European Commission proposes Standard Essential Patent Licensing Regulation
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Jane Lambert
In the last few years, there has been a spate of litigation throughout the world between businesses that have acquired large portfolios of patents that are essential for compliance with a manufacturing standard which are known as "standard essential patents" ("SEP") and the world's consumer electronics manufacturers known as "implementors" who want to use their patents. Standard setting institutions such as ETSI require the proprietors of SEPs to license their patents to implementors on fair, reasonable and non-discriminatory ("FRAND") terms.
Such an arrangement ought to work very well. As Mr Justice Marcus Smith said in Koninklijke Philips NV v Asustek Computer Inc. and others [2020] EWHC 29 (Ch) (17 January 2020) at paragraph [7 (4)]:
"Standard Essential Patents can be of great value to their holders. Holders can expect a substantial revenue stream from their Standard Essential Patents as the standard for which they are essential is implemented in products sold to millions of consumers. This revenue stream is supported by the fact that alternative technologies which do not meet the standard may well disappear from the market."
Such an arrangement ought to work very well. As Mr Justice Marcus Smith said in Koninklijke Philips NV v Asustek Computer Inc. and others [2020] EWHC 29 (Ch) (17 January 2020) at paragraph [7 (4)]:
"Standard Essential Patents can be of great value to their holders. Holders can expect a substantial revenue stream from their Standard Essential Patents as the standard for which they are essential is implemented in products sold to millions of consumers. This revenue stream is supported by the fact that alternative technologies which do not meet the standard may well disappear from the market."
"Unfortunately", as I said in FRAND - A Recap in NIPC Law on 8 Aug 2020 "that is not what always happens in practice," I explained:
"Patentees use the threat of injunctions to force implementers to take licences that they do not want or need or pay royalties that are way too high. A practice known as "holding up". Implementers deny that the patent is valid or essential to the standard while they make or sell goods that comply with the standard without paying the patentee a penny. A practice known as "holding out". Moreover, some of the patent holders have acquired their portfolios by purchase. It would be surprising if there were not at least a little resentment towards holders that had not actually invented anything."
"Patentees use the threat of injunctions to force implementers to take licences that they do not want or need or pay royalties that are way too high. A practice known as "holding up". Implementers deny that the patent is valid or essential to the standard while they make or sell goods that comply with the standard without paying the patentee a penny. A practice known as "holding out". Moreover, some of the patent holders have acquired their portfolios by purchase. It would be surprising if there were not at least a little resentment towards holders that had not actually invented anything."
I added:
"Disputes between patentees and implementers can take years to resolve. The usual procedure is for courts to order one or more "technical trials" to determine the validity and essentiality of a patent and whether it has been infringed followed by a "non-technical trial" to determine the terms of the licence. The cost of this litigation can be astronomical. No less than 5 technical trials between Unwired Planet International Ltd. and Huawei Technologies Ltd were ordered although not all of them took place. The non-technical trial lasted 7 weeks and is alleged to have cost the claimant £12.4 million (see Unwired Planet International Ltd v Huawei Technologies Co Ltd and another [2017] EWHC 1304 (Pat) (7 June 2017)). "
"Disputes between patentees and implementers can take years to resolve. The usual procedure is for courts to order one or more "technical trials" to determine the validity and essentiality of a patent and whether it has been infringed followed by a "non-technical trial" to determine the terms of the licence. The cost of this litigation can be astronomical. No less than 5 technical trials between Unwired Planet International Ltd. and Huawei Technologies Ltd were ordered although not all of them took place. The non-technical trial lasted 7 weeks and is alleged to have cost the claimant £12.4 million (see Unwired Planet International Ltd v Huawei Technologies Co Ltd and another [2017] EWHC 1304 (Pat) (7 June 2017)). "
The decision of the Supreme Court in ) Unwired Planet International Ltd and another v Huawei Technologies (UK) Co Ltd and another [2020] Bus LR 2422, [2020] UKSC 37 (26 Aug 2020) which I discussed in Patents: Supreme Court upholds Court of Appeal and Sir Colin Birss on FRAND on 27 Aug 2020 in NIPC Law has endorsed that procedure.
A few days ago the European Commission proposed legislation to regulate SEP licensing (see Intellectual property – new framework for standard-essential patents). I am grateful to Joff Wild for drawing this proposal to my attention in his article European Commission sets up final battle between SEP owners and implementers on the IAM website. It is summarized as follows:
"A patent that protects technology essential to a standard is called a standard-essential patent (SEP). Patent-holders commit to licence their SEPs to users of the standard on fair, reasonable and non-discriminatory terms and conditions. However, the system for licensing SEPs is not transparent, predictable and efficient.
This initiative will create a fair and balanced licensing framework and may combine legislative and non-legislative action."
This initiative will create a fair and balanced licensing framework and may combine legislative and non-legislative action."
The proposed legislation will be a regulation rather than a directive. A detailed proposal is promised for the third quarter of this year (presumably sometime between now and 30 Sept). There will then be a public consultation and the draft instrument will be placed before the Council in the last quarter of 2022. It will need to be adopted by the member states and the European Parliament.
Of course, none of this will affect the United Kingdom directly unless a future government decides to steer the country back towards the single market and the customs union. However, it may affect investment by implementors who would rather steer clear of the British market altogether than risk the threat of expensive litigation and the unenviable choice of an injunction or licences for patents in countries in which they have no interest. As I said in my case note on the Supreme Court's judgment:
"it has to be remembered that the UK is a medium-size market and that quitting the UK altogether may be a lesser evil than accepting a court imposed licence agreement. That seems to have been the conclusion of the defendants in TQ Delta LLC v Zyxel Communications Ltd and another [2019] EWHC 745 (Pat) (18 March 2019) who withdrew their undertaking to accept a FRAND licence and even agreed to pay the damages demanded by the claimant as the price for avoiding a non-technical trial on the terms of a licence (see TQ Delta, LLC v Zyxel Communications UK Ltd and another [2019] EWCA Civ 1277 (18 July 2019). The same reasoning appears to have been in the mind of the defendants in Koninklijke Philips NV v Asustek Computer Incorporation and others [2020] EWHC 29 (Ch) (17 Jan 2020)."
Of course, none of this will affect the United Kingdom directly unless a future government decides to steer the country back towards the single market and the customs union. However, it may affect investment by implementors who would rather steer clear of the British market altogether than risk the threat of expensive litigation and the unenviable choice of an injunction or licences for patents in countries in which they have no interest. As I said in my case note on the Supreme Court's judgment:
"it has to be remembered that the UK is a medium-size market and that quitting the UK altogether may be a lesser evil than accepting a court imposed licence agreement. That seems to have been the conclusion of the defendants in TQ Delta LLC v Zyxel Communications Ltd and another [2019] EWHC 745 (Pat) (18 March 2019) who withdrew their undertaking to accept a FRAND licence and even agreed to pay the damages demanded by the claimant as the price for avoiding a non-technical trial on the terms of a licence (see TQ Delta, LLC v Zyxel Communications UK Ltd and another [2019] EWCA Civ 1277 (18 July 2019). The same reasoning appears to have been in the mind of the defendants in Koninklijke Philips NV v Asustek Computer Incorporation and others [2020] EWHC 29 (Ch) (17 Jan 2020)."
I shall be discussing this and other developments relating to SEP licensing at the Cambridge IP Law Summer School at Downing College next month if anyone is interested. Should amplification or clarification of any point of this article be required I can be contacted on _44 (020 7404 5252 or through this website.
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