Why the EPO should decide which SEPs are essential

Under the fourth industrial revolution and the proliferation of the Internet of Things (IoT), there has been a push by car manufacturers to provide customers with so-called ‘connected cars’. These provide, through a telematic control unit (TCU), the ability to connect to the Internet and share such access with any mobile devices located within the car. This in turn facilitates not only connected services such as emergency dispatch, concierge, maps, weather, traffic, driving analytics and satellite radio, but also autonomous driving functionality.

However, with this internet access comes the question of whether the TCU processor in such cars may need a licence from a multitude of individual patent owners and pools to implement the 2G, 3G, 4G and 5G cellular standards in a way reminiscent of the smartphone patent wars that took place over the last decade.

Whenever the topic of standards is raised, the debate that inevitably follows is whether those who hold SEPs – and their commitments through various standard-setting organisations (SSOs) to license such patents on FRAND terms – are in reality licensing under a reasonable royalty rate, and what types of licensing models are exactly fair and non-discriminatory.

The academic and mainstream press, as well as global court decisions, are filled with approaches, analyses and commentary regarding these questions. However, what has not been addressed is a more fundamental question: who decides whether a patent is standard essential in the first place before we even get to the FRAND analysis?

SSOs, standards and SEPs

SSOs are national or international organisations – typically private and not-for-profit – whose members include for-profit company participants seeking to establish one or more technical standards that will be incorporated into a product or technical system. Nearly all SSOs have rules requiring participants to disclose the patents they own that relate to a proposed standard. Thus, the SSO disclosure rules ensure that SSO members make an informed decision when voting on a proposed standard that is (partially or wholly) patented.

For some companies, participation in SSOs is a means to earn revenue when a standard gets adopted and is eventually used widely. To ensure licensing income in the future, the strategies adopted by some participants include declaring a significant number of their patents as being “potentially essential” to the standard during the standard development process. Because it is often unclear until late in the process which technical specifications will ultimately be implemented in the standard, companies which intend to earn money from licensing register patents with the SSO throughout the entire standard development process to maximise the likelihood of owning patents which map to the standard.

This phenomenon is well illustrated within the European Telecommunication Standards Institute (ETSI), which is the most relevant SSO with respect to 2G, 3G, 4G and 5G cellular standards (whose participants include both those which develop digital mobile communications products and others which do not). The ETSI Intellectual Property Policy states that:

[E]ach MEMBER shall use its reasonable endeavours, in particular during the development of a STANDARD or TECHNICAL SPECIFICATION where it participates, to inform ETSI of ESSENTIAL IPRs in a timely fashion. In particular, a MEMBER submitting a technical proposal for a STANDARD or TECHNICAL SPECIFICATION shall, on a bona fide basis, draw the attention of ETSI to any of that MEMBER’s IPR which might be ESSENTIAL if that proposal is adopted.

In accordance with this policy, ETSI maintains a database of patents that have been found to be essential (or potentially essential) to any of their standards. Yet, in the recent US TCL v Ericsson case, the court decided that the total number of SEP families was 2,799 for 2G, 3G and 4G. However, the ETSI database contains more than 153,000 patents and patent applications (forming more than 11,469 patent families) declared to be potentially essential by various participants.

This situation presents an obvious but non-trivial problem for implementers of a standard (eg, original equipment manufacturers and their suppliers). That is, when faced with licensing requests from patent owners, they are often also faced with an imposing number of non-SEP portfolios, which all claim to be standard essential. As a result, implementers do not know which patents they actually need to license. To make such a determination requires the hiring of patent and technical specialists at enormous costs.

In principle, it is questionable why implementers should bear the costs of expending internal resources as well as hiring external consultants to filter out non-essential patents in so-called SEP portfolios. Viewed from an economic perspective, it is nonsensical that producers of goods implementing a standard for the benefit of consumers should bear the costs and expend resources to filter out non-essential patents claimed to be infringed by a SEP patent owner or licensor.

Judging essentiality

The authors propose a solution to the problem of determining whether a patent is standard essential: let the EPO decide.

Why the EPO?

The EPO is an ISO 9001-certified organisation and is widely considered to be one of the top patent-granting bodies in the world. Its membership includes 44 countries (38 member states, two extension states and four validation states) and it operates in a self-funding manner (ie, it receives no public financing) with an annual budget of €2.3 billion; in fact, it has had an annual operating budgetary surplus of at least €270 million since 2010. As of December 2017 the EPO had approximately 6,800 employees, with approximately 4,400 of those being highly qualified patent examiners working in all technological fields. In 2017 the EPO handled over 165,000 patent applications from around the world and granted over 105,000 European patents.

The rationale for allowing the EPO to determine the essentiality of patents for a particular standard becomes clearer when one considers the following:

• The EPO is a neutral institution that – unlike most SSOs – has no interest groups nor factions, such as potential licensors versus potential implementers.
• The EPO’s evaluations would take place in a non-litigious, public forum where the results may be universally applied to all implementers, as opposed to private court litigants individually hiring trial consultants and experts whose findings are typically subject to confidentiality obligations.
• The EPO’s determination would be readily applicable, unlike court or arbitral decisions, in virtually all member states.
• While the EPO examining corps may require additional training with regard to standards, it can be acquired within a short amount of time by personnel whose determinations are already relied on by the courts. That is, a standard essentiality determination is, in essence, a determination of whether a given patent’s claims read upon any aspect of a standard. This is similar to the novelty determinations that the EPO examiners perform on a daily basis.
• The EPO already has procedures and infrastructure in place for participants to appeal an examiner’s first-instance essentiality determination (ie, the boards of appeal).
• Given that the EPO is a non-profit organisation, the cost for the evaluation of patents should be reasonable.

This proposal may also have a non-obvious, positive consequence: the publications of the EPO’s essentiality determinations may result in a shift of SSO participants’ patent filing practices. That is, participants may start to put significantly more effort into filing patent applications which have a high likelihood of being truly standard essential. As a result, the EPO may experience significantly fewer patent filings relating to standards which should have a positive (or at least neutral) effect on its resource management when taking on these additional responsibilities.

How?

Practically speaking, the first step in implementing this proposal would be to have the member states authorise the EPO to determine whether a patent is standard essential. This additional activity could either:

• be immediately offered as a service to SSOs, their participants or the public at large; or

• be explicitly added to the mandate of the EPO.

In the first case, the service would be offered at a fee, in the latter, the cost would probably have to be borne by the member states. In the latter case, an amendment to the European Patent Convention – the multilateral treaty under which the EPO operates – would be needed. In the former case, it is not legally clear that such an amendment, and the requisite diplomatic conference to hold a vote by the member states, would be needed.

We explore the route of a fee-based service offering because we believe that the member states may be reluctant to approve additional EPO-mandated activities that may require additional public funding on their respective parts. Next, individual SSOs would need to opt in to this new EPO service by amending their IP policies to state, for example:

After giving notice of a SEP under this Policy, the determination of whether such patent is actually a SEP shall be finally settled by the European Patent Office (EPO) in accordance with their SEP Essentiality Determination Proceedings. Upon obtaining a Certificate of Essentiality from the EPO, only then shall [the SSO] add such patent to the database of essential IPR, and only then may the patent holder assert such patent against any party on FRAND terms as required under this Policy.

Finally, it is not difficult to imagine that the EPO would be able to devise equitable rules and procedures for these new SEP essentiality determination proceedings – similar to examinations and oppositions – where a request is assigned to a qualified examiner, a first-instance determination is made within a reasonable timeframe and an optional appeal procedure is available.

Costs

While the sample SSO policy amendment language provided above assigns costs to the patentees, the SEP essentiality determination service provided by the EPO could be financed in a variety of ways: • By the SSO – an argument can be made that SSOs should fund the EPO essentiality service in order to clean up their essential IP rights databases. However, many participants in SSOs have no interest in a cleaned-up database because it may reduce royalty income and trigger questions from licensees regarding the justification and fairness of royalty rates agreed to in the past. Further, not all SSO participants are potential patent owners that would benefit from essentiality declarations. Consequently, the authors are sceptical that SSO licensor participants will support the SSO funding such proceedings en masse.

• By the licensor/participants – because it is owners that declare patents to be potentially essential at the SSO, it seems reasonable that they should bear the costs of the relevant SSO having a cleaned-up database, which contains truly standard-essential patents. While the authors expect resistance to this alternative, it seems to be the fairest and simplest approach.
• By the implementer – while the authors find it difficult to argue that it is fair to have the implementer fund the effort because they are not at the root cause of the problem and all other implementers will benefit from the publication of the EPO’s essentiality determination without contributing to the cost, an alternative scenario could be to have similarly situated implementers cooperate to share the costs of initiating an EPO essentiality determination proceeding.
• By the appellant – regardless of who pays in the first instance, one can imagine that any appellant (eg, patentee or implementer) could pay for an appeal at the EPO.