Yesterday, the EU Commission adopted its long-awaited proposal for a regulation on standard-essential patents (SEPs), which – according to the Commission – is to promote transparency and predictability in licensing SEPs. With the draft regulation, which has been long in the making, the Commission proposes various measures that lead to novel requirements and obligations for patent owners and implementers and have the potential to significantly reshape the SEP licensing and litigation landscape.

SEPs for technical standards

SEPs are patents that are essential, i.e. necessarily required for the implementation of a technical standard (e.g. 5G, Wi-Fi or USB). They are particularly relevant for companies in the technology sector, as they will be the ones marketing the components that will connect to the standard, whether the final product will be a smartphone, a car, a medical device, or a refrigerator.

Because every company marketing a product that is compliant with such standard must make use of SEPs, they have to pay royalties to SEP owners. The determination of licensing rates has been heavily debated and kept the courts busy for over a decade. The disputes are characterised by needing to strike a balance between SEP owners protecting their intellectual property and giving implementers of standards fair and reasonable access to it. To achieve access, SEP owners are required to license the SEPs on fair, reasonable and non-discriminatory (FRAND) terms. However, the details on what is FRAND are still not worked out with the required certainty to allow for easy negotiations of licenses. EU Member States’ courts (e.g. in France, Germany, and the Netherlands) have taken different approaches in determining such terms (read more on German case law in this blog post). Other courts have decided to set global rates for FRAND licences (UK, China).

The Commission’s proposals

As envisaged in its IP Action Plan of 2020, the Commission aims to fill the gaps and to provide more legal certainty. The Commission believes that the issues affecting SEP licensing include insufficient transparency with regard to SEPs, FRAND terms and licensing in the value chain as well as insufficient FRAND dispute resolution mechanisms. The Commission’s draft includes the following:

• A Competence Centre will be set up within the European Intellectual Property Office (EUIPO), which will inter alia run a register for SEPs, keep an electronic database, conduct essentiality checks, and administer the process for aggregate royalty as well as FRAND determination.
• By way of a centralised register run by the Competence Centre, information regarding specific SEPs (e.g. on relevant standards, SEP ownership and public standard terms and conditions) will be made available.
• The Competence Centre will also keep an electronic database with essential information relating to SEPs (e.g. with bibliographic data on individual SEPs, case law and third-country legislation).
• SEP owners will be required to submit relevant information within certain time limits to the Competence Centre. Their ability to enforce the SEP and receive royalties will be restricted if the information has not been provided on time.
• Patent pools,courts as well as any person involved in alternative dispute resolution proceedings concerning SEPs will also be subject to transparency and/or information requirements.
• The Competence Centre will check a sample of SEP registrations for accuracy and completeness; independent evaluators will also conduct random essentiality checks on selected SEPs, i.e. they will determine whether a particular SEP is really essential for the standard or merely declared as such. In addition to the SEPs selected by the Competence Centre for the checks, SEP owners and implementers can designate SEPs for essentiality checks. The non-binding expert opinion shall be issued within 6 months, will be entered to the register and may be used as evidence before stakeholders, patent pools, public authorities, courts or arbitrators.
• The regulation is set to make information on royalties available. For that purpose, owners of SEPs for which FRAND commitments have been made shall notify to the Competence Centre the aggregate royalty for the SEPs covering a standard. Besides, owners of SEPs representing at least 20 % of all SEPs of a standard may request conciliation to mediate the discussions for a joint submission of an aggregate royalty. In addition, both SEP holders and/or implementers can ask an expert to recommend an aggregate royalty, but such recommendation will not be binding.
• The Commission wants to introduce an alternative dispute resolution mechanism to determine FRAND terms. With certain exceptions, both the SEP owner and the prospective implementer will be able to initiate the FRAND determination procedure. The procedure will be concluded within 9 months and is supposed to be a mandatory step before SEP owners and prospective implementers can launch court proceedings at national level. However, requests for a provisional financial injunction shall be allowed during the FRAND determination process (with exceptions for the seizure of property). Moreover, limitation periods will be suspended for the duration of the process.

In principle, the regulation shall apply to all standards published after its entry into force, i.e. only to future standards. However, the Commission may exempt cases from the provisions on aggregate royalty determination procedures and the FRAND determination where it believes SEP licensing does not give rise to significant difficulties or inefficiencies. In addition, where the Commission considers the functioning of the internal market to be severely distorted due to inefficiencies in the licensing of SEPs, it may determine which existing standards, parts thereof or relevant use cases will be subject to certain parts of the regulation.

The beginning of the legislative process

The adoption of the proposal marks the beginning of the legislative process. The EU Parliament and the Council will examine the proposals thoroughly. A political agreement, which will be the basis for the formal adoption of the regulation, may well require amendments and compromises. Some aspects of earlier versions of the proposal that were leaked to the public have been criticised heavily by the SEP community and the Commission already tried to address some of the concerns. It is expected that the final proposals will remain heavily debated and controversial.

Companies in the technology field, whether they are SEP owners or implementers, are well-advised to monitor the further legislative development to prepare for the upcoming regulation and the obligations that go hand in hand with it. If (even only partially) adopted as proposed, the regulation will likely have an enormous impact on all interested parties.