Proposed EC SEP regulation could be a big shake up for German courts

As part of its IP action plan, which aims to create more transparency and predictability in SEP licensing, the European Commission published a proposal for a new regulation on SEPs on 27 April 2023 (COM(2023) 232 final). Its most salient components are: a publicly accessible SEP register and electronic database to foster a broad availability of SEP-related facts and figures, independent essentiality checks and an extrajudicial yet mandatory FRAND determination procedure. The outlined FRAND determination procedure would be a big change for Germany, as courts have not yet set specific royalty rates for the use of SEPs or even provided guidance on how to arrive at a fair and reasonable rate.

An SEP register and electronic database

The proposed regulation would establish a central SEP register and electronic database at the EU Intellectual Property Office (EUIPO), with information on:

• the patent, its owner and its legal EU representative;
• any standard-essentiality assessments (eg, by a patent pool);
• court and arbitration proceedings on questions of infringement, validity standard essentiality, abuse of a dominant position and determination of FRAND conditions;
• the respective standard (including the relevant version, technical specification and sections to be covered by the SEP);
• the FRAND declaration of the SEP holder to the standardisation organisation;
• products or processes implementing the SEP (the holder would be required to communicate the information known to it); and
• licensing practices, such as publicly available standard licence terms (eg, licence rates and discounts) and overall royalty rate, and availability of licences through patent pools.

The planned information sources would be entirely new, especially with regard to their patent-specific sorting and central availability. The hope is that it would allow users to get a simple and better overview of the SEPs relevant to their products and licensing. A complete overview of licensees would increase transparency on whether a supplier of components (eg, chips) has already received consent to use an SEP, which might in turn influence negotiations in terms of licensing the patent rights by end-product makers. Although, there is still an ongoing and highly charged debate over whether licensing should be carried out at the component level or product level.

The central register’s critical nature is illustrated, for example, by the fact that SEP holders would only be allowed to enforce an SEP in the courts of member states or the Unified Patent Court (UPC) if it had previously been entered in the central register. Claims for royalties and damages for infringement of the patent would only be enforceable from the date of registration.

Aggregate royalty

A worldwide aggregate royalty for the use of a standard would be a crucial contribution to increasing the predictability of the royalty burden and thus SEP users’ commercial planning. The European Commission envisages that those involved in standardisation (SEP holders, in particular) will determine an aggregate royalty for the use of the entire standard and report it to the EUIPO. If they fail to determine and allocate the total licence fee, an expert could then be commissioned to prepare a non-binding proposal.

Independent and extrajudicial review of a patent’s essentiality

SEP proceedings regularly touch on the question of whether the teaching that the patent protects actually has to be realised in order to implement the relevant standard. If this is the case, then it is a small step to affirm infringement of a patent.

While SEP holders are obliged to disclose their SEPs to the relevant standardisation organisation, there are various reasons why a patent that is reported as standard essential is actually not mandatory for the realisation of the subsequently adopted standard (eg, technical changes in the standardisation process). Therefore, in the event of a dispute, German courts also examine the relevance of the teaching according to the patent for the respective standard.

Under the proposed regulation, an independent examination of a patent’s essentiality should be available without court proceedings. The proposal states that independent examiners should randomly assess the patents recorded in the central register (Article 28 et seq). The result of this examination would then be entered in the central register and would thus be publicly accessible. In this way, time, effort and cost for an examination of SEP users in the context of negotiations with SEP holders could be reduced.

FRAND determination procedure

In a new FRAND determination procedure (Article 34 et seq), a professionally experienced and independent conciliator will attempt to answer the core question of SEP litigation: what conditions are FRAND?

The conciliators would be selected from a roster of suitable candidates (Article 26 et seq). Different rosters of conciliators may take their technical specifications and expertise into account. The details of the selection procedure and requirements for this new position are yet to be defined.

The determination of specific FRAND conditions would be a major step forward in Germany compared to current practice. German courts have not yet set specific royalty rates for the use of SEPs or even provided guidance on how to arrive at a fair and reasonable rate. They usually limit their assessment to a strictly procedural examination of whether a party has presented itself as willing to reach a licence. An unwilling SEP holder might fail to obtain an injunction or a court order for recall or destruction, and conversely, an unwilling SEP user is barred from raising the defence of abusive dominance by the SEP holder. German courts do not go into the details of the SEP licensee's offer (eg, the royalty amount). With this new procedure, parties might have the chance to receive a clear statement on the royalties to be paid; this is even faster than a decision in first-instance proceedings before the German courts as the conciliator shall, in theory, submit a settlement proposal on this question after nine months.

According to the draft, these conciliation proceedings would be mandatory prior to initiating legal proceedings before an EU member state’s court or the UPC. By way of exception, however, a party can initiate court proceedings in parallel if the other party does not commit to the outcome of the determination proceedings at the beginning.

The FRAND determination procedure will result in a reasoned proposal by the conciliator. Parties are free to decide whether they accept the proposal as binding. If they do not accept it, the conciliator will generate a report that may be considered in subsequent legal proceedings. In addition, the non-confidential elements of the report will be made publicly available through the electronic database.

The road ahead

Transparency and predictability in SEP licensing is desirable and essential, given the increasing importance of SEPs. There is no question that the draft regulation cannot solve all of the problems of SEP licensing. While the draft is vigorously debated, we believe that it appears to set the right course. The legislative process of the European Union has just started, and it remains to be seen whether – and in what form – the draft will result in a final regulation.