Getting the EU SEP Regulation right — Part 3: Small and medium-sized enterprises’ problems not SEP-specific

Small and medium-sized enterprises (SMEs) appeal to politicians’ protective instincts. That makes them a favorite argument, and all too often just a pretext, in political debate. In Brussels more than anywhere else. The EU Parliament’s rapporteur on the SEP Regulation, Marion Walsmann MEP, made demonstrably false and nonsensical claims in the plenary debate (March 4, 2024 ip fray article), some of which also involved a fictitious SME. She’s a political ally and endorser of Apple-funded astroturfers who admit in their own emails to MEPs that SMEs don’t pay any membership dues: they’re just paid by Apple and some others. Brussels’ SME astroturfing problem has been raised in the media for years, and in 2022 several MEPs filed formal complaints (October 14, 2022 Politico article).

Sadly, SME astroturfing pollutes political debate in the EU over many issues.

With respect to SMEs and the SEP Regulation, ip fray is clearly in favor of finding a workable solution for SMEs and has even made a specific proposal. The following questions are the most logical ones to be asked:

1. Filtration #1: Who can credibly claim to speak for SMEs facing SEP issues?
2. Urgency: Is there evidence of an acute crisis requiring immediate legislative intervention?
3. Prevalence: Is there already a serious problem or a reasonable apprehension of near-term exacerbation?
4. Filtration #2: To what extent is the problem SEP-specific versus problems that underresourced parties also face in connection with non-SEPs?
5. Differentiation: What interests do different types of SMEs have with respect to patent policy?
6. Effectiveness: To what extent can the current legislative proposal solve SMEs’ problems?
7. Alternatives: Are there more effective and/or more proportionate options?

Prior to addressing these questions, it can be said that neither side of the debate appears to present convincing evidence and to advocate a workable solution that would benefit SMEs. That is a far bigger problem for those supporting the SEP Regulation as they want to change the law and rely in no small part on SME-specific arguments.

1. Filtration #1: Who can credibly claim to speak for SMEs facing SEP issues?

The first and simplest thing is to deliberately ignore astroturfers (February 22, 2024 ip fray article). That applies even more so when they present SMEs that allegedly face SEP issues even though there is no credible basis for that claim in light of what those companies actually do.

One of various problems with the impact assessment by the European Commission’s Directorate-General for the Internal Market (DG GROW) is that it quotes various SME submissions, some of which are actually implausible, without any independent verification. Obviously, some information can’t be published. But at minimum there should have been some verification by subject-matter experts under professional secrecy obligations.

2. Urgency: Is there evidence of an acute crisis requiring immediate legislative intervention?

All of us face in our daily lives matters that are urgent and important, but also urgent ones that are not important and important ones that are not urgent.

If one side of a debate takes the position that a problem is pressing and there is no time for further deliberations, then it should bear the burden of proof that there is indeed an acute crisis. In an acute crisis, hard evidence is not absent. There would be SMEs willing to go on the record with objective problems. There would be SMEs being driven out of business over SEP issues. And there would be litigation targeting SMEs, as it is just not realistic that no SME would ever choose to defend itself: maybe most would fold, but not all of allegedly countless SMEs are on the receiving end. None of that is the case here. The EC-commissioned impact assessment study explicitly confirms the absence of such evidence (even beyond SMEs). The EC itself essentially just argues that the problem will become a major one because of the growth of the Internet of Things (IoT) sector.

3. Prevalence: Is there already a serious problem or a reasonable apprehension of near-term exacerbation?

The absence of evidence tells us that this problem is not urgent and important at the same time. That raises the question of whether it is nevertheless real, and possibly will become urgent at a later stage based on foreseeable trends.

For the avoidance of doubt, ip fray agrees that there is a problem, and considers it plausible that the extent of the problem is difficult to prove as there are reasons for affected SMEs not to go on the record. None of that means that one must necessarily side with those advocating the current proposal. Before one possibly gets there, further analysis (along the lines of the questions outlined above) is needed. And the problem can’t be quite as pressing as some suggest because in that case there would be at least some verifiable evidence (as stated in the previous section). Also, there would be far more SMEs responding to EU and UK consultations on SEP licensing.

The England & Wales High Court of Justice has correctly found that well-resourced implementers of standards get better deals than smaller players, and that there is an incentive for SEP holders (and an actual practice by some of them) to capitalize on that by entering into license agreements with smaller players to create “comparables” for negotiations with others. The logic is indisputable, and there is evidence based on court-reviewed real-world license agreements. However, there has been only one SME license deal that has so far surfaced in actual litigation, and not because the SME was being sued, but because an agreement was proffered as evidence. The licensee was Fairphone, a company that was an SME when it took the license. The fact that it didn’t take long before Fairphone became too large to meet the EU’s SME definition doesn’t mean that the agreement shouldn’t be viewed against the background of Fairphone’s then-SME status, but suggests that they were already far larger than most SMEs.

Some proponents of the EU SEP Regulation like to shift the burden of proof by demanding that SEP holders declare how many SMEs they have approached with royalty demand letters and how many license agreements with SMEs they have concluded. Those questions are undoubtedly interesting, but that doesn’t justify asymmetrical transparency. On the same basis, one could request all sorts of information from the member companies of the Fair Standards Alliance. And when litigants essentially tell U.S. courts that they believe they’ll find something if only they’re allowed to conduct discovery, their cases are often dismissed because they can’t plead essential facts.

Demand letters are indisputably sent to SMEs. As there are hundreds of SEP holders, it’s inevitable that some will also target smaller implementers, even if it’s sometimes “by-catch” rather than a strategic selection.

It is true that SMEs who receive a royalty demand letter are not in a strong position to stand their ground, as litigation would be costly and risky. That means there probably are SMEs who overpay for SEP licenses. In the next (fourth) section, let’s talk about what part of that problem is SEP-specific. In the sixth section, let’s look into whether the proposal would solve the problem.

The theory that SEP assertions against, and SEP royalty demands from, SMEs would explode in the near term because of IoT is, however, speculation at best. It would only be credible if there were convincing reasons for which licensing and litigation economics would change fundamentally in the IoT era.

4. Filtration #2: To what extent is the problem SEP-specific versus problems that underresourced parties also face in connection with non-SEPs?

It appears that in the whole debate over the SEP Regulation, no one has even asked the above question.

There is a problem that patent litigation is too costly for many SMEs to defend themselves. But that also applies to non-SEP litigation. SMEs face royalty demands over non-SEPs all the time, and over non-SEPs it’s easier to find actual assertions (the Dusseldorf Regional Court is a particularly popular venue for that).

SEP litigation involves a FRAND defense, which comes with additional costs, but non-SEP litigation is expensive enough. SEP litigation is just a superset of non-SEP litigation in terms of the issues.

This means that if the EU institutions were to determine that enforcement must be weakened in order to protect the weak, the next step would be to weaken all patent protection on the same basis.

5. Differentiation: What interests do different types of SMEs have with respect to patent policy?

Weakening patent protection would be in the interest of many SMEs, but by far not all. Many of the most innovative ones actually prefer robust IP protection.

Those opposing the SEP Regulation (at least in its current form) should try to identify innovative SMEs with an interest in keeping the patent system reasonably strong. Even if those SMEs don’t hold SEPs, they could at least add some balance to the debate.

Oddly, until about 12 years ago, ACT | The App Association took exactly that position: it argued in Washington and in Brussels that SMEs need strong patent rights. But there were also real SMEs with patent portfolios that spoke up in patent policy debates. Those voices are missing at this point.

6. Effectiveness: To what extent can the current legislative proposal solve SMEs’ problems?

There is no compelling case that the proposed EU SEP Regulation in its current form will help SMEs facing SEP royalty demands and threatened or actual litigation.

What the proponents of the regulation say is there’d be “transparency” and SMEs would know what royalty rates are reasonable. Even that part is questionable, but if we take it as true for the sake of the argument, the SEP holder will not be liable (beyond fee shifting in “loser pays” jurisdictions) if it just keeps insisting on a higher royalty. And then the SME will have to think about how to defend itself in litigation.

The argument that getting a FRAND determination first and that this will be cheaper because a license deal will be struck before infringement litigation begins is spurious and fallacious. There won’t be an obligation to grant a license on particular terms until a court of law says so. If a SEP holder’s strategy is centered around a resource advantage, it will do the FRAND determination and then litigate anyway, which is not a crime and will, at worst, result in some fee-shifting. In that case the whole process is even more expensive, thus even less affordable to the SME than before. It’s also unrealistic to assume that the EUIPO-led FRAND determination will be cheap: if the SME wants to be in a strong position vis-à-vis the SEP holder, it will have to spend a lot of money on expert advice and legal representation.

7. Alternatives: Are there more effective and/or more proportionate options?

The current proposal is a non-solution to a conjectural problem that, at closer look, is not even SEP-specific for the most part but applies to non-SEPs as well. It is, therefore, appropriate to explore other options. Are there better ways of helping SMEs? Are other ways potentially more proportionate because they would specifically ease the burden on SMEs without putting a thumb on the scales with respect to non-SME cases?

There should be more of a discussion of that question, even though it may mean that there should be a new legislative proposal. By far the SME-friendliest proposal to date has been made by ip fray in a February 10, 2024 article. What is meant in that article by Licensing Negotiation Groups is not group boycott, but cost-splitting and clearly-defined information-sharing in connection with FRAND determinations.