The European Commission’s SEP licensing plans are terrible on every level
Never underestimate Europe’s capacity to snatch defeat from the jaws of victory when it comes to IP.
The news that the Commission (or, more accurately, DG Grow specifically) is set to table plans designed to make SEP licensing more transparent, predictable and efficient has been covered by several very reliable sources, including IAM. In essence, what is being reported will create a framework that places much greater cost and time burdens on SEP holders while reducing the royalties they generate through FRAND licensing.
Europe has spent decades building what are widely seen as the world’s pre-eminent patent and trademark offices - the EPO and the EU IP Office (EUIPO), respectively. Years of negotiation have led to the creation of a new unitary patent system with the very real potential to provide the world’s most important patent court. Alongside this, the Court of Justice of the European Union (CJEU) and Europe’s national courts have developed a body of case law that has driven the global agenda on SEPs and FRAND. Now, DG Grow seems set on putting all this in danger.
But, much more important, what looks like a solution in search of a problem will also imperil the continent’s innovation and technology security at a time when safeguarding them has never been more vital.
Naïve and poorly thought-through
The plans envisage a central role for the EUIPO - whose primary mission currently is to issue EU trademarks and design rights - in the registration of SEPs, assessing their essentiality and in determining FRAND rates.
One immediately striking aspect of the proposals is that they exhibit a bizarre lack of knowledge about the way in which SEP licensing in the real world happens.
Segmenting out the European portion of a proposed global transaction and subjecting it to European rates is not how efficient dealmaking can ever work. Believing otherwise is profoundly naïve. Talking of which, the proposals will delight Chinese implementers and regulators who have long argued for a regional approach to royalties.
Worryingly, no thinking seems to have been done about the length of time essentiality assessments per patent will take or where the skilled personnel needed to do them will come from.
Although its authors may not realise this, the plan is dependent on building an operation manned by individuals who are already extremely well remunerated. They will cost a great deal of money to lure away from their current jobs and there will need to be a lot of them.
Perhaps AI is seen as the solution here. However, despite advances, there is nothing yet out there that provides the levels of certainty justice will require.
What’s more, all of this is being suggested without any serious indication that there are any major SEP licensing problems in the EU. The amount of SEP-related litigation in Europe each year is minimal, for example, with most deals done without legal dispute. Neither is there any meaningful evidence that the current SEP licensing framework hinders innovation or access to technology.
What we do know, however, is that many deep pocket implementers, as well as groups that represent them collectively, have been lobbying heavily in Brussels for a long time to persuade authorities that they should pay less to license SEPs. It seems that they may have got their way.
But at what price?
Technology security threat
Once you begin reducing the amounts that licensors can make from their SEPs, you also reduce their incomes and, therefore, their ability to reinvest in further R&D.
Take Ericsson and Nokia, for example. They are two major European SEP licensors that are also among the world’s most important suppliers of cutting-edge connectivity infrastructure. As they have sunk money into that side of their operations – which are vital to so many European businesses, large and small, as well as to the continent’s overall technology security – it is licensing that has preserved their bottom lines.
Reduce licensing income, therefore, and the companies’ boards are left with very tough decisions to make that could prove to be highly unpalatable for Europe. All so that many already extremely successful, often non-European, businesses can enhance their own profits (on which they will then seek to avoid paying any tax in Europe).
Court questions
Then there is the new Unified Patent Court system, set to come into force in June.
For years, the European Commission has advocated for the UPC, telling all and sundry that it will be a gamechanger: a world class court system delivering high quality, dependable judgments that will create certainty and encourage innovation.
But now DG Grow is saying that, as things stand, UPC judges do not have the tools to competently handle disputes relating to the FRAND licensing of SEPs and so, by implication, are not able to hand down equitable decisions.
What message does that send out about the Commission’s views of the calibre and competence of the court’s judges? What does that say to SEP holders considering opting into the new system, or applying for unitary patent coverage or thinking of using the court for enforcement? What incentive does it give any accused infringer to settle? Has anyone at the Commission even asked these questions?
Of course, this does not just affect the UPC. It will also have an impact on national courts in EU member states and how they operate.
For a decade or so, these have been at the forefront of developing case law and precedent which have set the global SEP weather. Building on the CJEU’s landmark Huawei v ZTE decision, they have helped construct a licensing regime that makes equal demands of both licensors and licensees to ensure FRAND outcomes.
All that leadership – that European leadership - now looks to be in peril. The beneficiaries will be courts in other parts of the world. This is how soft power is squandered.
The EUIPO v the EPO
On top of all this is the role that the EUIPO will play. Currently, the Alicante-based organisation is primarily responsible for the examination and registration of EU trademarks and design rights, dealing with tens of thousands of applications each year.
It is regarded as a global leader and regularly places at number one in the annual rankings of the most innovative offices produced by World Trademark Review, IAM’s sister platform. Beyond some research, though, what it does not do is anything patent-related.
Under the Commission’s proposals this will change. In fact, given the amount of work that will be required to register and assess SEPs, as well as to determine FRAND rates, a large proportion of the office’s output will end up focusing on patents. This will not only require the employment of many patent specialists to do the day-to-day stuff, but also of more senior personnel to manage them.
Building such a function is going to take a lot of time and, in and of itself, will require a great deal of expertise. For perfectly understandable reasons, that expertise does not exist at the EUIPO. So, where is it to come from? Well, not from the top of the organisation as things stand.
A process is currently underway to select a new EUIPO executive director. As you would expect, all three individuals thought to be in the frame - João Negrão, Andrea Di Carlo and Etienne Sanz de Acedo – have deep experience of international trademark practice and policy. They have next to none in patents generally, let alone the deeply contentious world of SEPs.
The potential all this has to affect the EUIPO’s overall organisation and priorities is clear. The trademark community in Europe will be watching very closely to see how the services they currently enjoy are affected. They will not thank the Commission if their needs are downgraded to ensure the proper functioning of the new, cash-guzzling, SEP operation.
And what of the EPO? As a non-EU body, EU institutions such as the European Commission and European Parliament have no formal oversight of its functioning, so its exclusion from the plans is understandable. However, the EPO’s previously unassailable position as Europe’s pre-eminent patent agency will surely come under threat.
For starters, staff currently employed by the office at all levels will be targets for recruitment by the EUIPO. But there is a lot more to it than that.
If the EUIPO is registering and assessing SEPs, why wouldn’t it also assume responsibility for handling unitary patent applications in time? From an EU oversight perspective, that would certainly make sense. At the very least, it is a question that will continuously be asked - to the detriment of the EPO’s standing. Even if it remains unspoken, a deep-seated rivalry between the two entities is surely bound to arise.
Harmful outcomes
Unless there is a lot more to them than is currently being reported, DG Grow’s proposals look like they have been put together after listening to one set of interests without giving even the slightest consideration to the views of people who understand the business of SEP licensing.
They will impose significant additional burdens on patent holders without any balancing obligations being placed on licensees.
Not only will they harm Europe’s innovation infrastructure and threaten its technology security, but they will also be next to impossible to implement successfully for many years.
The EU has been here before: making unrealistic patent-related proposals, or threatening them, only to pull back once the difficulties have been exposed.
It’s not hard to see the same thing happening again when other DGs, European institutions, national governments and the wider stakeholder community begin to look closely at what DG Grow is suggesting. In the meantime, though, uncertainty will reign. That can only do damage.
Joff Wild is the creator of IAM and its former editor-in-chief. He now writes a weekly column for the platform and offers advisory/consultancy services, with a focus on IP policy, strategy, communications, marketing and business development