The European Commission’s “Proposal for a Regulation of the European Parliament and of the Council on standard essential patents and amending Regulation (EU) 2017/1001” (“Proposal”) is an attempt to bring some sanity to what is now a fragmented, difficult, time consuming and expensive FRAND licensing system.
In drafting my opening post, I took a walk down memory lane into the global SEP licensing disputes that surrounded the development of the third generation (3G) cellular standard. I was reminded that the decision as to what foundational technology would be used for 3G, and consequently which company would own the core SEPs underlying that technology, was one of the most contentious decisions ETSI has ever made. There were global patent disputes between key players, and companies and countries took sides. Patent lawsuits were filed. Europe and the United States nearly entered into a trade war. Eventually, settlements were reached and SEP licenses were granted. After that, the 3G standard took off, welcoming in an era of more globalized cellular communications.
In the twenty plus years since those events took place, the number of SEP disputes related to cellular standards (and other standards as well) has increased substantially. And the companies suing, and those being sued, have changed dramatically over those years. For the most part, the 3G patent wars were between the (then) dominant players from the United States and Europe. The parties were all standard contributors and also standard implementers.(1) The playing field was essentially equal: each party knew the standard well, each party owned SEPs, each party claimed its SEPs were of primary importance to the standard, each party made products that implemented the standard, each party was suing for infringement of standard essential (and other) patents and each ultimately ended up licensing their SEPs to the others in order to pave the way for successful adoption of the standard.
But these days, many of the SEP disputes involve patent holders who do not contribute to standardization and who do not themselves make or sell any products. Many of the companies being sued (or threatened with suit if they do not take licenses) are pure users of the standardized technology.(2) These users did not participate in the development of the standard, do not themselves own SEPs and do not have the experience or expertise (or in many cases the resources) to deal with the magnitude of license claims and lawsuits increasingly being made against them. Although some of these companies are large, many are small or medium businesses (SMEs) who may make or sell connected Internet of Things (IoT) products.
What these types of implementers share, whether large or small, is that, for the most part, the standardized technology is purchased from another company and not developed by the company from which a license is sought. The standardized technology typically is not part of the company’s core business (for example the medical device manufacturers, car companies and smart meter developers who buy WiFi, 4G/LTE or 5G chips from semiconductor companies to use in their products). That makes it very difficult for these businesses to address the licensing demands they are receiving. SMEs in particular are disadvantaged in SEP licensing negotiations because they do not know the technology well and they have limited means and few mechanisms to determine whether the patents being licensed are truly SEPs or to measure whether the amount being demanded by a SEP licensor is reasonable and commensurate with the value of the portfolio being licensed. Nor do they know how many such SEPs and SEP holders there are out there, how often SEP demands will be made of them or the aggregate amount of money they will be asked to pay over the years to license SEPs for a single standard. Nor really does anyone else.
On top of this lack of transparency, there has been a lot of inconsistency in how courts in different jurisdictions decide patent infringement lawsuits involving FRAND committed SEPS and what remedies are available for infringement of such SEPs. This has led parties to forum shop, often selecting jurisdictions that, although they have limited connection to the parties or the overall dispute, are perceived to be more favorable to that party's side. Patent litigation has gone global and split decisions are frequent: one jurisdiction may decide a patent is standard essential while another finds its national equivalent to be invalid or not essential, or one jurisdiction may issue an injunction for infringement of a SEP while another refuses to do so or issues an anti-injunction or anti-lawsuit injunction to stop other courts from issuing such injunctions. Different jurisdictions may each decide they can determine the terms of a global license, but each reaches a different valuation or imposes different key terms. This unpredictability has made it harder to conclude license negotiations and remote forum shopping has increased the cost and business time involved in dealing with such disputes.
Finally, the current system has become increasingly inefficient. Here’s an overview of what it is like to negotiate a SEP license with large SEP licensors based on my experiences negotiating such SEP licenses. Company A receives a licensing demand from SEP Licensor. Company A sells products that use the standard and may, or may not, have been involved in the development of that standard. SEP Licensor is an entity that does not make or sell any products, did not originate the patents (e.g. was not the original developer of the patented technology and was not the original owner of the patents) and did not itself participate in the development of the standard. SEP Licensor is a large licensor that acquired an entire portfolio of patents, or the right to license the patents, from a company (or sometimes multiple companies) that was involved in the development of the standard and who made a FRAND commitment (or SEP Licensor acquired the portfolio from another non-practicing entity that so acquired the patents).
SEP Licensor immediately demands Company A sign a non-disclosure agreement before sharing any claim charts or talking substantively with Company A. Company A believes that claim charts against the standard should be public since they do not contain any confidential information but is concerned that it will be tagged an unwilling licensee if it refuses to enter into an NDA. The parties spend months haggling over the NDA. Once an NDA is signed, they then go back and forth for several more years “negotiating” a license. This involves multiple meetings where claim charts are reviewed and dissected, and invalidity positions are made. From the get go, each party knows that the negotiations are not likely to result in a license because the parties are one to two (or sometimes more) orders of magnitude apart in their valuation of the SEPs. Each side comes to the table primarily so it will be perceived to be a “willing” licensor/licensee and not an “unwilling” one in order to position itself to obtain/avoid an injunction in any future litigation.
At some stage, one or both parties race off to court, often in more than one jurisdiction. In many of the courts, the parties then spend several more years litigating whether they were, or were not, willing licensors/licensees and whether a FRAND offer or counter-offer has been made. At the end of that very expensive, multi-year process, the parties are no closer to concluding a true FRAND license because neither party really knows how many of the asserted SEPs in the overall portfolio actually are essential, whether those SEPs are valid and what the value of those SEPs are within the framework of all the SEPs essential to that standard.
The EU Proposal is an effort to address these issues. The stated goals of the EU Proposal are to bring transparency, consistency, efficiency and fairness into the FRAND licensing system. These are worthwhile goals and reform of the broken FRAND licensing system is long overdue. While the EU Proposal is not without its issues,(3) I for one welcome the Commission’s genuine attempt to reform the current system. It is time to level the playing field and implement real change in order to make licensing of FRAND-committed standard essential patents closer to actually being fair, reasonable and non-discriminatory.
(1) Those who participate in the standardization process are often called “developers” or “contributors.” Those who own standard essential patents are often termed “SEP holders.” Those who implement the standard, e.g. use it in their products, are often termed “implementers.” Until very recently, almost all contributors to a given standard were also implementers of that standard and almost all standard essential patents were owned by these same implementer/contributors. In other words, historically there have been vanishingly few developers who were not also implementers, and very few SEP holders who were not also developers, implementers or both. That also has changed over the years.
(2) Although these companies are often termed implementers, for the most part they do not themselves
develop or implement the standardized technology. Instead, they simply purchase component parts from other companies (such as chip or module makers) that include the standardized technology. This type of “implementer” is better termed a user, as the EU Proposal recognizes.
(3) In upcoming posts, I will discuss whether and to what extent the current EU Proposal accomplishes its stated goals and what additional solutions the Commission should consider.