Alex Moss | April 19, 2023

The world got an early look at the European Commission’s (EC) forthcoming regulations for licensing standard-essential patents (SEPs), thanks to this recently leaked draft.

While the official proposal is slated for release on April 26, we hope this draft is a sign of what’s to come. It’s a huge step in the right direction that will make licensing more transparent, efficient, and fair for patent owners, technology developers, and consumers.

What are SEPs and why do they matter?

SEPs are patents that are essential to maintaining technical standards, which are the lifeblood of our increasingly interconnected world. Technical standards allow devices made by different companies to share network infrastructure and communicate seamlessly with each other. Thanks to them, we don’t have to worry about buying the same brand of smartphone as our friends or getting a heart monitor that can transmit data wherever we travel. But problems can arise when standards include patented technology, as many today do. If licensing fees become prohibitive and licensing disputes become intractable, SEPs can block technology makers’ access to standards and consumers’ access to the benefits they provide.

What is in the EC's draft and why would it benefit all sides?

First, the regulation prioritizes “transparency and predictability” in SEP licensing. Both are urgently needed. At present, most SEP licensing information is confidential, making it accessible to negotiating parties only at the enormous cost of litigation, and inaccessible to everyone else—including small companies that can’t afford to litigate, government agencies, and consumers.

More transparency would reduce the need for expensive litigation and the bargaining leverage litigation provides, putting small companies, whether SEP owners or technology makers, on a more level playing field, and less likely to be forced into unfair agreements. At the same time, it would enable government agencies and consumers to understand the SEP licensing landscape and asses its impact on innovation, supply chains, and prices.

To achieve greater transparency and predictability, the regulation calls for the creation of a “competence centre” that would “establish and manage a database and an electronic register containing detailed information on SEPs,” including court opinions, reports, and applicable laws of different countries. It also calls for the creation of a publicly available register with information about “the number of SEPs applicable to a standard, the ownership of relevant SEPs, and the parts of the standard covered by the SEPs.” To facilitate collection of this information, the register would require and incentivize all SEP owners to register their patents within 6 months of issuance (or at the opening of the register) by making registration a prerequisite for enforcement and collection of past damages. And to prevent over-registration, the regulation would retain independent experts to conduct random essentiality checks.

Collecting this information in a central, publicly accessible register would dramatically change the current licensing landscape for the better, especially for small companies that own patents or develop products. Currently, only big companies can afford to gather such information, which often requires litigation in jurisdictions around the world. A central register would equalize access, making licensing fair and efficient for all involved. By necessitating less spending on litigation and related activities, it would also foster greater investment in technology and product development.

Second, the regulation recognizes the importance of identifying the total royalty burden—the sum of all the fees that must be paid to different SEP owners—for specific standards. Knowing the total royalty burden, or aggregate royalty rate, is critical information for companies that are deciding whether to enter markets for standard-compliant products as well as for patent owners deciding what rates to charge. This information is also necessary for government agencies and the public to assess the practice cost of accessing a standard and determine whether that cost is so great it will deter companies from developing or manufacturing standard-compliant products.

Third, the regulation outline processes through which SEP owners and technology makers can get expert opinions on what the aggregate royalty rate for a standard is or should be. Rather optimistically, the draft permits contributors to a standard to determine the aggregate royalty rate and inform the competence centre what that rate is. In practice, this is unlikely as contributors to a standard typically have conflicting interests with some seeking to generate revenue from licensing SEPs and others from making standard-compliant products. But when contributors do not reach an agreement early enough, the regulation permits both patent owners and implementers (companies that make standard-compliant products) to request the determination of an aggregate royalty rate by experts appointed by the competence centre.

For such processes to be fair and effective, the appointed experts will need to be impartial, free from conflicts of interest, and possess—individually or as a group—sufficient technical, legal, and economic expertise. Even if these qualifications are met, the experts will need to determine how to set an aggregate royalty rate. While courts in various countries have done this in some cases, they often rely on problematic evidence, like other SEP licenses and statements by patent holders. Europe’s new processes may necessitate new, and improved methodologies for determining royalty rates. But the benefits of aggregate royalty rate determinations make these challenges worthwhile. These processes could make litigation over SEP licenses the exception rather than the rule, dramatically reducing transaction costs for SEP owners and technology makers alike. Those cost savings would, in turn, benefit consumers by allowing greater investment in innovation, price reductions, or both.

Critics may complain that this regulation will reduce the value of patents or discourage innovation. Not so: the regulation will give patent owners a surefire mechanism for setting royalty rates, prevent implementers from avoiding paying those rates (through protracted litigation around the world), and ensure that patents which truly are essential to standards receive their due share of licensing revenue. These changes will increase the value of patents and encourage innovation by enabling patent owners to enforce their rights more easily, predictably, and affordably.

Admittedly, the changes proposed in the draft may encourage innovation at the expense of litigation. This may reduce demand for lawyers, but patents and standards exist to promote investment in innovation and access to technology, not investment in legal fees and access to courts. Inevitably, any changes to improve the current morass of SEP licensing litigation will draw complaints from some patent owners and their lawyers.

That is why these changes must be viewed from the perspective of every party with a stake in SEP licensing issues—including small companies that invent technology and/or make products as well as consumers who depend on standard-compliant devices at home, work, or the hospital. By promoting transparency, efficiency, and fairness, the regulation can ultimately benefit patent owners and implementers of all sizes as well as society as a whole. We hope the EC continues to prioritize the needs of these constituencies—and that other governmental entities do the same.