As we reported in our 4 December blog post Upgrading the European IP framework: The European Commission unveils its Action Plan on Intellectual Property, the European Commission published an action plan on 25 November 2020 to improve the EU’s IP system. The plan identifies five key areas where the EU sees a need to act to strengthen and protect IP.

Following our last contribution, this article will focus on the Commission's specific plans regarding standard-essential patents (SEPs).

Background – SEPs and the 'new' innovation system for network driven markets

SEPs are patents that protect an invention and that purportedly must be used to comply with a technical standard. There are thousands of technical standards in existence. Commonly known standards include 3G and 4G. And a modern laptop computer uses over 100 technical standards in its design to ensure that it works as a standard-compliant product.

The ownership and licensing of SEPs are factors that have long been established as key barriers to market entry in network-driven markets, such as telecommunications, and associated service and product markets. In these network markets, competition between inventors is likely to lead to massive sunk costs where one network technology prevails over others due to inter-network incompatibility. As a result, these markets were among the first that demanded true international and inter-competitive technical standardisation, ie the unanimous specification of technical solutions to a given technical problem, in order to overcome the time-consuming and resource-wasting technology competition.

Technical standardisation has developed as the key driver of the network industries as they are known today, and has established a completely new form of not only co--operative but fully collaborative innovation. As a consequence, however, the limitations of the long-established patent system, which safeguards the patentee’s rewards of innovation, have become evident. 

The patent system focuses on a patentee protecting its products with a patent right against any imitation competition. However, the idea of standardization, which aims to open the technically standardised market to any implementer, is diametrically opposed to the patent system’s desire to foreclose imitating competitors from the market.

Early SEP disputes, known colloquially as the smartphone wars, led to vast amounts of patent infringement litigation around the world. This litigation was the manifestation of important underlying questions about SEP licensing: 

  • who can access the standardised but patent-protected product market; 
  • on what terms and conditions is access permitted; and 
  • how can the SEP proprietor reasonably be remunerated for its contribution to the standard?

In recent years, we have seen the spill-over of the smartphone wars to automotive markets, as a result of connected cars increasingly making use of standardised network technologies. These legal disputes are a symptom of the unsolved question of the correct distribution of rewards between, on one hand, the innovators contributing to the standard, and on the other hand, the implementers making use of the standardised technology. A complicating factor is that, while the implementers’ products and services use the network technology as a precondition, the value created by their products can at best be seen as just remotely related to the standardised technology.

Today, with the emergence of the internet of things (IOT) and 5G network technology allowing a theoretically unlimited number of devices to be connected via 5G, we are at the threshold of bringing the whole economy online via standardised technology. Consequently, the issues we have encountered so far are threatening to multiply by several magnitudes, endangering not only the desired proliferation of the standardised technology but also the undisputedly extremely successful innovation by standardisation process. This would have a number of negative ramifications: not only will contributors abandon standardisation work if not properly rewarded for their contribution but also implementers will not make use of the standardised technologies if faced by unforeseeable costs of using standards.

Improvement of SEP licensing

In its Action Plan, the Commission emphasises the importance of SEPs especially for the development of 5G and the IOT. SEPs accordingly play an important role not only in the currently highly litigious area of connected cars, but also in the health, energy, intelligent manufacturing, digital and electronic sectors. 

In this respect, the Commission states that further development of the IOT will not be possible without the use of SEPs and therefore legally stable, efficient and fair rules for licensing SEPs are necessary. The licensing process, which is often costly for both patent holders and technology implementers, will have to be made more predictable. Any necessary measures or reforms will need to consider the guidance provided in the 2017 SEPs communication, as well as discussions with relevant stakeholders.

As a result, the Commission has planned various actions up to the first quarter of 2022, including reforms to create legal certainty and to improve the framework for declaring, licensing and enforcing SEPs. Transparency and predictability in SEP licensing is to be increased by, among other things, encouraging industry-led initiatives in the most affected sectors.

In addition, the Commission is considering the creation of an independent system for third-party essentiality checks. This is intended to reduce litigation costs and increase legal certainty. Where appropriate ('if and where needed'), regulatory measures should also be implemented. 

Opportunities and risks 

In general, it is a positive sign that the Commission recognises the importance of SEPs and sees a need for action. It is also understandable that the Commission wants to create a procedure outside of litigation to clarify the extent to which technologies in a standard are essential, as this is often a costly and time-consuming part of litigation.

It is questionable, however, how and by which third party the Commission wants to implement the independent 'third-party essentiality check', and whether this will actually produce the desired effects, namely more legal certainty and fewer disputes.

The Commission’s intended third-party assessment can only lead to a reduction in litigation if the third-party decisions cannot be challenged by courts. However, the assessments would then provide a forum that would ultimately have more decision-making powers than a court of first instance, where decisions can be challenged. In this respect, the legitimacy of such a third-party check is questionable, and transparency in the third party’s decisions will be of crucial importance.

If, however, the third-party decision can be challenged with an appeal, the purpose of leading to legal certainty and fewer litigation costs would likely be lost. The consequence of an appeal process presumably would be that a large part of the third-party decisions would be taken up by the courts and, in this respect, no clarity would be established and, on the contrary, even more uncertainty would arise. This could even lead to greater barriers, especially for small and medium-sized enterprises, as additional costs would be incurred. 

There may be other alternatives to an essentiality test that could be considered. However, they should be evaluated carefully, as suggestions such as the establishment of a new jurisdiction or regime specific to SEPs, working in parallel to national jurisdictions or courts, would provide no advantages and should therefore be avoided.

Moreover, there are also actual implementation difficulties: the third party must, on the one hand, be technically qualified regarding the respective standard and, on the other, be entirely independent. This will likely be difficult to find for each standard.

As an indicator of this difficulty, standard-setting organisations have historically rejected any form of essentiality test, preferring to only offer the standardisation process framework, which relies on submissions by inventors participating in the standardisation work without requiring the submissions to be patent free. 

All in all, the Commission should consider carefully the extent to which the creation of a third-party essentiality check would result in advantages for SEP licensing, and whether it would be possible to achieve the Commission’s ultimately appropriate and well-intentioned targets by other means.

Prospects

The Commission's Action Plan is heading in the right direction regarding the acknowledgment of the importance of SEPs, but its specific implementation plans are divisive. 

Given the ever-increasing importance of SEPs for almost all sectors of the economy, it is hoped that the Commission will find impactful ways to provide more legal clarity regarding SEP licensing for both SEP holders as well as implementers. In any case, developments should be closely monitored. 

We will keep you informed of any further updates.