Context: In April 2023, the European Commission (EC) made a formal proposal for a regulation on standard-essential patents (SEPs) (“EU SEP Regulation”). A recent ip fray article has drawn parallels between that process and the one relating to the European Union’s Artificial Intelligence (AI) Act.
What’s new: The European Parliament’s Legal Affairs Committee (JURI), which is the lead EP committee on this bill, just held its vote, after which the measure will be put to a plenary vote. According to the EP’s press release, the bill as amended by so-called compromise amendments was adopted “with 13 votes for, no votes against and 10 abstentions.”
Direct impact: There is a blurred line between no votes and abstentions in the EU. In the EU Council, abstentions even have the same effect as no votes, and the same applies to any EP vote after the first reading. In other words, when every vote counts, an abstention is a no. It’s just a more diplomatic form, especially with one abstainer being from the rapporteur’s own party, the European People’s Party. This leaves German MEP Marion Walsmann a political lightweight–at least by comparison to the EP rapporteurs in comparable contexts–as the controversial and ill-conceived proposal is forwarded to the plenary and with a view to interinstitutional negotiations.
Wider ramifications: While the EP forged ahead at Mrs. Walsmann’s urging and the behest of Big Tech and automotive lobbyists (supported by Apple-paid astroturfers), there is no realistic possibility of the measure being passed into law during the current EU legislative term. The European Commission would be well-advised to read the writing on the wall and withdraw the proposal in order to start a new consultation process based on concrete ideas for how to address certain issues surrounding SEP enforcement in Germany (the only country whose courts gave rise to this initiative).
It is unusual for a rapporteur to be supported in her own committee by a narrow majority. In particular, MEPs rarely vote against a colleague from the same political group at the committee stage, and she’s from the largest one. But even the MEPs from Mrs. Walsmann’s own group didn’t rally behind her and lend her unanimous support.
This voting result shows that Mrs. Walsmann lacks not only support but also judgment. Instead of accepting that this bill is controversial and taking the necessary time to either find a genuine compromise or to convince the European Commission that it must go back to the drawing board, she suggested the sky was falling (for which there is no evidence, quite the contrary). Her gamble has failed. Now it’s obvious to every rational and analytical observer that something is fundamentally deficient about that proposal as well as Mrs. Walsmann’s increasingly conspicuous activism.
How could Mrs. Walsmann, in the glaring absence of parliamentary consensus, seriously expect to be in a position to make any far-reaching demands in future negotiations with the EU Council? If the plenary vote doesn’t go fundamentally better for her, she’s not going to have any bargaining power as it’s clear her ideas wouldn’t survive a hypothetical second-reading vote in which the EP can only pass amendments (or vote down a bill in its entirety) with a supermajority (a majority of all members, with all absentees and abstentions counting in the Council’s favor). But to build broader support, she’d have to alter course, at risk of then losing the support of some her current political supporters and corporate backers. It’s a conundrum, and the most realistic approach would be for the Commission to withdraw the proposal (possibly not this Commission, but the next one) and start all over again.
Mrs. Walsmann’s nonsensical statement
In the EP’s press release, Mrs. Walsmann is quoted with a statement that consists of falsehoods:
“The new instruments will bring much-needed transparency to an opaque system, make negotiations fairer and more efficient, and strengthen European technological sovereignty.”
The system isn’t all that opaque as even German courts require far-reaching disclosures; there are other issues. Negotiations don’t become more efficient as a result of additional hold-out. And European technological sovereignty means that those who contribute to standards, but also those who build key infrastructure components implementing them (Ericsson and Nokia), should not be harmed for no good reason.
“For instance, in 5G almost 85% of the standard essential patents are in fact non-essential.”
There hasn’t been enough 5G litigation yet to make such a claim with certainty. To the extent that 5G declared-essential patents have been asserted, the problems were usually on the validity rather than essentiality side, and the EU SEP Regulation doesn’t do anything to increase patent quality or to identify invalid patents.
“The new essentiality test will stop the occurrence of over-declaration and strengthen EU SEP holders´ position in global markets.”
This is now not just wrong or unproven. It’s ridiculously incompetent.
There is nothing in the entire bill or any proposed amendment that would penalize or otherwise discourage overdeclaration. Much to the contrary, the overall proposal even creates an incentive for a mix of general overdeclaration and strategic underdeclarations (in order to then assert de facto but undeclared SEPs in court without being subject to restrictions). The bill is an incentive framework for incorrect declarations of either kind.
“SEP holders will also benefit from an increased number of licenses, faster agreements, more predictable returns, and a reduced risk of litigation.”
No, Not a single company that doesn’t want to take a license now will have a reason after the hypothetical adoption of the proposal to stop infringing and start paying. That’s because the proposal is unbalanced.
“SEP implementers, 85% of which are small and medium-sized enterprises, will benefit from legal and financial predictability.”
None of the politicians or lobbyists supporting the proposal has been able to point to any SEP assertion against a small and medium-sized enterprise (SME). And even when it comes to license deals that have become known through litigation, the only example that ip fray has been pointed to so far is that a company named Fairphone was mentioned in a recent UK FRAND ruling. Even Fairphone is not an SME anymore, but it may still have met the EU’s SME definition at the time the relevant contract was signed.
Europe’s leading patent pool administrator, Sisvel, even argues that SMEs will be put at greater risk by the proposal (corporate blog post).
ip fray’s centrist and neutral position
ip fray has a position that is as clear as it is centrist:
- Net licensees are right to the extent that they criticize the state of affairs. They exaggerate as there is no widespread problem, much less a crisis, but it is correct that German courts have essentially vitiated the European Court of Justice guidance in Huawei v. ZTE: intead of seriously evaluating the two sides’ negotiating positions, they try to play a kindergarten game of merely judging behavior (which mostly hurts implementers, but sometimes even SEP holders). They don’t want to take the time (to be fair, the system there gives them little time per case) nor to step outside their comfort zone to perform any economic analysis.
- Net licensors are right that what the European Commission proposed here makes no sense. They focus on the negative implications for them, and that’s understandable. What some net licensees don’t seem to understand is that complicating matters for licensors won’t necessarily save anyone money. It will just force SEP holders to step up their efforts in non-EU jurisdictions, including (among others) various European non-EU jurisdictions (of which only the UK gets significant number of patent infringement lawsuits so far, but that could change). Implementers should realize that just creating an additional layer of EU bureaucracy in the form of a Competence Center that isn’t even going to acquire any serious competence (they’ll just outsource) and getting an additional year of hold-out (nine months plus, for practical reasons, some time before and after a FRAND conciliation process) is not the answer.
Therefore, ip fray is neutral. This is the typical situation in which someone would submit an amicus curiae brief in U.S. litigation “in support of neither party” and would actually mean it. What ip fray is committed to is accurate analysis and high-hit-rate predictions, not pandering to any particular camp. Obviously, that entails the risk of camp A claiming (or at least insinuating) that ip fray is in camp B or the other way round. That won’t work. The combination of positions taken and views expressed by ip fray is independent and easily distinguishable from what the Fair Standards Alliance (Apple and automotive) or IP Europe (Qualcomm, Nokia, Ericsson etc.) say.
When it comes to the binary question of whether the proposal should be scrapped or adopted, ip fray happens to agree–but for a different set of reasons–with IP Europe, despite not discounting the FSA’s criticism of the status quo. In ip fray‘s litigation coverage, the number one goal is to accurately deduce what will happen next, which in some cases favors a net licensor and in others a net licensee.
From sources on both sides, ip fray knows that there is a greater diversity of views on both sides of the debate than meets the eye. In particular, sophisticated net licensees are aware of the shortcomings.
Mrs. Walsmann is either pandering to a certain group of companies or she doesn’t understand the issues. Whatever the reason may be, it’s clear based on today’s outcome that her aggressive push for a committee vote at this stage was a mistake. MEPs who don’t agree with the compromise proposal are now emboldened to build majority support for additional amendments. The best plan would be to vote against the proposal as a whole, but for political reasons, with everyone striving to come across as constructive, that is less likely. It is, however, far from impossible that this ill-conceived, hastily-prepared and poorly-crafted proposal could die a slow death by simply not being enacted before, at some point, the Commission (albeit the next one) might just pull it.
In the meantime, there will be some landmark UPC decisions in SEP cases and other developments.
For Mrs. Walsmann, who started her political career as a collaborator of a regime (the one of the German “Democratic” Republic) that despised democracy and human rights, today’s vote was a Pyrrhic victory at best. Back in the day, they always had near-unanimous and very often 100% unanimous results in the East German fake parliament. And she may remember from those days that even a nominal “absention” was considered a strong and crystal clear statement.