Standard Essential Patents - guide

27 April 2023
by eub2 -- last modified 27 April 2023

The European Commission on 27 April proposed new rules to help companies, especially small and medium-sized companies (SMEs), make the most of their inventions, leverage new technologies and contribute to the EU's competitiveness and technological sovereignty.

Why is intellectual property important and why is the Commission proposing a new initiative on patents today?

Europe has a long tradition of encouraging creativity and innovation. Intellectual property (IP) rights help companies, inventors and creators protect and valorise their intangible assets. The Commission continues to deliver on the Action Plan on Intellectual Property of November 2020 to improve the IP legal framework, notably in three patent-related fields where legislative action is required: supplementary protection certificates, compulsory licensing and standard-essential patents. Despite the strategic importance of patents, EU patent law remains fragmented. EU patent law therefore needs to be modernised to boost the resilience of our patent system, support the EU's green and digital transition and strengthen the EU's technological sovereignty, in particular in emerging technologies. With the set of proposals for a Regulation adopted today the EU shows its willingness to further reinforce the harmonisation of EU patent law and complement the Unitary Patent System, whose launch will take place in June 2023. In today's world of globalised markets and the knowledge economy, it is vital to ensure that the EU IP system is effective, transparent and future proof, setting global standards.

What are standard essential patents and which standards and products are concerned?

A Standard Essential Patent (SEP) is a patent that protects technology that has been declared essential for the implementation of a technical standard adopted by a standard developing organisation (SDO).

Such standards include for example technology standards such as 5G and WiFi, audio and video compression and decompression (e.g., MPEG, HEVC), technologies for data storage and exchange (e.g., CD and DVD), photo formats (JPEG), and home audio and video interoperability (HAVi).

The users of these standards have traditionally been producers of telecommunication equipment, mobile phones, computers, tablets, TV sets, etc. With the recent rise of the Internet of Things (IoT), these standards are increasingly implemented by a growing number of stakeholders, including many SMEs, in connected cars, drones, payment terminals, tracking devices, smart meters, health monitors and other smart devices.

What is particular about SEP licensing in comparison with other patent licensing and what are the problems?

The holder of a patent is normally free to decide whether to license to other economic actors the right to exploit its innovation. However, the inclusion of a patented technology in a standard gives the SEP holder certain market power over an implementer of the standard. Therefore, SEP holders that participate in standard development are required to commit to license their SEPs on "fair, reasonable and non-discriminatory" (FRAND) terms.  

SEP licensing can in practice give rise to certain difficulties. Some key issues are lack of transparency with regard to the SEP landscape and the essentiality of the claimed SEPs, which makes it difficult for implementers to assess their SEP exposure sufficiently in advance to take into account the licensing costs when planning their product business. On the other hand, SEP holders complain about time- and cost-intensive negotiations, especially with large implementers. Those frictions can lead to litigation which adds considerable delays and costs to negotiation and conclusion of licensing agreements.

More specifically, the following drivers of these problems were identified. First, there is lack of transparency on the ownership, applicability and essentiality of SEPs. This leads to an over-declaration of SEPs (i.e. patents being declared as essential to a standard even if they are not). Second, there is very little information on SEP licence fees (FRAND royalties), which create substantial obstacles to implementers with little or no expertise or resources to assess whether the licensing offer of the SEP holder is indeed FRAND. Finally, licensing disputes can be time- and cost-intensive. Therefore, the mere threat of an injunction (leading to a suspension of production or seizure of allegedly infringing products) and the probability of a long and costly court procedure can create an ineludible pressure on implementers, especially SMEs, to agree to a licence at rates that may not be FRAND. For both parties, to seek a resolution in courts also consumes a significant amount of resources and time.

What is the objective of the proposed measures?

The SEP reform aims for a balanced framework, setting a global benchmark for SEP transparency with the following two objectives:

1. Ensuring that both EU SEP holders and implementers innovate in the EU, make and sell products in the EU and are competitive in non-EU markets;
2. Ensuring that end users, including SMEs and consumers, benefit from products based on the latest standardised technologies at reasonable prices that adequately reward the underlying innovation.

The initiative aims to incentivise participation by European firms in the standard development process and the broad implementation of such standardised technologies, particularly in IoT industries. 

What is the scope of the proposal?

The proposed Regulation will apply to all standards that will be published by SDO's after its entry into force (future standards). In principle all key features of the proposed Regulation, including the registration and essentiality checks, aggregate royalty and FRAND determination will be applicable to those future standards. However, where SEP licensing does not give rise to significant difficulties or inefficiencies affecting the functioning of the internal market, the Commission will establish standards or related implementations or use cases, for which the provisions of aggregate royalty determination procedures and the FRAND determination would not apply.

The Regulation will in principle not apply to standards that have been published by SDOs before its entry into force. However, where the functioning of the internal market is severely distorted due to inefficiencies in the licensing of SEPs, the Commission will determine, within the time limits set out in the proposed Regulation, standards or related implementations or use cases to which the proposed Regulation will apply. The Commission will also determine, which of the procedures (aggregate royalty, FRAND determination) would be applicable.

What are the main aspects of the proposal?

The proposal contains the following building blocks:

1. SEP register, database and essentiality checks: Establishment of an obligatory register held by the EUIPO, where SEP holders record their SEPs, providing details on patent and standard. Selected SEPs are subject to a non-binding essentiality check. The proposal further provides for an electronic database that would contain information on, among other things, aggregate royalties, FRAND terms and conditions or any licensing programmes, as well as collective licensing programmes.
2. SEP aggregate royalty: SEP holders will be able notify in the register the expected maximum aggregate royalty. Alternatively, both SEP holders and/or implementers can ask a conciliator to recommend a (non-binding) aggregate royalty.
3. FRAND determination: An expert-driven and time-limited out-of-court dispute resolution mechanism that SEP holders and implementers can benefit from when negotiating a FRAND licence. In certain circumstances, and subject to certain safeguards regarding the genuineness of commitment and access to justice, a SEP holder and an implementer would have to try first to agree on a royalty during the FRAND determination of no longer than 9 months, before they could resort to litigation. The FRAND determination would thus be a safe harbor to negotiate without the pressure of litigation for implementers and would help to limit the duration of otherwise protracted licensing negotiations for SEP holders.
4. SME support measures: Free advisory services; reduced fees for registration of SEPs and for essentiality checks and access to the SEP register; promoting more favourable FRAND terms and conditions for SMEs.
5. Establishment of a 'Competence Centre' at EUIPO to administer the elements above (registry, database, essentiality checks, aggregate royalty, FRAND determination and SME support services).

Why is the proposal establishing a centralised register for SEP registrations?

The centralised register and electronic database will contain information on relevant standards, products and processes, SEPs in force in the EU, SEP licensing FRAND terms and conditions or any licensing programmes, collective licensing programmes and on essentiality.

For SEP holders the register will create transparency with regard to the relevant SEPs, their share of all SEPs declared to the standard and the features of the standard covered by their patents. SEP holders will be in a better position to understand how their portfolios compare with other SEP holders' portfolios. This is important not only for negotiations with implementers but also for the purpose of cross-licensing with other SEP holders. The centralised register and database would make it easier for SEP holders to approach implementers and present the necessary information on patents, relevant standards and aggregate royalty.

For implementers, the register will provide a trusted source of information on the SEP landscape, including information on SEP ownership and standards. Making such information available in the register will also help to shorten the duration of technical discussions during the first stage of the SEP licensing negotiations.

What would be the impact of the proposal on SMEs?

SMEs that are SEP holders may currently have limited resources to license their SEPs efficiently. The register would give visibility of and a positive "stamp" on their SEP portfolio. The aggregate royalty would support their royalty demands and the FRAND determination procedure would offer them an opportunity to negotiate a licence agreement without the need to enter into costly litigation.

Innovative SME implementers use connectivity standards such as 4G, 5G, Wi-Fi, and NFC in a wide range of novel products, particularly in IoT. Therefore, the question of how to license those technologies is relevant for such SMEs. This initiative would equip SMEs with information that facilitates licence negotiations, such as from whom to request a licence, what is the size of SEP portfolios, and what is the aggregate royalty. The FRAND determination should eliminate situations, in which an SME is pressured into concluding a licence agreement on unfavourable terms by a threat of an injunction that could exclude its products from the market. Additionally, the initiative would offer SME implementers and SME SEP holders reduced fees for the use of the services of the Competence Centre and advice on SEPs.

What would be the benefits for SEP holders and implementers?

The reform would help tackle both 'hold-out', i.e. delaying tactics by SEP implementers, and 'hold-up', which describes the practice of SEP holders demanding excessive royalties when the product is already on the market and locked in to the standard, in a balanced way. These issues are underpinned by a lack of transparency with regard to the applicability of SEPs and their licensing conditions, the lack of information on how competitors are treated in terms of SEP licensing.

The proposal aims to restore the balance in the SEP licensing environment. It would give visibility of and a positive validation to the SEP holders' SEP portfolios, which is particularly beneficial for SEP holders with strong portfolios. All stakeholders benefit from a trustworthy source of information that brings transparency into a currently opaque environment.

The establishment of an aggregate royalty helps to justify royalty demands, while the FRAND determination provides for a procedure to support good faith licensing negotiations and to establish FRAND terms without the need to enter into cost- and time-intensive litigation. Implementers can thus better estimate their exposure to the overall royalty burden and SEP holders can better assess their royalty exposure in cross-licensing negotiations.

Why was the EUIPO chosen to for the Competence Centre?

The EUIPO was chosen to administer the elements of the proposal through the Competence Centre, as it has vast experience with the management of an IPR registration system and it has the necessary technical expertise and capacity. Moreover, it has also experience in offering alternative dispute settlement processes. Although the EUIPO will be the administrator of the various services, the actual aggregate royalty setting, essentiality assessment and FRAND determination will be carried out by selected external experts.

Proposal for a Regulation on Standard Essential Patents

Factsheet on SEPs

Source: European Commission