Context: Driven by political and personal ambitions rather than a sense of responsibility, the European Commission’s (EC) Directorate-General for the Internal Market (DG GROW) and the European Parliament rushed to a plenary vote on the proposed regulation on standard-essential patents (SEPs) a few months ago (June 11, 2024 ip fray article). But the complexity of the subject would have required a lot more thought and better advice than the one they received. Those who understand the subject know that the proposal is ill-conceived and will deny it only if they are paid by those whose political agenda it suits, also with a view to what other jurisdictions such as China will do.
What’s new: This week, a patent infringement trial in the Unified Patent Court (UPC) — which apart from minor childhood diseases is on track to become the biggest ever success of EU-level innovation policy — perfectly illustrated one of the fundamental flaws of the proposed EU SEP Regulation. There are various such issues, but the one this article focuses on is that the bill — contrary to the case law of the European Court of Justice (ECJ) — does not take into consideration the simple fact that a patent declared essential to a standard and subject to a FRAND commitment may not confer any market power on its owner. (Conversely, it’s also possible that a patent is not FRAND-pledged and was never formally declared essential, but is inevitably infringed when implementing a critical standard.)
Direct impact: Before the SEP Regulation is adopted, this issue must be addressed so as to avoid a divergence between EU case law and the new regulation. But to fix the problem will take more than the insertion of a word or a sentence: the issue is actually structural and involves everything from the contemplated SEP Register to aggregate royalty determinations for standards to bilateral FRAND determinations as a prerequisite to enforcement action.
Wider ramifications: In recent years, the EU has been more concerned with quantity than quality when it comes to regulating the technology sector. As a result, the EU fails to stop the bloc’s economic decline. It threatens to accelerate.
Let’s start with why Philips v. Belkin perfectly illustrates the problem. To begin with the failure by two EU institutions to do their homework, the European Parliament juxtaposes on its website the original Commission proposal and the slightly modified EP version. Nowhere is the concept of market power mentioned. Market dominance is mentioned only in connection with a kind of lawsuit that someone might bring and where the SEP Regulation should (also)) apply, but not in connection with the most fundamental definition, which is the one of the term SEP:
- The Commission proposal says in Article 2(1)(1): “‘standard essential patent’ or ‘SEP’ means any patent that is essential to a standard”
- The Parliament’s version says ” ‘standard essential patent’ or ‘SEP’ means any patent that a SEP holder claims to be [emphasis in original] is [sic — both the Commission proposal and the Parliament’s text contain many typos] essential to a standard”
The regulation with all its provisions, across the board, applies to what is a SEP according to that definition. But in Huawei v. ZTE, the ECJ made it clear that a FRAND licensing obligation under antitrust law presupposes a dominant market position. In that particular case, market power was not disputed (para. 43). But the ruling talks again and again and again about the legal basis being an abuse of a dominant market position. Before dabbling in SEP legislation, one should first make a good-faith effort to understand the logic of the top EU court’s seminal SEP judgment.
ip fray reported on the trial the UPC’s Munich Local Division (LD) conducted on Tuesday (July 2, 2024 LinkedIn post):
- No FRAND defense:
Belkin’s FRAND defense had failed in Dusseldorf, and they didn’t even try in the UPC. In accordance with EU antitrust law (Huawei v. ZTE), a FRAND defense can succeed only if the patent-in-suit confers market power. Here, Qi is just one of various ways of charging a device. There are different proprietary wireless charging systems, and there’s always the option of charging over a cable. Presiding Judge Dr. Matthias Zigann mentioned this only in passing.
The patent-in-suit was declared essential to the Qi wireless charging standard.
Qi is a FRAND standard. It’s about wireless charging. The relevant standard-setting organization (SSO) is the Wireless Power Consortium. Its IPR policy (PDF) requires (F)RAND licensing for most purposes and royalty-free licensing for low-power receivers.
So here we see a FRAND-pledged declared-essential Philips patent, but no FRAND defense. It’s not that the FRAND defense failed because of unwilling-licensee behavior or because the offered terms were FRAND. No, it failed because both the Dusseldorf Regional Court and (in an obiter dictum at trial) the UPC’s Munich LD held that patents reading on the Qi standard don’t confer market power on their owners.
It’s market power, stupid!
(adapted from Bill Clinton’s 1992 campaign slogan)
You can’t implement Qi without infringing a QI-essential paten. The patent-in-suit in this case (provided that it’s held valid) may end up being considered essential to Qi.
But can implement wireless charging without implementing Qi. Various vendors have their proprietary systems: Apple (Apple Quick Charge), Samsung (Samsung Fast Charge), Google (Google Power Profile). And wireless charging as a whole competes with traditional charging over a cable.
This is not like cellular networks where if the world’s network infrastructure is built for 4G and 5G, you can’t just come up with your own communications protocols and hope that your devices connect with existing networks.
Not only is it incompetent to subject Qi patents to such rules as the ones in the EU SEP Regulation (the courts clearly know better than the Commission and the Parliament), but it’s also inconducive to innovation, competition and economic growth.
The creation of a non-essential standard like Qi is procompetitive. Qi-compatible devices compete with devices that implement Apple Quick Charge, Samsung Fast Charge and Google Power Profile. There could even be a second or third open standard competing with Qi in the market for wireless charging standards open to implementation by all comers. But to enable that competition, you must let those holding patents essential to such non-essential standards enforce.
DG GROW has growth in its name, but did not have economic growth on its mind when drafting the proposed SEP Regulation. The only kind of growth they were concerned with was that of the EUIPO: they want to give that agency a reason to set up another department.
There are two reasons why an organization like the Wireless Power Consortium requires FRAND licensing commitments. They don’t know in the beginning whether their standard may effectively monopolize a particular market. And they want to encourage adoption (which is why they even mandate royalty-free licensing of one category of devices). But none of that makes it acceptable to restrict enforcement. If the standard doesn’t confer market dominance on SEP holders, there’s no entitlement to a compulsory license under antitrust law. And if enforcement deters others from adopting the standard, another standard (or simply proprietary approaches) may prevail.
From a contract law perspective it’s another story. But that involves the right of third-party beneficiaries to enforce such a contract. That’s not a matter of EU law.
It’s not just that an entire standard like Qi may not confer market power. You can also have patents on parts of a standard like 5G that don’t make you dominant in any relevant market. Maybe those parts were not implemented to an extent that results in market power.
No easy fix: the issue is structural
While it would be easy to add a market power requirement to the definition of the term SEP in Article 2(1)(1) of the proposed regulation, that would create all sorts of issues.
Who, when and how would market power be determined before it’s even clear that a SEP must be put in the SEP Register? And what if this changes because of emerging competition? What will be done then? Who will decide that patents declared essential to a certain standard are no longer subject to the proposed regulation?
Who and how will market power be considered before making an aggregate royalty determination for the entire standard?
Who and how will it be determined whether a SEP holder has the right to immediately enforce or must first go through the envisioned bilateral FRAND conciliation process?
The EUIPO, which is simply a trademark office with no patent expertise and certainly no competence to hand down antitrust rulings, can’t do it. The consultants it will appoint as evaluators or conciliators can’t do it either.
If the regulation allowed SEP holders to bring claims if they dispute market power, the whole infringement litigation will have to proceed before the court can make that decision. If the court then finds that there is market power, would the patentee lose? Or would they have to do the EUIPO-led FRAND determination first and then come back to the infringement court, which would stay its proceedings in the interim?
Given that market power is sometimes reasonably disputed (as in Philips v. Belkin, where two courts denied market power), it’s simply not workable to force companies to add their patents to a SEP Register, to go through essentiality checks and to submit to aggregate and bilateral royalty-setting proceedings before they can enforce their rights. It’s another fundamental rights issue, too.
The European Commission should withdraw its proposal. There are various issues such as this one. That is not to say that everything is perfect the way it is. ip fray believes that implementers do not have enough of a chance to defend themselves against SEP assertions in Germany (which is a problem in one country, not in the entire EU). But the SEP Regulation just trades in the current (imperfect, but not catastrophic) situation for something poorly-thought-through.