Wednesday, April 5, 2023

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'?

The European Commission's draft regulation on standard-essential patents (SEPs) (initial reaction, table of contents and synposis) is primarily characterized by the imposition of additional costs and delays, and by generally poor craftsmanship. I'll write more about the latter on other occasions, but have already pointed to some flaws, such as the failure to determine essentiality claim by claim and deficient rules for the envisioned SEP Register, which don't take into account that non-essentiality and invalidity decisions by courts and patent offices can be reversed and that they are a per-jurisdiction question (for instance, the same patent might be deemed essential in Germany but not in the Netherlands). There isn't even a mechanism for putting patents back on the SEP Register.

One could forgive--and the Commission (especially if it engaged in a proper consultation process on specific proposals) could correct--those kinds of shortcomings. But there are two issues that I view more seriously and which are the focus of this post:

You can click on any of the links above to go directly to the related section.

Art. 17(2) of the EU Charter of Fundamental Rights (CFREU)

Recital 34 of the draft SEP regulation claims that the proposal "respects the intellectual property rights of patent owners (Article 17(2) of EU Charter of Fundamental Rights), although it includes a restriction on the ability to enforce a SEP that has not been registered within a certain time-limit and introduces a requirement to conduct a FRAND determination before enforcing individual SEPs."

It goes on to argue that objectives of general interest may be pursued so long as there is no "disproportionate and intolerable interference which infringes the very essence of the rights guaranteed." Actually, the "very essence" of patent rights is their enforcement as the ECJ has repeatedly recognized (see further below), there would be less restrictive means (to apply a proportionality principle that is recognized in EU antitrust law), and the adverse effect on enforcement far outweighs any of the claimed benefits of the contemplated rules.

Even if one forgot about other issues and focused only on the delay of enforcement, the envisaged restriction is very significant. Patent rights are limited to 20 years from the priority date. In digital standardization, the foundational research often takes place about 10 years before a technology is actually adopted as part of a standard (for which there is no guarantee, which makes those investments in R&D quite risky). Thereafter, it takes time for the standard to gain commercial relevance. The window for enforcement--which includes injunctive relief--is in most cases just a single-digit number of years, and it can take years (including appeals and parallel nullity actions or opposition proceedings) before enforcement actually kicks in. Speaking from my experience, I started covering SEP enforcement actions in granular detail a little over a decade ago, and I can't think of a single SEP that was being litigated in the early part of that period over which anyone would still bring a lawsuit today.

To illustrate that fact: I regularly have to throw away printouts of patent documents that I used to bring with me to court hearings, so I'm aware of the short periods during which SEPs are actually relevant to enforcement. I keep those printouts for environmental reasons (until expiration), but only when lawsuits are brought within a very few years of each other (such as Nokia v. Daimler and Nokia v. OPPO) do I get to reuse an existing printout. Subject to meeting logistics, I stand ready to testify on those observations before legislative institutions.

Unable to make a reasonable argument for an unreasonable measure, the Commission's Directorate-General for the Internal Market (DG GROW) then contradicts itself in its attempted justification:

"In that respect, this Regulation is in the public interest in that it provides a uniform, open and predictable information and outcome on SEPs for the benefit of SEP owners, implementers and end users, at EU-wide level. It aims at dissemination of technology for the mutual advantage of the SEP holder and implementers. Furthermore, the rules concerning the FRAND determination are temporary thus limited and aimed at improving and streamlining the process but are not ultimately binding."

(emphases added)

DG GROW can't have it both ways. The bankrupty of the argument lies in the fact that one can't "provide[] a uniform [...] and predictable [...] outcome ... at [an] EU-wide level" on a basis that is "not ultimately binding."

If those are just non-binding recommendations, then it is disproportionate to delay enforcement and impose significant (in some cases substantial) costs on the parties. You would then be interfering with fundamental rights through measures that are not inherent to the pursuit of "objectives of general interest" (Rec. 34). If, however, those FRAND determinations have an effect beyond just providing an advisory opinion to the parties--which the recital's promise of uniform and predictable outcomes flatly concedes--then the process must meet a higher standard. As I explained in my previous post on the draft SEP regulation, there must be appeals. There must be transparency, and that means you cannot hide the identity of the essentiality evaluators as their determinations ultimately impact (via the essentiality ratio) the FRAND rates set by the conciliators. You will have to hold public hearings in accordance with Art. 47 CFREU.

The draft regulation contradicts itself anyway because Recital 6 says that SEP cases in Dutch, French and German courts "show different approaches (not necessarily different results) with regard to FRAND determinations concerning SEPs." So there is no need to ensure consistency in the first place, which suggests that it's not about harmonization but about the Commission wanting to put an insensitive thumb on the scales of a complex system. But the bigger issue is the contradiction within Recital 34.

Could the problem be solved editorially? I don't think so:

  1. The draft has been leaked, and the objective of "provid[ing] a uniform [...] and predictable [...] outcome ... at [an] EU-wide level" is now known and well-documented. The mask is off. That draft can be presented as evidence in any future proceeding.

  2. If that claimed benefit was watered down, such as by merely arguing that those advisory opinions would contribute to greater consistency, the pursued objective would no longer justify the restrictions, costs, and delays in question.

At an abstract level, this is like the "squeeze" situation in patent litigation, where (depending on claim construction) a patent is either broad and invalid or narrow and not infringed. Here, you either have an objective worth pursuing, in which case you may meet the proportionality test (if we ignore arguendo the availability of less restrictive means) but need a completely different setup that guarantees access to justice, including appeals, for the essentiality checks as well as the FRAND determinations based on them, or the costs, delays, and restrictions cannot possibly be justified by the objective.

DG GROW tries and obviously fails to square the circle. They want to create a system under the auspices of an EU institution (the EUIPO, more appropriately called EUTMO) that would make impact on multi-billion-dollar license deals but on a non-appealable basis. The draft regulation is broken beyond repair in the sense that essentiality checks and FRAND determinations would either have to be thrown out (in which case there would be nothing left but a duplicative "wiki") or redesigned from scratch to meet access-to-justice standards.

In Recital 36, the draft regulation argues that "[a]s confirmed by the CJEU, a FRAND determination as a precondition to access to national courts is deemed to be compatible with the principle of effective judicial protection." I'll discuss that in the section on conflicts between the proposal and the ECJ.

Art. 6 of the European Convention on Human Rights (ECHR)

Judges are rather sensitive to a denial of the right of access to justice, and there's a pretty good chance of the ECJ figuring out that the envisioned regulation would also limit its own jurisdiction. But even if DG GROW was hoping that the ECJ would ultimately uphold the regulation (as it rarely invalidates the EU's legislative decisions, apart from exceptions like the 2006 Data Retention Directive), there would be another court that could do so: the European Court of Human Rights in Strasbourg, which is not an EU institution but whose decisions the EU and its Member States have chosen to respect.

Art. 6 of the European Convention on Human Rights guarantees the right to a fair trial. Here's an official 130-page document that the Council of Europe has published to explain based on the case law how that article is applied.

Art. 27(2) of the Universal Declaration of Human Rights (UDHR)

The Universal Declaration of Human Rights (UDHR) also guarantees access to justice, with a non-exclusive focus on criminal law. It furthermore recognizes intellectual property in its Art. 27(2):

"Everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author."

The draft regulation imposes restrictions that would also have to be--but possibly cannot be--justified in light of that article.

National constitutions of EU Member States

Apart from the ECJ and the ECHR, the Commission also has to consider the risk of the regulation being held incompatible with the national constitutions of certain EU Member States. For example, Art. 14 of the German Basic Law protects property rights, and is widely deemed to also protect intellectual property rights, particularly in light of international obligations such as the UDHR.

If even just one Member State's top court held that the rights of patent holders based in that country cannot be restricted by the regulation, the EU would have a problem--and patent holders based in that country (including some who might move their assets there) could bring enforcement actions anywhere in the EU and point to that unconstitutionality holding.

Treaty on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

The Treaty on Trade-Related Aspects of Intellectual Property Rights (TRIPS) was agreed by members of the World Trade Organization, which also includes all EU Member States.

In Recital 35, DG GROW first focuses on the general objectives of TRIPS. More specifically, the draft regulation then says:

"The temporary suspension of the right to effective enforcement of exclusive rights in Article 28(1) of the TRIPS Agreement may be considered to be limited in line with Article 30 of the TRIPS Agreement."

As I explained further above, that "temporary suspension" affects a rather significant part of the enforcement window for SEPs. DG GROW then focuses on the availability of damages for past infringement:

"The exception to the exclusive right would not conflict with the normal exploitation of the patent, which in the context of standard-compliant products, is to license such patents under FRAND terms and conditions and collect royalties."

That "normal exploitation" is what SEP holders want, but it doesn't always work that way. Any SEP rules must also work for cases in which a reasonable licensor faces an unwilling licensee. That is what the ECJ recognized in Huawei v. ZTE. Under the case law, there already are restrictions on FRAND-encumbered SEPs that do not apply to non-SEPs. But DG GROW now substitutes its own judgment for that of the top EU court in determining that further-reaching restrictions should be imposed.

The draft regulation's attempted justifications (not only, but also with a view to TRIPS) are replete with boilerplate language and purely conclusory statements such as the averment of "tak[ing] full account of the legitimate interests of all parties." None of that is going to be relevant when conflicts between the contemplated regulation and fundamental rights or international treaties have to be resolved.

Recital 35 for the largest part focuses on the fact that enforcement will be possible sooner or later. Then the "non-binding" argument is made like in the CFREU context:

"Further, neither the FRAND determination nor the published aggregate royalty is binding upon the parties but provides relevant data points for resolution of the dispute by courts."

There are many ways of providing "relevant data points." For instance, that is the why parties to FRAND disputes hired expert witnesses. If we sum it up from a TRIPS point of view, the draft regulation would severely shorten the actual enforcement window for the purpose of providing non-binding data points--a characterization that is inconsistent with the goal stated in Recital 34 of providing uniform and predictable outcomes of SEP cases across the EU.

European Court of Justice (ECJ)

The draft regulation is an anti-ECJ proposal in various ways:

  • It would create a new category of dispute resolution proceedings with an indirect judicial effect that will be beyond reach for review by the EU General Court (EUGC), which is the lower division of the Court of Justice of the EU (CJEU), and by extension the ECJ, to which any EUGC decisions can be appealed.

  • In Huawei v. ZTE (2015), the ECJ interpreted EU primary law in its effort to carefully balance SEP-specific considerations against the general availability of patent injunctions:

    42. For the purpose of providing an answer to the referring court and in assessing the lawfulness of such an action for infringement brought by the proprietor of an SEP against an infringer with which no licensing agreement has been concluded, the Court must strike a balance between maintaining free competition — in respect of which primary law and, in particular, Article 102 TFEU prohibit abuses of a dominant position — and the requirement to safeguard that proprietor’s intellectual-property rights and its right to effective judicial protection, guaranteed by Article 17(2) and Article 47 of the Charter, respectively.

  • Seven years later, in Phoenix v. Harting (2022)--which for the avoidance of doubt was not a SEP case--the ECJ stressed the importance of access to preliminary injunctions in order to put an end to infringements.

In the first section I already noted that the Commission acknowledges it's not acting out of concern over inconsistencies between the outcomes in national court, which suggests it just wants to recalibrate the system. It's about DG GROW simply attempting a legislative override. The draft regulation's token references to Huawei v. ZTE are disingenuous because DG GROW always wants those time-consuming EUIPO-administered process to result in a FRAND determination, contrary to the ECJ's case law according to which unwilling licensees--who do not respond constructively to infringement notices--will be enjoined without even reaching that question.

Unified Patent Court (UPC)

Prior to my first post on the draft SEP regulation, I already noted on LinkedIn that the Commission is apparently not prepared to let the Unified Patent Court (UPC) get started and define its approach to SEPs. They just don't seem to have faith in patent judges.

The conflict between the draft regulation and the UPC goes even further. What about the UPC's "Patent Mediation and Arbitration Centre, seated in Lisbon and Ljubljana"?

Why create another dispute resolution mechanism (led by a trademark office) when you have that supposedly wonderful European patent judiciary offering mediation and arbitration services?

It would be more prudent to just let the UPC--including its alternative dispute resolution center--do its work for a couple of years before intervening in a system that hasn't even had the chance to prove its worth.

Contradictions between draft regulation and other Commission communications and actions

It's also difficult to square the draft regulation and its thrust with what has previously come out of the Commission. What ever happened to the principles laid out in the 2017 communication "[s]etting out the EU approach to Standard Essential Patents"? That one was in line with Huawei v. ZTE.

Where's the "open and cooperative approach throughout the legislative process, from policy design to final agreement" according to President von der Leyen's "mission letter" to Commissioner Thierry Breton? Organizing webinars, expert groups, and consultations on abstract questions are no substitutes for an open and cooperative discussion of specific measures prior to a formal legislative initiative.

Just last month, the Commission issued a statement on securing the long-term (beyond 2030) competitiveness of the EU. Research and innovation is at the heart of that strategy.

The final point is that the Commission is accusing China at the WTO level of violating TRIPS through its FRAND determinations and antisuit injunctions. If the Commission actually does propose anything like the draft regulation that has leaked, it should immediately withdraw its WTO complaint because of its own efforts to impose restrictions on the enforcement of SEPs.