Context: The legislative process for an EU regulation on standard-essential patents (SEPs) is in full swing and certain arguments made in support of the proposal are debatable (February 4, 2024 ip fray article). SEP license agreements with large corporations as net licensees continue to fall into place (February 8, 2024 ip fray article). But those advocating urgent legislative intervention claim that the measure is needed to protect small and medium-sized companies (SMEs), also with a view to emerging application categories in IoT.
What’s new: The European Parliament has put the SEP Regulation on the February 27 plenary agenda, but the process is not going to be concluded before the elections in spring. Knowing that it will take longer, and that a new EU Commission and an EU Parliament with many new members may take different views, it is not too late to make constructive suggestions. Therefore, ip fray proposes how to make sure the EU SEP Regulation benefits SMEs without the EU putting its thumb on the scales of negotiations involving large implementers like Apple and BMW.
Direct impact & wider ramifications: This is just food for thought, but it will be telling to see whether those who claim to be SME advocates actually want an SME-only solution or one that merely benefits those who primarily fund them, such as Apple.
An Apple-funded astoturfing operation that pretends to represent SME interests is not the only participant in the debate over the EU SEP Regulation to argue that SMEs need to be protected. In fact, even on the other side of the debate there is a lot of sympathy for SMEs and their particular needs.
This is the ip fray proposal to actually limit the EU SEP Regulation to SME issues in a meaningful way that will result in greater legal certainty for SMEs than the current proposal and in more licensing income for SEP holders than the status quo, with another benefit being that it eliminates any international trade, international comity and European fundamental rights issues:
If a SEP holder seeks to enforce, in the EU, a SEP against a defendant who currently meets the EU’s SME definition (regardless of where it may be based) or has met it in at least one of the three previous calendar years,
- the FRAND licensing offer must pertain to more than 25% of all SEPs declared essential to the relevant standard (“critical mass”), for which the burden of proof is on the SEP holder;
- the SME must be given the option to make a binding commitment to take a license on FRAND terms to be set through a transparent and appealable process to be defined by the SEP Regulation; and
- the SME will be allowed to partner, for the purposes of the related licensing negotiations (prior or subsequently to the start of litigation) and/or a potential FRAND determination process, with any number of other SMEs meeting the EU’s definition.
The above is a summary, not a proposed statutory text. The above would be fleshed out in detail, including transparency obligations on pools that make offers to SMEs, but non-SMEs would simply be outside the scope of the entire regulation. No European presents to Big Tech, or to the automotive industry. Just a solution for SMEs.
As ip fray has noted on other occasions, there is no SME SEP crisis as far as litigation is concerned. It appears that SEP holders generally don’t care to sue SMEs, owing to litigation economics. Nevertheless ip fray does believe that SMEs are entitled to legal certainty. The fact that there is currently no such enforcement activity shows that there is no urgent need for legislative intervention. The EU can take its time and do a better job than otherwise. But it doesn’t mean that the SEP licensing system works for SMEs.
There can be situations in which a single SEP holder holds more than 25% of the patents declared essential to a given standard. But that will rarely be the case. In most cases, a pool will have to be formed, which means that the SEP Regulation would present a SEP holder with three practical choices concerning SMEs:
- Just don’t enforce against SMEs because it’s not worth it (current reality; pure economic pragmatism).
- Do enforce against SMEs in the EU if necessary, but only after joining a pool that has the critical mass, and subject to the procedures laid out in the SEP Regulation.
- Don’t join a pool, but do enforce against SMEs, just outside the EU. For instance, many EU SMEs export to jurisdictions like the UK and Switzerland, even if they may not all be susceptible to enforcement actions on other continents.
Any such pool would be optional from a licensing perspective. It’s always possible to enter into bilateral agreements. It’s just that if they can’t work it out and the SEP holder wants to go to court, it will (unless it has the critical mass all by itself) need a pool.
The regulation would have to clarify that the pool does not have to license non-SMEs. Beyond that, it would even be desirable to clarify that courts in the EU shall not pay any regard to SME-specific pool terms in cases involving non-SME licensees. This means a pool could even make a particularly attractive offer for SMEs without adversely affecting its licensors’ position in dealings with larger licensees. It can be made more affordable for SMEs, but he result must be the correct one, not a sandbagged royalty figure.
The FRAND determination process would have to be better than the current one, making it even easier for SMEs to defend themselves against supra-FRAND demands while also ensuring that those investing in standards-related innovation get paid.
SMEs would even benefit from a Licensing Negotiation Group (LNG) block exemption as a result of the regulation or a parallel EU Horizontal Block Exemption Regulation. If larger companies form LNGs, there will often be serious cartel issues (January 30, 2024 ip fray article). If, however, the purpose is to make it more affordable for SMEs to defend themselves against supra-FRAND demands, then they should be given legal certainty. In most cases they won’t meet the market-share threshold for an illegal cartel anyway.
Mathematically, the threshold for the critical mass allows up to three pools (or a mix of pools and very large patent holders) per standard. In practice, it’s more likely going to be one or two.
There’s a lot more that could be said about this. The purpose of this proposal is just to show that the EU could do something for SMEs without harming EU innovators that are active in certain fields of technology. There would be no proportionality issues anywhere. Right now, SMEs are largely unlicensed and SEP holders don’t sue them. The objective should be more license deals because that means legal certainty for SMEs and incremental income for SEP holders.
Depending on how stakeholders on both sides of the debate react to this proposal, ip fray stands ready to elaborate on this further, to comment on insightful feedback and to discuss any interesting ideas, always provided that it’s an SME-only solution that will not impact license deals with, and enforcement against, larger companies.