s legal representative in the EU;
- the relevant technical standard (including the relevant version of the standard, details of the respective sections of the standard that are to be covered by the scope of protection of the patent) and the FRAND declaration of the SEP holder;
- established licensing practices (such as the existence of any publicly available standard terms and conditions, including royalty, royalty-free and discount policies, and the aggregate royalty rate where available);
- the availability of licences via patent pools, where applicable;
- whether essentiality checks has been performed and the result of such checks; and
- any court proceedings concerning SEPs (on questions of infringement, validity, non-enforceability, standard essentiality, abuse of a dominant position and determination of FRAND terms and conditions).
The register and database are to be managed by a competence centre at the European Union Intellectual Property Office (EUIPO). SEP holders shall have six months after a new standard is entered in the register to register their SEPs there.
Anyone who fails to register shall not be able to bring a claim for infringement of the non-registered SEP in relation to the implementation of the relevant standard until the registration has taken place (Article 24 of the draft SEP Regulation). In the EU, the registration of the SEP in dispute will therefore become a prerequisite for the admissibility of certain SEP-based infringement claims. This will not affect claims based on agreements (e.g. licence agreements) that were concluded before the Regulation came into force and provide for a licence fee for the unregistered SEP.
Patent pools are also subject to new obligations under the Regulation. Among other things, the Regulation obliges pools to provide information on their website about the patents managed, including the standard licence agreement, royalties, any discounts, a possible aggregate royalty rate and a complete list of licensees for each implementation (Article 9 of the draft SEP Regulation).
These new information sources planned by the EU legislator will be beneficial for all parties interested in transparent and speedy SEP licence negotiations.
Aggregate royalty
Currently, the appropriate aggregate royalty for a standard-compliant product – information that is important for SEP licence negotiations in many respects – is generally not known by the parties involved in SEP licensing. This is also the case where patent pools have been formed for the licensing of SEPs, as they often do not cover all the SEPs required. It is therefore to be welcomed that the draft regulation provides for an aggregate royalty rate to be determined for the use of a standard.
The persons involved in the standardisation (i.e. in particular the SEP holders) shall, in addition to the technical coordination, determine an appropriate aggregate royalty for the use of the entire standard and report this royalty to the EUIPO competence centre for inclusion in the register and database. If they fail to determine and allocate the aggregate royalty, it shall be possible to commission an expert to prepare a non-binding proposal. A corresponding application can be submitted by SEP holders (with at least 20% of the relevant SEPs) or SEP users (with a combined EU market share of at least 10%, alternatively ten SMEs or start-ups). These thresholds are likely to be discussed further in the course of the legislative process.
Independent and out-of-court review of standard essentiality
One of the central points of discussion, both in out-of-court SEP licence negotiations and in court infringement proceedings, is the question of whether the teaching protected by the patent is actually necessarily implemented by a standard-compliant product (i.e. whether the patent is actually "standard-essential"). Experience shows that a considerable number of patents declared to be standard essential are in fact not standard essential (e.g. as a result of changes in the patent application procedure or changes to the technical specifications in the standardisation process).
Under the new Regulation, it shall be possible to carry out an independent check of the essentiality of a patent without having to conduct court proceedings. On behalf of the competence centre, independent evaluators are to carry out random checks of the patents entered in the central register (Article 28 et seq. draft SEP Regulation). In addition, SEP holders can voluntarily submit their SEPs to the competence centre for an essentiality check (Article 4a of the draft SEP Regulation). The check is to be completed within six months. Although the result of the examination shall not be legally binding, it will nevertheless be entered in the central SEP database and can be used in SEP licence negotiations or in court proceedings as an indication of the existence or non-existence actual essentiality, which can reduce points of contention, effort, time and costs.
New method for determining FRAND terms and conditions
To answer the key question of SEP litigation, i.e. which terms and conditions are to be considered FRAND, SEP holders and SEP users shall be provided with a conciliation procedure (FRAND determination procedure) (Article 34 et seq. of the draft SEP Regulation). Professionally experienced and independent conciliators shall submit a proposal for FRAND terms and conditions to the parties after nine months at the latest.
The EU Commission assumes that an out-of-court resolution of FRAND disputes by way of the new FRAND determination procedure is on average eight times more cost-effective than corresponding court proceedings. Such a conciliation procedure for determining specific FRAND terms and conditions will be a significant step forward, particularly compared to court proceedings in Germany. This is because courts in Germany have so far refused to determine which contractual conditions and, in particular, which royalty rates are to be regarded as FRAND. With the new procedure, the parties involved in SEP licensing will be able to obtain an indication of the amount of licence fees from an objective and independent third party relatively quickly.
According to the draft, the courts of an EU Member State or the Unified Patent Court (UPC) shall not rule on an infringement action as long as the FRAND determination procedure has not been completed. However, "provisional injunctions of a financial nature" remain possible at all times (Article 34 draft SEP Regulation), which in Germany, for example, is likely to mean a provisional seizure of assets, but not a preliminary injunction.
The parties are free to decide whether to recognise the outcome of the dispute resolution procedure as binding. The report to be prepared by the conciliator with an assessment of the FRAND terms and conditions is always made publicly available - in its non-confidential parts - in the electronic database and can be taken into account in court proceedings.
Conclusion
With its vote of 28 February 2024, the European Parliament supports the SEP licensing reform initiated by the European Commission. Despite the stark criticism of the draft Regulation – particularly from the SEP holders – the European Parliament is not proposing any fundamental changes, but is instead leaving the core of the European Commission’s proposal unchanged. The draft Regulation is now being reviewed by the Council of the European Union. If the Council requests further changes to the draft, the interinstitutional negotiations between the EU Commission, Council and EU Parliament ("trialogue") will follow, in which the final text will be agreed upon (provided an agreement can be reached at all). The overall duration of the further legislative process is difficult to estimate and also depends on whether the Council decides on the legislative proposal before the EU elections in June 2024. In the case of the EU Data Act adopted last year, there were only around nine months between the European Parliament's vote and publication in the Official Journal. It would be good if the SEP Regulation could become law at a similar speed.
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