Sunday, June 4, 2023

EU-only SEP register can't serve as basis for global FRAND determinations: proposed EU regulation on standard-essential patents suffers from incongruent provisions

The proposed EU regulation on standard-essential patents (SEPs) did not spark much enthusiasm when it was formally presented in late April. Since then, the companies that have spoken out strongly in its favor include Deutsche Telekom--which also celebrated a German patent injunction "reform" that has not made a difference after almost two years of being in effect--and some automotive industry players such as Continental. Not only do those companies hold only a small quantity of SEPs but they can't even be considered the most sophisticated SEP licensees. When Deutsche Telekom gets sued, it's always the makers of network infrastructure or of end-user devices that are invited to intervene and do the hard work.

The European Commission's Directorate-General for the Internal Market (DG GROW) may have viewed some of the criticism (particularly of the draft bill that leaked in late March) as an attack on the initiative and on the people behind it, but DG GROW should understand that a fair amount of criticism is warranted and actually helpful. Without any objective need to rush things, DG GROW put out a proposal that has fundamental flaws, gets some important details of patent law and SEP enforcement wrong, lacks an evidentiary basis, and is teeming with typos and linguistic errors like no other document I've ever seen from the Commission (even in far less important contexts). There's no denying that something went awry.

DG GROW doesn't seem to have coordinated its proposal with other DGs. For instance, DG COMP released its new horizontal guidelines on Thursday, and while they warn against price fixing in the context of standardization, they say nothing that would legalize a cartel setting an aggregate royalty rate for a given standard.

What about other European institutions that are key to standardization and SEP enforcement? The European Patent Office is not involved. The European Telecommunications Standards Institute (ETSI) strongly spoke out against the envisioned SEP Register. And this week the Unified Patent Court UPC) officially commenced its operation (the first lawsuits have already been filed), on which occasion the President of the UPC Court of Appeal, Judge Dr. Klaus Grabinski, "urged [DG GROW, whose director general was present] to rethink [its] SEP plan" according to a report by ManagingIP's Rory O'Neill that was also referenced by the former editor-in-chief of IAM, Joff Wild, on LinkedIn. Also on LinkedIn, one of the leading German patent litigators, Cordula Schumacher of Arnold & Ruess, welcomed Judge Dr. Grabinski's criticism of the proposal and warned against "a serious restriction of the fundamental right of access to the courts (including the UPC!) [that] might be a violation of the Charter of Human Rights."

In his inaugural speech, Judge Dr. Grabinski had expressed his support for DG GROW's "aim to enhance transparency, but access to justice is a core fundamental right."

That statement vindicates one of my blog posts about the EU SEP Regulation. On April 3, I was (unless I missed something) the first one to publicly criticize the fact that appeals appeared to be not even an afterthought. That post was based on the draft regulation, but the late April proposal didn't fundamentally cure that defect. The possibility of a second-opinion essentiality check does not solve the fundamental problem. Essentiality checks, aggregate royalty determinations for standards, and FRAND determinations between parties must all be appealable to the courts of law.

Sadly, the official legislative proposal not only failed to address many of the issues that were already identified based on the leaked draft, but it even raises new ones. I'll talk about the shortcomings of the proposal in multiple posts, just like last time. Today I'd just like to focus on one: the territorial incongruence between the SEP Register and the envisioned FRAND determinations (both agggregate royalty rates for entire standards and portfolio rates set in disputes between parties).

Between the leaked draft and the official proposal, DG GROW decided to make those FRAND determinations worldwide. As a result, the SEP Register and the FRANd conciliation rules are no longer co-extensive with respect to the patents covered (click on the image to enlarge):

The problem is real. For instance, there are patent holders who prioritize U.S. filings and don't obtain as many patents in Europe as they do in the States. And there are numerous SEPs that exist in China, but which do not have any equivalents in Europe.

That inconsistency guarantees that the FRAND determinations will be incorrect, as they will rely on the EU SEP Register and the related essentiality checks.

I've previously criticized that there is no provision in the proposal for making adjustments to those worldwide FRAND determinations based on judgments in other jurisdictions, such as Chinese FRAND rate-setting decisions. Why shouldn't Chinese courts have the right to set the rate for the Chinese part of a portfolio, or U.S. courts for the U.S. part?

In its explanatory memorandum, DG GROW points to "the context of global developments" concerning SEP-related legislation. If anything, the EU initiative will actually encourage and embolden other jurisdictions to take similar initiatives, which will result in multiple frameworks and potentially multiple jurisdictions claiming in a given case to have the right to make a global FRAND determination. When such conflicts arise, there is no rule that the first legislation of this kind to be enacted takes precedence over "younger" laws.

In the end, the EU proposal may have the opposite effect of what those worldwide FRAND determinations are intended to achieve. We may very well see a regional fragmentation of portfolios, with companies asserting U.S. patents in federal district courts and the ITC, Chinese patents in Chinese courts, and so forth.

Instead of going it alone with a deeply flawed proposal, the EU should engage with key trading partners such as the United States, which considers the proposed SEP Regulation unhelpful. And I don't think I'm asking for too much if I want any such proposal to be at least internally consistent. The disconnect between the SEP Register and the essentiality checks on one hand and FRAND determinations on the other is a structural issue.