In April 2016 the European Commission identified three main areas where the standard-essential patents licensing environment could be improved. At the end of last year, the Commission released a further Communication entitled "EU's approach to Standard Essential Patents" (the "Communication"). The Communication fleshes out the previously identified deficiencies and proposes measures as to how the current environment can be improved. A summary of the Communication is set out below.
What is a standard-essential patent?
Standards are used within various industries to ensure that interoperable and safe technologies are widely disseminated. For example, within the telecommunications sector, technologies such as Wi-Fi and Bluetooth have been standardised to allow interconnectivity between devices made by different manufacturers. Most, if not all, standards incorporate patented technology. Indeed, patent holders intentionally contribute their protected technology during the development of a standard such that it is included within the final standard. A patent that protects technology essential to a standard is called a standard-essential patent ("SEP"). To prevent monopolisation by SEP holders, and in keeping with the overall aim of the standards system, SEP holders must commit to license them on fair, reasonable and non-discriminatory ("FRAND") terms.
Evidence suggests that the licensing and enforcement of SEPs does not always work as intended and can lead to conflicts: technology users of SEPs accuse SEP holders of charging excessive licensing fees for weak patent portfolios; conversely, SEP holders accuse technology users of willful infringement of their SEPs and not entering into good faith licensing discussions. The Commission believes that such conflict results in delay in the widespread use of standardised technologies across the EU, and concluded that there is an urgent need to set out three key principles that foster a balanced, smooth and predictable framework for SEPs:
1) Increasing transparency on SEPs exposure
In order to conduct fair licensing negotiations, and enable potential users of a standard to identify the scale of their exposure to SEPs, information on the existence, scope and relevance of SEPs is vital. Currently, information on SEPs can only be found on databases maintained by standard developing organisations ("SDOs"). These databases may record tens of thousands of SEPs for a single standard, and declarations of essentiality made by SEP holders are (a) not subject to scrutiny and (b) are often made before the scope of either the standard or the SEP has crystallised. The Commission suggests the following measures:
- Improving quality and accessibility of information recorded in SDO databases. For example, by including links to patent office databases and updates relating to patent status and ownership.
- Developing an information tool to assist licensing negotiations. Whilst the current declaration system in SDOs supports the technical standard setting process, it is not geared towards future SEP licensing. The Commission suggests:
- More up-to-date and precise declarations. Declarations tend to be made early on in the standardisation process and typically concern patent applications as opposed to granted patents. Rightholders should review the relevance of their declarations at the time of adoption of the final standard and when a final granting decision on the patent is taken. SEP holders should also make reference to the section of the standard that is relevant to the SEP.
- Essentiality checks. To guard against the risk of broad over-declarations, there is a need for a higher degree of scrutiny on essentiality claims. The Commission suggests this is performed by an independent party with technical capabilities.
- The costs associated with implementing these measures means a proportional approach must be taken. Options include initially extending measures to new key standards / technologies and incentivising SEP holders to increase transparency.
2) General principles for FRAND licensing terms for SEPs
Currently, licensing is hampered by unclear and diverging interpretations on the meaning of FRAND. The Commission has therefore established a first set of key signposts on the FRAND concept. These include:
- Licensing principles in respect of IP valuation:
- Licensing terms have to bear a clear relationship to the economic value of the patented technology and not be based on any element of the decision to include the technology within the standard.
- A FRAND value should take into account the present value of patented technology and be irrespective of market success of the product which is unrelated to patented technology.
- When defining a FRAND value, an individual SEP cannot be considered in isolation. Instead, parties need to take into account a reasonable aggregate rate for the standard, assessing the overall added value of the technology.
- Transaction costs relating to the negotiation of a license should be kept to the minimum necessary.
- The creation of patent pools or other licensing platforms (within the scope of EU competition law) should be encouraged.
- Valuable expertise and know-how around FRAND determination that has been gained through licensing agreements, mediations, litigations etc. should be collected and exploited.
3) A predictable enforcement environment for SEPs
Disputes on SEPs are an important factor in the licensing system when negotiations fail. A predictable enforcement environment is therefore required, and the Commission makes the following comments:
- Availability of injunctive relief is a key issue in the SEP area. On the one hand, injunctive relief should be available to protect SEP holders against infringers unwilling to conclude a licence on FRAND terms. On the other, safeguards are required to ensure implementers threatened with an injunction aren't forced to agree to licence terms that are not FRAND. Whilst requirements may vary according to each case, the Commission considers the following guidance from Huawei v ZTE as useful:
- A prospective SEP licensee has to receive sufficiently detailed and relevant information to determine the relevance of the SEP portfolio.
- Any counter-offer by a SEP licensee must be concrete and specific.
- What is deemed reasonable in terms of the timeliness of any counter-offer will be dependent on the details and quality of the information provided in the SEP holder's initial offer.
- A proportionality assessment must always be conducted on a case by case basis and injunctive relief must always be effective, proportionate and dissuasive.
- With respect to litigation on the basis of patent portfolios: SEP holders may offer non-SEP patents in addition to SEPs, but cannot require a licensee to accept a licence for these additional patents; a general reluctance to offer or accept all SEPs required may be an indication of bad faith; and any counter offer needs to be with respect to all SEPs in order to be FRAND.
- Alternative Dispute Resolution mechanisms, such as mediation and arbitration, are currently underexploited. When it comes into existence, the Unified Patent Court's dedicated arbitration and mediation centre will provide a forum benefitting from a pool of specialised judges, thus ensuring high quality and efficient proceedings.
- Patent Assertion Entities, which are becoming increasingly involved in SEP licensing, should be subject to the same rules as any other SEP holder.
- There is a need for SEP holders, SDOs and other relevant stakeholders to proactively raise awareness of the FRAND licensing process.
Disputes relating to SEPs continue to be on the rise and it is encouraging to see that the EU Commission is aware of, and keen to tackle, deficiencies in the SEP environment. The Commission's conclusions and proposals summarised above are sensible and, at face value, would address many of the current issues, in particular in relation to the need for accurate and up-to-date declarations by SEP holders regarding the essentiality of their rights. The devil, of course, will be in the detail as to how these measures are implemented, enforced and, crucially, the costs involved in doing so. Furthermore, a common theme throughout the Communication is the need for greater transparency and use of experience garnered in previous SEP licensing and disputes. However, the very nature of establishing what is FRAND can only be determined on a case by case basis, so the usefulness of previous examples is limited. Furthermore, the exercise of determining a FRAND value will almost always require consideration of confidential licensing information. Stakeholders are unlikely to want this information to be made publically available and, as we have seen from recent case law, this is a position the Courts appear to agree with (see our blog on the latest in the series of judgments in Unwired Planet International Ltd v Huawei Technologies Co. Ltd & Ors patent battle.