Tuesday, December 12, 2017

EU guidelines on standard-essential patents favor product-centric businesses large and small

Given that I'm working hard on my personal "Flexit," I'm the exact opposite of your average "EU über alles" kind of claquEUr. But when the EU does something right, I'll acknowledge it. The "Communication from the [EU] Commission to the [EU] Institutions on Setting out the EU approach to Standard[-]Essential Patents" (published the week before last) is by far the best I've seen from the European Commission, or any EU institution, in ages.

Just like the Fair Standards Alliance, I welcome this (now quoting the FSA) "forward-looking guidance to European industry" on SEP licensing because the European Commission declined to endorse "use-based" licensing fees, which is what the likes of Nokia and Ericsson (and their non-European allies, particularly Qualcomm) wanted. "Use-based" licensing is just a euphemism for gutting the "ND" (non-discrimination) part of "FRAND" by allowing patent holders to charge royalties on components of multifunctional products they have nothing to do with. Industry issues often enter the public sphere only through litigation, and the dispute between Apple and Qualcomm serves as a useful showcase: Apple credibly alleges that Qualcomm effectively seeks incremental royalties on iPhones with more memory, better/bigger screens, better cameras, fingerprint sensors, and so forth. That kind of insanity is what "use-based licensing" comes down to. I wonder when the likes of Qualcomm will demand royalties on the interior of the official Apple Stores, arguing that no one would walk into those stores in the first place if it weren't for wireless connectivity...

Obviously, Apple was among the parties who provided input to the European Commission that was materially consistent with what the Fair Standards Alliance proposed. We can talk about the proper royalty base (or damages base, to be precise) again in the build-up to next year's fourth Apple v. Samsung trial, but let's stay focused on SEPs right here and now.

The royalty-base issue became the most hotly-contested one during the EU consultations on which last month's official communication was based. But the question of injunctive relief is no less important. At the end of the day, a SEP holder can extract excessive SEP license fees either way: by going directly for overcompensation (in the form of license fees and/or damages awards) or by getting leverage through injunctive relief (sales bans, import bans, seizures by customs authorities; USITC-style remedies are indeed available and sometimes granted in the EU as well) and then imposing non-FRAND settlement terms. Arguably, injunctive relief is even more problematic since it can also be used to shut competitors out of markets. The EU guidelines on SEPs do make reference to the Huawei v. ZTE ruling by the Court of Justice of the EU, and it becomes clear (not just between the lines) that the Commission, generally speaking, disfavors SEP injunctions. What made stakeholders focus more on the royalty base is simply that the rejection of "use-based licensing" has yet to be enshrined in case law while there's plenty of case law around the globe that has practically made it impossible to obtain SEP injunctions except under extremely rare circumstances. The Qualcomm showcase is also telling: while Qualcomm has flooded Apple with patent infringement suits this year, it's not even trying to seek SEP injunctions (including SEP-based import bans): all of its injunction requests are based on non-SEPs according to Qualcomm's own representations.

The EU stresses that its guidelines are a set of policy recommendations, not an interpretation of the law. But the part on injunctive relief is a statement of the law for the most part. I hope that some of the ongoing disputes and competition enforcement actions will over the next few years result in so much clarification that even the royalty-base question will have to be considered a largely settled ("settled" in terms of "adjudicated") issue.

The Commission guidelines start off with transparency. I agree with that part. It's an interesting suggestion that patent offices could help determine and, after a standard is finalized and a patent finally issued (or narrowed through reexaminations or litigation), revisit the question of whether a given patent, as finally issued, is actually essential to a standard, as finally adopted. Apart from the standard-specific parts the EU positions on transparency relating to SEPs should also apply to non-SEPs. At least I can't see any reason why they shouldn't. But it would have been off-topic for the Commission to make a more comprehensive recommendation on patent ownership transparency.

In subsection 2.2, the EU SEP guidelines refer to the principle of non-discrimination (again, the "ND" in "FRAND"). That part of the guidelines could have been sharper, clearer, and more elaborate. But the Commission's competition enforcement arm still has the opportunity to make a positive impact with respect to some SEP holders' refusal to extend licenses to rival chipset makers.

I disagree with the Commission's rosy portrayal of alternative dispute resolution (ADR) mechanisms and of the (so far non-existent) Unified Patent Court. I always consider it a lost opportunity when a SEP licensing issue gets resolved through an opaque process that doesn't contribute to the evolution of case law (on the proper royalty base, for instance).

The part on open source and SEPs (Section 4) is factually accurate. What I think should always be made clear in this context is that open-source companies such as Red Hat do pay patent royalties all the time while claiming in policy discussions that open source, particularly software licensed under the GPL free software license, and patent royalties are inherently incompatible.

All in all, the EU SEP guidelines are a victory for businesses of all sizes whose focus is on making and selling products (as opposed to the monetization of patent portfolios). While Europe's companies are and will remain insignificant in the largest market segments and most lucrative fields of technology (apart from SAP, and even that one may be acquired by a U.S. tech company sooner or later), the jury is still out on its automotive industry (I'm skeptical, but others aren't), and the EU Commission refers to Internet-of-Things (IoT) startups. In IoT, there are and will be many niche opportunities, and that's exactly where the EU (as an economy) does have some opportunities (while it's never going to be competitive in search engines, operating systems etc.). I agree with the Commission that small IoT companies need a healthy and reasonable SEP-licensing environment. Helping those companies, and Europe's automotive industry, makes a lot more sense than wacko calls for a cordinated EU response to the success of companies like Apple, Google, and Facebook.

More than anything, I'm glad the European Commission didn't bow to lobbying pressure from increasingly patent-focused has-beens like Ericsson and Nokia. Those companies aren't Europe's future. And some of the key beneficiaries of supra-FRAND royalties would be non-EU companies such as Qualcomm at any rate.

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