New EU proposals on FRAND patent licensing aim to resolve disputes out of court

Mark Marfé and Sarah Taylor of Pinsent Masons said the European Commission’s plans for a proposed new EU regulation on standard-essential patents (SEPs) (78-page / 808KB PDF) may lead businesses to evaluate their options concerning the most appropriate forum for resolving SEP licensing disputes.

SEPs are patents that protect technology believed to be essential to implementing a technical standard. In other words, you cannot operate a standard compliant device without necessarily using the patented invention. Standards are developed by businesses working together under the auspices of standard-setting organisations (SSOs), such as the European Telecommunications Standards Institute (ETSI), which oversees the development of communications standards vital to many businesses.

SSOs like ETSI require SEP rights holders to make SEPs available for others to use by way of a licence on fair, reasonable and non-discriminatory (FRAND) terms. Disputes on what are FRAND terms often arise in the context of SEP licensing negotiations. Litigation can then follow if the parties are unable to agree. Disputes have arisen in many jurisdictions including the UK, Germany and France, as well as in the US and China.

The European Commission’s proposals aim to improve transparency and predictability in SEP licensing, improve fairness and efficiency in the licensing process, and limit costs. To do this, it hopes to facilitate FRAND negotiations between rights holders and technology implementers and provide for out-of-court settlement of disputes.

Underpinning these objectives are proposals that encourage SEP holders to disclose the patents they consider to be ‘essential’ to the implementation of technology standards via a centralised register, which is to be set up and maintained by a new and yet to be established ‘competence centre’ within the EU Intellectual Property Office (EUIPO). There are also further plans for a new arbitration process to steer disputing parties away from court proceedings.

SEP holders that fail to register the patents they consider standard essential in a timely manner will not be able to claim damages or collect royalties on the SEPs for the duration of the delay. The competence centre would be responsible for undertaking essentiality checks on a sample of registered SEPs annually.

SEP holders will also be required to provide details of FRAND licensing terms and policies, including royalty rates and standard terms and conditions of FRAND licensing, with the aim of helping prospective technology implementers to assess the costs and SEP holders calculate expected returns. Rights holders would be expected to keep the information updated.

Taylor said: “While the proposals aim to encourage both SEP holders and implementers to innovate in the EU, many have criticised them for placing a considerable burden on patentees. Notwithstanding this, as FRAND litigation is renowned for being lengthy and expensive, greater market transparency could benefit both SEP holders and implementers in license negotiations. In particular, SMEs, including those which operate in the Internet of Things space, will likely be assisted by such increased transparency.”

A panel of conciliators with relevant technology expertise, appointed by the EUIPO-based competence centre, will administer a new conciliation process designed to help SEP holders and technology implementers agree a FRAND license without going to court.

Engagement with the process is heavily incentivised under the proposals. SEP holders would be prohibited from initiating infringement proceedings without first engaging with the conciliation process, while technology implementers would similarly be prohibited from requesting that a court in an EU member state determine the terms and conditions of a FRAND licence if they did not first engage with it.

Despite this, the parties would be free to choose whether they wish to engage in the conciliation process and commit to comply with its outcome. However, if one party committed to accepting the outcome of the otherwise-non-binding procedure and the other did not, the former would be entitled to initiate proceedings before the competent national court pending the FRAND determination.

Further, and importantly, the incentives to engage with the conciliation process would not interfere with SEP holders’ rights to apply to court for “provisional injunctions of an adequate and proportionate financial nature” where they have committed to license their SEPs on FRAND terms.

Taylor said: “The mandatory FRAND conciliation process, administered by the EUIPO, is perhaps the most controversial element of the proposals, particularly given the fact that the EUIPO, which does not currently have any patent expertise, will be responsible for it. However, the EUIPO is familiar with managing complex electronic databases and, perhaps more importantly, has an established mediation and arbitration centre, which is likely to assist in facilitating the process.”

Taylor also said the proposed FRAND conciliatory process aligns with views shared amongst the European judiciary that alternative dispute resolution for such disputes should be explored.  She cited previous comments made by Lord Justice Arnold on the use of arbitration to resolve FRAND disputes, as well as his comments in a postscript to his judgment in last year’s Apple v Optis decision before the UK Court of Appeal, where he invited standards-setting organisations (SSOs) like ETSI to make legally enforceable arbitration of such disputes part of their intellectual property rights policies.

“While the UK is no longer part of the EU and will not, therefore, be subject to these new proposals, FRAND disputes are, by their nature, multi-jurisdictional,” Taylor said. “The availability of a mandatory alternative dispute resolution mechanisms, and the forthcoming Unified Patent Court, which will become operational on 1 June 2023, will provide new forums in which SEP and FRAND disputes in Europe may be resolved.”

“However, while the FRAND conciliation process will be a mandatory step before parties may commence court proceedings in an EU member state, it does not prevent them from commencing proceedings in jurisdictions outside the EU. Some parties may view non-EU jurisdictions such as the UK, where the courts have decided that they are able to determine global FRAND licence rates, as a more attractive venue for SEP disputes, where they may seek to obtain a more favourable resolution or, at least, avoid some of the transparency requirements,” she said.

Other notable proposals included in the draft SEP regulation include provisions that would oblige SEP holders to consider offering SMEs more favorable FRAND terms. SEP holders would also be required to consider offering discounts or royalty-free licensing for low sales irrespective of size of implementer.

Marfe noted that the draft legislation refers to the “the global character of SEP licensing”.

“Consistent with the market practices identified in various court decisions, the draft legislation says that conciliation process is said to concern a global SEP licence” he said. “However, the proposed rules leave open that the parties may agree a more limited licence scope. Notably the rules also say that SMEs involved in the FRAND determination may request to limit the territorial scope of the FRAND determination.”

The proposed new regulation would generally apply to all standards that are published after its entry into force. Conversely, standards published before the entry into force of the regulation would generally not be subject to the proposed new regime. However, the draft legislation provides that it may also be a need to cover certain important standards such as 4G on which many IoT applications run.

The European Commission’s proposals are subject to scrutiny, amendment, and formal adoption by the EU’s two law-making bodies – the European Parliament and Council of Ministers. It can take months, even years, for proposed new EU legislation to pass through this process. The Commission has proposed that the new regulation begin to apply two years from the date it enters into force.

The proposals form part of a broader package of reforms to the EU’s intellectual property (IP) regime that are planned, which includes reforms to supplementary protection certificates and around compulsory licensing.