Context: The proposed EU regulation on standard-essential patents (SEPs) remains controversial (April 20, 2024 ip fray article). One of various ways in which the bill is criticized relates to the notion of governmental price-setting, which proponents of the regluation (inside and outside certain EU institutions) have so far disavowed.
What’s new: An EU Commission paper released on Friday (April 26, 2024) definitely validates concerns over the EU not merely pursuing a “transparency” agenda, but having more aggressive goals in mind for the mid and long term that do amount to governmental price-setting, all in the name of the European Green Deal. A report on a so-called “stress test” of the proposed SEP Regulation (EC webpage) toys with such ideas as (a) the EU mandating lower SEP royalties to the extent that connectivity standards are implemented by cleantech products and (b) entirely royalty-free green standards. Furthermore, the paper considers the fragmentation of the global standards system a plausible scenario over the course of the next 20 years, without considering that the EC itself is undermining that system, such as through how it seeks to diminish the role of non-European companies in ETSI.
Direct impact: The EC’s objective was only to demonstrate that various ways in which the world could develop have been considered as part of a “stress test” deemed to be conducive to responsible and prudent policy-making. But there is no indication whatsoever that the unnamed “experts” mentioned in the paper actually were knowledgeable in the field of SEP licensing and enforcement. What is clear, however, is that some EU officials are dreaming of putting not merely a thumb but an iron fist on the scales of SEP licensing and enforcement. The SEP Regulation is part of that scheme.
Wider ramifications: Policy makers seeking to protect innovation must be profoundly concerned over the executive branch of the EU government dreaming of direct price regulation and considering the current SEP Regulation proposal a useful intermediate step in that direction.
If the European Commission meant to give policy makers comfort that its proposed SEP Regulation was a well-considered initiative, it has succeeded in the opposite.
The EC picked the SEP Regulation for “a pilot process of stress-testing policy options against a set of [r]eference foresight scenarios.” The idea is for the EU Policy Lab and the EC’s Joint Research Center to bring “experts” together to discuss whether a proposed piece of legislation would make a positive or negative impact if the world evolved in each of multiple different ways. The stress test for the SEP Regulation was performed against the following four “reference foresight scenarios”:
- “Storms”: “This is a world where societies became more self-cent[e]red and retreated inwards, strengthening the role of nations and regional blocs.”
- “Endgame”: “This is a world where economic growth and competitiveness trump well-being and social equalitiy [sic].”
- “Struggling Synergies”: “This is a world where there is a strong multilateral determination to fight climate change while sidelining other aspects of sustainability.”
- “Opposing views”: “This is a world where society is divided into a regenerative alliance and an exploitative alliance and both try to impose their paradigm.”
All of those are “plausible scenarios” according to the document.
It’s doubtful that actual experts (in the sense of people with hands-on SEP licensing and enforcement expertise) were involved in the “qualitative participatory process” among five or six individuals. It could be that they were all just EC officials. At least there are strong indications that industry experts were not involved.
Across the 48-page document, the word “green” appears 60 times. That density alone shows that the EU officials who worked on this primarily had one overarching question in mind: climate change and how a united or divided world would deal with it.
What is most telling with respect to the EU’s future plans is the description of the “Opposing views” scenario:
“This is a world where the EU and other like-minded countries prioritise environmental policies and the health of natural ecosystems.”
That first sentence alone makes it clear that the EU considers itself part of a future “regenerative alliance” that prioritizes the fight against climate change while the rest of the world forms an “exploitative alliance” that only cares about short-term profits:
The ‘regenerative alliance’ standards are constantly raised to further stimulate green innovation and applications. Green technologies are enabled by digital solutions, and green IoT devices are ubiquitous. Different platforms with different standards are used to fulfil specific requirements. Investments in interoperability are key. Patent systems are divided between the ‘regenerative’ and ‘exploitative’ alliance.
The following passage then starts with what must be an error: they must have meant to say “exploitative” in the first snetence (strong IP protection) as the document goes on to describe the opposite of strong IP protection in the remainder (and would otherwise not say anything at all about the “exploitative” alliance’s patent system).
There is a unified patent system with strong intellectual property protection in the ‘regenerative alliance’. To promote market diffusion, green-tech patents are made available royalty-free within the ‘regenerative alliance’. Standards, patent licences, and access to cutting-edge green/clean tech are used as a geopolitical carrot-and-stick to encourage countries to join this alliance.”
So, should there be a bipolar world with a “regenerative” alliance (the “good guys” of which the EU considers itself a part, if not the thought leader) and an “exploitative” alliance (the “bad guys”), then
- the EU’s enemies would have strong patent protection, while
- the EU would strategically weaken patent protection in the two ways outlined on page 17 (PDF page 20) of the document:
- “Governments may require royalty-free green standards, if applicable, to promote faster uptake of the technology.”
- “Specifically low-FRAND royalties are set for communication standards (for IoT devices and beyond) used in green technologies.”
The result of the stress test is a 4×6 matrix. For each of the four scenarios, they evaluated six policy options (baseline option; increased transparency; FRAND solution; industry-led clearing house; clearing house led by independent authority/uniform prices; SEPs are royalty-free).
To the SEP ecosystem’s relief, that last option (SEPs being totally royalty-free) was the only one to be considered negative in each of the four scenarios. The SEP Regulation proposal that is on the table is somewhere between the “transparency” and “FRAND” options (in the stress test paper, the licensing level in the supply chain would be mandated, while the version adopted by the European Parliament would not resolve that question definitively). The “transparency” and “FRAND” approaches are both considered “positive” in all four scenarios, therefore also including the ones where the EU would dictate royalty-free green standards and reduced royalty rates for cleantech products.
The EU Commission would probably downplay the significance of this. But there’s no denying that there are officials who are contemplating certain ideas. For instance, on page 40 (PDF page 43) of the document, the last item says:
“There could be special pricing for green SEPs: differentiated pricing would be required for technology that is used for green applications (which would have a lower price) and non-green applications (which could have a higher price).”
And on page 39 (PDF page 42), SEPs are described as adding “a cost to the development of green technologies.” Given how important green technologies are to the EU, those thought experiments must be taken seriously. Initially, the proposal is only about non-binding FRAND opinions by external consultants appointed by the EUIPO. But the paper on the stress test shows that the agenda is indeed about the EU gaining control over SEP royalty rates, up to the point where the EU might decide that certain “green” standards must be royalty-free (and their implementation would be mandatory), while those holding connectivity-related SEPs would apparently still be entitled to a royalty, but only a reduced one if the product in which those connectivity standards are implemented meets whatever criteria to be considered a cleantech product. The document doesn’t provide many examples, but smart meters are one of them.
Those ideas go beyond industrial policy in market-based economies. They reflect a worrying trend toward an almost Soviet-style plan-based economy.