Tuesday, August 15, 2023

IP Europe submission criticizes proposed 'delegation of power by the Commission to itself and to the EUIPO': EU SEP Regulation

On Friday, industry body IP Europe responded to the European Commission's consultation on its proposed regulation on standard-essential patents (SEPs). A short blog post highlights some key issues, and IP Europe also published its 28-page consultation response.

While the long document has a hierarchical structure, it is a difficult read. There's a lot of trees there, but the contours of the forest could be made clearer. Certain themes are found throughout the document, such as evidentiary issues with the proposal (of which there are--I agree--plenty). An expert working group in the EU Council may find IP Europe's submission a treasure trove of strong analysis. I understand that it is a challenge to critique a legislative proposal that is flawed at all levels: there's so much to say. I'd just like it to be easier to figure out what the core messages and counterproposals are.

I try to understand both sides of the debate, but the problems with the EU SEP Regulation are structural. IP Europe is right that it's designed to bring down SEP license fees (whether it would ever achieve that in practice is actually unclear). When a proposal is unbalanced and unworkable, an independent commentator like me is left with no choice but to side with those who call for its withdrawal and/or overhaul. To be honest, while there obviously are various ways in which the proposal could be modified, I think the best solution would indeed be to toss it because it is, seriously, crap.

That, of course, does not mean that I agree with IP Europe across the board. Not only have I just voiced my honest opinion on its messaging but there are a few items in the submission that I would not support. For instance, it is IP Europe's position--and a legitimate one to take--that "the critical problem in the marketplace [is] the practice of 'hold-out.'" Hold-out is indeed an issue: I've attended patent trials, read court decisions, and unofficially heard of negotiations in which an unwilling licensee refused to engage in constructive negotiations. However, there are also cases in which SEPs (and other patents, but let's stay focused on SEPs here) get overleveraged, particularly through enforcement actions in Germany. In footnote 18, IP Europe says SEP royalties "have been, and can be, checked by the courts of EU Member States and now also the UPC." Unfortunately, that is not the case in Germany, and that's the country in which most European SEP infringement cases are filed.

If the EC's Directorate-General for the Internal Market (DG GROW) and organizations representing implementers (such as certain automotive industry associations) wanted to have a debate over whether the 100% behavioral, 0% economic approach of German courts--which may or may not be adopted by the UPC to that extent--is appropriate, I would say: let's discuss. Let's talk about that, let's not forget that there is also significant room for improvement with a view to hold-out, and let's think about what the EU could do to strike a better balance.

Instead, we are now faced with a proposal that--as IP Europe's submission accurately notes and documents--is all about price regulation by two EU institutions, with the stated goal of lowering those prices.

The evidentiary issues here start with the most basic question (which IP Europe also raises, but differently):

Why now? How is this urgent?

The honest answer would be: because the current EU legislative term ends next spring. That, of course, cannot officially serve as justification. Let's face it: this here is all about institutional and individual ambition, not about sound industrial policy.

The DG GROW-commissioned impact assessment study itself makes it clear that there is no acute crisis, yet we see some EU officials in different institutions acting as if the house was on fire. Some people are rushing this like critical decisions at the height of the pandemic. The difference being that the total number of typos and grammatical errors found in all of the EU's COVID-related documents is dwarfed by all of the linguistic and editorial flaws (plus formatting inconsistencies) in that one SEP proposal.

For interinstitutional reasons, the Council and/or the Parliament should teach DG GROW (I'm not saying "Commission" because I haven't seen anything like this from any other Commission DG) a lesson. They should send DG GROW back to the drawing board, and tell them to get their act together next time in legal, evidentiary, and linguistic terms. That proposal is substandard in every respect. It's a disgrace for the EU.

IP Europe's paper raises various issues I've previously addressed, and points to numerous issues with the proposal. I commmend them for that work, and it will serve as useful reference material in the further process. For now I'd just like to talk briefly about one issue with the proposal that I haven't previously stressed:

DG GROW wants the EU's co-legislators to give overreaching powers to the Commission and to the EUIPO.

Important decisions such as on what standards the regulation should relate to or what methodology should be applied in FRAND rate determinations must be made democratically. The Commission may have left those questions open because it needed more time to make up its mind, or maybe the plan was to avoid any political debate over those questions. Whatever the motive may have been, it is unacceptable. And IP Europe is also right that the EUIPO can't just have the authority to remove patents from the register.

IP Europe's submission notes that the Commission seeks to "vest[] the EUIPO with the authority to act as a rate regulator, unilaterally setting FRAND royalty rates"--and that this goes far beyond an effort to "increase transparency."

There is no shortage of reasons to reject the proposal in its current form and to demand a withdrawal or complete overhaul. The excessive delegation of legislative power to the Commission and the access-to-justice issues relating to the EUIPO's management of the SEP Register are additional reasons to conclude that the proposal that was put forward in April is broken beyond repair.

The ECJ's Huawei v. ZTE decision was a good one. Its application could be improved, but not through the creation of an unchecked and burgeoning bureaucracy with an unconcealed and one-sided agenda to put a thumb on the scale.