Power, cooperation and Standard Essential Patents – Reviewing the European Commission’s bid for reform

The European Commission’s proposal to upend the current system for Standard Essential Patents (SEPs) have prompted many reflections and a good amount of criticism. One perspective that has been woefully missing – in the original proposal and the ensuing reactions to it – is the fact that the market for SEPs is international and that the rules governing SEPs aren’t decided in Europe alone. Europe is still punching above its weight in some important aspects of the “SEPs system”. Standards are of growing importance for technology development, economic growth, and international power, and Europe should therefore be careful to protect its advantage. Right now, it isn’t.

The market for SEPs has two distinct European dimensions. First, there are still significant contributions to cellular technology and standards (cellular technology represents the dominant part of the SEPs market) from European firms. Of course, Ericsson and Nokia are two significant contributors, but they are far from alone. There are many more European firms among technology contributors and holders of patents that are essential to a standard. In Europe’s ICT technology sector, development and manufacturing are actually quite distributed across countries, with activities scattered around Europe and many countries having a good performance in ICT royalties.

Second, European institutions (e.g., standard-setting organisations like ETSI and courts) play an out-sized role for developing standards and resolving disputes between licensors and licensees over the contractual terms for using SEPs. The global jurisprudence that has evolved is significantly influenced by European institutions. For instance, the 2015 decision by the CJEU on the process for determining FRAND (Fair, Reasonable and Non-Discriminatory) conditions – notably a case between two Chinese firms – have been reflected by courts in non-EU countries. Moreover, Europe’s influence on global jurisprudence could grow with the recent establishment of the Unified Patent Court. The body of competence and experience that has been built up in Europe, and the integrity of the institutions dealing with SEPs issues, should be treated as a competitive advantage. In the emerging global competition for setting standards, it is in Europe’s interests to have technology firms highly invested in the region’s institutional framework for standards and patents.

What has changed over the last three decades is that the uses (or implementation) of cellular technology have globalised. Even if there are many SEP licensees in Europe – many of the companies that are active in the SEPs market are both licensors and licensees (illustrated, for instance, by this summer’s cross-licensing agreement between Ericsson and Huawei) – the reality is that cellular technology implementation has largely moved elsewhere. Market competition makes it less affordable to produce inputs for or assemble handsets, routers, towers, computers, and other telecom devices and equipment in Europe. European ICT firms have rather been focusing on upstream parts of the technology value chain. This is where they have specialised.

Therefore, the rules governing SEPs need to have a stronger international orientation, and policies that are developed for standards and patents have to accommodate the global reality of policies and market behaviour. SEPs are no longer an intra-European affair. While much can be said about the Commission’s proposal, it can hardly be accused of putting too much emphasis on the international nature of today’s technology market. In fact, that part is almost completely missing in the proposal.

This is surprising. Foreign attempts to assert power over SEPs are growing. Late in 2022, the European Union filed a complaint at the World Trade Organisation over China’s use of anti-suit injunctions and policies to bar European firms for protecting the cellular SEPs in foreign courts. As an ascending economic power, China wants to have a greater influence on cellular patents, standards and SEPs, and largely wants decisions over licenses and access to patents in China to be determined on Chinese terms alone. Indeed, Beijing wants Chinese implementers of SEPs to pay less for accessing these patents.

China can make life difficult for foreign SEP holders in China, but it cannot command the outcomes of the international market – which, of course, is crucially important for China’s international ICT firms like Huawei. Rightly, the EU reacted against China’s practice, and have argued that it violates the integrity of patents. To use the Commission’s own language, China’s SEPs measures are “effectively depriving European technology companies of the possibility to exercise and enforce the rights that give them a technological edge”.

Europe is not following the Chinese example of meddling with and politicising SEPs – at least not in detail. However, the spirit of the Commission’s proposal builds on the same desire to have more political control over SEPs, and to redistribute revenues from SEP holders to SEP implementers. The underlying assumption behind the Commission’s proposal – that the SEP system favours SEP holders at the expense of SEP implementers and needs to be rebalanced – is a central feature of China’s thinking, too.

The European Union plans to use other instruments for changing the character of SEPs. It has proposed a mandatory conciliation process between licensor and licensee before they go to court for a legal resolution. Even if the conciliation result is non-binding, it is motivated by arguments that are about reducing the royalty expenditure for SEP implementers. It is also a strange proposal in light of the Commission’s argument that the risk with the current system is that implementers won’t use a standard because of patent complexities. This view was contradicted by the empirical assessment of SEPs done at the request for the Commission – which said that the evidence is “inconclusive” and that “it does not appear that the observed challenges in SEP licensing are sufficiently severe as to systematically discourage potential contributors from participating in standards development, or discourage potential implementers from creating products that use technology standards subject to potential SEPs.” If anything, a mandatory conciliation with non-binding results will disincentivise the use of standards because it will take a longer time to agree on a price when there is a dispute.

Additionally, the European Commission is setting out a process to negotiate the aggregate royalties that are reasonable for SEP holders – a system of “pre-market” bargaining that, strangely, is not clear about whether it is for EU SEPs holders and implementers or for everyone. Obviously, it does not make sense to have a pre-market bargaining for EU holders and implementers only (again, the technology market is global). If that is the intention, why would holders and implementers – assuming pre-market price commitments can come to meaningful results (spoiler alert: recent attempts at commitment statements haven’t been leading to results that are of much or fast help) – accept the EU result on aggregate royalties and not take their SEPs business elsewhere? There are strong efficiency arguments against such a policy model: the SEPs market should reward firms with the best technology. More fundamentally, disabling market competition between technology suppliers before the market is known, will impact negatively on the incentives to innovate and actually contribute technology to a standard. If companies have valuable IP and believe it would be demanded even if it isn’t declared essential to a standard, why would they contribute to a standard and cap royalty revenues? It was for situations like these that SEPs evolved in the first place. Just as in the case with China, one could argue that such measures are “effectively depriving European technology companies of the possibility to exercise and enforce the rights that give them a technological edge”.

Companies who believe their SEPs aren’t respected or valued according to market terms can respond in several ways. The general problem with the politicisation of SEPs is that the big SEPs holders will likely rebalance their patent portfolios, and gradually increase the share of patents that will be outside the remit of the new SEPs system. If they know they have valuable technology, they can avoid declaring it essential to the standard. The result is a declining value of the standard in the first place, forcing more companies to invest in their own upstream technology.

More specifically, rather than waiting for the outcome of the conciliation process or accepting an aggregate royalty income in Europe, holders can take their business to other jurisdictions. An EU-based aggregate royalty decision or estimation has no legal standing in US markets or in US courts, for instance. The SEPs market is international and the major ICT companies, representing a dominant part of the legal SEPs disputes, do not need to use an EU court or an EU model for settlements.

There is a second reason for being surprised about the absence of an international understanding in the Commission’s proposal. Why has it not sought to address these issues internationally and shape a development that would be effective also outside of Europe? The fact is that the Commission’s proposal took many by surprise. It has been known for some time that the Commission wanted greater transparency and more essentiality checks of SEPs. Fine. But it surely was not known that it wanted to establish a new quasi-price regulation and move to a system where aggregate royalties should be negotiated in advance – before the market dynamics of discovery and competition had worked their way. Governments in other countries reacted with surprise, too.

The EU’s relation with the US is of particular interest. Standards and IP are important components of the work in the Trade and Technology Council. A Strategic Standardisation Information (SSI) mechanism was established at one of the earliest TTC meetings, building on the working group on tech standards. Both sides reconfirmed the importance of this work at the Paris summit in 2022, and followed up on it at the TTC meeting in Sweden in 2023. The purpose? To better defend the technology and standards interest of Europe and America. It would seem obvious that the EU could have deepened its work with the US to find a united approach to address common and real problems with SEPs. However, it didn’t.

Meanwhile, the US offered its own experience of attempting to change the balance between SEP holders and implementers. The results have not been altogether impressive. In 2019, the Trump administration issued a new statement about guidance for remedies in SEPs and in FRAND disputes. In 2021, the Biden administration withdrew that 2019 statement because it thought it tilted the balance between SEP holders and implementers in favour of the former. Later the same year, a new statement was drafted by the US Patent and Trademark Office, the National Institute of Standards and Technology, and the US Department of Justice – but this proposal was criticised for going too far in the other direction. One core argument against it was that it would make it harder for US firms to defend their patents from foreign infringement. Eventually, the three agencies pulled the statement, basically leaving it again to the market and courts to figure out licensing arrangements and settle disputes.

A couple of observations can be made of American efforts on FRAND and SEPs. First, it is very difficult to provide strong policy guidance on what prices should be paid for licenses because the balance between SEPs holders and implementers is delicate. Any attempt at regulating the price of licenses will face strong resistance and every price regulation will come with negative effects. Second, it is important to provide solid evidence and consult deeply with industry before changes are made. Bad proposals are embarrassing and inspire other countries to take similar types of measures that injure US interests (China’s anti-suit injunctions, for instance, which also affects US patents). Third, policies will have to accommodate the international market: a US only reform would have negative effects on the status of US agencies and courts for standards and the protection of patents.

The conclusion is that both Europe and America have an interest to consult deeply with each other before making any move on SEPs. Europe’s interest is even stronger because of the out-sized role it plays for cellular standards and SEPs disputes. Moreover, Europe isn’t as much of a frontier technology economy that it used to be. The natural market pull of the EU is lower than before and companies are rather looking elsewhere for coordinated processes on new technology standards. Europe has spent a lot of energy regulating new technology sectors. Squandering its global advantage in cellular standards and SEPs would be incredibly short-sighted and erode Europe’s international power.