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EU policymakers miss chance to clarify principles around the licensing of standard-essential patents, says expert

Out-Law Analysis | 30 Nov 2017 | 9:52 am | 5 min. read

ANALYSIS: The European Commission has missed an opportunity to provide greater clarity to technology companies over the approach they should follow when licensing standard-essential patents (SEPs).

The Commission on Wednesday published a new communication purporting to set out a new approach to the licensing of SEPs. However, the paper contained a disappointing lack of detail on some of the concepts of SEP licensing that often fall subject to dispute between SEP owners and prospective licensees.

As a result, we can therefore expect courts across Europe to continue to shape the law and best practice in this area.

Issues around FRAND licensing

A SEP is a patent for technology that has been developed as industry standard and where it is impossible for other businesses to make products that adhere to that standard without using the patented technology.

Because of the lack of availability of alternative technology, there are restrictions on the way in which owners of SEPs can exercise and enforce their rights in those patents. EU competition rules prohibit businesses in a dominant market position from abusing that position of dominance. SEP owners are therefore obliged to licence their technology on fair, reasonable and non-discriminatory (FRAND) terms.

However, as the Commission itself noted, "licensing is hampered by unclear and diverging interpretations of the meaning of FRAND". It said that "the roll-out of IoT in Europe" could be delayed as a consequence of "divergent views and litigation over FRAND licensing".

The Commission's paper provides a balanced picture of the different directions in which SEP owners and prospective licensees are pulling, and of their legitimate interests in doing so.

On the one hand there is the need to allow businesses to enforce their patent rights against infringers where they have invested time, money and other resources into developing new technology standards. On the other, it is important to prevent SEP owners from delaying the launch of new products or services that rely on their technologies through the way they enforce their patent rights.

The difficult balance that needs to be struck is an example of the challenge that exists in reconciling rights around free trade and competition within EU law with other established EU principles around rights in property, including intellectual property, and the need to reward innovation.

New Commission guidelines are lacking

Within FRAND licensing negotiations there is potential for disagreement on a multitude of issues.

SEP owners and prospective licensees can place a different valuation on the royalties that should be paid for use of the patent. There may be claims that proposed licensing terms are not fair or reasonable, or indeed that they are discriminatory when compared with licensing terms that SEP owners offer to other licensees.

Further disagreement can arise over the length and geographic scope of licensing agreements.

Unfortunately, the Commission's paper does not contain much in the way of clarification over which practices negotiating parties sometimes adopt are permitted in the context of FRAND licensing.

However, the Commission did set out some broad guidelines that it said businesses should use to shape their development of "common licensing practices" for SEPs. It described its guidelines as "a first set of key signposts on the FRAND concept", but said that it does not believe there to be a "one-size-fit-all solution to what FRAND is".

In its guidelines the Commission said that the licensing terms for SEPs "have to bear a clear relationship to the economic value of the patented technology". It said that the determination of "a FRAND value" should include consideration of "the present value added of the patented technology" and that it was irrelevant in that regard what "the market success of the product which is unrelated to the patented technology" is.

The Commission also said that for cases where licensing agreements would span more than one SEP, SEP owners cannot apply a royalty rate for each of their patents individually and propose the total as the final royalty rate for the package.

It said: "Parties need to take into account a reasonable aggregate rate for the standard, assessing the overall added value of the technology."

Further Commission recommendations

Within its paper the Commission also made a series of other recommendations designed to help smooth FRAND licensing negotiations and reduce litigation.

For example, it called for increased transparency over the "existence, scope and relevance" of SEPs. To achieve this, it called on standardisation bodies to enhance the "quality" of information they record in their SEP databases.

The standardisation bodies were also called upon to incentivise SEP owners and users "to report the case reference and main outcome of final decisions, positive or negative, on declared SEPs (including on essentiality and patent validity)" in a further effort to boost transparency over litigations involving SEPs. The Commission said the measure could limit potential future litigation over such patents.

The Commission also suggested that patent offices across Europe could carry out "essentiality checks" of SEPs in "new and key standards" such as 5G.

According to the Commission, some businesses developing SEPs sometimes overstate the claims they make about how essential their patents are to the operation of technological standards, and that such checks could help to verify that the claims made are justified. It said the verifications could be useful within licensing negotiations or litigation proceedings.

However, the measures aimed at boost transparency around SEPs raise a number of issues.

It is unclear, for example, how patent offices would manage already large workloads to verify the essentiality of patents, even if the checks are only conducted on a sample basis as the Commission has suggested they could be.

The measures also raise a potential issue around disclosure of commercially sensitive information. The Commission seeks "up-to-date and precise information on SEPs", but it is not clear how far it wants to go. SEP owners will naturally be reluctant to share information about the specific licensing deals they strike. Yet, without that information it is difficult to see the additional transparency delivering much more than just a minor benefit.

One positive to arise from the Commission's paper was its confirmation that SEP owners in Europe are entitled to pursue injunctive relief before the courts against infringers of their patents. Injunctions can prevent rival businesses from releasing new products or services that rely on patented technology that they are not licensed to use. This marks out the EU as different from the US, where SEP owners are restricted to pursuing damages in claims against infringers.

Courts will still play a central role in resolving disputes over SEPs

Many businesses in the European technology sector in particular where SEPs are prevalent will be disappointed with the Commission's paper.

There was a chance for the Commission to provide some much needed detail on the protocols that both SEP owners and prospective licensees must follow to avoid, on the one hand, infringing competition rules through unreasonable FRAND negotiations and enforcement, and on the other allow prospective licensees to demonstrate their willingness to conclude a licensing agreement and avoid infringement proceedings.

The central principles for FRAND licensing were laid out by the Court of Justice of the EU (CJEU), but there has been room for interpretation from its judgment. The issue for businesses operating across the EU is that national courts have interpreted the practices adopted in negotiations differently, and indeed there has been divergent approaches taken across regional courts in Germany.

In the end, a lack of precise Commission policy here will mean that it will again fall to the courts to clarify what practices businesses should follow in FRAND negotiations.

Peter Koch is a Munich-based expert in patent law and litigation at Pinsent Masons, the law firm behind Out-Law.com.