Quite a furor has broken out over the European Commission (EC) proposals for a new regime covering primary patents over critical technologies, especially in the telecoms sector. The EC, the EU’s executive body, has been roundly criticized by a number of patent experts for rushing in with an ill-considered plan based on poor understanding of this complex and arcane field, which is likely to do a lot more harm than good.
These patents come under the heading of SEP/FRAND, where SEP (Standard Essential Patent) protects a technology deemed essential by a Standard Setting Organization (SSO) for a given sector, such as 5G. When an SEP has been declared to the SSO, the owner of that patent must then be willing to licence the technology on Fair, Reasonable and Non-Discriminatory (FRAND) terms. For a sector as large as 5G, there will be many contributory SEPs.
The reaction might seem surprising given that the EU has been preparing this plan for three years, so should have been able to take differing perspectives into account. The project stems from the Commission’s 2020 Action Plan on Intellectual Property, which included a pledge to introduce measures that “improve transparency and predictability” in SEP licensing. The objective was to oil the wheels and reduce the cost of Europe’s supposed digital transition, but if so, it looks like it has backfired spectacularly.
There is a sense of “if aint’t broke don’t fix it,” which appears to be the position the current Biden administration has taken over proposals for change there. That is not to say the current system involving interminable litigation between major technology players is ideal, but it represents a sort of consensus that seems to work and there is a belief that any attempt to change it would only make matters worse.
But the EU has developed the attitude that it should be at the top table of technological regulation as it is to an extent over privacy with its admittedly rather contentious GDPR (General Data Protection Regulation) launched in May 2018. It has resented the perceived dominance of the big US tech players, even though in the case of 5G two of its member states, Sweden and Finland, host the companies competing most strongly against Chinese, South Korean and to an extent Japanese competition.
The current situation in Europe and North America is that FRAND fees are determined by those already being charged for similar SEPs or, in some cases, by how many relevant patents a company has developed. Then when there is a dispute over the fee being requested by the patent holder, the parties involved turn to the courts to determine a supposedly fair fee.
In practice such litigation is a commonplace part of the competitive background for major players as they weigh up costs against the benefits of swinging FRAND fees in their favor. Such litigation does not necessarily imply that the warring parties are antagonistic and often occurs between partners in various ventures. Litigation can also smolder on at a low level even when a settlement has been agreed, as in October 2020 when Apple attempted to revive an attempt to quash three of Qualcomm’s smartphone patents even after the main case had been settled. Such examples reflect patent litigation being an ongoing business operation to reduce costs just like investments in supply chains or just in time delivery.
The EC might well consider this inefficient and a cost that can be avoided by creating an independent arbiter of SEP fees. But the attempt to do so reveals naivety and lack of understanding of the patents process, as various experts in the field have made clear.
The EU’s underlying motivation is easy to understand and even attracts some sympathy in the light of its ambitions towards greater harmonization of trade within its internal market, as part of a progression towards greater integration. The status quo was that patents in Europe, not just the EU, had been granted by the European Patent Office and applicable in 39 signatory countries.
The patents were then packed into national bundles which each country enacted separately with translation as required and renewal fees applicable. From then on, the patents were administered nationally, and, in some cases, litigation would ensue in one of those countries but not others.
It was this fragmented situation the EC determined was inimical to establishment of a fully “frictionless” internal market inside the EU, leaving aside the issue of those countries outside the bloc.
The EC’s plan has been to set up a new Unified Patent Court (UPC) for EU member states that would come into force on 1 June 2023. After that date, the UPC will hear cases regarding infringement and revocation proceedings of European patents valid in participating member states. Then just one court ruling would be applicable in all member states that have ratified the UPC Agreement.
In principle this sounds logical and efficient, but it puts a spanner in the works not just of international patent procedure but also the established IP mechanisms within the EU, which is the point some patent experts have picked up on. Europe already has organizations well placed to handle various aspects of Intellectual Property (IP) management with regard to telco standardization, notably ETSI (European Telecommunications Standards Institute), whose authority will be weakened if the proposed new regime goes ahead.
The current plan is to make the European Union Intellectual Property Office (EUIPO), a body set up in 1994 to manage trademarks, responsible for arbitrating disputes over FRAND rates and also to manage a proposed register of SEPs, despite not having specific patents expertise. Trademarks are very different from patents. This would also in some cases override the European Court of Justice (ECJ), which has ruled on patents disputes in the past.
Typical of expert responses is one from Joff Wild, IP consultant and ex editor in chief of IP publication IAM, in a recent Linked In post. He derided the idea of giving so much power to EUIPO which lacked the expertise, and wrote: “This looks like legislation that has been drafted after listening to one set of interests without giving even the slightest consideration to those of people who actually understand SEP licensing. I sense years of paralysis ahead.”
He added that the proposed arrangement would actually increase the burden on SEP holders while driving down the royalties they may be able to generate through FRAND licensing. The overall impact would be to increase rather than reduce costs associated with licensing and sow confusion because of friction between Europe and other jurisdictions.
Wild also indicated that the EC itself seemed confused and had apparently changed tack during this period of presumed reflection, having been pumping up the idea of the UPC as a universal court to set Europe on a harmonious course, only then to propose this central role of oversight for the EUIPO.
It is unclear how this will unravel and to what extent there will be kick back from stakeholders that own relevant IP, including the major 5G equipment vendors like Ericsson and Nokia. There is consensus though that the new framework would weaken Europe’s position in standards development and SEP enforcement, the opposite of the intention.
A footnote is that a major motivation for the EC’s ill-considered patents framework appears to have been to reduce the royalties paid by the continent’s automakers for inclusion of cellular connectivity. This is rather odd given that the average cost per car of the relevant SEP license fees is certainly well under $20, making it a minor expense compared with the total costs incurred as a result of connectivity, including all the modules and sensors.
The only saving grace is that the EU has not created a brand new institution here, merely pumped up an existing one beyond its remit or competence.