Out-Law / Your Daily Need-To-Know

Independent essentiality assessments for standard-essential patents endorsed

Out-Law News | 08 Mar 2021 | 12:06 pm | 5 min. read

Businesses that want to make money from licensing out their standard-essential patents (SEPs) to others should be required to subject those patents to independent assessments of their 'essentiality', a group of experts established by the European Commission has said.

The move could help speed up the SEPs licensing process and reduce the volume of litigation associated with those types of patents, according to a new report produced by the expert group, which comprises figures from industry, academia, law and the judiciary.

SEPs are patents related to technologies that are incorporated in standards, such as connectivity standards, and these standards facilitate interoperability between devices and systems including the networks of connected and communicating devices that make up the so called Internet of Things (IoT). Standards are developed by businesses working together under the auspices of standard setting organisations (SSOs), such as the European Telecommunications Standards Institute (ETSI). It is a pre-condition that businesses benefiting from that framework of collaboration under SSOs make the patents they subsequently obtain relating to standardised technologies available to others by way of a licence on fair, reasonable and non-discriminatory (FRAND) terms. However, ETSI considers licensing terms as commercial matters to be agreed by the SEP holder and the implementer of the standardised technology.

Disputes often arise in the context of SEP licensing negotiations. In November last year, in its IP action plan, the European Commission called for more stable, efficient and fair rules governing the licensing of SEPs. The Commission said it would consider reforms aimed at easing legal tensions between SEP owners and technology implementers, including the possible introduction of a new independent third party system for assessing the 'essentiality' of patented technology to a technical standard.

In their recent report, the group of experts on licensing and valuation of standard essential patents addressed a range of topics, including potential essentiality assessments. They proposed to introduce independent essentiality checks "for those SEPs that SEP holders intend to commercialise, whether for offensive or defensive licensing purposes".

"The fact that no essentiality checks are systematically performed for declared SEPs to determine whether they are objectively SEPs (“true SEPs”) leads to a lack of transparency as to the ownership of true SEPs following the adoption of a standard, what licences may be needed to lawfully implement the standard, and what the estimated aggregate royalty for these licenses may be," the report said.

The expert group said patent offices would be the "preferred bodies" for conducting essentiality assessments, but that law firms could also undertake that work.

Under the proposals, SEP owners would prepare a "claims chart" in respect of their patent for independent evaluation. In this context, a claim chart is a side by side comparison of a patent claim's wording and the part of a standards document it is said to read onto. It has been estimated that an essentiality check would initially cost between €4,000 and €5,000, but could fall if essentiality checks become the norm across other parts of the world too. This cost would be borne by the SEP holder, according to the plans.

To help reduce costs, SEP owners would only have to subject one patent in a patent family in "a major market country" for essentiality assessment, "with self-certification for other members of the same family". The EU, US, China and Japan would be the jurisdictions classed as 'major markets' "at least", with other countries possibly being added on a case-by-case basis. The expert group said machine learning algorithms could have a role to play in supporting "cost-efficient essentiality assessments".

The expert group said that while technology implementers should continue to be able to challenge the essentiality of a SEP, it has suggested that those companies should be required to go through "a fast challenge procedure before the independent body that did the essentiality check" so as to avoid those companies turning to litigation as "hold-out tactics" to agreeing licensing terms.

SEP holders would be expected to submit essentiality confirmations, together with claim charts, to SSOs for recording in an SEP database – the creation of which has also been recommended by the expert group as a means of improving transparency in relation to SEPs. SSOs should also be encouraged to list details of the outcomes of opposition and litigation proceedings regarding essentiality or validity of declared SEPs in those databases, according to the report.

Mark Marfé, patent law expert at Pinsent Masons, the law firm behind Out-Law, said: "Efforts to provide greater transparency as to the ownership and number of true SEPs covering technical standards are very welcome. This can only benefit the SMEs and new players in the IoT space. Such businesses will be required to license standardised technologies such as 5G and they therefore need to understand how such licences will impact their bottom line in what is an increasingly complex ecosystem."

Many of the disputes that arise around SEPs concern disagreements between patent holders and technology implementers as to what constitutes 'FRAND'. The expert group's report sets out some recommended valuation methods for the determination of a royalty and highlights practices that could be viewed as discriminatory, and practices that could promote non-discrimination.

The expert group suggested that guidance on the meaning of "non-discriminatory" could be developed by the European Commission, and further proposed the development of a methodology to enable patent holders to assess compliance with their obligations to act in a non-discriminatory fashion in respect of their SEPs.

"A methodology … would provide an objective range – a sort of safe harbour – within which a licence would be considered in compliance," it said.

The creation of a confidential repository of SEP license agreements was also proposed, with access to the terms and conditions of prior agreements, "to be used by courts, competition authorities, public arbitration boards, or trusted persons to promote transparency".

The expert group's report also addressed the issue of whether SEP owners should be able to pick and choose which businesses in a supply chain they pursue for licensing their technology. A series of questions on that issue have been referred to the Court of Justice of the EU (CJEU) by the Regional Court of Düsseldorf in the context of a dispute between Nokia and Daimler.

Emmanuel Gougé, who also specialises in patent law at Pinsent Masons, said: "The expert group suggested that the European Commission could endorse three principles it put forward to guide the licensing of SEPs in the value chain. If endorsed, the principles would encourage SEP owners to license at a single level in a value chain for a particular licensed product, adopt a uniform FRAND royalty for a particular product irrespective of the level of licensing, and enable suppliers to pass on any FRAND royalty costs they incur up the supply chain without their customers being able to take out indemnities against that."

Not everyone in the expert group endorsed the proposals contained in the group's final report. Monica Magnusson, vice-president for intellectual property rights policy at mobile device manufacturer Ericsson, said the report "only lists individual opinions on the current status as well as on suggestions for change" and that "those opinions and suggestions are often not accompanied by any empirical evidence and often include methods broadly rejected by courts".

Co-written by Diane Avril of Pinsent Masons.