As the European Parliament is on the verge of expressing its view on the Commission’s proposal for a regulation on standard essential patents (SEPs), it seems appropriate to draw the attention to potential disruptive effects of this legislative initiative. Although some commentators have portrayed the proposed regulation as a balanced, innocuous and ‘common-sense’ solution, the reality is very different, as the regulation will likely have adverse effects on European innovation, tech sovereignty and the competitiveness of the European Union in the global arena.
It is worth reminding that standards are the most important and, at the same time, most fragile pillars of the modern global tech economy. Indeed, while they play a key role in ensuring interoperability and technical compatibility across a broad range of industries, their creation is a resource-intensive research and development (R&D) activity. Patent owners have limited time to generate a return for their investments through royalties for the use of their patents and are bound by fair, reasonable and non-discriminatory, or FRAND, royalty commitments. In other words, obtaining a fair and timely compensation for the technologies contributed to global technological standards is essential for innovators. Yet, innovators are regularly exposed to risks arising from lengthy negotiations and high costs of licensing due to the various means used by implementers to delay the obtaining of a license.
Furthermore, as the rise of the internet of things (IoT) and the evolution of many industries hinge on advanced mobile telecommunication standards (4G and 5G) to ensure interoperability and technical compatibility, SEP licensing has become a matter of geopolitics. China has long announced its desire to become a leader in key technological standards such as 5G and has adopted numerous policies to promote the achievement of this goal. The European Commission has expressed concerns before the World Trade Organization (WTO) over an approach by Chinese courts and authorities aimed at unfairly promoting domestic economic interests by a centralized top-down approach for setting royalty rates to undervalue foreign patents, specifically in the context of standardized technologies.
The empirical evidence informing the Commission’s initiative reveals that there is no SEP licensing failure in Europe.
In parallel to this, the Commission delivered its proposed SEP regulation on standardized technologies, which has been harshly criticized for being detached from reality and unsupported by empirical evidence and economic justification, and also for itself adopting a centralized top-down approach. Such doubts and concerns have been confirmed by the numerous questions raised by member countries within the EU Council Working Party on Intellectual Property, according to a document leaked by POLITICO.
The empirical evidence informing the Commission’s initiative reveals that there is no SEP licensing failure in Europe. That is, litigation involving those type of patents has been decreasing for years and research has described the market as one with “healthy innovation and wide adoption”. Despite the lack of any discernible evidence of a market failure to address, the proposed regulation would overhaul the entire SEPs licensing system introducing an essentiality check system, a conciliation process for FRAND terms and, most importantly, a price-setting mechanism for SEPs.
Further, such an intrusive and extensive intervention would be not only unnecessary, but also dangerous for three reasons.
The immediate effect of such an approach would be to devalue European patents, endangering future investments in innovation.
First, the regulation would jeopardize the current guiding framework for licensing negotiations that has been provided by the European Court of Justice (CJEU) in Huawei v. ZTE ― a landmark case involving SEPs, in which the CJEU provided important guidance for how parties should behave when negotiating a license for standardized technologies. As shown in a recent paper, by endorsing an approach which is inconsistent with the CJEU’s stance, the proposed regulation would add confusion and uncertainty, thus increasing licensing disputes, instead of supporting balanced and successful SEP licensing negotiations.
Second, the initiative is imbalanced and one-sided as it completely ignores the perspective of patent owners and is apparently motivated by the surprising aim of redistributing value from patent owners to implementers. Indeed, as a matter of fact, the costs of such a regulation would be borne by patent holders alone, whereas the implementers would reap all the benefits. Moreover and paradoxically, given that, according to the findings of the Commission’s Impact Assessment, less than 10 percent of implementers are based in Europe, the proposal would have the effect of subsidizing non-EU implementers.
Third, as illustrated in another paper, the immediate effect of such an approach would be to devalue European patents, endangering future investments in innovation and even the survival of some of the European leading innovators in key areas such as advance mobile communication. Whereas implementers of standardized technologies are largely based outside Europe, two European companies ― Ericsson and Nokia ― are among the top five innovators in this space, and would be directly harmed by the adoption of the regulation. In other words, as a result of the proposed regulation, the EU would pursue the very same goal of Chinese authorities (for example, to devalue European patents), despite the case filed by the EU against China at the WTO. More generally, the EU would undermine the ability of European companies to compete in key technological areas.
The proposal is not only providing solutions for a problem that does not exist, as there is no evidence of market failure, but it is also pursuing an unjustified goal.
In brief, the proposal is not only providing solutions for a problem that does not exist, as there is no evidence of market failure, but it is also pursuing an unjustified goal of value redistribution and threatens the financial value of European patents.
For all these reasons, our warning for the members of the European Parliament is to be careful what they wish for.