EU SEP Regulation Update: Reenvisaging the European ‘FRANDscape’

On  April 27, 2023, the European Commission published its proposal for how the licensing of standard essential patents (SEPs) should be governed in the EU. The draft regulation states that the initiative aims to incentivize participation by European firms in the standard development process and the broad implementation of such standardized technologies, particularly in IoT industries. The developments are of interest to any business that develops, implements or markets connective technologies.

SEPs

Standard essential patents (SEPs) cover technology adhering to international standards that ensure interoperability between components made by different manufacturers in different territories.

In many cases, users of standards are expected to pay royalties to compensate for their use of the patented technology. SEP owners often undertake that they will seek to recover fair, reasonable and non-discriminatory (FRAND) royalties if their patented technology is adopted by a standard.

The precise meaning of “FRAND” has led to significant debate between those who own the technology (SEP owners) and those who use the technology (so-called ‘implementers’, such as mobile phone manufacturers).

The standards that have been the subject of much of the litigation in this field are the cellular telecommunications standards such as 4G and 5G. Standards will be implemented more widely with the growth of the IoT, for example in automobiles and smart appliances.

The Draft Regulation

The European Commission’s proposed framework would bring about significant changes to SEP licensing and enforcement if enacted by the European Parliament. Key elements of these reforms are as below.

Competence centre – A new “competence centre” is proposed to be established at the EUIPO to administer the reforms.

SEP registration – Owners would be required to register their SEPs with the EUIPO within six months. Failure to meet this deadline would limit an owner’s ability to recover infringement damages during non-registration and may prevent enforcement of unregistered SEPs in EU Member States.

SEP royalties calculation – SEP owners would need to notify and agree an aggregate royalty for all SEPs covering a standard, with optional assistance from the EUIPO or non-binding expert opinions. The idea is that the aggregate royalty represents the amount an implementer should pay for its use of the standard. The aggregate royalty is in theory then divided amongst SEP owners proportionally based on their share (or value) of total SEPs.

Essentiality checks – The EUIPO would evaluate whether patent claims are essential to a given standard.   Details on the methodology of these checks would be determined by the Commission within 18 months after enactment.

FRAND determinations prior to initiating national litigation – Either SEP owners or implementers could request the EUIPO to determine FRAND royalty amounts payable under SEPs. This requirement has sparked controversy due to concerns of prolonged periods with unpaid royalties.

Implementation

The draft regulation has received significant industry attention since it was published in April 2023. However, its publication was just the beginning of a very long process.

The draft regulation will need to secure approval from the European Parliament before it is established in European law. It will follow the ordinary legislative process set out in the Treaty on the Functioning of the European Union. Before the text is adopted by the Committee on Legal Affairs, other committees may be designated to provide an opinion if the proposal also affects them, and the committees will work together to reach agreement on suggested amendments. During this time, the Commission is able to defend its position and answer questions to the committees.

Once the draft text has been adopted by the relevant committee in the Parliament, which in this case is the Committee on Legal Affairs, it will be reviewed by the full (plenary) Parliament. Parliament has its first reading and will adopt its position.

The text of the proposal approved by Parliament is put to the Council for a first reading, and the Parliament’s language will be adopted or amended by the Council and sent back with reasons for the changes.

There is no time limit for the Parliament’s nor the Council’s first reading. Hence, there may be years before the draft regulation is enacted.

According to the Commission’s proposal, the regulation would then not take effect until 24 months after legally entering into force.

The parliamentary committees that have thus far provided draft opinions on the proposals are the Committee on International Trade (INTA) and the Committee on the Internal Market and Consumer Protection (IMCO).

Contrasting Views from INTA’s and IMCO’s Draft Opinions

The Commission’s draft regulation is widely seen as advantageous to implementers and punitive to SEP owners. The balance was to some extent restored by INTA’s opinionl, which is seen as a wholesale rebuttal of the Commission’s proposal and has been viewed favorably by SEP owners. INTA’s opinion suggests an intention to dilute the impact of the reforms to an extent that would render the effect of the regulation limited.

In contrast, IMCO’s opinion is largely supportive of the Commission’s proposals and approves the substance of many of the provisions. IMCO even proposes to extend the scope of standards to which the regulation would apply.

The Future of the European FRANDscape

While the draft regulation remains under the scrutiny of the European Parliament and its committees, it is expected that SEP owners and implementers will continue to lobby their positions and the outcome of the proposed reforms remains unclear. However, companies encountering standardized technologies and looking to do business in the EU, whether as net licensees or licensors, may take some comfort in the short to medium term.

The parliamentary process is long, and the arguments are so divisive – as the committee’s opinions have shown – that consensus may be difficult and lengthy to reach. For now, then, it seems to be business as usual as far as the impact of the Commission’s draft regulation is concerned.

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