Questions Abound On EU Plan For New Essential Patent Rules
By Ryan Davis · (May 1, 2023, 10:35 PM EDT)
The European Union's call to create a new body to set royalty rates for standard-essential patents before lawsuits could be filed has drawn a skeptical response, with experts questioning how the plan would work and whether it would achieve its goal of streamlining disputes.
The European Commission released its proposal on Thursday, saying the move is aimed at bringing more transparency and predictability to a complex area of the law that has led to heated disputes and litigation.
When patents must be used in a product in order for it to operate on industry standards like Wi-Fi and 5G, the patent owner pledges to license them on terms that are fair, reasonable and nondiscriminatory, or FRAND. However, what constitutes such a rate often spurs legal clashes, and the EU proposal could reshape them in unpredictable ways.
Tom Cotter, a professor at University of Minnesota Law School, said that since rates are now set through litigation in courts around the world, which can lead to inconsistent results and forum shopping, "there is certainly is a lot of discussion around the world about the need to come up with a better, more efficient system for determining FRAND royalties."
"There's a lot to be applauded in trying to do that," he said. "But I'm not sure that this particular proposal is going to go forward as is because of the many objections that people have raised to it."
The European Commission called for a new "competence center" to be established within the European Union Intellectual Property Office, or EUIPO, which would create a central registry of standard-essential patents in force in the EU and conduct checks of whether the patents are in fact essential.
The proposal also calls for the center to operate a system to set a global FRAND rate for the patents when the parties cannot agree, with such a determination becoming a requirement before litigation could be filed in the EU. The commission said the nonbinding rate would be set within nine months, and would "limit the duration of otherwise protracted licensing negotiations."
The many questions spurred by the idea of creating an entirely new framework for standard-essential patents disputes have focused on the role of the EUIPO, whether the new body could meet the task being set out for it, and what would happen once a rate was set.
The EUIPO currently only registers trademarks and designs and has no involvement in patents, so its central position in the process is puzzling to many observers.
Marianne Schaffner of Reed Smith LLP's Paris office said that she found the proposal "quite concerning" since the key role is given to "an office which has no competence in patent law."
Moreover, she said that requiring patent owners to register their patents with the new body, and get determinations on whether they are essential and what a FRAND rate would be before litigation could begin, "adds so much complexity, and it slows down so much the possibility of having a decision from a court, that it's not business-minded to me."
While the proposal envisions the new body coming up with a FRAND determination within nine months, "I think that's very ambitious," said Andrew Sharples of the law firm EIP's London office. "To do a meaningful analysis in that time is going to be difficult, I think."
When the new body does set a FRAND rate, the fact that it would not be binding raises questions about what the parties are supposed to do with that information, attorneys said.
The commission "appears to have realized that the nonbinding nature just facilitates more delay," Sharples said. As a result, he noted that the proposal includes language stating that if one party commits to abide by the determination, it can terminate the process and file suit, putting pressure on the other side.
"They're trying to put in place incentives for parties to actually abide by their ruling, but query whether people will," he said, especially since there's no way of knowing at this stage what kind of rates the new body will set.
The EU aim for the proposal appears to be to "reduce litigation by giving the parties some idea of what a FRAND rate would be," said Amol Parikh of McDermott Will & Emery LLP. "But it's a nonbinding rate, so I'm curious to see if the courts will go through a similar analysis and come up with a similar rate."
In addition, Parikh noted that much about the proposed new process remains unclear, including who would be hired by the EUIPO to make the determinations, what experience they will have and what types of decisions they might make.
"Those are the types of questions that stakeholders are going to have to determine whether the regulations are workable in practice," he said.
Brian Pomper, executive director of the Innovation Alliance, whose members include owners of standard-essential patents like Qualcomm and InterDigital, said that a new body to determine licensing rates is "really going to hurt the technology developers."
When companies create inventions that are essential to industry standards, then are told, "'you're not going to be able to license this on the open market, you are going to have to take the price that we are going to be willing to allow you to charge,' that's a not a recipe for technological success," said Pomper, a partner at Akin Gump Strauss Hauer & Feld LLP.
He said the proposal appears driven by the concerns of companies like automakers that implement standards in their products and want to pay lower prices to license patents. "I can tell you ... it's not the patent creators and innovator companies that are going to the EU and saying, 'You need to set up a system to set prices in our marketplace,'" Pomper said.
In contrast, the proposal was welcomed by Alex Moss, executive director of the Public Interest Patent Law Institute, a group that says it's dedicated to ensuring that the patent system promotes access to technology for the public's benefit.
The proposed new system would provide more transparency about standard-essential licensing information, which is now largely confidential and can't be accessed by anyone other than patent owners except through litigation, she said.
"So right now, they have an enormous information advantage and that's really how this changes the game," Moss said. "The value of your patent shouldn't reflect an information asymmetry."
In addition, she noted that standard-essential patent litigation is extremely expensive, so the possibility that the new body could reduce disputes would free up money to use for salaries or research and development, to the benefit of both sides.
Others said if the system were to be adopted, it's not clear how it could impact the behavior of patent owners and potential licensees who implement standards in their products.
"It might not have the desired effect. It might simply result in either implementers or owners going to other countries to try to get determinations," rather than dealing with the framework in the EU, said Cotter of the University of Minnesota Law School.
Likewise, Reed Smith's Schaffner described the proposal as "a gift that the EU commission is making to the U.K." Since the courts in that country have said they can make FRAND determinations without all the steps being contemplated in Europe, the U.K. would likely become a more appealing litigation venue if the policy took effect, she said.
For now, it's far from certain that the European Commission's proposal will become a reality. It must be approved by the EU countries and the European Parliament to take effect and will likely face fierce lobbying. "If this is ever implemented, I imagine it's going to look much different than the proposal," said Parikh of McDermott.
"There's a lot of uncertainty and at least from many quarters, I think, some degree of unhappiness with the current proposals," Cotter said. "So that makes me at least somewhat skeptical that it is going to be adopted in its present format."
