Essential patents: the Communication of the European Commission on SEPs

Patents protecting a specific aspect of a technical standard and being essential for the application of a technical rule issued by a Standardization body are called SEPs (Standard Essential Patent). As a consequence, in case of a real SEP, essential for the application of a standard (we will focus on this later), the one using that specific standard has to ask and obtain a licence for the usage of the related SEP. Standards are always more essential to create products able to communicate with each other. Let’s just think to the multitude of electronic devices and also to the IoT (Internet of Things) and to robotics. During the last few years, people jurisprudentially tried to find new adaptations permitting on the one hand the protection of the SEP holder and the payment of royalties and on the other the safeguard of the undertakings needing a SEP licence to survive on the market. A patent is SEP when its holder declares it to a SDO (Standard Developing Organization). Those declaring that their patent is a SEP should at the same time undertake to give it in licence at FRAND (Fair, Reasonable and Non-Discriminatory) conditions. In practice, the SEP holder verifies the presence of a product using a precise standard on the market and consequently asks the producer or seller to sign a licence contract at FRAND conditions. Theoretically, on the basis of the general principle of the subject, the holder could also bypass this request and act against the user of the standard, sue him/her or worst, start a precautionary procedure. To avoid this (disastrous) second hypothesis and the risk of abuse of dominant position, the jurisprudence created some principles that we can find in the leading case Huawei v. ZTE (C-170/13 of 7.16.2015), a point of reference for all SEP questions. The Court of Justice decided that, according to art. 102 TFEU, the SEP holder does not abuse of his/her dominant position if the condition below take place before starting an infringement action against the user of a technology protected by SEP.

-          The SEP holder warned the user of the presumed forgery pointing the infringed patent and specifying how it is counterfeited;

-          After the presumed counterfeiter manifested the will to draw up a licence contract at FRAND conditions, the SEP holder send him/her a concrete offer of licence written at FRAND conditions;

-          Despite the above, the presumed counterfeiter did not follow up the offer with diligence according to the commercial uses and in good faith.

The mechanism seems fair and efficient but there are many critical issues. SEPs are not like other patents. The contractual freedom in this sector is very limited, not to say null. The holder of an essential patent can chose if declaring it a SEP offering it at FRAND conditions but the user cannot choose if using this standard (unless stopping to produce that product and leave the market) and is forced to accept any condition proposed by the SEP holder. Many factors cause the difference, and the risk of iniquity, of treatment of the licences. Here some examples.

1. SEP formation

A patent is defined essential after a self-declaration of the holder who declares that that patent is necessary and essential for the application of a standard and this declaration makes the patent available to licences at FRAND conditions to those willing to use that standard. This declaration, that seems to favor the user because assures him/her the approval of the licence at FRAND conditions, puts him/her in a difficult position because the first and immediate consequence is to qualify him/her “a priori” as a counterfeiter. As already said, the holder self-declares a SEP without any control by an authority or a commission: no one verifies that those patents are part of that standard and are essential to that application. One could to reply that, like for every other patent, it is up to the presumed counterfeiter to verify if the technology used is protected by a title of industrial property and of any interference, but for SEPs this study may be particularly hard since there are many patents declared essential for a standard and this analysis could be almost impossible and really expensive.

2. The heap of a same standard SEP and the necessity to use more standards

A SDO can register tens of thousands SEP declaration for the same standard and a producer may need to use different standards for a single product. This means that an undertaking may need to obtain several SEP licences multiplying the above problematics. There is also another aspect to consider more practical-commercial than legal but still important.

3. The position of the seller

The holder of a SEP often addresses to a seller rather than a producer for strategic reasons or for commercial possibility or technical-legal matters. The difficulties in verifying the essentiality of a patent and its presumed forgery, which are very high for a producer, are even more and sometimes paralyzing for a seller. Just think to electronic devices, even a television, containing integrated circuits, chips and tens of components purchased from thirds without the possibility to know their technology. The easy syllogism of the SEP holder applies also to them. If someone uses a component which needs a standard to function and if there is a declared SEP for that standard then s/he needs to obtain a licence for that SEP. But how can the seller know and verify if this is true? In some cases, it could be abstractly possible even with some technical problems, but sometimes s/he would not be allowed to because s/he will not have access to the technology inherent in many components. In that case the seller can sign blindfolded, expose him/herself to the risk of a legal action or stop selling the product. It seems that addressing to a presumed counterfeiter saying that s/he counterfeits only for the use of a standard for which a patent was declared essential is in contrast with the condition of “specifying how it should be counterfeited” because this specification is a sort of tautology.

4. The FRAND concept

No one really knows what the acronym FRAND means. The SEP holders send their proposal of licences (I have read tens of them from the most important SEP holders)where the royalty is indicated based on the turnover or a fix amount to be paid for each item sold specifying that this request is FRAND but no one furnishes a parameter of reference allowing to verify that it is true. Obviously, they refuse to show, even partially, other licence contracts signed in their favor which could demonstrate that that royalty really is FRAND.

As a consequence the presumed user of the SEP is forced to accept the royalty proposed as FRAND as an act of faith. All this without considering that contracts are often penalizing even from other points of view and the intervention margin granted to the user are very limited, not to say null. Again, this practice seems in contrast with the principles of the Huawei case. A user “manifesting the will to draw up a licence contract at FRAND conditions” should have the right to have the proof that the conditions proposed are really FRAND, on the contrary the negotiation inevitably  reaches a deadlock. It is quite obvious that time does not play in favor of the SEP holder. The presumed counterfeiter will not immediately comply to the proposal since, lacking of the parameters of reference, s/he would not be able to evaluate it efficaciously.

5. The heap of FRAND licences

Even if the proposal of licence really is at FRAND conditions, fair and sustainable, one should keep in mind that it would not be the only one. The producers of electronic devices often need more than one licence. In this case, a FRAND licence (and royalty) can became unacceptable if, added to many other royalties, each of them FRAND, reaches commercially unacceptable amounts. The SEP holder does not even think about it. Each of them works individually and autonomously beside other holder of essential patents.

6. The difference of treatment

As mentioned above, licence contracts are not public and the user of that standard cannot know if other people contacted at the same conditions. On the same market, it happens to find undertakings to which were required licences and other not. The criteria on the basis of this difference is at the SEP holder complete discretion. This affects negatively the market because some undertakings would necessarily need to increase the cost of their product, forced to pay the licences. The other undertakings instead, not having any added cost can sell the same product at lower costs. The distortive effect is even more visible in case of big undertakings which, a part from having SEP, create, directly or indirectly, also devices using that standard. These undertakings have the advantage of being able to draw up contracts with each other and one uses the SEP of the other without paying any royalty and maintaining a lower cost of production in comparison to the one of other undertakings bearing the cost of their licences.

Even being a good starting point, the Huawei guidelines are insufficient to solve the problem arising from SEPs.

In 2016, the European Commission had started a consultation on this topic and many of the critic point mentioned above sprang from there. Finally, on November 29, 2017, it issued the COM Communication (2017) 712 where it underlines the necessity of a new and different approach to SEPs.

The European Commission evaluation on SEPs

First of all, the Commission notices a lack of transparency and invites the SDOs to organize clear, easily accessible databases containing detailed pieces of information on declared essential patent, including their “status” and their real extension following the fulfillment of the granting procedure.

Many patent applications are declared SEP but the declaration should be confirmed at the grant of the patent since its initial protection could have been limited. The SEP holders should be clear concerning which part of the standard is protected by their monopoly.

The Commission underlines that the declaration of SEP made by the holder constitutes “de facto” a presumption of essentiality of the patent easing the holder’s judgement because in practice it changes the duty of proof because the presumed counterfeiter should demonstrate the non-interference and non-essentiality. In this sense the Commission considers appropriate an evaluation of essentiality from an independent body whose intervention could be requested both by the holder of the patent and the possible user in order to preliminarily clarify if the SEP is really linked to the standard and to which part of it. This evaluation would be useful during negotiations and also in case of a case.

Finally, there is the hypothesis of the introduction of a tax that SEP holders should pay to confirm their declaration. However, all these measures would be introduced gradually and for the past only for the “key standards”

1The European Commission evaluation on SEP licences

One of the key points concerning licences still is establishing when a licence is FRAND.

The Commission suggests the creation of a series of fundamental points on the FRAND concept and the discussion among operators to establish the right royalty for each particular case since a single solution “one-size-fit-all” is not possible. In particular, the technical sector and the real economic contribution offered by that precise SEP to the product should be taken into consideration.

Moreover, and this is a very important aspect, a SEP would never be considered by itself, but the parties will take into consideration “a reasonable aggregate rate for the standard”. The goal is establishing a reasonable “maximum cumulative rate” to the use of that standard in its totality.

It is assumed the creation of “patent pools” or platforms reserved to licences to create a sort of “one-stop-shop” through which purchasing licences of a standard being fully aware of the total cost of that standard independently from the number of patent related to it. This solution does not solve the problem of the necessity of using more standards in a single product but it is an important step forward.

The Commission considers important the formation of an accessible general knowledge on the licence conditions applied to this sector and intends to bring together a group of experts at the aim of studying the situation and furnishing clear information on FRAND licences.

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The European Communication evaluation on SEP cases

Litigations on SEPs are increasing and for this reason, since the lack of clarity on this subject, many users could be pushed to accept a licence even at non-FRAND conditions to avoid the risk of a legal litigation.

The Commission considers the principles expressed in the Huawei case a good starting point but it underlines the necessity of a collaboration among SEP holders, users, Courts and other parties involved in the decision procedures, such as arbitrator and mediators, to develop specific methodologies that could take to an efficient litigation resolution system specific for this particular type of patent. Turn to ADR is considered particularly useful and it should be envisaged in the SDO platforms themselves. There is also a mention to the importance of collaborating also with open source developers to establish the solution to follow in case of an interference with a SEP.

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To conclude, the Communication of the COM Commission (2017)712 represents a good starting point for an urgent discussion and awareness.

Even if precise rules are still missing, we hope that they could be issued. It is obvious now that SEPs need a special treatment in comparison to non SEPs because their very nature, at the “self-declared” status, that imposes caution to avoid an abuse of dominant position and a brake to free competition.

Waiting for the next interventions, the Judges have now at their disposal, next to the Huawei decision, the evaluation of this important Communication that makes them again the main characters of a change and invites them at taking into consideration a number of critic aspects every time they would decide about a case having as object a SEP.