A Few Thoughts on the European Commission's Draft Proposal Concerning SEPs

By now, everyone who reads this blog has probably already read, or at least read about, the leaked draft of the European Commission's Proposal for a Regulation of the European Parliament and of the Council on Standard-Essential Patents.  (Long story short, the proposed legislation would require, inter alia, for "any patent in force in one or more EU Member States that is found to be essential to a standard," that SEP owners and implementers submit to a nonbinding FRAND determination, to be made by a two-member panel of "conciliators," under the auspices of the European Union Intellectual Property Office (EUIPO).  The EUIPO would also maintain a registry of SEPs--and registration too would be a prerequisite to enforcing any given SEP--and would conduct nonbinding essentiality checks.  The system would take two years to enter into force.)  I'm sure it will be a hot topic of discussion at Fordham Law School's 30th Annual Intellectual Property Law & Policy Conference, at which I will be one of the panelists on FRAND issues this coming Friday.  Last week, Enrico Bonadio and Dyuti Pandya published a short, mostly favorable overview of the draft regulation on the Kluwer Patent Blog (with a link to the draft itself).  And over the past two weeks, Florian Mueller has published a series of posts (here, here, here, here, and here, with perhaps more to come), explaining why he views the proposed regulation as "an unmitigated disaster."  Without repeating what others have already said, let me highlight a few things of note that I haven't seen as much discussion of yet (though I don't claim that I've seen every commentary that may be out there, so apologies if I am repeating a point that others have already made):

1.  The third recital states that "every stakeholder should be allowed to use a standard," and concludes that if a patent owner makes a FRAND commitment, "it cannot refuse to license its SEPs to a party who is willing to agree to FRAND terms and conditions."  Unless I overlooked it, I don't see these propositions clearly embodied in any of the regulation's articles, but if taken at face value, they would seem to endorse the "license to all," as opposed to the "access to all," interpretation of FRAND commitments.

2.  Article 3 would make it clear that FRAND commitments bind subsequent patent owners.

3. Article 7 would require the SEP owner to provide the EUIPO's proposed "competence center" with the owner's "standard terms and conditions for" licensing registered SEPs, "including its royalty and discount policies."

4.  The regulation contemplates that "contributors to a standard for which FRAND commitments have been made" could jointly agree on aggregate royalty burdens relating to that standard; and, in the event these contributors can't reach agreement, could ask the EUIPO for assistance in facilitating such agreements (see recitals 15-18, arts. 17-20).  This raises a question of whether such agreements violate antitrust law.  Perhaps not, for reasons dating back to the U.S. Antitrust Modernization Commission's analysis from 2007 if not earlier, but I imagine this could be a potentially contentious issue.

5. As noted above, probably the most important aspect of the draft regulation is its requirement that owners or implementers request a nonbinding, but mandatory, FRAND determination prior to initiating litigation before any court in an EU member state or the UPC.  (The contemplated process would not prevent parties from litigating outside the EU, however, see article 48.)  The determination would be made in nine months by a two-person panel of appointed conciliators, who would make use of the EUIPO's proposed SEP registry and would hear evidence from the parties.  The procedure is intended to facilitate out-of-court settlements that balance the interests of owners and implementers (see recital 31); and, along with the establishment of the registry and the essentiality checks, to promote transparency.  Only the "methodology and the assessment," however, and not the FRAND determination itself, would be made public absent consent of the parties, see article 60), though it's not clear to me what the difference is between the "assessment" and the "FRAND determination."

I have no inside information regarding the draft proposal, and it's always hazardous to speculate, but I wonder if the principal motivation behind requiring a nonbinding but mandatory FRAND determination goes something like this:  (1) disputes over FRAND-committed SEPs are going to increase substantially in the coming years, with the IoT; (2) so far, EU member states' courts (unlike their counterparts in the U.K., the U.S., and China, among others) have shown little willingness to assess FRAND royalties themselves, and are not suddenly going to become eager to do so; (3) the German courts' interpretation of Huawei v. ZTE, and its possible (likely?) adoption by the UPC, will continue to present implementers with a substantial risk that they will be characterized as "unwilling licensees," and thus subject to injunctions, and thus vulnerable to unreasonable SEP owner demands; and (4) imposing a nonbinding but mandatory FRAND determination as a precondition to litigation will, in effect, eliminate most of the litigation.  Suppose, for example, that the SEP owner is unsatisfied with the outcome of the nonbinding but mandatory FRAND determination.  Does the SEP owner file suit and now (perhaps) risk being characterized as an unwilling licensor, for not accepting the terms of the FRAND determination?  If so, the owner wouldn't be able to get an injunction, and thus would either have to request that a member state court or the UPC set the FRAND rate itself or, more likely, settle on terms reflecting the nonbinding FRAND determination.  Alternatively, suppose that the implementer is unsatisfied with the EUIPO's determination.  If the implementer doesn't come to terms and winds up being sued in Germany or the UPC, there would be a substantial risk of being enjoined, which would then leave the implementer at the SEP owner's mercy--so, better to settle on the unfavorable terms recommended by the conciliators.

Now, maybe that's not how things would work out.  Maybe the SEP owner and the implementer would not automatically be deemed "unwilling" simply for disagreeing with the FRAND determination.  I tend to think, however, that there would be considerable pressure to reach agreement speedily once the conciliators made their FRAND determination--which perhaps is the point.  I will be interested in hearing what others have to say about this later this week at Fordham.  And I also think that Florian Mueller has identified some serious potential unintended consequences (e.g., "balkanization" of SEP portfolios, encouraging SEP owners to bring their suits elswhere) and shortcomings (no validity determination in connection with essentiality checks), that would need to be addressed if this proposal were to go forward.