Is EU standard-essential patent regulation a non-starter?

Since the European Commission unveiled its draft regulations for standard-essential patents (SEPs) in April 2023, a multitude of stakeholders and thought leaders have voiced their opinions.

Some of those opinions are supportive, but an increasing number are not. And the weight of criticism may mean that SEP regulation may not happen at all.

With this proposed regulatory framework, the Commission aims to set “fair” royalties for SEPs through licensing on fair, reasonable and non-discriminatory (FRAND) terms.

Further, it says it will improve transparency and efficiency, and resolve disputes between SEP holders and companies using international technology standards, such as 5G and WiFi.

European Parliament committees wade in

Two out of the three European Parliament committees—the  Committee on International Trade (INTA) and the  Committee on the Internal Market and Consumer Protection (IMCO)—that were invited to submit feedback on the regulation published their draft opinions earlier in October.

The  Committee on Legal Affairs (JURI), the leading committee of the three, has now published its report and will begin to write compromise amendments from the amendments tabled in JURI. A vote within JURI is expected in January 2024, and the plenary vote is expected in February 2024.

Justin Lambert, of counsel at Mishcon, believes that the Parliament committees’ proposed amendments to the regulation “are quite astute”.

“The committees are basically saying, ‘the Commission has vastly underestimated the complexity of the situation, [and] the resources that would be required to implement their proposals.

“‘And the consequences of that: Go back to the drawing board’.”

Most recently, JURI met on October 19 to officially present its draft opinion. Its rapporteur, Marion Walsmann, concluded that there were “intrinsic differences” between representatives.

One thing they did largely agree on, though, was to deem Walsmann’s draft report as improving on the Commission’s proposed regulation “significantly, in many areas”, and that clarification of the text is needed.

Stakeholder concern

The ink on the Commission's draft text when it was first published hardly had time to dry before stakeholders began to speak out.

The European Telecommunications Standards Institute (ETSI) was possibly the first, urging the Commission to stall the proposed regulations in a leaked letter in May.

And manufacturers such as Siemens, Nokia and Ericsson have expressed concern, arguing that while they support the Commission’s overall goals, the regulation is unnecessary, burdensome and costly and that further engagement with industry is necessary.

Even voices from European governments and across the Pond have waded in.

The Finnish government is “ highly critical” of the proposal, arguing that it “would create a significant regulatory burden.

Sweden said that it “intends to work to ensure that the proposed regulatory framework is not introduced, or at least that the regulation is as limited, flexible and predictable as possible.”

Kathi Vidal, director of the US Patent and Trademark Office, said in a hearing of the US Senate Judiciary Committee in July that the proposed regulation was “extremely problematic” in a world in which standards are designed to be global.

And the American Intellectual Property Law Association (AIPLA) argued in August that some provisions may violate US and European law, and in any case are unnecessary.

A risky proposal

Fredrik Erixon, an economist and the director of the European Centre for International Political Economy (ECIPE) in Brussels, is most recently quoted (in an article sponsored by Nokia and Ericsson) as saying: “By decreasing the value of standards, we risk fewer patents being declared to standards, less specialisation and less innovation.

“With implementers increasingly based outside of Europe in countries like the US and China, these legislative changes look set to redistribute income from Europe to other parts of the world.”

This came a week after António Campinos—president of the European Patent Office (EPO)—joined the debate publicly for the first time.

In a letter dated October 23, addressed to the chair and vice-chair of JURI, he argues that the proposed regulation has “significant drawbacks” and could result in “legal insecurity”.

He said that despite the EPO’s expertise on SEPs, it had not been consulted on the proposed regulation, “despite several follow-up communications reiterating this offer toward the European Commission”.

While he applauded the proposed regulation’s “important and commendable” stated goals, the EPO president said that some aspects “may be ill-suited to achieve these stated goals and require more in-depth analysis”.

Unregistered SEPs at risk

Lawyers and law firms too, are speaking out. For example, Juliet Hibbert, of counsel at Bird & Bird in London wrote early on that if the regulation was adopted in its proposed form, it would “severely curtail a patent holder’s rights in the EU”.

“It's interesting to see the different approaches taken by the three committees,” she told WIPR after the committees published their draft opinions and report.

“From whichever side you are looking at this regulation, Article 24 results in a curtailing of a SEP holder’s freedom to enforce its IPR rights” — Juliet Hibbert, Bird & Bird

“For instance, Article 24 [in the Commission’s text] provides severe restrictions if a SEP is not registered (or is suspended from registration).”

“In its original form, Article 24 means that a SEP holder cannot enforce the patent or receive royalties or seek damages for infringement before the FRAND determination is initiated.”

INTA, she notes, considers this a “wholly disproportionate effect” since a suspended or unregistered SEP becomes unenforceable, which INTA considers to be “incompatible with the fundamental property right”.

INTA, therefore, suggests the removal of this Article in its entirety, notes Hibbert.

“IMCO appears to agree with this,” she adds. “In its introductory justification [the committee says] that ‘Article 24 of the proposal should be revised to eliminate penalties associated with non-registration of SEPs’, but then it has not followed this up with any amendments to Article 24.”

In the draft report available at the time of going to press, JURI had not commented on Article 24 at all, she points out.

“I find this very surprising, as JURI speaks to ‘legal affairs’.

“From whichever side you are looking at this regulation, Article 24 results in a curtailing of a SEP holder’s freedom to enforce its IPR rights as it considers appropriate.”

SEP holders' dominance

Mishcon’s Lambert tells WIPR that he is “very sceptical” of the proposed regulation overall and does not believe that it will be implemented.

“The idea that the EUIPO could get people to do the sort of jobs that the Commission is proposing is fantasy.”
— Justin Lambert, Mishcon

“The reasons for the proposal that were valid in 2017 are possibly no longer valid, given the development of the law through court decisions,” he says.

For example, adds Lambert, one rationale for the proposal is that since a SEP owner owns IP that is obviously essential for the implementation of the standard—and therefore the sale of devices incorporating the standards technology—“the SEP owner has a dominant position and can abuse that”.

Commenting on the Commission’s proposal to establish a Competence Centre within the EU Intellectual Property Office (EUIPO) to oversee the SEPs process, Lambert is equally sceptical.

“For goodness’ sake, the idea that the EUIPO could get people to do the sort of jobs that the Commission is proposing is fantasy.”

‘Badly prepared and rushed’

Patrick McCutcheon, managing director of IP Europe—which represents both SEP holders and implementers—says that his organisation believes the regulation is “badly prepared and rushed through”.

“Clearly the machinery of Parliament is such that they have to take account of their political groupings, and we understand that [it] wants to get this to a plenary vote before the end of term,” he tells WIPR.

“Our argument is that the proposal is based on a flawed impact assessment, a very unsatisfactory consultation with stakeholders, and even very poor consultation within the Commission.”

According to McCutcheon, the Commission met with stakeholders, including IP Europe.

“But at no stage of the process did it give any hint as to what it was contemplating,” he adds.

What next?

McCutcheon claims that departments within the Commission only saw the proposal the day it went into the formal interservice consultation.

“That’s a highly unusual approach,” he says.

“This produced such a furious reaction within the Commission that the draft proposal was revised 12 times during the period of the interservice consultation before it was adopted.”

“You need to show market failure in order to justify intervening in a market. There is no market failure.”
— Patrick McCutcheon, IP Europe

The result is, he adds, that the final text that the Commission adopted was not seen by the regulatory scrutiny board, which overlooks the process. The impact assessment was published before the board got the final report from the underlying studies.

“It looks to us like the cart was put before the horse,” he says. “So you write the regulation, then you make up the rationale. And after that you go looking for the evidence.

“The problem is they didn't find the evidence.”

Despite what the Commission claims, the level of litigation is low and has been steadily falling, says McCutcheon.

“You need to show market failure in order to justify intervening in a market. There is no market failure.”

A ‘political football’?

The EU Parliament and Council will now consider the committees' feedback, and may request further input from them.

But what is likely to happen after that?

IP Europe would like to see a rethink of the regulation, and for the European Parliament to conduct its own impact assessment.

“Absent a withdrawal of the proposal, we would like to see that the parliamentary committees study carefully what's in the proposal, rather than rush debate,” says McCutcheon. “With so many amendments, it's hard to see how they can reach a plenary vote.”

He adds that the issue “appears to have become a political football and is being kicked towards the goal”.

“Some MEPs might make some political representations during their re-election campaigns that they're somehow doing the right thing for somebody.

“We're not quite sure who it is, because we think that the primary beneficiaries of this [regulation] will be non-European.”

Lambert adds: “My impression of [the parliamentary committees’ feedback] is that their comments are so fundamental that they're not really expecting any revised draft, because accepting the comments would require a rethinking of the purpose of the regulation and the resources required to implement it.”

“Whatever the outcome,” concludes Hibbert, “it is looking like there is a debate ahead (and possibly an EU parliamentary election) before agreement regarding this proposed regulation is in sight.”

This article has been updated since publication to correct information about the European Parliament committees.