The European Commission (EC) has issued a Proposal for a Regulation of the European Parliament and of the Council on Standard Essential Patents amending Regulation (EU) 2017.1001, COM (2023) 232 final 27 Apr 2023. After issuing the proposal, the EC solicited feedback from stakeholders (including patent holders and implementers), with a response deadline of August 10.

This article explores what the proposed regulation would mean for standards development organizations (SDOs) and for companies that participate in standards development. In addition, this article explores some of the noteworthy comments made during the public comment period and offers an analysis of the future of the proposed regulation based on a recent conversation with the Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs (small and medium-sized enterprises), the unit within the EC responsible for the proposed regulation.

Note: A standard-essential patent (SEP), as used in this article, is a patent that is technically essential to a technical standard. In other words, it is a patent necessarily infringed by an implementer of that standard. The proposed regulation addresses many key aspects of how SEPs are determined and licensed. (Standards organizations with royalty-free licensing obligations appear to be outside the scope of the proposed regulation.1)

If enacted, the proposed regulation would be nothing short of transformative in the patent world, with impacts ranging far beyond the EU. In describing the background and reasons for the proposed regulation, the EC makes salient arguments about the need to improve the transparency and accessibility of standardized technology and to remove or reduce barriers or friction that can be created by the current patent licensing framework.

Under the proposed regulation, the following would be established:

  • an SEP register with essentiality checks;

  • a “Competence Centre” under the aegis of the EU Intellectual Property Office (EUIPO) to manage the registry, conduct the essentiality checks, and provide objective information regarding aggregate royalty rates to implementers;

  • conciliation procedures that are required before launching patent infringement litigation for SEPs; and

  • a process for determining an aggregate royalty for using a standard before, or shortly after, its publication.

The EC states that with these changes, the licensing landscape for SEP will benefit because the proposed regulation does the following:

  • reduces the information asymmetry between a SEP holder and an implementer by providing the implementer with more information about SEP holders through the mandatory registry;

  • creates a mechanism to derive the aggregate royalty for using a standardized technology; and

  • reduces potential litigation friction through a pre-trial obligatory conciliation and through the additional information and services the Competence Centre will provide.

There are several concerns often raised by implementers regarding the existing SEP licensing framework. Four of the most frequently cited concerns are the following:

  • a lack of transparency regarding who owns SEPs and what the royalty rate will be for implementers;

  • the difficulties that arise when a single technology specification has many different licensors or multiple patent pools with differing royalty rates (e.g., HEVC)2;

  • the expense of negotiating with licensors; and

  • the prospect that some of the licensors may be non-practicing entities (often referred to as patent trolls in the media) whose sole interest is royalty revenues.

The EC appears ready to upend the existing patent licensing framework to promote the use of technology standards by emerging EU technology companies (many of which are SMEs) and to encourage those companies to participate in the standards development process, all in furtherance of improving the EU’s ability to compete globally in the technology arena. The EC also anticipates a significant benefit to consumers in the form of reduced prices of products and services as cost savings from lower royalties due to SEP owners are passed down.

But by proposing to upend the existing framework, the EC has stirred up a hornet’s nest, judging by the public comments. The EC’s efforts to significantly alter this system may need to be phased in over a number of years to be palatable to certain stakeholders, while other stakeholders believe the change cannot come fast enough.

If one were to consider the current state of patent licensing as a dire situation, then the EC’s approach could be summed up as “drastic times call for drastic measures.” One of the most drastic measures in the proposed regulation is that a patent holder may not assert its SEP in litigation in an EU member state (and presumably before its Unified Patent Court) without first registering the SEP with the Competence Centre and engaging in the conciliation process established by the regulation.

The disclosure requirement alone may be considerable. Under the rules of large standards-setting organizations such as the European Telecommunications Standards Institute, members are already obligated to disclose their SEPs. Even though it may be best practice to encourage or foster SEP disclosure, very few SDOs have a mandatory SEP disclosure policy.3 If the proposed regulation is adopted, a member of an SDO with no SEP disclosure requirement will need to review its patent portfolio to determine whether it holds SEPs related to those standards.

Even for the SDOs with mandatory SEP disclosure policies, the policies only apply to their members. However, it would appear that the requirement under the proposed regulation would extend beyond SDO members to all SEP holders, meaning all companies seeking to assert their SEPs regardless of whether they have been involved in the development of a standard.

The proposed regulation is strongly opposed by patent licensors, who argue that their fundamental ownership rights in their patents are being curtailed. They assert that filing a patent infringement lawsuit is both a fundamental right and critical to getting licensees to agree to pay royalties. Their argument is that the value of their property will be decreased because they will be compelled to accept the royalty rate established by the Competence Centre.

This state of affairs would be, in their view, equivalent to technological rent control. A property owner suddenly finds that its apartment building’s rents are controlled by a local municipal board and tenants can remain in their apartments in perpetuity, with rent increases set by the board and not by arm’s-length negotiations between landlord and tenant. (On the other side of the argument, rent control is an enormous benefit to renters.)

This is perhaps an oversimplification of the situation. Detractors of the proposed regulation have provided detailed and sophisticated arguments as to how patent owners would be deprived of their fundamental rights. Some commenters have argued that requiring patent holders to register their SEPs and limiting the ability to assert patents would violate the TRIPS Agreement (Trade-Related Aspects of Intellectual Property Rights Agreement), the provisions of EU treaties on property rights, and the national laws of several EU countries.4

The proposed regulation calls for SDOs to notify the Competence Centre when they publish a new technology standard. There are thousands of technology standards published each year. In addition, organizations often publish errata or addenda, which may contain normative requirements; presumably a notice would also be required when such documents are published.

It is unclear how the actual published technical specification would be made available to the Competence Centre. While it may not appear to be a large burden, this could present issues with SDOs that only publish their specifications to their members. It is unclear whether the EC will require that the technology specifications be made public. If the obligation to disclose SEPs is imposed on all purported SEP holders (not just members of the SDO that developed the technical standard), it is likely that the final regulations would need to require that technical standards be made public when submitted by an SDO.

Lastly, it is unclear how the determination of an aggregate royalty would affect standards development timetables given (1) the lengthy, difficult, and contentious process of setting royalty rates and (2) the extent to which this eventually will be an opt-in regime for determining aggregate royalties. The EC has indicated that its intent is not to slow down the standards development process—indeed, one of the goals of the proposed regulation is to foster the speedy commercial introduction of new standards-based products and services.

Many comments were filed during the public comment period. Apple, Inc. filed comments arguing that many criticisms of the proposed regulation were not grounded in reality and that non-judicial essentiality determinations could provide useful information (i.e., the essentiality checks managed by the Competence Centre in the proposed regulation). Apple concluded by encouraging the EC to continue its efforts to increase fairness in SEP licensing.

The American Intellectual Property Law Association (AIPLA) filed comments critical of the proposed regulation. AIPLA’s comments can be said to fall into four areas:

  • the proposed regulation would violate international and European laws (e.g., the TRIPS Agreement);

  • the proposed regulation is overly broad;

  • the proposed regulation will require more resources than planned; and

  • the transparency enabled by the proposed regulation will not achieve the results envisioned.

AIPLA also argues that the proposed regulation has far-reaching impacts and will affect SEP holders throughout the world. While much of its criticism is valid, AIPLA may have gone a bit too far in its rebuke of the purpose and potential impact of the proposed regulation. Its comment states, “[w]hile the EC has identified a few high-level concerns with SEP transparency and FRAND licensing efficiency, i.e., which patents are SEPs and what terms are FRAND, such concerns are largely expressed as unsupported conclusions and speculation.”5 The existing framework for licensing SEPs is inefficient, and to diminish the concerns raised by the EC is probably overstating the point when AIPLA’s real argument is that the proposed regulation goes too far.

I would argue that the EC’s concerns are well-founded and its solutions would be transformative. However, reasonable people will differ regarding whether the proposed regulation is necessary or even lawful. To its credit, the proposed regulation points out that other countries have adopted or are exploring corrective solutions6 to the system of patent licensing that currently exists.7

My understanding is that the SEP regulation is still on schedule for adoption in 2024 even though EU parliamentary elections are scheduled for mid-2024. For those concerned about the impact on SDOs, my understanding is that the goal of the proposed regulation is not to delay the adoption of standards (quite the opposite, in fact) and that the Competence Centre may be able to provide information or assistance if there are problems or difficulties complying with the SEP regulations.

Additionally, there is apparently a misunderstanding about the amount of staffing the EC expects to put in place if the proposed regulation is adopted. The 12 employees mentioned in the proposed regulation represent the initial staff needed to organize the registry, which will grow to something like 30 employees when operational.

The EUIPO will handle this part of the administrative function, which DG GROW believes should be in its wheelhouse. However, the validation of the SEPs (the technical essentiality check) and the conciliation procedures will require outside experts, who will be hired by the Competence Centre. The centre may establish a roster of qualified personnel (for example, patent attorneys) who would be hired to conduct the essentiality checks on the purported SEPs.

Even with the roster of outside experts, the ability to perform technical essentiality checks in a uniform manner may prove challenging without the aid of sophisticated technology tools. Much of the credibility of the Competence Centre will turn on the accuracy of these essentiality checks.

One recurring concern expressed in the public comments regarded the EUIPO’s ability to manage the essentiality checks and the availability of skilled attorneys due to anticipated conflicts. Artificial intelligence (AI) tools offer the promise of reducing the staffing burden under the proposed regulation and creating a standardized way for patent professionals to perform a technical essentiality check. AI could help bridge the gap and improve the credibility of the essentiality checks.

However, AI by itself will not be able to address this task—it will also require professionals to provide their expertise to produce the best results. This combination has the promise of gaining industry credibility and withstanding judicial scrutiny.

Over the past five years, I have been involved in creating an AI tool specifically designed for identifying and validating technical essentiality. At its core, this tool uses multiple machine learning models that are trained on various different technology domains. (In order for the system to best understand what a particular technical specification means, it needs to be trained using information associated with that particular technology field because technical words in one field have a different meaning in another field.) An effective system also needs to be able to understand the meaning of each patent claim and each element of a patent claim.

Using this approach, our AI tool matches both the patent claim and its constituent elements to specific sections of a technical specification, creating a virtual claim chart for a patent professional to check and validate. The scoring algorithm, which determines the closeness of a match, was calibrated by examining hundreds of known SEP matches. This baseline unique algorithm can be improved by an individual evaluator via feedback, but its improvements are not applied system-wide, so the baseline remains intact across evaluators. This AI-based system emulates how patent professionals perform matches, taking into account the meaning of the words in the technical specification and the meaning of the words in the patent claim and elements (as well as a patent’s specification language).

Over the five years of developing this system, we have had several breakthroughs, including discovering that we had to train different models for different types of technologies to get good results. The promise is that AI tools will play a significant role in helping to improve the credibility, efficiency, and predictability with which SEPs are identified and disclosed.

Arnold Brown is an attorney who has worked with technology standards organizations and technology companies that participate in technology standards. He was instrumental in developing Daystrom Solutions (daystromsolutions.io), an artificial intelligence solution for SEP patent discovery. He is a partner at Seyfarth Shaw, LLP. He would like to acknowledge the comments that Carter Eltzroth made to an earlier version of this article. This article is not legal advice, is provided for informational purposes only, and represents the views of the author and not the views of any other individual, organization or firm. The author is not licensed to practice law in the European Union.

Arnold Brown is an attorney who has worked with technology standards organizations and technology companies that participate in technology standards. He was instrumental in developing Daystrom Solutions (daystromsolutions.io), an artificial intelligence solution for SEP patent discovery. He is a partner at Seyfarth Shaw, LLP. He would like to acknowledge the comments that Carter Eltzroth made to an earlier version of this article. This article is not legal advice, is provided for informational purposes only, and represents the views of the author and not the views of any other individual, organization or firm. The author is not licensed to practice law in the European Union.

Close modal
1

Proposed Regulation, Explanatory Memorandum page 12. “It does not apply to SEPs that are subject to royalty-free intellectual property policy of the SDO that has published the standard.”

2

See “HEVC Royalty Stacking and Uncertainty Threaten VVC Adoption,” published on ipwatchdog.com by Craig Thompson, August 13, 2021. Also, see C. Eltzroth and J. Cary, “Fostering of Patent Pools Covering Cable Technology: Lessons from VVC Pool Fostering,” a technical paper prepared for SCTE (2021), available at https://ssrn.com/abstract=3949545.

3

The EU already has indicated that it is best practice for purposes of EU Competition Law that a standards organization require the disclose of SEPs. See Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements C(2023) 3445 final (1 Jun 2023), para 457.

4

The EC argues that the proposed regulation is lawful, claiming “Limitations on the exercise of IP rights are allowed under the EU Charter of Fundamental Rights, provided that the proportionality principle is respected. According to settled case-law, fundamental rights can be restricted provided that those restrictions correspond to objectives of general interest pursued by the EU and do not constitute, with regard to the aim pursued, a disproportionate and intolerable interference which infringes the very essence of the rights guaranteed.” Proposed Regulation, page 10 (Explanatory Memorandum, Impact Assessment: Fundamental rights). The Commission cites several cases in this line of reasoning including: Judgment of the Court of Justice of 13 December 1979, Hauer v. Land Rheinland-Pfalz, C-44/79, EU:C:1979:290, para. 32.

5

AIPLA comments dated August 10, 2023 to the Proposed Regulation at page 2.

6

The proposed regulation cites initiatives in Japan, South Korea and Singapore, as well as a withdrawn proposal in the United States to improve the current framework of patent licensing (page 4). Japanese Patent Office Guide to Licensing Negotiations Involving Standard Essential Patents; South Korean Guidelines on unfair exercise of Intellectual Property Rights; Singapore’s Competition & Consumers Commission Guidelines on the treatment of Intellectual Property Rights.

7

The current framework is a mix of patent pools, patent licensing packs (quasi-patent pools), non-practicing entities, and individual practicing company patent licensing programs (together with catch-and-kill patent companies and various other players that assess, research, buy and sell SEPs).

Proposal for a Regulation of the European Parliament and of the Council on Standard Essential Patents COM(2023) 232 final (27 Apr 2023), referred to in endnotes as “proposed regulation.”
Public comment of AIPLA filed on August 10, 2023 to Proposal for a Regulation of the European Parliament and of the Council on Standard Essential Patents COM(2023) 232 final (27 Apr 2023): Re: The Proposal for SEP Regulation published on April 27, 2023
.
Public comment of Apple, Inc. filed on August 10, 2023 to Proposal for a Regulation of the European Parliament and of the Council on Standard Essential Patents COM(2023) 232 final (27 Apr 2023): Submission in Response to the European Commission’s Consultation Regarding Its Proposed Regulation on Standard Essential Patents
.