Friday, April 21, 2023

Draft SEP regulation threatens EU Commission's credibility at WTO level, may backfire big-time: issues outlined by former U.S. government officials and senior Qualcomm lawyer

More and more issues are identified concerning the European Commission's draft regulation on standard-essential patents (SEPs) that may or may not be formally put on the table next Wednesday (April 26) by EC Executive Vice President Margrethe Vestager. While the Commission is briefing reporters today (with critics of the proposal apparently planning the same for Monday and Tuesday), Mrs. Vestager told MLex (after speaking at a conference) that the 26th remained the target date, but delays could not be ruled out due to the EC's busy agenda. I first shared the information on LinkedIn (after reaching out to MLex about it).

For my previous reporting and commentary on the subject, see the link list toward the end of this post.

Yesterday (Thursday, April 20), an important letter was sent to key members of the EU Commission and an insightful write-up was published on LinkedIn. I'll discuss both below.

  1. Letter from former senior officials of U.S. government agencies to EC leaders

  2. While attacking Chinese antisuit injunctions at WTO level, the EC intends to create its own antisuit regime to interfere with foreign legal proceedings

Former leaders of U.S. government agencies under POTUS #42-#46 (Clinton, G.W. Bush, Obama, Trump, Biden) sent the following letter yesterday to EC President Ursula von der Leyen, EVPs Margrethe Vestager and Valdas Dombrovskis, and Commissioner Thierry Breton:

1. Letter from former senior officials of U.S. government agencies to EC leaders

Comments on European Commission's Draft "Proposal for Regulation of the European Parliament and of the Council Establishing a Framework for Transparent Licensing of Standard[-]Essential Patents" (April 20, 2023 letter by Christine Varney, David Kappos, Walter Copan, Makan Delrahim, Andrei Iancu, and Noah Phillips)

Most of them work in private practice now. Notably, three of them (former Antitrust AAG Christine Varney, former USPTO Director David Kappos, and former FTC commissioner Noah Phillips) are Cravath partners. Makan Delrahim (Trump's Antitrust AAG) is a Latham & Watkins partner, and Apple (which holds rather different positions) is major Latham client.

The letter expresses "shared concerns regarding an apparent pivot in the European Commission’s longstanding intellectual property (IP) policy that threatens European and American innovation leadership, and by extension, European and American economic success and security." (emphases added)

In diplomatic terms, that is a much stronger statement that it may appear to be at first sight. If we were talking about a statement by the signatories' successors, EU-U.S. relations would almost be on the brink of a trade war. The EC's leaders should ask themselves whether the objective of bringing down patent royalties paid by Apple and some automotive companies is really worth such complications. The answer should be clear, and what's also clear is that some people in the lower echelons of the Commission have acted irresponsibly in drafting a bill that raises such concerns without engaging in proper stakeholder consultation. Asking general questions about SEP-related grievances is not a substitute for discussing the implications of specific ideas.

The signatories of that letter know from their vantage point as former high-ranking government officials about "the critical yet fragile balance that must be struck when regulating [SEP] licensing" and warn that "even seemingly small policy changes can have outsized impacts." So does, by the way, a counterpart of theirs in London, UKIPO CEO Adam Williams, who told IAM in a recent interview (paywalled) that "massive intervention" in that area is rarely the right thing, and one needs to find a middle ground.

That's consistent with what I've observed as a cross-jurisdictional litigation watcher.

Near the top of page 2, the letter says SEP policies "should be data-driven and should consider the practical impact on industry and relevant geopolitical realities" (emphases added). Neither the draft regulation nor the draft impact assessment suggest a data-driven approach. Much to the contrary, I've already identified passages that are shockingly out of touch with reality and based on some people's opinion rather than any evidence, such as in connection with certain patent pools operated by Avanci and Sisvel. I also highlighted "geopolitical" in that quote because the Commission--especially at the most senior level--should be more sensitive to diplomatic and trade considerations.

The former U.S. government officials' letter warns that if the Commission proposed a regulation like the draft they've seen--even if it was not ultimately adopted in a similar way, shape, or form--"would also pave the way for Europe’s implementer-dependent international competitors to set binding aggregate royalty rates that severely devalue European innovation." Elsewhere (Section III), the letter describes those other jurisdictions as "[u]ndemocratic."

The EU would shoot itself in the foot. Given that even just making an ill-conceived proposal (regardless of what will subsequently happen in the legislative process) harms EU interests, the Commission should step back and think it all over again, with help from stakeholders on both sides of the debate.

Section II of the letter points out another credibility issue for the EU. As the letter recalls, it's been less than a year since the executive director of the EUIPO, Christian Archambeau, said “[o]f course, we will never have the competency in patents. But national offices do have competency in patents. So through the network, we can leverage their capabilities for common projects." And now the Commission wants to task the EUIPO with overseeing one of the most complex tasks in patent law (some would even argue it's the single most difficult one): portfolio valuation.

I agree with the overarching concerns raised by that letter and disagree only with the signatories' support of the EU complaint over Chinese antisuit injunctions ("The European Union rightly argued that [...] violated China’s obligations"--in my opinion those Chinese antisuit injunctions are just a defensive response to extraterritorial overreach by foreign courts).

2. While attacking Chinese antisuit injunctions at WTO level, the EC intends to create its own antisuit regime to interfere with foreign legal proceedings

The letter shown and discussed above discusses geopolitical and international trade issues that would arise even from just putting a fundamentally flawed proposal on the table next week. In that regard, let's now look at the attempt to create de facto antisuit injunctions at the EU level that would interfere with the sovereignty of foreign jurisdictions and go against the concept of international comity.

In a LinkedIn article published yesterday, Qualcomm's chief licensing lawyer, Fabian Gonell, explains why the draft SEP regulation would do "exactly what [antisuit injunctions] do in China: penalize patent holders that bring an action in foreign courts." And Mr. Gonell is rightly wondering how the Commission, which will soon have to file its substantive brief in support of its WTO complaint over China's antisuit injunctions, will seek to distinguish the antisuit element of its proposed SEP regulation "from the [Chinese] conduct of which [the EC] is complaining."

That LinkedIn article makes all the right points, and actually discusses only one of the two antisuit mechanisms envisioned by the EU contrary to its position in the WTO proceedings that no instrument of that kind should restrict patent rights in the first place. So let me explain it here in my way--in even more basic terms with a view to those who may be less familiar with the topic--and discuss both antisuit elements of the draft SEP regulation in parallel.

First, let's clarify what amounts to an antisuit mechanism. Two years ago I participated as a speaker in an EC webinar (the blog post also shows my slide deck)--a webinar that has now been declared part of the consultation process for the draft regulation, which I deem a mischaracterization. I'm now going to take a position totally consistent with the effects-based approach of my May 2021 presentation:

An antisuit mechanism

  • effectively precludes a party from enforcing its rights in another (almost always a foreign) jurisdiction (the enjoined jurisdiction)

  • by means of (typically drastic) sanctions in the enjoining jurisdiction.

The EU complains that China (in that context, the enjoining jurisdiction) imposes antisuit injunctions on patent holders, effectively precluding them from enforcing their patent rights in the EU (through the enforcement of SEP injunctions) by imposing per diem contempt fines.

Back then I said that requiring defendants to EU SEP cases to take a global portfolio license to avoid the enforcement of an injunction ultimately also means that they can't seek a rate-setting decision in other jurisdictions (with respect to the patents valid in those countries) because they will either lose sales or be sanctioned for contempt of court (by disobeying the injunction). In yesterday's article, with a focus on the draft SEP regulation, Mr. Gonell now argues--and I agree--that one must just focused on whether a party is "penalize[d]" for "bring[ing] an action in foreign courts." That is the nature of the antisuit beast, and Mr. Gonell rightly calls it "a distinction without a difference" that Chinese antisuit injunctions result in fines on SEP holders while the EU's envisaged antisuit mechanism penalizes them with a "loss of rights to enforce EU patents."

The EC's draft SEP regulation would penalize SEP holders in one context and implementers in another. Oddly, the antisuit context is the only one in which the draft regulation is at least somewhat symmetrical, while in all other regards it just seeks to impose costs on SEP holders, and to delay and complicate enforcement, while doing nothing to combat hold-out by unwilling licensees.

How can parties set off the draft regulation's antisuit mechanism?

Art. 48 of the draft regulation defines the term "parallel proceeding" as


civil court proceeding, any other court procedure or procedure before a tribunal or administrative or state authority of a jurisdiction outside of the Union called upon by law to make legally binding and enforceable decisions;


concerning a licensing dispute concerning the same standard and its implementation, or including SEPs from the same patent family involving one or more of the parties to the FRAND determination as a party, and


[a duplicative "and"] concerns the same matter which serve as a basis for the FRAND determination.

This is extraterritorial overreach, plain and simple. It's about non-EU jurisdictions like the UK, U.S., China, India, or Brazil, to name but a few examples of jurisdictions in which SEP holders often enforce their rights. And it covers "licensing dispute[s]" as well as patent infringement actions that may result in injunctions putting an end to violations.

Whoever came up with that essentially wants the EU to take the position that all other jurisdictions in the world have to wait until the EU has made a FRAND determination--or if one doesn't wait, one will get penalized in the EU. It's a "my way or the highway" attitude. It has nothing to do with international comity. It's more like what one would expect from so-called "rogue states"...

Let's look at the two sides of the licensing negotiations:

  • If SEP holders started "parallel proceedings", they'd seek a FRAND determinations and/or enforce their rights in foreign jurisdictions.

  • If implementers started a "parallel proceeding", it would be a FRAND determination that would result in an obligation to enter into a license (the statute is limited to proceedings that result in "legally binding and enforceable decisions" as opposed to mere declarations).

The draft regulation doesn't even distinguish between foreign FRAND determinations that would cover patents valid in the EU or not. So, for instance, if an implementer asked a Chinese court to order the SEP holder to grant a license to only its Chinese SEPs on court-determined terms, it would run afoul of the EU's rules! That's insane.

The penalty is defined by paragraph 2 of that article in conjunction with two paragraphs of another article:

[Art. 48(2)]

In case of a parallel proceeding [as defined in para. 1] filed prior or during the FRAND determination by a party, the FRAND determination panel, or in case it has not been established, the competence centre, shall terminate the procedure upon the request of the other party. Article 47(3) and Article 47(4) shall apply.

We have to turn to Art. 47(3) and (4) to find out more specifically what is meant by "terminat[ing] the procedure upon the request of the other party." Art. 47 is the statute that defines what constitutes a "[f]ailure of a party to engage" in the EU's FRAND determination proceedings. So, even if a party that is enforcing its rights elsewhere contributed constructively to an EUIPO-led FRAND determination, the mere fact that it's also asserting non-EU patent rights in foreign jurisdictions would be penalized like a failure to engage.

Art. 47(3) addresses the scenario in which the implementer fails to engage (which as per Art. 48(2) includes a scenario in which a party avails itself of a foreign court for certain purposes, even if no EU patents are concerned):


The competence centre shall issue a notice of termination of FRAND determination to the SEP owner, including for the use before the customs authorities of a Member State, if the FRAND determination was terminated under [t]his article, and the party referred to in paragraph (1) is the prospective implementer.


The competence centre shall issue a notice of termination of FRAND determination to the implementer, if the FRAND determination was terminated under [t]his article, and the party referred to in[ ]paragraph (1) is the SEP owner.

So, if a party--licensor or licensee--avails itself of a foreign court, the other party will get a notice of termination--but the party that exercised its rights outside the EU will not get one. What does that mean in practice? It means that only one party--the one that didn't run to a foreign court--is free to do in the EU what it wants.

If the party that doesn't get such notice of termination is the patent holder, Art. 58(4) precludes it forever from enforcing its rights in the EU:

A court of a Member State or the Unified Patent Court, requested to decide on any issue related to a SEP in force in a Member State, shall not proceed with the examination of the admissibility of the request, unless it has been furnished with a notice of termination of the FRAND determination.

It's a total enforcement deadlock, a sanction that can--and in many cases will--be more drastic than a contempt fine.

For implementers, the penalty is that they lose the protection the draft regulation would afford them with a view to enforcement in national courts as well as USITC-style customs seizures. Implementers--unlike SEP holders--wouldn't be worse off than today if they asked a foreign court to enforce their rights under a foreign country's laws. But if that draft regulation had entered into force, availing themselves of foreign courts (even in my example of someone just seeking a Chinese FRAND ruling with respect to Chinese patents) would deprive them of a shield they'd otherwise have in the EU.

This is judicial imperialism. Should the EC actually put that kind of proposal on the table, I'd be left to wonder why the EU Commission doesn't have the checks and balances in place to prevent such a terrible mistake. It shouldn't be hard for the ultimate decision makers to figure out, with help from their advisers, that the draft regulation is a dumpster fire.

Links to prior FOSS Patents posts on the envisaged EU SEP regulation

In chronological order:

  1. March 29: European Commission departs from best practices in hasty preparation of standard-essential patent policy proposal that is fundamentally flawed and unbalanced

  2. March 31: Table of contents and synopsis of European Commission's draft proposal for standard-essential patent regulation

  3. April 2: Proposed EU SEP regulation will also harm net licensees: implementers of standard-essential patents must be careful what they wish for

  4. April 3: In draft EU SEP regulation, appeals are not even an afterthought: what if owners or implementers of standard-essential patents disagree with decisions?

  5. April 5: EU Commission contradicts itself in attempted justification of SEP regulation in light of EU Charter of Fundamental Rights: 'uniform and predictable outcome' but 'not ultimately binding'?

  6. April 11: Is the EU becoming hostile to standards-related innovation, standards development, and the enforcement of standard-essential patents?

  7. April 12: Definitive issues: draft EU regulation on standard-essential patents fails to properly define 'SEP' and 'enforcement', and encourages antitrust violations

  8. April 14: Stakeholder reactions to draft EU SEP regulation: both licensors and licensees identify issues that counsel against premature proposal

  9. April 16: European Commission's take on patent pools has turned negative: draft impact assessment makes up and distorts facts, relies on conflicted "researcher"

  10. April 17: ETSI asks European Commission to reconsider SEP regulation -- Apple protests as it stands to benefit from SEP enforcement complications more than any European company

  11. April 19: Qualcomm outlines Reciprocal FRAND Agreement as superior alternative to European Commission's "fatally-flawed proposal" of non-binding standard-essential patent valuations

Only indirectly related, yet pretty relevant: