Friday, April 14, 2023

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

The leaked draft of an EU regulation on standard-essential patents (SEPs) has drawn various reactions. This blog may have written about it more often than any other website, which should be no surprise given its FRAND focus (initial reaction, table of contents and synopsis, downside for implementers, access-to-justice issues, conflicts with fundamental rights and international obligations, industrial policy implications, flawed or missing definitions and antitrust issues). But I'm not a SEP licensor or licensee. This post is a round-up of what those who license SEPs (outbound or inbound) have said, mostly through trade associations.

  1. Net licensees are generally in favor, but partly (and rightly) unconvinced of bottom-line benefit

  2. Perspective of major patent holder who is also a large-scale implementer: Huawei

  3. Net licensors don't want unnecessary costs, delays, and uncertainty

1. Net licensees are generally in favor, but partly (and rightly) unconvinced of bottom-line benefit

Three different organizations representing net licensees (ip2innovate, Fair Standards Alliance, ACT | The App(le) Association) have issued statements. The first thing to keep in mind here is that it's part of the modus operandi of the deep-pocketed net licensee camp's lobbying efforts to have such lobbying fronts spring up like mushrooms, though at a closer look there are important overlaps between their memberships.

I've produced the following table that shows the extent of duplicative membership just based on four U.S. companies (Apple, Google, Intel, Cisco) (click on the image to enlarge):

Automotive companies now also tend to be members of multiple such organizations.

The other problem with net licensees' lobbying efforts is astroturfing, the most deceptive of all lobbying practices. I'll get to that in a moment, and for now just want to say is that the European Commission risks coming across as naive (or, worse, as purposely buying anything that appears to support DG GROW's agenda) by taking at face value the input it receives from self-declared small and medium-sized enterprises (SMEs) about their alleged difficulties relating to SEPs. The draft impact assessment, which has also leaked, quoted all sorts of unsubstantiated and unverifiable claims by unidentified SMEs, which I consider a highly questionable approach because I'm sure that a number of those stories would not withstand scrutiny (a year ago I debunked an SME-SEP lie that was told in an interview sponsored by large implementers).

The Fair Standards Alliance (FSA) itself--other than some of its members--cannot be accused of astroturfing. It only issued a brief statement on LinkedIn:

"The Fair Standards Alliance acknowledges the work of the European Commission in the draft proposal for a regulation on standard essential patents (SEPs). The FSA applauds the Commission’s effort to increase transparency and predictability for all stakeholders in the innovation ecosystem. We are pleased to see that the proposal aims to support a more fair and balanced licensing environment for SEPs. We are assessing the draft proposal in further detail and look forward to sharing more detailed feedback soon."

My takeaway from the final sentence is that they like the idea of complicating SEP enforcement, but at least some of the FSA's members are sophisticated enough to know that the devil is in the details. It looks like they can't easily reach a common position, but we'll see.

The FSA's sibling is the equally Brussels-based ip2innovate (IP2I) group. It's been only slightly less than two years since this press release, which makes that organization look bad not just with the benefit of 20/20 hindsight but because I predicted the outcome even earlier (and it's worth nothing that non-IP2I member Volkswagen issued a far more realistic statement at the time): Patent law reform strengthens Germany as a location for innovation; Europe needs to follow suit to enhance its competitiveness

In that press release, IP2I members said "German patent law has finally arrived in the 21st century" and predicted that German courts would now "apply the principle of proportionality to patent disputes." The word "proportionality" appeared in that press release nine times. But there has not been a single case--roughly 20 months since the new injunction statute entered into force--in which the alleged disproportionality of a patent injunction even became a serious topic of discussion in a German patent infringement action.

The fact that they have previously claimed victory because they don't understand how patent litigation really works is important to bear in mind. Interestingly, IP2I's reaction to the draft regulation is a little more cautious. They don't want to get burned again. So while they say the proposal is generally "to be welcomed" and "a big step in the right direction," they also "look forward to working with the Commission and other stakeholders on any necessary changes." That doesn't sound like they are totally sold on the draft proposal.

To my great surprise, the statement from the net-licensee side that offers more depth than the others happens to come from ACT | The App Association. To be clear, it's not an App Association--it even works against app developers where it benefits Apple, the company that largely funds--and according to sources cited by a Bloomberg article--effectively controls ACT. Presumably that statement was dictated by Apple or ACT was at least briefed by Apple on the key talking points.

I disagree with the rhetoric, but would like to highlight the following issues that ACT (i.e., Apple) has identified:

  • "It would be extremely helpful for the Commission to confirm a number of self-evident truths that are unfortunately still disputed by some. They include the fact that a FRAND commitment always follows a SEP in the event of a transfer, and that SEP holders cannot refuse to license to any party who is willing to agree to FRAND terms and conditions."

    Philosophically, the draft suggests all of that. However, Apple has been advocating chipset-level licensing for a long time, and the proposal now falls short of its expectations because it merely envisions that the EUIPO would "raise awareness" for the licensing level, which is not binding on any court.

  • "We hope the Commission will acknowledge that injunctions on FRAND-committed SEPs should only be available in limited circumstances, as a last resort."

    Again, philosophically the draft proposal is an anti-injunction proposal in the sense of imposing preconditions for "enforcement"--a term that it fails to define, which is a major problem because it could mean all sorts of things--and to delay the process. But the proposal does not attempt to move the goal posts wih respect to the reasons for which the infringement courts grant or deny injunctions. What ACT (Apple) appears concerned about is that even after that nine-month FRAND determination process, certain courts might simply enjoin implementers over behavioral issues (Sisvel v. Haier). I discussed that possibility in a recent post on why implementers should be careful what they wish for.

  • "Certain SEP holders persistently require SMEs to, in a SEP licensing negotiation, either license SEPs that are invalid or unenforceable, or patents that are not even essential to the standard. We hope the Commission will introduce measures to address such abuses."

    The SME story is just astroturfing, but let's talk about the issues they raise. Given their stated concern about the need to license non-essential patents belonging to SEP owners, the draft regulation is counterproductive for their purposes. First, the draft regulation defines the term SEP in a way that includes non-essential patent claims. As a rseult, even non-essential patent claims would have to be considered in the envisioned FRAND determinations. Second, net licensors would have to place greater emphasis in litigation and in licensing negotiations on their non-SEPs.

  • "Further, it would be helpful for the Commission to clarify that reasonable FRAND rates for SEPs are based on the value of the actual patented invention, which does not include the patent’s inclusion in the standard, hypothetical downstream uses at the end of a value chain, or other arbitrary factors.

    “Finally, we believe it would be important for the regulation to find a means for ensuring that conciliator panels reflect the balance of experience and viewpoints needed to produce fair and appropriate outcomes."

    Those two paragraphs show that ACT | The Apple Association is far from convinced that those FRAND rates will really bring down licensing costs (which is obviously any net licensee's ultimate objective). I've already explained that the conciliators (arbitrators) will actually have an incentive to set high royalty rates. Many (if not most or almost all) of those who are eligible for that role are readers of FOSS Patents, by the way. ACT (Apple) appears concerned now that there could also be a problem with the selection process resulting in a bias favoring high royalty rates.

    Their demand for valuation criteria to be laid out by the regulation would fundamentally complicate things for the Commission. As for the value of "the patent's inclusion in the standard," it's worth nothing that even Justice Mellor's InterDigital v. Lenovo FRAND judgment (which was a much better outcome for the defendant than for the plaintiff) acknowledged in para. 168 that it's neither fair nor feasible: "For my part, I do not see how one can eliminate or distinguish the value of an invention being incorporated into a standard from the invention itself."

2. Perspective of major patent holder who is also a large-scale implementer: Huawei

Earlier this year I described Huawei as an "accidental net licensor" because it's simply an innovator who obtains and implements patents, and does both on a very large scale. That fact makes Huawei's perspective particularly interesting in this policy context: they know both sides because they are on both sides. I can't think of any other company that is so clearly in the middle between net licensees and those who are either just licensing firms or generate a far greater royalty surplus.

In a recent IAM article (paywalled), Huawei's European IP chief Xiaowu (Emil) Zhang was quoted saying that "the regulators are not in the business" (thus don't completely understand how licensing works) and that the envisioned FRAND determinations would be "detrimental to the whole industry."

3. Net licensors don't want unnecessary costs, delays, and uncertainty

Last week, IP Europe--whose members include major net licensors such as Qualcomm, Ericsson, and Nokia--issued a detailed and thoughtful statement. IP Europe's first and foremost concern is that the draft regulation would encourage holdout and complicate efforts to enforce intellectual property rights against unwilling licensees. The statement furthermore raises industrial policy issues (investment in R&D, EU leadership in standard-setting, strategic autonomy).

Looking at all those official stakeholder reactions to the leaked draft and considering the partly structural issues I've identified, it's clear that this here needs a lot more work before it can be reasonably put forward as a legislative proposal. And I haven't even talked much about the draft impact assessment, parts of which are easily debunked as biased and unsubstantiated (in fact, the draft impact assessment even takes an unfounded position on whether a certain patent pool's rate is FRAND, without a scintilla of evidence or any factual argument)...

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