Context: The European Commission’s proposal for a regulation on standard-essential patents (SEPs) remains controversial. Only a narrow majority of the lead committee in the European Parliament adopted a compromise proposal (January 24, 2024 ip fray article). It is known (not least from a leaked document) that the EU Council’s working group on this matter raised numerous questions that the EU Commission apparently wasn’t comfortable enough to answer in writing.
What’s new: A conspicuous lobbying effort is underway. The Fair Standards Alliance (FSA), which represents Apple and other net licensees of SEPs, has recently been focusing on the German and French delegations to the EU Council by arguing in a thinly-conceiled manner that both countries are net payers of SEP royalties and should therefore throw their weight behind the EU SEP Regulation. The FSA presumably hopes, as a lower priority though, to lobby French and German MEPs ahead of the plenary vote.
Direct impact: Both governments’ experts must have been aware of SEP royalty flows all along, yet have reasons to take a broader innovation policy perspective. And no economic argument, whether one specifically agrees with it or not, can explain away the proposal’s objective deficiencies. That said, there is a possibility that short-circuited arguments will influence the further process and potentially persuade political decision-makers to give certain directions to the experts in charge.
Wider ramifications: In connection with the EU’s AI Act, Germany and France sought to protect innovation with a view to local startups (Mistral in France, Aleph in Germany), but were sidelined by the then-Spanish presidency as discussed in today’s ai fray article, with internal divisions potentially also having been a factor.
There is a pattern: last week, Charles River Associates (CRA) published an FSA-commissioned study on SEP “royalty flows into and out of Germany” (CRA announcement), and on Friday (February 2, 2024), the FSA posted an infographic to LinkedIn, based on input from CRA, about SEP royalty flows into and out of France.
Oddly, the infographic is ambiguous: the huge arrow that is meant to visualize outbound royalties points more or less in the direction of the small yellow area that shows the position of France on the world map. But the text of the post is clear: allegedly, €401 million in SEP royalties go out of France and “only 7” SEP licensors are French, accounting for allegedly “just 0.3% of the global market.”
CRA’s figures show the same 0.3% share for German SEP holders. The study about Germany oddly states very wide ranges: “total royalty outflows of between €182 million and €770 million in 2022” (the upper end being more than four times as high as the lower bound) and “inflows … estimated to be between €64 million and €142 million.” With so much uncertainty on both sides, the upper bound is even more than five times the lower one for the bottom line (“significant net outflows ranging from €117 million to €628 million”).
It’s not as simple, however, as just saying that an economy that is a net payer in a certain field should just attempt (with the effect in this case not even being certain, given the deficiencies of the proposal and the ability of SEP holders to adjust) to drive down prices. Much less can one argue that this end justifies any means, even unsuitable or unworkable ones.
ip fray’s neutral and centrist positions
As ip fray already stated on the occasion of the vote in the EP Legal Affairs Committee under the subhead ip fray’s centrist and neutral position, the FSA has a point that there are serious issues with the case law, but the proposal that is on the table, even if heavily amended, wouldn’t address them. This is not a zero-sum game where anything that complicates the process and harms net licensors will automatically improve the situation (and, ultimately, deal terms) for net licensees. Therefore, ip fray is forced to agree, on the bottom line and actually for a different set of reasons, with IP Europe and others who criticize the proposal as fundamentally misguided. This is all the more regrettable as ip fray strives to reach readers across the IP law community, to build bridges and to further mutual understanding.
In connection with Licensing Negotiation Groups (LNGs), an idea that even gave rise to proposed amendments to the EU SEP Regulation, ip fray again took a balanced view by opposing purchasing cartels and group boycotts while also criticizing the overleveraging of SEPs that results from courts effectively (under the threat of a sales and manufacturing ban) obligating car makers to license tens of thousands of patents even if only the German part of a single EPO-granted SEP has been found to be valid and infringed. LNGs are another question of the end versus the means.
If and when ip fray organizes debates (such as in the form of webinars) or publishes guest contributors’ opinion pieces, both sides will be invited in a balanced fashion.
A more holistic economic (and economic policy) perspective
The FSA/CRA approach misses the broader picture. At a closer look, the implied argument that Germany and France should support the EU SEP Regulation because local companies stand more to gain than to lose from suggested (though actually speculative) savings rings hollow.
The bulk of those outgoing royalties simply amounts to what the automotive industry pays for cellular SEP licenses. Those numbers just can’t be juxtaposed to or subtracted from SEP royalty income by a few innovators:
- Anything the EU does now with respect to SEPs is indirectly also going to influence, in the EU and even at the level of world trade, IP policies in general, particularly patent policy but by extension even other types of IPRs such as copyrights. Policy makers in those countries have to look at the overall implications while the FSA is by virtue of its mission focused on SEPs alone (and CRA will narrow its view to whatever someone pays them to focus on).
- SEP royalty income funds innovation, while SEP royalty expenses are merely a cost of doing business that is ultimately passed on to consumers and has no strategic implications. In fact, it is arguably even better for German premium car makers if cars are generally not too cheap, but one doesn’t even have to get into that kind of argument. The key thing is that everyone pays the same royalties. Should there currently be a number of unlicensed Chinese car makers, that’s a different question and there is actually no reason why SEP holders couldn’t simply enforce their rights against those Chinese companies in the EU.
- The fact that those automotive SEP royalties are non-differentiating must be stressed once more. If Mercedes has a problem with Tesla, it’s not SEP royalties because Tesla pays (or will sooner or later pay) the same ones. By contrast, if companies like Nokia and Ericsson lose SEP royalties (or if their enforcement costs go up), that money will be missing in areas where they could spend it on innovation and to create and sustain exactly the kind of employment the EU needs in the tech sector.
- Relative to the price of a car, those SEP royalties are also negligible. Without a doubt, the EU’s automotive industry is in trouble. German premium makers are facing strong Chinese competition in China. Xiaomi recently presented a high-end electric vehicle that appears technically superior over any European car. The Apple Car has been postponed again and again, but will inevitably come. The EU auto industry is struggling with the transformation away from fossil fuels, with the already substantial and rapidly-increasing importance of software and the key mobile platforms for which app developers create software belong to U.S. gatekeepers. Compared to those issues, the question of whether they pay $10, $20 or $30 per car for SEP licenses is simply irrelevant, especially when everyone else who sells huge volumes in Western markets has to pay those fees as well. If the EU (or, specifically, Germany and France) wanted to strengthen the local automotive industry, there would be a number of far more impactful things they could do.
- Looking at current inbound and outbound licensing is a very shortsighted perspective. Strategically-thinking licensees know that they need those technologies not only now but also in the future, and that it is in their interest to maintain significant incentives.
- The EU SEP Regulation does nothing that will encourage local companies to invest more in innovation related to standards, which would increase the EU’s share of the global SEP landscape. Much to the contrary, some may even reduce standards-related employment in the EU.
Structural flaws can’t be explained away
The honest thing for the FSA to do would be to say:
“We believe net licensees are disadvantaged by the current case law, particularly in Germany. We appreciate the Commission’s and some MEPs’ attempt to help us. But this here is a misguided approach that won’t yield a good result.”
Instead, they apparently think that getting roughly one year of extra hold-out and a political signal to the rest of the world that SEPs should be devalued is worth glossing over the issues.
The patent policy experts of the EU member states, however, are aware of their responsibility. The Commission’s Directorate-General for the Internal Market (DG GROW) put out something bad. They also appear unrepentant about it: one of their officials even says in public that they don’t know if it will work and that it’s based on some assumptions for the future, but they’re doing it anyway. MEPs presented amendments (particularly in the EP’s Internal Market and Consumer Protection committee) that partly reflected a shocking degree of incompetence and irresponsibility. That is where the Council comes in as the voice of reason.
There are structural issues. There a problems with fundamental rights. There are implications for global trade. Even if SEP royalties for car makers were several times higher than they are, that still wouldn’t justify doing something that is just wrong and setting a precedent even beyond IP policy.
Unreliable numbers (as evidenced by the extremely wide ranges) presented in a misleading way are not the answer. And they are not a substitute for the absence of evidence of the problems being quite so pressing as to necessitate a rush to a final legislative decision.