EC’s proposal for the regulation of standard-essential patents is flawed
On 27 April 2023, the European Commission proposed regulations (‘the SEP initiative’) which would transform the licensing of standard-essential patents (SEPs). This far-reaching proposal is now pending before the European Council and the European Parliament.
European leadership in 5G and 6G is at stake
Nokia is a major inventor and an implementer of standardized technology, and we therefore support a balanced approach to SEP licensing that both incentivizes inventors and provides predictability to companies that license the use of another company’s inventions. However, we believe the SEP initiative is deeply flawed and cannot achieve its goals and will undermine European leadership in 5G/6G. Notably, the SEP initiative contravenes the independent academic study that DG GROW commissioned to support it. Accordingly, the Council and the Parliament should encourage the Commission to take a second look at this proposal.
Nokia shares the European Commission’s goals for more transparent and efficient licensing of SEPs. To that end, in our response to DG GROW’s Call for Evidence, Nokia included a detailed proposal for how essentiality checks could be conducted in a fair and balanced manner.i Members of the DG GROW team commented many times that it was a constructive and helpful proposal.
At the time of Nokia’s response to the Call for Evidence, it appeared that essentiality checks were the only regulatory intervention that DG GROW was considering. Stakeholders were in the dark about the extent of DG GROWs proposals published on 27 April 2023. There was no meaningful consultation with industry, or within the Commission, regarding core elements of what has now been proposed, notably i) the register, ii) conciliation, and iii) the setting of aggregate royalties.
Forging ahead on the initiative, without the benefit of stakeholder input, DG GROW has proposed massive regulatory intervention which is neither justified nor will it deliver the transparency, efficiency and predictability sought by the Commission, Councili and Parliamentiii, and which DG GROW claims are driving this initiative.
European Commission’s own studies do not support the SEP initiative
DG GROW commissioned an academic consortium to analyze the need for regulation. That consortium found that there was no empirical evidence or data which justified regulatory intervention especially on such a massive scale.iv However, DG GROW moved forward with the SEP initiative irrespective of the data and the advice of their own experts.
Lacking objective empirical evidence of an alleged problem needing to be solved, DG GROW turned to industry survey data (from webinars and consultations). The problem with this sort of survey data is that it reflects the commercial interests of those surveyed, i.e., it is subjective evidence, not objective evidence. It is like asking companies if they prefer higher or lower taxes; only one outcome can be expected.
Given that implementers of standardized technology far outnumber SEP holders (innovators that invest heavily in risky R&D and contribute their inventions/technology to global open standards and delivering huge societal benefitsv), it was preordained that the survey data would call for regulatory intervention that would tend to reduce SEP royalties.
Increasing transparency and SEP licensing efficiency and providing predictability are laudable goals. However, the SEP initiative does not seem well calibrated to achieve them.
The SEP initiative fails to meet its objectives
With respect to ‘efficiency’, all aspects of the SEP initiative impose costs, burdens and delays for those who license SEPs. Registration and essentiality checks are duplicative of roles that are played by ETSI and European courts respectively. Essentiality checks, conciliation and aggregate royalty procedures are all non-binding procedures. This means that they will just be another process and another expense prior to licensing and litigation. This is far from a recipe for efficiency.
With respect to ‘transparency’, the conciliation/FRAND determination and aggregate royalty processes go well beyond transparency and enter the realm of price regulation. Transparency would be better served by requiring disclosure of information rather than the setting of prices. Similarly, transparency would be better served by improving the ETSI declaration database rather than duplicating it. In any event, the evidence that the transparency provided by essentiality checks improves licensing efficiency is questionable.vi
With respect to ‘predictability’, there is no defined scope for the regulation. Article 1(2) of the initiative provides that the standards to which it applies may be changed by later acts of the Commission, including possible retrospective application to existing standards. This completely undermines any predictability that could possibly be created by the SEP initiative. On this basis, the real extent of the initiative’s impact, cost, and burdens are difficult, if not impossible, to predict. The Commission’s Impact Assessment even acknowledges that “different redistribution of economic surplus may, however, affect innovation and standard implementation incentives in ways that are difficult to predict”.
Further, the non-binding nature of the various procedures will not provide predictable outcomes or deliver licensing agreements. In addition, the fact that the EUIPO ‘competence centre’ (which has no previous experience of dealing with patents), and the plethora of external examiners and conciliators, will be required to deliver many new tasks, on a limited budget and in a very short timeframe, makes it difficult, if not impossible, to provide the rigorous, impartial and qualitative system capable of producing reliable information of consistent quality that is necessary to ensure predictability.
The massive scale of the SEP initiative, combined with the lack of objective, empirical evidence supporting the need for regulatory intervention, calls into question the proportionality of the DG GROW’s proposals. The fact that it undermines Europe’s leaders in 5G/6G, and therefore Europe’s technological sovereignty and strategic autonomy should cause policy makers to question whether this specific proposal really serves European interests.
Further engagement with industry is necessary
If the Commission really wants to improve SEP licensing transparency, efficiency, and predictability, it should adopt a 3-fold approach. Such an approach would begin with a proper evidentiary basis (i.e., determining whether there is actual objective, empirical evidence of market failure). No such evidence currently exists.
Second, it should adopt an incremental approach. The Impact Assessment is largely bereft of solid evidence showing that the proposed regulatory interventions would be effective. Accordingly, unsubstantiated initiatives such as essentiality checks should begin on a small trial scale, with voluntary participation, to build experience and evaluate potential effectiveness.
Finally, the Commission should engage with key stakeholders, notably industry and other relevant DGs, as well as the Commission’s international partners. Developing proposals in isolation has produced a SEP initiative which is not fit for purpose.
[i] Nokia’s response to EC DG GROW Call for Evidence for the Initiative “Intellectual property – new framework for standard-essential patents,” Annex III: Nokia position on Third-party Essentiality Assessments of Disclosed SEPs, pp 19-30, 9 May 2022. Available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13109-Intellectual-property-new-framework-for-standard-essential-patents/F3257414_en or https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13109-Intellectual-property-new-framework-for-standard-essential-patents/F3257414_en.
[ii] See Council conclusions on the enforcement of Intellectual Property Rights, 6681/18, 1.3.2018, http://data.consilium.europa.eu/doc/document/ST-6681-2018-INIT/en/pdf and Council conclusions on intellectual property policy, 9932/21, 18.6.2021, https://www.consilium.europa.eu/media/50529/st-9932-2021-init.pdf.
[iii] European Parliament resolution of 11 November 2021 on an intellectual property action plan to support the EU’s recovery and resilience (2021/2007(INI)), OJ C 205, 20.5.2022, pp. 26-36, CELEX: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021IP0453.
[iv] Empirical Assessment of Potential Challenges in SEP Licensing, page 185, “Existing empirical evidence on the causal effects of current SEP licensing conditions is largely inconclusive. Empirically observable outcomes do not indicate the existence of pervasive “opt-out” from standards-related innovation as a consequence of SEP licensing conditions; i.e. it does not appear that the observed challenges in SEP licensing are sufficiently severe as to systematically discourage potential contributors from participating in standards development, or discourage potential implementers from creating products that use technology standards subject to potential SEPs.
[v] The pro-competitive benefits of open standards and licensing on fair, reasonable and non-discriminatory (FRAND) terms and conditions are widely acknowledged. Open standards development supports market entry, encourages innovation, and benefits society generally by increasing consumer choice. The global framework for the FRAND licensing of SEPs enables broad access to standardised wireless technology to users across numerous sectors and for all actors in the relevant value chains. Industry commentators and academics alike have recognized that standardization plays a fundamental role in the development and implementation of the foundational technologies central to critical global infrastructure. Effective protection and enforcement of SEPs ensure the continued investment necessary to develop and contribute technology to global standards, while commitments to (FRAND) licensing terms and conditions encourage and enable implementation of these standards at scale. See, for example, Justus Baron & Kirti Gupta, Unpacking 3GPP Standards, 27 J. OF ECON., MGMT. AND STRATEGY 433 (2018), available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3119112.
[vi] Essentiality checks are a necessary part of every patent pool due to competition law. The Avanci pool for automotive licenses to cellular SEPs launched in 2016. Even though essentiality checks were part of the process, the Avanci pool was not successful until multiple litigations had been filed by Avanci members against Daimler and Ford. Thus, it was litigation, which validated portfolios and rates, not essentiality checks, that enabled efficient licensing.