EU considers time limits for FRAND licensing negotiations

The European Commission has asked businesses for their views on whether fixing time limits would be desirable and, if so, what periods would be reasonable.

The potential for time limits to be prescribed is just one of a number of radical options for reform that appear to be under consideration by the Commission, according to a recently opened call for evidence. The Commission is exploring how it can “promote an efficient and sustainable SEP licensing ecosystem” through the initiative and has said it could legislate to achieve that aim.

A SEP is a patent that protects 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. As a result, the bodies through which businesses collaborate to develop standards – such as ETSI in the context of telecoms standards – 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.

Often, SEP holders and implementers of the underlying standardised technology disagree over what constitutes a FRAND licence. Many courts globally, including in the EU, have considered this question as well as the related behaviours of the negotiating parties – SEP holders sometimes accuse implementers of unreasonably holding out from agreeing a licence and choose to pursue an injunction for patent infringement; technology implementers sometimes claim that the licensing terms proposed by SEP holders are unreasonable and that by pursuing an injunction against them the SEP holder is abusing a dominant market position, in breach of EU competition rules.

In 2015, the EU’s highest court, the Court of Justice of the EU (CJEU), considered these issues in detail in the case of an underlying dispute between Huawei and ZTE that had come before the German courts. In its judgment, the CJEU stipulated the steps technology implementers must take to be considered ‘willing’ licensees, as well as the steps SEP holders must take to attempt to reach a licensing agreement with implementers before an injunction can reasonably be pursued without that action breaching competition law.

The CJEU confirmed that SEP holders must first provide written notification to an implementer of their technology of their alleged infringement of the patents. In response, the implementer must confirm its willingness to take a FRAND licence. The obligation is then on the SEP holder to make a FRAND licensing offer. That offer must either be accepted by the alleged infringer or, if it believes the offer is not in fact FRAND, it must make a counteroffer on FRAND terms offering, for example, a bank guarantee in respect of that offered amount.. SEP holders that do not accept the counter proposal must justify their own offer as FRAND. In certain circumstances the dispute will need to be resolved by a tribunal, such as a court.

It is each of these steps that the Commission is now considering prescribing time limits to.

The Commission has asked businesses what they consider to be “average reasonable time limits” for each step, acknowledging that what is a reasonable period of time for an implementer to express its willingness to obtain a licence could vary from case-to-case since that might depend on factors such as the number of patents to be covered by the agreement, the complexity of the technology and the level of knowledge about that technology within the implementer’s organisation, among other things. According to the options put forward by the Commission, any time limits imposed could be as short as one month per step.

The Commission has also asked businesses whether they would welcome any further clarity on any of the steps stipulated by the CJEU.

Other possible interventions the Commission has invited evidence on include new transparency obligations that could require SEP holders to make certain information about their SEPs public – including, potentially, their standard FRAND licensing terms. The Commission also appears to be considering requiring technology implementers to make public disclosures about which standards they use too.

Businesses have also been asked whether a “confidential repository of licensing agreements” should be established to help judges and arbitrators determine FRAND rates and, if so, whether and to what extent SEP holders should provide supplementary information to “unpack” the agreements.

The Commission also appears to be considering establishing a new independent system of third-party assessment of the ‘essentiality’ of patents to the implementation of standards. UK law makers are considering introducing such a system too.

An expert group established by the Commission previously recommended that SEP holders be required to submit their patents for independent ‘essentiality’ assessments by patent offices or law firms after it found that the lack of such checks “leads to a lack of transparency as to the ownership of true SEPs following the adoption of a standard, what licences may be needed to lawfully implement the standard, and what the estimated aggregate royalty for these licenses may be”.

According to the call for evidence paper, the Commission is also exploring whether to intervene to restrict the businesses in a product’s value chain a SEP holder can seek a FRAND licence from. The CJEU had been due to consider this issue in the context of a dispute between Nokia and Daimler until the companies reached a settlement agreement last year. Daimler had argued that its suppliers should be the ones to take a licence from Nokia, but Nokia had pursued a FRAND licence with Daimler.

Businesses have also been invited to share their views on “the reasonable range of discounts that would not cause discrimination in the context of a licensing of a SEP”, and on matters of enforcement – including how the use or arbitration for resolving FRAND disputes can be incentivised and under what conditions a court should be able to require parties to resolve a FRAND dispute in arbitration.

The Commission said its new framework for SEPs is likely to entail legislative reforms in tandem with non-legislative measures, including the possible introduction of fresh guidance on the application of competition law to disputes arising around use of standardised technology.

The Commission said it would hold a public consultation, lasting at least 12 weeks, on any proposals it intends to pursue in light of the feedback it receives to its call for evidence exercise, and that it would also undertake targeted surveys with industry “on specific issues”. Formal proposals are expected to be outlined before the end of the year.

Separately, the European Commission has confirmed that it has opened legal proceedings against China before the World Trade Organization (WTO) in relation to restrictions it claimed China has placed on the ability of EU companies to enforce SEP rights in the country.

According to a Commission statement, one of its concerns relates to the grant of so-called anti-suit injunctions by Chinese courts. Anti-suit injunctions are designed to prevent an opposing party from commencing or continuing proceedings in another jurisdiction. The Commission further criticised Chinese courts for using “the threat of heavy fines” as a deterrent to European companies litigating their patent rights before the courts in other jurisdictions.

The Commission said: “In August 2020, China's Supreme People's Court decided that Chinese courts can prohibit patent holders from going to a non-Chinese court to enforce their patents by putting in place an “anti-suit injunction”. The Supreme People's Court also decided that violation of the order can be sanctioned with a €130,000 daily fine. Since then, Chinese courts have adopted four such anti-suit injunctions against foreign patent holders.”

The Commission said it believes China’s practices place European high-tech companies “at a significant disadvantage when fighting for their rights”. It claimed that the grant of anti-suit injunctions allows Chinese companies to access European technology “cheaper or even free”. The Commission said the practices adopted by China’s courts are inconsistent with the country’s obligations as a signatory to the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).