Friday, September 1, 2023

The proposed EU SEP Regulation is a hot mess that lawmakers can dilute but not fix due to structural issues, fundamental rights, and international obligations

Many dozens of issues have been raised with respect to the proposed EU regulation on standard-essential patents. Not only--but also--by me. Now that the EU's co-legislators in the Council and the Parliament are back from their summer vacations, I think it's time to take a high-level look. Let's discuss the forest and not just a lot of (sick) trees. Let's ask ourselves: is there anything that could be done to turn that proposal into something that is at the same time constitutional, in line with international obligations, workable, and useful? What amendments could make a positive impact?

Regrettably, the proposal is a "wholly bad idea" as Mr Justice Marcus Smith noted, and fundamentally there are only three things that can be done:

  1. Go back to the drawing board and think up something different, such as a codification of Huawei v. ZTE with useful clarifications and guardrails.

  2. Water it down to mitigate the damage.

  3. Pass something into law more or less along the lines of, and possibly even worse than, the proposal that is on the table.

The primary problem facing those criticizing the proposal is that they have too many things to criticize (and, therefore, too many amendments to suggest) because there is so much that's wrong with it. But let's sit back for a moment and think about that proposal in broad terms. What is it all about?

It's a triad of measures: (i) a SEP Register (EU only), (ii) a process for (maximum) aggregate royalty determinations (global), and ultimately (iii) a process for FRAND determinations relating to specific licensor-licensee relationships (also global). And SEP holders find their enforcement (in the EU) adversely affected, such as being precluded from asserting certain SEPs as SEPs (they might still assert them independently of a standards-based infringement accusation) or having to await the outcome of a FRAND determination prior to suing.

Earlier this week I declared myself largely in agreement with Dr. Justus Baron's advocacy of the idea that (ii) should be stricken. One can also make the argument that (i) and/or (iii) should be optional. Or that (iii) should, at minimum, not impede enforcement.

But what would be left then? Like it or not, (ii) is the centerpiece of what the Directorate-General for the Internal Market (DG GROW) has in mind. Technically, one could go straight from the SEP Register to bilateral determinations, but budgetary and time constraints would make it practically impossible to make any top-down royalty determinations: it would come down to a review of comparable license agreements, which is what the courts of law tend to do (as Dr. Baron also notes in his paper).

The disconnect between an EU-only SEP Register and global royalty determinations is glaring, but what can you really do? If the register is global, you'll end up assessing countless Chinese patents to provide just one example of how unworkable this would be. If the royalty determinations are EU-only, you eliminate an inconsistency and avoid a comity problem, but you end up failing to resolve disputes of a global nature.

It's a conundrum. In the headline I said "hot mess" and that's another way of putting it. Either way, this is not going to lead to a positive outcome.

What kind of regulatory philosophy does the proposal reflect? First, it's a specimen of interventionism: without hard evidence of any of the alleged problems harming innovation, competition, or consumers, they just want to do something. Second, they don't really want to accept responsibility for anything. If they proposed some Huawei v. ZTE-style legislation, they'd at least have to come clean and set specific rules that the courts would apply. Both rate-setting parts of the proposal are designed to have it both ways: let's do something, let's even do mandatory things, but we want to have our cake and eat it, so we'll say the results are non-binding. And above all, there's an underlying belief that the economy needs more bureaucracy, as if that wasn't so typical of what EU skeptics (such as Brexiteers) have been criticizing for decades.

Now that MEPs return to Brussels (and Strasbourg) and the Council's working groups convene more frequently again, there's a lot that one can tell them about the shortcomings of the proposal in question. For the avoidance of doubt, I, too, will continue to discuss details of the proposal and proposed amendments. But we must not lose sight of the fact that the overall structure and the underlying philosophy are the root cause of those problems.

There's no point in putting lipstick on a pig.

If a house is bound to come crashing down, what's the point in painting the walls or cleaning the windows?

Unless the decision makers in the EU's co-legislator institutions send the thing back to the Commission, or the Commission comes to the realization that it's better to withdraw this proposal, a lot of time, money, and energy is going to be wasted rearranging deck chairs on the Titanic.

The one thing that the decision makers must understand--with the help of those who can explain the issue to them, and who are not in the camp that will simply welcome anything that complicates SEP licensing and enforcement--is that there is no viable path forward with this proposal. There just isn't.

The actual decision makers should not allow themselves to be fooled by those who drafted the bill. It's not some form of advanced and modern policy making to effectively require companies' participation in certain processes only to then argue that access to justice isn't really needed because the result is not binding. It's nonsensical. Here, again, you can go in different directions if you like, but it's not going to lead to anything useful, workable, and lawful in light of fundamental rights and international obligations. You can make it formally binding, but then you get into conflicts with international obligations and basic rights, and at least have to allow appeals to the courts of law, but if you do that, you might as well start in court. You can reduce the pressure on parties to participate in those processes, such as by making the SEP Register with its essentiality checks non-mandatory and ensuring that those FRAND determinations are just an additional option for alternative dispute resolution (like the UPC's mediation center), but if you do that, chances are that your "beautiful" new bureaucracy is not going to be utilized by a lot of companies.

If there was one game-changer amendment, I'd be happy to propose it. That is what I've done in other contexts. For example, I said very clearly in early 2020 what language would have turned Germany's patent injunction statute into something more eBay-like. I didn't initially make that proposal public, but it was shared with quite a number of key players in the net licensee camp.

The EU SEP Regulation can't be meaningfully improved even with a dozen amendments. That's a fact the decision makers just have to face. It's not a question of whether those representing net licensors are being constructive. It's because the overall idea will always lead to issues.

DG GROW's impact assessment claims that they evaluated different options, but they didn't really do so. For essentiality checks, they didn't consider any practical option, and they're not even clear about what they want now: sample size and other parameters would be defined by the Commission at a later stage, which is also one of those structural issues that are pervasive throughout the proposal. For FRAND determinations, there's even less analysis other than claiming that those would cost less than litigation, but might (which is just an assumption lacking any factual basis) reduce litigation (though even DG GROW can't point to a problem of rampant and growing SEP enforcement).

If DG GROW thinks the judges in one or more EU Member States don't decide SEP disputes the way Brussels would like them to, then they should just be honest about it and do the hard work that it takes to understand how those cases are decided, and to make specific proposals on that basis. They could start with non-binding recommendations and still initiate legislation if it turns out inevitable. But the instict that the first thing to do is to create some more bureaucracy is wrong, and that's not going to be addressed by 1, 10, or 100 legislative amendments.

I just want to urge everyone to remain focused on the broad concept rather than get lost in myriad details. The devil here is not in the detail, it's in the overall structure. Politicians can urge everyone to be "constructive"--but in order to be that, one needs a basis. The starting point is beyond repair, and changes can only be dilutive or make things worse, neither of which makes sense.

The ones who are not solution-oriented are not the ones who say that the Emperor has no clothes when it simply is the case. The unconstructive ones are those who defend a fundamentally flawed thing only because they believe it may come in handy (or at least won't hurt) when engaging in hold-out. Let's be blunt about that. They want that crap to be passed into law, possibly in an even more problematic fashion, just to violate the spirit of Huawei v. ZTE, according to which FRAND is a two-way street. And many of the individuals pushing for it are just self-serving. They're looking for a way to internally claim victory (knowing that the decision makers above the IP departments can't realistically figure this out). They want to say they've achieved something, even if it could backfire, such as if the conciliators end up setting higher royalty rates than some people may think today. The incremental costs will likely make SEP licensing more expensive for implementers (and, by extension, consumers).

Net licensees of course have the right to criticize the current state of affairs from their vantage point and to try to move the goalposts in their favor. Some of their criticism of the current situation would be justified; some would not. The other side then has the right to insist on a reasonable balance, which is clearly missing at the moment. But it's either incompetent or irresponsible to support the proposal that is currently on the table. The intellectually honest thing to do is to say that this is the wrong way regardless of what one's objectives may be--and furthermore to acknowledge that this is the wrong time because it will be interesting to see, among other things, what case law the UPC develops and to what extent its mediation center will be utilized.