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  • Marta Beckwith

The Devil is in the Details: EU Proposal Part Three - Transparency

Updated: Aug 2, 2023

As I previously discussed (see EU Proposal - Part One), the goals of 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”) are laudable. The details of the proposal are important however, and this post takes a deeper dive into those details. If those details are done well, the final regulations could do much to accomplish its goals of bringing transparency, consistency, efficiency and fairness into the FRAND licensing system and could shed light on the murky world of SEP licensing. Done with mediocrity, it runs the risk of becoming just a further burden and obstacle to concluding SEP licenses. Done poorly, it could result in implementers paying amounts for SEP licenses that are so high either for an individual portfolio or in the aggregate that the plan decreases implementation, innovation and competition and reduces companies’ willingness to contribute to standards development. The devil is indeed in the details.


OVERVIEW OF THE PROPOSAL


In case you have missed all the coverage and overviews that have come out since the Proposal was released, here is a brief overview of the Proposal.[1] The Proposal sets up a “competence centre”[2] with many functions, including to:

  • collect and maintain a database of patents alleged to be standard essential for a particular standard;

  • make determinations on essentiality of SEP patents, including by sampling registered patent families;

  • enable access to caselaw and rules from other jurisdictions relating to SEPs; and

  • compile “non-confidential information on FRAND determination methodologies and FRAND royalties.”

There are also provisions in the Proposal to determine:

  • an aggregate royalty for a standard (Articles 15-18);

  • the terms and conditions of a FRAND license for a particular SEP portfolio (Title VI); and

  • to which existing standards the Proposal will apply (Article 66) (see A Greener Future - EU Proposal Part Two).

There is much to unpack in the Proposal. Since so much of the Proposal is focused on enhancing transparency, this post will address whether the Proposal accomplishes that goal, including suggestions on ways to improve the Proposal to better achieve transparency.


TRANSPARENCY


Currently, many of the standard setting organizations (SSOs) have two basic ways to provide a “Letter of Assurance” (“LoA”) (an LoA is the paper that a SEP holder provides to an SSO in which it makes a FRAND commitment). One way is to specify the SEPs that the SEP holder owns and is willing to license on FRAND terms. Another is to provide what is called a “Blanket LoA” or “Blanket Letter of Assurance.” A Blanket LoA simply says something like the SEP holder will license on FRAND terms all essential patents that the SEP holder currently, or in the future, has the right to license. A Blanket LoA commits the SEP holder to a broad FRAND commitment to license all SEPs it owns, now or in the future, on FRAND terms and thus is worthwhile for the SDOs to allow. However, Blanket LoAs do not help with the goal of transparency. If most SEP holders provide Blanket LoAs (as is true for many standards), it becomes difficult even to determine the total number of patents for which FRAND commitments have been made, let alone the entire landscape of SEPs for that standard.[3]


The Proposal contains multiple provisions regarding the collection of data about patents alleged to be essential to a standard. Until now, this type of information mostly has been collected privately in so-called “patent landscape” reports.[4] Such reports are often quite expensive to purchase, which puts them out of the reach of many SMEs, and they are subject to allegations of bias since they are often prepared at the request of one party to licensing negotiations or litigation.


In that regard, the Proposal is beneficial for transparency because it requires SEP holders to disclose their SEPs prior to suit in any EU jurisdiction. It requires the Center to track those disclosed patents and the entities owning those patents. It requires patent pools to publish on their websites a list of SEPs being licensed, who owns those SEPs and any essentiality determinations that have been made. Collection of this type of information in a single, accessible location by a neutral body (with no or limited costs to access) is long overdue.


All of this is a good first step towards achieving transparency, but more is needed.

  1. Proactive collection of information.

It is important to have SEP holders identify what they believe to be their essential patents and I urge all SEP holders, even those who do not intend to file a lawsuit in the EU, to identify their SEPs to the Center. Many large companies give Blanket LoAs because it is much easier to do so. It does not require review of their portfolios or a determination as to what the company believes is standard essential. But it makes it very difficult to evaluate the SEP landscape. So, I call on all companies that gave a Blanket LoA to step up to the plate, do their diligence on their own portfolios and report their SEP holdings to the Center.


That being said, most SEP holders have no intent to file a lawsuit in the EU on their SEPs and not all companies will voluntarily disclose their portfolios. In order to have a better understanding of the entirety of the SEP landscape, the Proposal should make clear that the Center must proactively seek such information. The better private SEP landscapes first identify the list of all entities that provided LoAs for a particular standard. They then review all specifically identified patents (e.g. those listed in a non-blanket LoA) as well as patents that originate from those entities that gave a Blanket LoA to determine a preliminary list of patents that might be essential and for which a FRAND commitment has been made. They may also try to determine how many SEPs there are for that standard for which no FRAND commitment has been made. They then have subject matter experts review the preliminary list to make essentiality determinations and narrow the list down to those patents likely to be essential.[5]


The Center need not start from scratch. While none of these patent landscapes is perfect, for standards for which a patent landscape is available, the Center should, as much as possible, collect the information contained in those reports and subject it to its own verification process. This would allow the Center to hit the ground running on those standards for which good prior patent landscapes exist. Where there are no such prior landscapes, the Center should prepare its own patent landscape using a similar methodology.


In other words, the Center should not wait around for SEP holders to declare their SEPs to the Center but instead should be authorized to proactively seek to determine the entirety of the landscape for a given standard. This would allow tracking of SEPs that have not been disclosed by SEP holders to the Center and would provide a much more accurate picture of all SEPs for a given standard. Without such a landscape, the Center will still be determining FRAND terms, and potentially an aggregate royalty, without knowing the totality of the SEP landscape for that standard. Without an accurate patent landscape, the Center could easily set FRAND rates for individual patents or portfolios, and aggregate royalties, too high.


2. ­Collection of Information on Ownership and Existing Licenses.


The Proposal focuses on identifying and tracking essential patents. But there are two other pillars of information necessary for true transparency in SEP licensing: (1) existing licenses and (2) ownership structure.


(a) Licenses. It is impossible to understand the overall SEP licensing landscape without knowing what licenses already exist. Without such knowledge, no matter how much information the Center gathers on how many SEPs there are for a particular standard, implementers still would not be able to understand the overall licensing burden they might be asked to pay if they decide to implement the standard. A standard may contain hundreds, or even thousands, of patented inventions. The Center is being tasked with making decisions on FRAND royalties, but to be reasonable, such determinations must take into consideration the overall royalty amount (the aggregate amount) that implementers already are being asked to pay for that standard. And any determination made by the Center regarding an aggregate royalty amount should as well. For example, assume the Center determines that an aggregate royalty for a standard should be $X. If the existing SEP licenses for that standard are already more than $X in the aggregate, then the Center should consider that before imposing any additional burden on implementers. But the Center will have no way of determining the existing burden without first collecting existing licenses.


The Proposal does task the Center with collecting license information that is public. For example, Article 5 includes collection of “public standard terms and conditions.” But, for most standards, such public information reflects only a small fraction of the actual licenses that have been entered into, and the terms and conditions in such public facing documents often differ from those in actual license agreements. By gathering and disseminating only public facing terms and conditions, the Center runs the risk of further distorting the relevant markets by making it appear that the only terms, and only licenses, are the public facing ones. Indeed, without the collection of all licenses, the Center, regulators and implementers may come to a wrongful conclusion that the aggregate royalty already being paid by implementers is substantially different than it truly is.


The lack of such overall licensing information also leaves courts and regulators in the dark. Currently, there is a dispute between SEP holders who claim patent licensees are unwilling and “hold-out” is occurring and implementers who say that licensors are not making FRAND offers and patent “hold-up” is occurring. What everyone agrees, however, is that there is a substantial need for additional, verified evidence.[6] Litigants and licensors need this information but more importantly, regulators and courts are basing decisions on their views of these claims. In order for all sides to feel that such decisions are valid, there is a need for the collection and dissemination of additional fulsome, empirical evidence of existing SEP licenses and licensing practices.


The Center is in a good position to collect, analyze and disseminate such information. It should be tasked with collecting and analyzing all SEP licenses and the Proposal should require SEP holders to disclose all licenses prior to filing suit in any EU jurisdiction, similar to the disclosure requirements for SEP patents.


(b) Ownership. Patent ownership for some SEP portfolios can be quite opaque. Some SEP holders set up intricate ownership structures for various perceived advantages. Some do so in order to divide up their SEP portfolio with (one assumes) the belief that the total amount they will receive for the separate pieces of the portfolio is more than they would receive if they licensed the portfolio in the aggregate. Some SEP licensors do so in order to receive funding for different pieces of their licensing/litigation campaigns from different sets of third parties. Some do so to obtain tax advantages, or for a combination of these reasons. I have had experience with at least one licensor which split its portfolio up in complex ways among various and differently owned entities in order to try to avoid its existing license commitments. Without knowledge of the ownership structures of SEP licensors, it is not possible to understand whether “an” entity is seeking more, in aggregate, than its portfolios merits or is seeking to avoid its existing license commitments. For the Proposal to bring transparency to SEP licensing, it should require the disclosure and collection of information about who is behind a licensing effort, how many other SEP licensing efforts those people or entities are engaged in and what other people or entities have a financial interest in the outcome of any SEP license or litigation result.


There is an additional reason to collect such ownership information. The Proposal repeatedly states that the evaluators, experts and conciliators will be “independent.” It also allows evidence to be provided by an “independent source.” (See Article 23(2)(d)). It is impossible to determine independence without knowing ownership. Several Courts in the United States have started to require such disclosures so that the Court can evaluate whether it has a conflict that would require recusal. For example, Chief Judge Conolly of the United States District Court for the District of Delaware requires in his standing order that a patent holder disclose the name of every owner, member and partner of the patent holder, and every individual and corporation with a direct or indirect financial interest in the party. The order applies to parties that are non-governmental joint ventures, limited liability corporations, partnerships or limited liability partnerships and those that provide litigation funding.[7] Under his order, publicly traded companies are not required to disclose ownership. However, the Commission could require disclosure by publicly traded companies of any ownership stake by a single individual or entity of more than 10%. This, at a minimum, would allow all parties to evaluate the independence of any decisionmakers appointed by the Center.


3. Confidentiality.


Confidentiality is the antithesis of transparency. In my experience, SEP licensors often use claims of confidentiality to hide their existing licenses, their claim charts against the standard and their ownership structures. These claims of confidentiality allow such SEP licensors to cherry pick what becomes public. There are a number of instances where the Proposal requires the competency center to collect and publish only non-confidential information.


The Commission should make clear that the Center has the authority, and indeed the obligation, to collect non-public information and to assess whether purportedly confidential information should actually be treated as confidential.[8] The Center should also be empowered to make public non-confidential information and a synopsis of any confidential information collected. For example, if the Center determines that certain licenses are confidential and/or certain portions of such licenses are confidential then it should release a summary of the information contained in those licenses, including overall payment terms.


CONCLUSION


The Commission has a tremendous opportunity with its establishment of the Center to bring true transparency to SEP licensing, the public debate about SEPs and FRAND and to governmental decision-making regarding FRAND and SEPs. But true transparency requires proactive gathering of information by the Center, including information about licenses and ownership structures.


I urge the Commission to establish fulsome disclosure requirements for all SEP licenses and SEP licensor ownership structures similar to the Proposal’s requirements for patents, including the obligation to disclose all existing licenses and all people and entities having a financial interest in the SEP holder or the SEP licenses, prior to filing suit in any EU jurisdiction. The Commission should also require disclosure of such licenses and ownership structures for all parties to any Center proceedings. The Center should be tasked with collecting and maintaining such information and making available the information or a summary of the information. This would bring the Proposal much closer to achieving the Commission’s goal of transparency.


[1] The Proposal contains a good overview of each Title of the Proposal in Section 5 of the Explanatory Memorandum.

[2] The Proposal uses the spelling “centre” but my U.S. spell checker keeps thinking I have made a typo. I will (unless quoting) refer to it as the competence center or the Center, using the US spelling. Similarly, unless quoting, I will generally use the U.S. spellings for standardize, etc. It is somewhat amusing as we discuss standardization that these words are not standardized (or standardised) in English.

[3] The decision in the public version of the recent decision in Optis v. Apple has an interesting discussion of the difficulties of determining the full stack of SEPs for a given standard as well as the "quality" of individual SEPs or portfolios within that stack. I note that a lot of the information regarding, for example, the numbers of SEPs is redacted. https://www.managingip.com/pdf/public-non-confidential-version-of-optis-v-apple-trial-e-judgment-2023-ewhc-1095-pdf

[4] For example, various entities have done private analysis of SEPs related to 4G and 5G. See https://www.paconsulting.com/newsroom/pa-consultings-latest-report-identifies-a-key-shift-in-5g-essential-patent-ownership-28-april-2021 and https://support.unifiedpatents.com/hc/en-us/articles/4415793634711-3GPP-RAN-Landscape-Methodologies-A-Closer-Look-at-4G-and-5G.

[5] For example, in TCL Comm. Technology Holdings Ltd. v. Telefonaktiebolaget LM Ericsson, Case No. 8:14-cv-341 (C.D. Cal. 2014), the Court accepted an analysis prepared in this way for TCL by Concur IP and Ernst & Young India as the baseline for the overall number of SEPs for 2G/3G and 4G.

[6] A number of commentators have pointed to a lack of evidence as a reason not to move forward with the Proposal. While I do not agree with that conclusion, I do agree that collecting more evidence is extremely important.

[8] I note that many governmental agencies around the world, including in the EU, already require disclosure of certain information even if non-public and have mechanisms to determine whether and to what extent allegedly confidential information should be publicly disclosed. See for example, the Market Abuse Regulation (Regulation (EU) no. 596/2014).

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