Governments of three medium-sized EU member states agree: proposed SEP Regulation is overly intrusive and unbalanced

If the decision makers in Brussels knew and understood the facts and the law, they'd realize that the proposed EU regulation on standard-essential patents (SEPs) is misguided and should be tossed (in favor of a complete do-over) regardless of whether one is more sympathetic to one camp or the other. But political dynamics are sometimes detached from reality, especially in the EU, whose economic policy track record is abysmal.

That's why influential voices of reason are needed. Granted, the collective voting weight of the Netherlands, Finland, and Sweden falls far short of a blocking minority in the EU Council. But it's a critical mass of member state governments opposing the bill in its current (or any similar) form in order to get the attention of all the experts. Council working groups are composed of experts, who obviously get political directions from above, but the likelihood of them being receptive to technical (in terms of "legally technical") arguments is far greater than when you're dealing with politicans seeking reelection or higher office based on faux achievements.

That also applies to issues concerning fundamental rights. The EP(P) rapporteur on this one, Marion Walsmann MEP (EPP-Germany), even seeks to exacerbate the bill. Mrs. Walsmann's voting record with a view to human rights should be subjected to scrutiny. And just like the totalitarian political system in which she started her career, she seeks to silence and suppress rather than listen to critical voices:

According to what I heard from Brussels sources, Mrs. Walsmann is none too pleased with the draft opinion authored by her party colleague Professor Danuta Hübner (Poland), who is the international trade committee's (INTA) rapporteur. Mrs. Walsmann incredibly argues that INTA oversteps its competency by commenting on a wide range of aspects of the draft regulation, but a WTO treaty named TRIPS (trade-related aspects of intellectual property rights) is reason enough for the INTA committee to look at the proposal holistically, with or without Mrs. Walsmann's blessings or misgivings. And if any additional reason was needed (it is not), the perspective of the EU's largest trading partner should be considered as well. INTA has no shortage of reasons to be profoundly concerned and to make its presence felt, for the sake of protecting the EU's reputation on the world trade stage.

Back to the EU Council, which would be in the best position to prevent an idiocy that could even turn out a tragedy.

1. The Netherlands

The Dutch government was the first one to formally voice criticism of the proposal. Others may have previously done so behind closed doors, though.

I'll now quote a few passages based on the English-language summary provided by IP Europe on its live blog (the two original documents--in Dutch--are also available: 1, 2):

• "the intrusiveness of the initiatives relative to the perceived magnitude of the problem"

• "the potentially adverse confluence of the proposal with the launch of the Unified Patent Court and existing (market) mechanisms such as patent pools and existing alternative dispute resolution options"

• "the risk that by regulating the licensing practice for SEPs, the EU loses attractiveness both as a standardization environment and the place to resolve disputes effectively and efficiently"

2. Sweden

The Swedish government--which is not simply in Ericsson's pocket but also has major implementers of all sizes to take into consideration--discussed the EU proposal at a recent parliamentary committee hearing (minutes in Swedish). From a machine translation:

• "the proposal put forward introduces a comprehensive and highly binding regulatory framework in an area where there was previously no regulation and places extensive tasks on the EUIPO, which has not previously handled similar tasks"

• "the background analysis presented by the Commission does not support the view that such restrictive measures are necessary"

• "it seems doubtful whether the proposed limitations on the ability of patent holders to prosecute infringements can be regarded as proportionate restrictions on their intellectual property rights"

• "The Government therefore intends to work to ensure that the proposed regulatory framework is not introduced or, in any case, that the regulation is as limited, flexible and predictable as possible. In this respect, the Government intends, among other things, to work to ensure that patent holders' ability to prosecute infringements is limited as little as possible and that the authorisations granted to the Commission in the Regulation are limited as far as possible."

• Sweden's Social Democrats went even further, saying inter alia that "a proposal as far-reaching and intrusive as the present one should not be used as a basis for legislation."

3. Finland

The Finnish government circulated a "U-letter" that discussed various policy issues including the EU SEP Reg (Finnish document). Based on a translation and a summary that I've obtained, the Finnish government has declared itself "highly critical" of DG GROW's proposal. Here are some key points:

• "the proposed regulation is disproportionately burdensome on the right-holders and thus “likely to discourage European companies from participating in the development of international standards"

• the scope of the regulation - the standards that it will apply to - is left to the Commission to define via a delegated act, which may confer disproportionate, inappropriate and unjustified powers on the Commission

• the FRAND determination process restricts fundamental right to judicial review and thus raises the question of compliance with the WTO-level TRIPS agreement

Here's a translation of a longer passage:

"The Government considers it important that the regulation of businesses is clear, predictable, proportionate, competition-neutral, technology-neutral and innovation-friendly. An environment that encourages and inspires entrepreneurship means that businesses and citizens are not discouraged by excessive regulation. Intangible rights, such as patents, encourage businesses to innovate and promote the use of innovation in society. They are therefore an important part of innovation policy, which aims to build conditions in Finland that encourage companies to innovate boldly, innovate and grow internationally.

"The Government is highly critical of the Commission's proposed regulation on patents essential to the standard. The Council of State considers the objectives of the Regulation to improve the licensing of essential patents and to increase transparency to be important, but considers that the measures proposed by the Commission do not fully comply with the principle of proportionality. The proposed new regulation would create a significant regulatory burden, in particular for holders of essential patents, which is likely to discourage European companies from participating in the development of international standards. As such, the Council of State welcomes the fact that the Commission has taken into account the role of small and medium-sized enterprises (SMEs) in its initiative. However, the negotiations must ensure that a balance is maintained between taking into account the interests of essential patent holders and users of standards, which promotes the dissemination of standardised technologies and the development of new technologies and products, without placing an unduly burdensome new regulatory burden on enterprises.

"The Government is highly critical of the Commission's proposal that the proposed regulation would also apply, under certain conditions, to standards or parts thereof published before its entry into force and that the Commission would define such standards by delegated act. The negotiations must ensure that the powers conferred on the Commission are sufficiently precise, proportionate, appropriate and justified.

"The Government is highly critical of the Commission's proposal for a compulsory settlement procedure to determine the FRAND conditions for licensing essential patents. Negotiations must ensure that the regulation does not unduly restrict the right to judicial review, which is a fundamental right. The negotiations must also ensure that the proposed procedures comply with the terms of the World Trade Organisation (WTO) TRIPS Agreement on Trade-Related Aspects of Intellectual Property Rights."

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European Parliament rapporteur proposes further deterioration and radicalization of EU SEP bill, fails to understand issues and to demonstrate professionalism

Unlike those who engage in lobbying, I don't have to mince words when commenting on what's going on in the EU with respect to the proposed regulation on standard-essential patents (SEPs). Among other things, I've saidthat the EU SEP Reg does reinforce my belief that the EU--an economic policy failure, plain and simple--is on the wrong track in many ways. I'm currently moving to a far better-run country that is not an EU member and most likely won't join in my lifetime.

The European Commission's Directorate-General for the Internal Market (DG GROW) has already embarrassed itself with the proposal and with the partly absurd ways in which it has attempted to justify it. While there is a silver lining in the form of a counterproposal by the rapporteur of the EU Parliament's international trade committee (INTA), I've now seen the draft report by the lead committee's (legal affairs, JURI) and therefore the Parliament's rapporteur--and it's an unmitigated disaster.

As I mentioned in the previous post (which I just linked to), the EP/JURI rapporteur on the SEP Reg, Marion Walsmann, started her parliamentary career as an active supporter of East Germany's antidemocratic regime. I'll talk about that some more on another occasion, but based on what I've researched, her party--which was part of the "National Front" bloc led by the Socialist Unity Party of Germany--almost 100% consistently voted in favor of every single proposal by the ruling communist party until the Fall of the Wall (the only significant exception was in 1972, at which point Mrs. Walsmann was a child). If that is true, then she has a consistent voting record of siding each and every time with an oppressive regime that despised democracy and violated human rights--and was rewarded by the regime for contributing to some faux pluralism. One of the most corrupt actions in German history was to merge those bloc parties into West German parties, all of which seized the opportunity to clear their financial debt, except for the Greens, which didn't have a formal sister party in the GDR anyway.

Nowadays there are no more bloc parties, but there's a phenomenon called astroturfing that is not entirely dissimilar. In an annex that lists entities from whom Mrs. Walsmann received input, ACT | The App(le) Association" is also found.

There are some funny typos in that annex ("Philipps" instead of "Philips" and "Xiami" instead of "Xiaomi") and a fundamental error concerning the lobbying entity of her home country's automotive industry: as the long-form name for VDA, the annex states "Verband Deutsche Automobilhersteller", which is not only grammatically incorrect (an "r" at the end of the second word is missing) but simply not the name of the organization. The actual name is "Verband der deutschen Automobilindustrie." The difference is that the former refers to "automakers" while the latter also includes suppliers.

Those are not the only typos and errors. For instance, she espouses amendments to Article 9 of the proposed regulation that refer to determinations "per user case" while the correct term (which is used in many other instances in the same document) is "use case". Also, the German-language "explanatory statement" uses an inconsistent spelling for the German word for "essential": sometimes with a "t", some other times with a "z". And then there's an odd passage that says implementers can hardly find out "whether a standard is actually essential." She must have meant whether a SEP is actually essential to a standard. Then there are grammatical errors in a sentence about applications to which SEPs are relevant: the list of examples starts with the correct grammatical case ("dem Internet der Dinge"), but then switches to the wrong one ("vernetze Fahrzeuge" (which means "connected vehicles" and where a "t" is missing from the first word) and "intelligente Städte".

Why are those typos and other errors worth mentioning? It's just striking that DG GROW and its philosophically-aligned EP rapporteur can't even put out documents of a decent editorial quality when dealing with this subject. Actually, various of Mrs. Walsmann's proposed amendments serve no other purpose than to correct typos found in DG GROW's proposal. That's OK, but then she should get her own act together.

The degree of Mrs. Walsmann's alignment with the EC proposal is close to 100%, just marginally below the level of her alignment with East Germany's Marxist-Leninist dictatorship when she started her parliamentary career in the late 1980s.

It is ridiculous that she claims in her draft report to seek to strike a balance between the interests of SEP holders and implementers, and her reference to the need to address hold-out is meaningless. She simply wants implementers to be able to use the envisaged process to delay with impunity, which is reflected by various aspects of her proposal, such as the justificatio nof her proposed amendment to Recital 34:

"The parties should be able to wait until the outcome of the FRAND determination procedure in order to decide if they want to be bound by the result."

That is the very opposite of what UK courts expect of the parties. In the UK, one has to accept to be bound by a determination of whatever terms are in fact FRAND. If Mrs. Walsmann got her way, implementers could just say after the end of the lengthy process that a royalty rate isn't low enough for their taste.

Mrs. Walsmann's report clearly reflects that her understanding of how SEP licensing and enforcement work is lacking and wanting. Instead of fixing the problems with the original proposal, she just wants to add more elements that are indicative of incompetence. Three particularly stupid examples:

• She proposes a new Recital 10b that would advocate allowing Licensee Negotiation Groups (LNGs). However, the issue with LNGs is that they are irreconcilable with anti-cartel rules if the collective market share is too high and an actual or threatened group boycott obstructs the licensing process. Possibly influenced by her astroturfer soulmates who falsely claim to represent small and medium-sized enterprises, she then writes that "LNGs benefit SMEs in particular." But SMEs typically won't need an exemption from competition law if they coooperate in reasonable ways: they won't even come close to the market share thresholds where there might be antitrust scrutiny. The ones who need an exemption are the likes of Volkswagen and Toyota.

• Proposed new Recital 10a talks about patent pools. The proposal says pools "should also commit to FRAND terms and conditions." What would be the practical meaning of that commitment? Pools can't enforce directly, so all that matters is that a given pool's licensors are bound by a FRAND licensing obligation.

• The draft report makes an attempt to define the term "patent assertion entity" (in order to then withhold certain SME benefits of the bill from them). The problem is that this is not going to work in litigation. One of the criteria there is that a company "does not engage in [...] the research and development of such inventions"--but it's going to be pretty easy for licensing firms to show at least a small investment in R&D.

The draft report also goes directly against the case law of the European Court of Justice and the courts of various EU member states by imposing obligations on patent holders based on declared--as opposed to actual--essentiality.

Let's look at the bigger picture. As I said last month, DG GROW's proposal is a hot mess that lawmakers can at best dilute, but not fix. We have a proposal on the table now from the trade committee's rapporteur, and that one comes down to dilution. It's like "we should actually vote against it, but let's make it look more constructive and merely strike one part (aggregate royalties) and defang the others." And now we see what the rapporteur wants to do: she seeks to make things worse.

The Parliament shouldn't follow this rapporteur, and not even her own group, the European People's Party, which has a clearly more reasonable alternative to choose that was authored by another EPP MEP, Professor Danuta Hübner from Poland.

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Proposed EU SEP Regulation gets pushback from influential European People's Party MEP: draft opinion of Committee on International Trade (INTA)

Finally, the proposed EU regulation on standard-essential patents (SEPs) has been formally criticized--in the form of a draft committee report--within the European Parliament (EP). Not just from within the EP, but also from within the EPP: that's one more P and stands for European People's Party. The EPP is the largest group in the EP, though with 25% of the votes it's not as powerful anymore as it used to be at its peak where it needed only one other (and reasonably large) political group to form a majority (reasonably consistent voting along party lines provided).

There are many rapporteurs on a dossier (legislative or other matter) in the EP, which made it hard to get anything done against the EPP.

So I have to start with the proceudral context. The EP determines a lead committee on a given dossier. In this case, that's the Committee on Legal Affairs (JURI). One member of the lead committee becomes the entire EP's rapporteur. Every other political groups selects a shadow rapporteur, who is also a member of the lead committee. Sometimes shadow rapporteurs disagree fundamentally with the Parliament's rapporteur, whose positions may even be controversial within the same political group.

Here, the EP's rapporteur on the EU SEP Reg is Marion Walsmann, a (German) member of the EPP who started her political career as a parliamentary supporter of the East German communist dictatorship, which is my way to state a simple fact that is mentioned on the German but not the English Wikipedia page. The Christian Democratic Party of the German "Democratic" Republic was not an opposition party: it was part of an effort to pretend pluralism, and its politicians such as Mrs. Walsmann at the time enjoyed privileges for applauding the ruling communist party as it oppressed the true democrats in the country. There were opportunistic reasons for which all major West German parties except the Greens (there simply was no faux Green party in the GDR as the Green movement started toward the end of the GDR's infamous history) merged with their nominal East German counterparts right after reunification: it was mostly about money, and to some extent also about inheriting some existing structures. I'll leave that story for another day.

Mrs. Walsmann is deemed to be in favor of the proposal, or even of amendments that would cause further harm to SEP holders, but that is clearly not a consensus position, not even within her own political group. If one or more other committees are designated to provide an opinion, every such committee also has a rapporteur (and then there are shadow rapporteurs at the committee level). For the Committee on International Trade (INTA), the rapporteur is also a member of the EPP: Polish MEP (and former EU commissioner for regional policy) Danuta Hübner.

On Monday, Professor Hübner submitted her draft opinion: an 82-page document that contains a long list of amendments, the bottom line of all of whic his that SEP enforcement should not be restricted, complicated, obstructed, or delayed in any way, and particularly not the enforcement of non-EU SEPs.

Professor Hübner proposes

• to drop the part about aggregate royalty determinations (for all SEPs related to a given standard) entirely, which is consistent with a proposal by one of the researchers who were commissioned by the EC's Directorate-General for the Internal Market in this context;

• to limit bilateral everything else (which is not the case for bilateral FRAND determinations under the Commission proposal) to patents valid in the EU, which makes particular sense for a trade committee to propose but is equally common sense;

• to define reasonably clearly the scope of the regulation and not to delegate excessive powers to the Commission, an aspect on which she is particularly qualified to opine as a former chair of the EP's Constitutional Affairs Committee;

• to steer clear of disproportionate restrictions of patent holders' rights to enforce their IP, which actually raises international trade (as many patents valid in the EU are held by non-EU companies) and constitutional (fundamental rights) issues at the time; and

• to put more specific and elaborate measures in place to assist SMEs with a view to their participation in standardization as well as with a view to assisting them in their inbound licensing efforts.

The draft committee report coherently and consistently seeks to codify those objectives and to straighten out some other flaws, such as a weak definition of the term "patent family." Professor Hübner's proposal is certainly of a far higher quality than the Commission proposal, which in this case is, however, not a significant threshold.

There are some details I disagree with. In particular, the rationale provided for some proposed amendments is that removal of a patent from the envisioned EU SEP Register would render it unenforceable, but one could even argue that such a patent becomes even more enforceable: national courts or the Unified Patent Court (UPC) could still deem it essential, but it would not fall under the rules of the proposed regulation, and even if courts did not deem it enforceable, it might be a formidable non-SEP. The only respect in which the removal of a declared SEP from the register is certain to adversely affect its owner is that the company's essentiality ratio for the purposes of EU FRAND determinations will go down. Whether national courts will be swayed at all by those EUIPO-led determinations by anonymous "evaluators" is impossible to tell right now. As a litigation watcher, I could easily see lots of situations in which an infringement court would deem a patent essential notwithstanding an EUIPO-led negative determination. If some national courts--as I've just seen in the dispute between Nokia and OPPO--arrive at different conclusions on comparable questions than courts in another EU Member State, why wouldn't they also just use their own judgment instead of adopting the outcome of an opaque and generally low-credibility process?

But let's not get lost in details. A month ago I already said that the EC proposal "is a hot mess that lawmakers can dilute but not fix due to structural issues, fudnamental rights, and international obligations." Looking at it from that angle, I think the most straightforward proposal for Professor Hübner to make would actually have been to propose only one deleting amendment. Strike the whole thing because it's crap. It's easy to see, though, why she didn't do that: while perfectly warranted, it would be viewed by many as not being constructive.

What would the net effect of those amendments be? Dilution and delay (the latter because she'd extend the initial implementation period from 24 to 36 months).

Would the proposal--regardless of the proposed INTA position being consistent and coherent--serve any purpose? No, with just one exception: the part about helping SMEs might make sense, though that one is so small that it wouldn't warrant an entire legislative measure in its own right. There wouldn't be much else left. The aggregate royalty determinations would be thrown out; the bilateral process would be voluntary, and while there are strong reasons for limiting the scope of the regulation to SEPs valid in the EU, global licensing disputes result in global license agreements, so it is doubtful that the FRAND determination process would play much of a practical role.

I hope that some political group(s) will ultimately propose an amendment that enables MEPs to vote down the proposal as a whole. But at this stage, all that people can do is propose countless amendments. This is still an early stage of the process.

The EP votes on each amendment separately, though the non-binding voting lists provided to MEPs seek to ensure consistency. If just some of Professor Hübner's amendments got support in the further process (be it a parliamentary vote or a so-called trilogue where representatives of the EP, the EU Council, and the EC try to broker a deal that an EP majority typically rubberstamps), the regulation could become toothless. It can't be reduced to absurdity because it already is absurd, but something absurd that may not even benefit implementers as much as some of them hope might be defanged.

The intellectually most honest and generally most rational outcome would be for the EU not to pass anything into law based on the current proposal. They should send the EC back to the drawing board, and maybe there would never be a second proposal. But it could be that some people just want to have some outcome so they will (rightly or not) claim victory as they seek a nomination for reelection or audition for higher office or whatever.

It would be a waste of time, money (particularly taxpayers' money), and energy. Sadly, the EU's economic policy initiatives don't work very often, yet there are always politicians who put their weight behind them and hope for political gain from them. Maybe that's the inevitable fate of this proposal, but I'm not ready to give up yet. Rationality could still prevail, and Professor Hübner's draft opinion is, by and large, a silver lining.

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Sisvel's narrowband IoT patent pool boosts value proposition with Huawei and others bringing in many patents while lower rates enable new applications such as printable trackers

Patent pool administrator Sisvel just announced that Huawei, one of the largest patent holders in this space, has joined the narrowband Internet of Things (IoT) patent pool that was launched last November. The largest founding licensor was Ericsson.

This is the second Sisvel pool for Huawei to join. More than a year ago, Huawei started its working relationship with Sisvel as an initial licensor of its WiFi 6 pool (as Sisvel president Mattia Fogliacco recalls in today's press release) and is also an Avanci 5G licensor, which shows that the Chinese innovator is increasingly receptive to pool-based licensing solutions. Other major SEP holders may now be more interested in joining this pool, given that Huawei and Ericsson (as well as various other patent holders) already give the licensing program a lot of substance.

Sisvel's updated list of NB-IoT licensors contains several other names I haven't previously noticed, such as KPN, Deutsche Telekom, and BlackBerry. What licensees get is a "one-stop shop" (as Sisvel's cellular IoT program manager Sven Torringer calls it in today's press release) that gives them access to more than two dozen patent portfolios, with Huawei, Ericsson, and NTT Docomo being considered particularly strong in narrowband IoT. It's fair to say that Huawei had a leadership role in the development of the IoT-related parts of the 4G/LTE standard.

Sisvel's press release mentions "new royalty rates for the Cellular IoT patent pool, including for devices with a lower selling price," and that it has "expanded its offering to new product verticals." Previously, as I reported at the time, the rate was "$0.66 per unit for LTE-M" and "a distinction [was] made between asset trackers ($1.33 per unit) and smart meters ($2 per unit)." The $2 (smart meters) and $1.33 (smart sensors with a selling price above $20 and up to $130) price points are still found. But now there is also a $0.35 per-unit royalty rate for smart sensors with a selling price above $6 (up to $20) and a $0.08 per-unit rate for devices with a selling price of $6 or less.

For makers of low-priced IoT products, this means the value proposition has changed enormously in their favor: far more patents, and far lower rates for certain applications. It looks like two factors have resulted in this more flexible and attractive royalty structure:

• In my commentary on the creation of the pool I already noted that the challenge for an IoT patent pool is market development: it's not enough to offer licenses or to dissuade implementer from infringement, but about adoption of the standard. Patent pool administrators operate in a two-sided market. They have to bring licensors and licensees together, and in order to do so, they have to listen to both sides.

• Sisvel's new NB-IoT royalty rates are definitely reconcilable with Huawei's bilateral licensing terms for such products, which are highly differentiated as I explained last month. The pool is a one-stop option, but it's not the only way to get access to Huawei's intellectual property.

  Huawei is both a major patent holder and a large-scale implementer. If a pool worked for only one side, Huawei would find it hard or even impossible to join.

The rock-bottom rates that the pool now offers for devices with a selling price of $6 or less should enable new applications. What comes to mind as potentially the highest-volume and lowest-price NB-IoT application is called printable NB-IoT tracking labels. They are asset trackers in the form of stickers that could, for instance, track an Amazon package.

At a time when policy makers are working on an EU SEP Regulation, it's warranted to put major SEP news such as this one into the current political context. The European Commission's Directorate-General for the Internal Market (DG GROW) clearly underestimated the extent to which patent pools could be part of the solution as opposed to being part of the problem. The favorite pretext (not only of DG GROW but also Apple and its allies and astroturfers) to push for legislative intervention is that IoT SMEs allegedly need a different legal environment. But patent holders are smart enough to realize that IoT patent licensing won't work unless the royalty rates enable IoT product makers to thrive. While I still haven't seen a single SEP enforcement action against an SME as defined by the EU, and the IoT sector is generally not a legal battlefield at the moment, the market continues to find and improve solutions.

Patent pools not only bring licensors together with licensees, but also have to broker a compromise between licensors of very different kinds. Huawei with its high product volume (which is not fully visible to people in the Western hemisphere for purely geopolitical reasons, but is a reality in the rest of the world) obviously has a more balanced take than a non-practicing entity, which is not meant to disparage NPEs but plainly a fact. In order for a pool to unite product makers like Huawei and Ericsson with infrastructure companies like NTT Docomo and Deutsche Telekom as well as with research institutes and patent licensing firms, it has to identify royalty rates that work for all of them.

An EUIPO-led process for aggregate (entire standard) and bilateral (licensor A and licensee B) royalty determinations will cause delay and complicate matters. In the meantime, patent pool administrators and other market actors work out and fine-tune the solutions they offer.

With so much in flux especially concerning IoT, the prudent thing for the EU to do would be to wait and better understand what's going on. Instead of trying to adopt something before the end of the legislative term just for the sake of having some kind of outcome to show (no matter how flawed), they should go back to the drawing board and take note of new developments, such as IoT licensing terms becoming more attractive at a breathtaking pace.

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OPPO defends another 5G patent against Nokia's opposition: Mannheim trial scheduled for December, UPC PI motion conceivable, and what would the EUIPO do under the proposed regulation?

Nokia and OPPO are giving each other a hard time in different patent validity fora. Recently, even some Nokia patents that gave rise to German injunctions have been deemed invalid in other--but definitely reputable--jurisdictions. It's a monumental, earth-spanning dispute. There hasn't been anything so large and long-running in the wireless sector for years.

The latest development involves OPPO's EP3624524 on "wireless communication methods, network device, and terminal device." It's a 5G declared-essential patent that OPPO asserted against Nokia in Mannheim, with a trial scheduled for December 5, 2023. In early February, an opposition panel of the European Patent Office (EPO) declared the challenged claims non-novel, but did not take a specific position on (non-)obviousness. Yesterday, the panel upheld the patent in an amended form.

The Bardehle Pagenberg patent attorneys who achieved that partial victory are Tobias Kaufmann and Dr. Nikolaus Buchheim.

In June, another OPPO patent-in-suit was also defended in an amended form, and a modification of the claim language that looked like a minor clarification to me resulted in a non-essentiality determination by the Mannheim Regional Court. So I want to be careful about any predictions at this point. The patent may or may not be standard-essential in its narrowed form. And if it's not essential, then it may or may not be infringed, but an infringement allegation would have to be based on what Nokia's baseband stations actually do as opposed to a (rebuttable) presumption that what reads on the standard is infringed by a product that has been declared standard-compliant. As there is no pretrial discovery in Germany (in fact, nothing even remotely like U.S. discovery), it is far easier to properly plead an infringement case over a SEP than over a non-SEP.

I've recently attended several preliminary injunction hearings before Local Divisions of the Unified Patent Court (UPC): two in Munich (with Bardehle Pagenberg having won one case while the other is under advisement), and one each in Vienna and Helsinki. Companies are increasingly concerned about the implications of a patent surviving, in one form or another, a validity challenge, as the UPC appears rather willing to grant preliminary injunctions over such battle-tested patents, provided (of course) that other requirements, such as urgency, are met.

The Nokia v. OPPO/OPPO v. Nokia dispute showcases various of the things that can happen in SEP enforcement, raising the question of what would happen--or would have happened--if the proposed EU SEP Regulation was already in force.

With respect to what implications the amended claims of EP3624524 would have under the EU SEP Regulation, there are at least two interesting questions:

• If there had been an essentiality check based on the patent as originally granted, would the EUIPO routinely perform a new one in a situation like this?

• If the claim amendments pushed the patent out of the area of essentiality, but the patent could still be asserted as a non-SEP, wouldn't the patent holder actually be in a stronger position than if it was deemed essential for purposes of the EU SEP Regulation?

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Avanci 5G doubles number of licensees, quadruples number of licensed brands as BMW signs up: Volkswagen/Audi next?

The Avanci 5G automotive standard-essential patent (SEP) pool revealed Mercedes-Benz as its first licensee last month. Today the licensing program announced that BMW has joined as well, which takes the number of licensed brands from one to four: Mercedes, BMW, MINI, and Rolls-Royce. Today's press release also indicates that the number of licensors has increased from 58 to 61.

By now, almost the entire automotive industry has an Avanci 4G license. But back in 2017, BMW became Avanci's first 4G licensee. It took a while for that pool to be widely adopted. Things appear to be going significantly faster with Avanci 5G now.

In retrospect, BMW's decision made business sense unless one believes in the illegal concept of group boycott: Mercedes (then named Daimler) and Volkswagen did not save money by opposing the Avanci model. They ended up choosing the pool license over bilateral licensing negotiations and disputes, but unlike BMW they incurred litigation expenses (in Volkswagen's case, the dispute was short-lived and due to the fact they licensed only 3G patents for most of the cars the group makes). BMW saved money, time, and energy. They stayed above the fray.

While I have not yet seen a German SEP infringement case targeting BMW, they are clearly not a soft target for non-SEP holders. Typically represented by Bardehle Pagenberg's Professor Tilman Mueller-Stoy ("Müller-Stoy in German), BMW is known to defend itself vigorously against patent infringement assertions, though most of the time the outcome is, obviously, a license agreement. If such a company takes a license without litigation, it must have concluded that the licensed patents are valuable.

Germany's remaining three automotive brands are Volkswagen, Audi, and Porsche, all of which belong to Volkswagen Group. Audi and Porsche clearly compete in some of the same market segments as BMW and Mercedes. It would make a lot of sense for VW to join the pool now. Sooner or later, some 5G SEP holders will start to enforce their rights against unwilling licensees. Just like German judges pressed Mercedes (then named Daimler) to explain why a license that had been taken by their closest (and equally German) competitors: BMW and Audi. I doubt that Audi would want to have to justify--particularly in front of the same judges who heard Nokia v. Daimler--a refusal to take a license that Mercedes and BMW deem to make economic sense.

Just like actions speak louder than words, real-world license deals are way more meaningful than spin doctoring and political propaganda. Mercedes-Benz told the EU that the proposed SEP regulation (or something even more lopsided) was badly needed, yet became the first Avanci 5G licensee because they deemed it prudent. Similarly, BMW Group is now an early adopter of the Avanci 5G license, yet it is a member of the Fair Standards Alliance and of certain automotive industry organizations that take similar positions.

There's nothing difficult to understand: every company would like to bring any cost category--here, cellular SEP license fees--down, even if such costs are already fair and reasonable. Automakers are no different. That is unrelated to the merits of Avanci providing a one-stop solution that Mercedes and BMW have twice (4G and now 5G) considered superior over dozens and dozens of bilateral deals. And opportunism by some car makers certainly doesn't make the EU proposal any less misguided. Case in point, a single Nokia v. OPPO decision in Sweden (which went in the defendant's favor) showcases at least four of the countless flaws of that bill.

Accurate and holistic analysis needs to look at what those companies say and what they do. License deals that are concluded in the absence of litigation--and presumably even without the slightest threat of litigation other than the fact that any infringement may sooner or later become the subject of enforcement action.

Europe's and particularly Germany's automotive industry is facing undeniably large problems. Cellular SEP licensing is none of them, though. Even if those costs were reduced through political intervention (which I don't see happening, though it is some people's agenda), that wouldn't help to address any of the fundamental challenges facing the European auto sector, particularly because there's no comparative advantage for companies selling cars in a given target market in which certain patents must be licensed.

Today's Avanci-BMW announcement is good news for those who argue that the market can and will find solutions, as are other recent license deals such as Huawei's recent agreement with Xiaomi.

Patent pools exist to simplify licensing--which must have been the reason why BMW entered into one agreement rather than 60+ bilateral deals--while some EU officials and politicians are trying to complicate the process and mistakenly view pools as part of the problem, not part of the solution.

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Four of numerous flaws of proposed EU SEP Regulation are illustrated by OPPO's Swedish victory over Nokia: binary register won't reflect non-binary world, and jurisdictional differences matter

This is a follow-up to my Thursday post on a Nokia v. OPPO decision by the Swedish Patent and Market Court that held a pair of declared-essential patents (from the same family) invalid, but also an addition to my commentary (since March) on the unbelievable fundamental flaws of the proposed EU regulation on standard-essential patents (EU SEP Regulation).

The two SEPs in question were deemed invalid by the Swedish court, which was a major win for OPPO, but Nokia had obtained and enforced a German injunction over them. Due to Germany's bifurcation system, the infringement ruling came down prior to the resolution of a parallel nullity action. Nokia had also successfully asserted those patents against OPPO in the Netherlands and the United Kingdom, two jurisdictions where a full invalidity defense is available. Nevertheless, the four-judge panel in Sweden made its own decision and begged to differ from their colleagues in a couple of other countries.

Let's briefly look at this from the EU SEP Reg angle--actually, from four angles related to that ill-conceived legislative proposal:

1. If the EU SEP Reg was already in force, and if the envisaged SEP Register had been implemented, those two patents would have to be removed from the register if Nokia made a request pursuant to Art. 25(1)(b): "invalidation of the patent by a competent authority" (which the Swedish Patent & Market Court undoubtedly is).

   The proposal does not say anything about how to resolve conflicting decisions from different jurisdictions.

   As a result, Nokia would be allowed to enforce those patents without having to comply with any of the provisions of the EU SEP Reg. Simply put, those patents would be treated as a non-SEPs with a view to the regulation, though national courts might nonetheless apply Huawei v. ZTE. The patent holder might consider that flexibility gain to far outweigh the negative effect of a lower essentiality rate and reduced number of declared-essential patents. Here, with Nokia having a huge SEP portfolio, the removal of a couple of patents from the database wouldn't adversely impact the overall valuation of the relevant portfolio.

2. The fact that the Swedish decision differs from the ones in the UK and the Netherlands, and from the probability assessment of the Mannheim Regional Court, doesn't make it necessarily wrong. But it clearly cannot be ruled out that a Swedish appeals court might overrule the Patent and Market Court, given that some other judges have also deemed those patents valid. I personally believe the Swedish decision is very well-reasoned and other jurisdictions should be persuaded by it, but you don't know until they have all decided. Assuming only for the sake of the argument that the decision was reversed, the EU SEP Reg--based on the current proposal--would not even have a mechanism in place for putting those two patents back.

3. When criticizing the EU SEP Reg, I've said repeatedly that the outcome of essentiality checks can depend on what jurisdiction's claim construction and other legal standards are applied. The proposal does not specify that, and there is no uniform standard across the EU. The Swedish decision was based on validity, and an invalid patent is by definition non-essential. What happened here can also happen in connection with an infringement analysis. The starting point is always claim construction. And after that one, there are other steps that can differ between countries.

   It doesn't make sense to assume that a patent is essential or not. It's not binary. It may be essential in some jurisdictions and non-essential in others.

   While I agree with the criticism voiced by one of the researchers commissioned by the EC's Directorate-General for the Internal Market, Dr. Justus Baron, of the aggregate royalty determination part of the proposal, Dr. Baron and I have expressed different views on whether jurisdictional differences make a practical difference for the envisioned essentiality checks of samples of patents. The fact that a Swedish court invalidated two SEPs deemed valid in a couple of other European jurisdictions supports my view that jurisdictional differences pose a confidence problem: you need even larger samples then, and even the assessment of all patents of a given portfolio may be unacceptably unreliable if each European patent is analyzed under only one jurisdiction's standard while in litigation you may get one outcome in the Netherlands and another in Sweden.

4. At a recent SEP conference in Warsaw, Bardehle Pagenberg's Professor Tilman Mueller-Stoy ("Müller-Stoy" in German) said something I also mentioned in the post I just linked to: essentiality determinations are not too meaningful if validity isn't analyzed as well. The Swedish Nokia v. OPPO situation is now the latest example.

An EU proposal that treats a dynamic environment as static and a non-binary world as binary is not going to do any good. It's going to be a waste. The courts of law may in the end not be persuaded that the EU's essentiality checks, essentiality ratios, aggregate royalty rates, and bilateral FRAND determinations are relevant or helpful. If something flies in the face of what the real experts (as opposed to those who drafted the proposal) know, the actual decision makers may mimimize the impact of the EU SEP Reg, just like the 2021 patent injunction "reform" in Germany has made no real-world impact.

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Standard-essential utility models are major loophole in proposed EU SEP Regulation, presumably because of fundamental rights issues: structural problems

At this week's Warsaw conference on standard-essential patents (SEPs), Professor Jorge Contreras (Utah)--who is generally in favor of the proposed EU SEP Regulation, which I attribute to his well-known preference for softer SEP enforcement rather than unbiased analysis of the bill's incurable flaws--criticized one major loophole: the draft regulation doesn't cover standard-essential utility models.

That is indeed a loophole, and quite a big one. The version that leaked in late March actually defined SEP in a way that explicitly also covered utility models (SEUMs), which are registered--but not examined--property rights covering technical inventions and available in certain jurisdictions, particularly Germany, but also Spain and Italy. The current proposal does not pertain to SEUMs.

SEUMs are not just a hypothetical possibility. They do exist and actually get enforced. In December 2018, I attended a SEUM trial in Munich, where the defendants were represented by Professor Peter Chrocziel (one of the best patent litigators Germany ever had; at the time of that SEUM trial, he was a Bardehle Pagenberg partner, and now running his own IP and antitrust law boutique in Munich, focusing on strategic advice).

If the EU SEP Regulation entered into force, contributors to standards could easily work around it by obtaining German utility models and enforcing those, without enforcement being delayed or the commercial terms being impacted by the envisioned FRAND rate determinations. German national courts would presumably apply the Sisvel v. Haier standard, but that is--relatively speaking--the best a defendant to a SEUM assertion could hope for.

Utility models come with two key limitations. One is that they will be enforceable for only 10 years, not 20, from the priority date. The other is that there is no presumption of validity, so the hurdle for defendants seeking a stay pending a parallel validity determination is rather low. However, if there already is some case law relating to a patent based on the same original invention, or if there is no reasonably strong invalidity argument, German courts will order injunctions. And in Spain, it appears that it is even harder to invalidate a modelo de utilidad than a patent (it must be very obvious--not merely obvious--over the prior art).

There's an independent second reason for which contributors to standards may be more interested than ever in additionally obtaining utility models: they do not fall under the jurisdiction of the Unified Patent Court (UPC) (this week I attended the first-ever preliminary injunction hearing in the UPC). For right holders who want to hedge their bets in enforcement, it's a major opportunity to be able to seek national (particularly German) injunctions in parallel to enforcing European patents in the UPC. A complementary utility model is often a superior alternative to opting out a patent. You can ha

While Professor Contreras accurately identified the loophole and the potential for circumvention of an EU regulation, the solution is not the one he suggested.

Putting back the definition that originally leaked wouldn't work. I attribute it to a conscious decision--not an oversight--that DG GROW removed utility models from its definition of the term SEP. There are two possible factors here:

• The delays and restrictions of enforcement that the proposed regulation would impose are highly problematic with a view the EU's charter of fundamental rights as well as international obligations such as TRIPS. That is also an issue with a view to patents, but what exacerbates the problem in the case of utility models is that a delay by about a year is far more harmful when an IPR expires after 10 years (not 20). Given how much time it takes from the creation of a standard to its commercial adoption, the enforcement window is extremely short for SEUMs, so it would be very difficult to justify a delay of enforcement by roughly a year.

• There may also be limitations on the EU's ability to regulate utility models, while there already is some EU primary law relating to patents.

So what is the solution? As often in life, the roadmap to a solution starts with being honest and realistic:

There are numerous details to criticize about the proposal, and the SEUM loophole is another one to add to the list. But as I explained in a recent post, the problems are fundamental. They're structural. It's not going to get us anywhere to try to address them one by one because fixing some of those issues will create others, and in some cases the choice is between having a regulation that makes no sense or to get into serious conflicts with fundamental rights, international obligations, and the constitutions of one or more EU member states.

That's why we should all be able to agree that DG GROW's proposal is--as Mr Justice Marcus Smith accurately noted--"a wholly bad idea." The solution is not to turn left or right, but a 180-degree turnaround. Go back to Square One and devise something workable and reasonable. When computer programmers find that a certain problem-solving strategy won't work, they will at some point throw away an entire code segment and start again from scratch.

The Warsaw conference put on full display that those who drafted the bill lack regulatory humility. Their attitude is irresponsible; their competence must be questioned in light of such unbelievable stupidities as suggesting that an entire SEP family is either essential or non-essential based on the assessment of a single patent; and there is no evidentiary basis for doing what they propose to do. Those who defend the proposal resort to disingenuous methods such as incorrectly limiting the fundamental rights issues to a mere delay of enforcement.

The net-licensee camp needs some voices of reason now.

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Head of EU Commission unit that drafted SEP Regulation acknowledges lack of competence, displays irresponsible regulatory zeal at conference: policy makers should reject that attitude

The Warsaw conference on standard-essential patents (SEPs) that I blogged about last month started yesterday and will end in a few hours. Apart from audio quality, it was probably the best event so far at which the proposed EU SEP Regulation was discussed.

If there ever had been any doubt that something was fundamentally wrong with the process and the mindset that brought about the proposal in question, it would have been eliminated by some of what was said at that conference. I can only hope that EU policy makers are going to realize now that no matter whether one might want to put a thumb on the scales of SEP licensing and enforcement for one side or the other, the proposal that is currently on the table cannot possibly serve as the basis for a co-legislative process that is not equipped to fundamentally restructure an ill-conceived proposal. The only reasonable thing to do would be to withdraw it and restart the discussion in order to identify workable and legally defensible solutions.

The people who drafted the regulation are known to be unhappy about criticism of their work and their competence. And I generally prefer to talk about substance rather than people's competence. But I regret to say that in this case, the proposal is so bad--structurally, legally, technically, and even in terms of typos and numerous linguistic errors--that those people's work is rightfully criticized and their ability to get this right is legitimately called into question. It shouldn't be necessary, but somehow there were people at different levels of the Commission who authorized an official proposal that is a disgrace for the institution. The proposal's blatant disregard for fundamental rights, which has since been called out by Europe's top patent judge, is worse than the linguistic shortcomings, but the latter would have been extremely easy to identify and should have given some people pause.

I never met Kamil Kiljański, the former chief economist of the European Commission's Directorate-General for the Internal Market (DG GROW) who is now running the IP policy unit, and listened to him yesterday for the first time. And I was shocked by some of what he said.

He started with the usual disclaimer that he was expressing his personal views and not representing the Commission. But such disclaimers are of limited significance. The fact of the matter is that the head of the unit that drafted that proposal is simply unable to defend it--and that some of his answers only served to validate (if not exacerbate) concerns.

He said: "I am sure there are people in the audience who know the proposal better than I do." If that was just the pretense of modesty, it wouldn't even be worth mentioning. But the quality of the proposal suggests that were few people in the audience who understand the topic less than he does. Seriously, a policy unit that proposes an essentiality determination for an entire patent family based on a single SEP lacks the competence to deal with patent law. In fact, a well-known patent litigator who spoke at the conference said "[he] can only laugh" about that approach. It also calls into question whether someone without a solid background in patent law--in this case, an economist--should be tasked with the development of a hyperaggressive legislative proposal in one of the most specialized and complex fields of law.

When someone asked Mr. Kiljański about the proposal essentially resulting in one additional year of hold-out by unwilling licensees, he argued that the "built-in postponement" was just "a safe space especially for SMEs" (for the avoidance of doubt, the requirement to engage in FRAND rate-setting prior to litigation is not based on the defendant's size). And he added: "Last time I checked litigation wasn't that fast either." If anything, that is an argument against further delay. Patents have a limited lifespan. For SEPs it takes particularly long from invention to monetization. Imposing a further delay for a "non-binding" opinion is disproportionate.

What makes it all the more disproportionate is that Mr. Kiljański admitted that the basis for the whole proposal is nothing more than some EC officials' assumption that the SEP licensing market is undergoing significant changes due to IoT applications. He conceded that they're trying to act in advance of some developments they merely "anticipate" (as opposed to hard evidence for existing problems) and said that "with most of the regulations you have to see what happens." For example, he said he hoped the unitary patent would increase innovation, but one doesn't know yet.

How irresponsible is that?

You can't just regulate aggressively and claim that there is a sense of urgency unless there is a clearly identifiable problem that must be fixed immediately.

You can't justify a hastily-prepared proposal (again, all those typos and linguistic errors reflect highly unfavorably on the entire European Commission) only because of an election cycle.

And people who don't even know some of the basics of patent law are not in a position to make a proposal that lawmakers could seriously consider.

Even some of those who believe that SEP legislation could be helpful are aware of major issues. At a London conference in June, I heard criticism of the proposal from professors who clearly are sympathetic to implementers' legitimate interests. Regrettably, there are organizations who dislike the current state of affairs so much that they try to downplay or explain away the serious issues that exist. That is disingenuous. There should be a procedural agreement between both camps--proponents and critics of the proposal--that the best way to make use of the remainder of the current legislative term is to reassess the situation and discuss specific ways forward (which was not the focus of the so-called consultations that took place prior to the current proposal).

The most balanced position at the Warsaw conference was taken by Bardehle Pagenberg's Professor Dr. Tilman Mueller-Stoy ("Müller-Stoy" in German), who advises and represents plaintiffs and defendants alike. (Earlier this week he represented plaintiffs seeking a preliminary injunction in the UPC's Munich Local Division in a life sciences case.) Professor Mueller-Stoy said clearly and credibly that he would welcome a well-thought-out piece of SEP legislation. And if there ever was any doubt about him not siding only with SEP holders, he eliminated it by saying that he has more than ten SME clients who are on the receiving end of SEP licensing demands: those lobbying on net licensors' behalf pretty consistently deny that SMEs are facing practical issues with SEP licensing, given that it is generally not profitable for SEP holders to enforce their rights against small implementers.

The SME-related "evidence" found in the Commission's impact assesment is dubious at best. And as a litigation watcher, I haven't seen any SEP infringement lawsuits against SMEs (if the EU's own SME definition is properly applied). The smallest company I've seen as a defendant to a SEP enforcement action owns 70% of the German WiFi router market, which puts it way above the EU's SME criteria. But what Professor Mueller-Stoy said must be taken seriously. If the Commission decided to go back to the drawing board, it should put its researchers--and next time all of them should be actual researchers and not just corporate representatives of service providers looking to grow their businesses--in contact with him and other lawyers, and obtain more information (with confidentiality safeguards) from actual SMEs who truly faced SEP royalty demands. Symmetrically, the Commission should then also enable major SEP licensors to provide evidence from their vantage point.

If there is actual evidence of a growing SEP licensing problem for SMEs, the next question would be how to address that particular issue (again, if it verifiably exists) without moving the goalposts in favor of large unwilling licensees. None of the rules that the proposed regulation envisions is a targeted solution for SME issues. They have some SME-specific rules that also help patent holders qualifying as SMEs (of which there are many, and of which there would be even more if the proposal was passed into law). The Commission accepts submissions from Apple's well-known astroturfers claiming to represent SMEs. They should make a good-faith effort now to identify true SMEs and have licensing experts analyze whether their stories of receiving SEP licensing demands (or the alleged impact on product design decisions) are plausible--the ones in the current impact assessment largely aren't, which DG GROW couldn't figure out for lack of competence in the field.

The answer would not be to make SMEs generally immune to SEP royalty demands, but the Commission could operate a true competence center (as opposed to just an outsourcing operation) that would advise SMEs on SEP licensing matters, and possibly some safe harbor that shields SMEs from immediate enforcement litigation. But the rules would have to apply exclusively to cases where SMEs are the defendants.

Professor Mueller-Stoy highlighted several shortcomings of the proposal. He does not believe that experts capable of making reliable essentiality assessments will be available to the extent they would be needed, and he noted that those who truly understand the subject are very expensive (himself included). As an experienced litigator, he just cannot see (nor can I as a litigation watcher) that essentiality checks are meaningful without any validity determination, when invalidity is typically the first defense to infringement claims. And he explained that the proposed regulation could have unintended consequences, such as that SEP holders may divide their portfolios into smaller packages and assign them to "SMEs", or that SEP holders might strategically file patents of different degrees of essentiality (theoretically it sounds like a binary question, but in practice it isn't) for tactical purposes, resulting in additional layers of complexity and transaction costs.

The Commission has simply talked and listened to too many economists, including some who are simply interested in selling their services (to the Commission and to the private sector), instead of learning from those who actually litigate SEP cases, such as Professor Mueller-Stoy.

There is no point in leaving that kind of work to the EU Council or the European Parliament. It must be done by the Commission, and it failed to do so the first time.

I wish to point out that this is the first time that I don't merely disagree with a Commission proposal but see strong indications of the wrong people having been in charge of creating it. The proposal in question is unbelievably deficient, and what I heard from the head of DG GROW's IP policy unit yesterday almost reflected an intervenionist attitude that might be worthy of a communist dictatorship running a plan-based economy, but is unacceptable in this context.

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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.

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EU SEP Regulation and potential rate-setting cartels: soft law and conflicting rules are not enough to eliminate serious risks in different jurisdictions

In the paper I mentioned yesterday, Dr. Justus Baron flags a number of issues relating to the aggregate royalty setting part of the EU SEP Regulation. Besides many of his points being valid, what makes that paper significant is that he is an actual researcher as opposed to some corporate representatives that were also retained by the EC in the SEP Regulation context but have commercial interests such as selling services to licensors and licensees or getting paid by the EC later on to set up and run an EU SEP Register (in the latter scenario, the Court of Auditors should investigate).

I'd like to follow up on one thing that is not central to Dr. Baron's latest paper but worth commenting on in its own right. In connection with current practice he notes that maximum aggregate royalty rates are rarely announced by SEP holders despite "existing guidance from the EU Commission [which] makes it clear that joint announcements of maximum aggregate royalties by groups of SEP holders do not, in principle, violate EU competition law." A footnote then points to para. 474 of the EC's Horizontal Cooperation Guidance, which I'll quote now:

474. Standard development agreements providing for the ex ante disclosure of the most restrictive licensing terms for standard-essential patents by individual IPR holders or of a maximum accumulated royalty rate by all IPR holders [emphasis added] will not, in principle, restrict competition within the meaning of Article 101(1). In that regard, it is important that parties involved in the selection of a standard be fully informed, not only as to the available technical options and the associated IPR, but also as to the likely cost of that IPR. Therefore, should an SDO’s IPR policy choose to provide for IPR holders to disclose prior to the adoption of the standard their most restrictive licensing terms, including the maximum royalty rates or maximum accumulated royalty rate to be charged, this will generally not lead to a restriction of competition within the meaning of Article 101(1). Such ex ante unilateral disclosures of the most restrictive licensing terms or maximum accumulated royalty rate would be one way to enable the parties involved in the development of a standard to take an informed decision based on the disadvantages and advantages of various alternative technologies. [emphases added]

The above does not--and presumably was not deemed by Dr. Baron to--dispel cartel concerns over the aggregate royalty determination part of the proposed regulation:

• Art. 18 of the proposed EU SEP Regulation (unlike Art. 15-17, which are the other articles relating to aggregate royalty rates) opens the conciliation process for aggregate royalties to implementers. The paper raises various policy issues concerning the participation of licensees. The Horizontal Guidelines allow ex ante announcements of royalty rates (with the limitations I'll discuss in the next bullet points), but they do not allow licensee negotiation groups (by the way, the UK Competition &: Market Authority doesn't condone LNGs either). The following paragraph from Dr. Baron's paper, referencing Dr. Igor Nikolic, discusses what could go wrong from a cartel law point of view when licensees gang up on licensors during such a process:

  "Instead, net licensees have an incentive to use the process for problematic concerted action. They may for instance exchange competitively sensitive price information. More immediately, licensees may use the process for a concerted push to depress royalty levels. If major net licensees agree among themselves not to pay more than a certain amount, SEP licensors may find it difficult to build market acceptance for their FRAND licensing offers. Such negotiations among net licensees on maximum rates resemble a buyer[s'] cartel, and are clearly concerning from an antitrust perspective (Nikolic, 2023)."

• Even for licensors, there is no real safe harbor. The language of the Horizontal Guidelines has its limitations, but it's also just soft law. I struggled to decide with which of those two limitations to begin (that it's not binding on courts or that the wording isn't hard and fast). I'll start with the language:

  If something is "in principle" or "generally" acceptable, that is far from a safe harbor. One can have a debate over whether it is a presumption of legality or, possibly, just the negation of a presumption of liability ("it's not a per se violation"). Whatever it may be, it relates only to joint announcements of that kind, with participation being either voluntary or required by a standard-setting organization.

  Through limiting words like "generally", the guideline explicitly leaves room for potential misconduct surrounding such announcements. The simplest and clearest example would be that the relevant parties might agree not only on a maximum but also on a minimum rate (potentially both being the same). While it is easy to say that it's generally unharmful if some companies they say they're not going to ask for more than a specified amount, it's a rather different analysis when they say it's not going to be less than a certain number. Another example is that there might be patent holders with partly congruent and partly incongruent interests. They might engage in horse trades like "we'll support low royalties with respect to a particular codec if you guys support higher royalties for 5G." In the EU Council that happens all the time, but that's politics and not a potential cartel.

• The Horizontal Guidelines are just a Commission communication. That's soft law. It means DG COMP itself will investigate the conduct surrounding such maximum aggregate rate announcements only under the most egregious of circumstances. But even without para. 474 of the Horizontal Guidelines, the Commission will find it hard to go after anyone abiding by a regulation it proposed (though lawmakers have the final say). That is, in fact, another reason for which the EU's legislative bodies must be careful because the Commission has already limited, for political reasons, its ability to curb abuse in that context (should the proposal be adopted in that form or a materially consistent one).

• The EU courts are not bound by it, but very often side with the Commission.

• The national courts of EU member states won't necessarily be impressed with a non-legislative document from Brussels, and even less so in cases where there is a reasonable (though not necessarily a very strong) argument that the challenged conduct is related--but not inherent--to the announcement of the maximum aggregate rate.

• And like in some other contexts, the EU SEP Regulation is not well-thought-out with a view to what will happen in other jurisdictions. If the combination of the Horizontal Guidelines and the EU SEP Regulation matters in the EU, why should a court outside the EU care? There could be investigations by regulators or private enforcement actions against the participants in a rate-setting cartel in some non-EU countries where no EU law, hard or soft, will serve as an excuse if those markets are impacted (and they will be, as the EU wants those rates to be global).

All I wanted to do with this post is explain why the idea of aggregate royalty determinations based on potential agreements between SEP holders could get companies into trouble. In a world in which at least one automotive supplier sued a patent pool that does not preclude its licensors from entering into bilateral agreements (with that supplier still litigating against one such licensor in Delaware state court), there is always the risk of someone arguing that even an announcement of a maximum rate (hypothetical worst case for implemeneters) was unlawful, maybe not per se but in light of case-specific facts or circumstances. And implementers, too, would have to be careful so they don't end up forming a buyers' cartel.

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New Mercedes-Benz statement: despite Avanci 5G license, EU should enact regulation on standard-essential patents in accordance with DG GROW's legislative proposal

Mercedes-Benz (formerly known as Daimler, though Mercedes has been its most famous brand for a long time) recently became known as the first licensee to participate in the Avanci 5G standard-essential patent (SEP) platform. The company previously engaged in bilateral licensing of 4G patents with Nokia and others, only to then opt for Avanci's 4G pool as a one-stop solution.

Last month, the European Commission published the car maker's feedback to the proposal for an EU SEP Regulation by the Commission's Directorate-General for the Internal Market (DG GROW). According to Mercedes, the proposed regulation "is urgently needed to eliminate the current lack of transparency and the associated imbalance in license negotiations on standard essential patents." The document advocates moving the needle even further to suit the interests of implementers.

I reached out to Mercedes to help me understand whether, after securing the vast majority of cellular communications licenses they need, there is any practical reason at this stage for them to call for legislative intervention. A spokeswoman replied later in the day. Let me show you the original statement in German, followed by my translation:

Mercedes-Benz steht für Innovation und wird mit der neuen E-Klasse die 5G Konnektivität als einer der ersten Automobilhersteller in den Markt einführen (Herbst 2023).

Wir bekennen uns klar zu den FRAND-Regeln und werden trotz eines derzeit erst entstehenden Lizenzmarktes nur lizenzierte Produkte in den Verkehr bringen.

Mercedes-Benz hat sich auch aus wirtschaftlichen Erwägungen entschieden, die angebotenen Rechte über den 5G-Avanci-Pool zu lizenzieren. Grund dafür waren mangelnde Transparenz z.B. in Bezug auf Preise und Schutzrechte sowie fehlende effiziente Alternativen.

Mercedes-Benz hält es weiterhin für erforderlich, dass der von der EU-Kommission vorgelegte Entwurf einer Verordnung über Standard-Essentielle Patente umgesetzt wird. Eine solche Verordnung kann einen klaren und vorhersehbaren Rechtsrahmen sowohl für SEP-Inhaber als auch für die Implementierer schaffen.

Translation:

Mercedes-Benz promotes innovation and, with its new E-Class generation in the fall of 2023, will be one of the first car makers to launch 5G-connected automobiles.

We are clearly committed to the FRAND regime and will only release licensed products into commerce, even though the licensing market is currently just developing.

Mercedes-Benz decided for economic reasons to license the relevant intellectual property rights via the Avanci 5G pool. The reason was a lack of transparency with respect to fees and intellectual property rights as well as the absence of efficient alternatives.

Mercedes-Benz continues to deem it imperative that the European Commission's proposal for a regulation on standard-essential patents be implemented. A regulation of that kind can establish a clear and predictable legal framework for SEP holders as well as implementers.

The part that has me particularly puzzled is the one about a lack of transparency concerning licensing costs and IPRs:

• The Avanci 5G fee is public: it's on the Avanci website.

• The licensors are all listed on the same website.

• Mercedes can find out via ETSI and other standards development organizations, or certain patent databases maintained by private enterprises, what patents those licensors have declared essential to 5G.

• The alternative to Avanci 5G would have been bilateral licensing, which they tried with 4G and apparently deemed inefficient in 2021. They could have reached out to patent holders and inquired about bilateral licensing terms.

Pragmatic or dogmatic?

Mercedes sees value in Avanci and doesn't want to risk a new round of infringement litigation (like they experienced with 4G), but the feedback they submitted to the European Commission and the statement they provided to me suggest that they believe they could get a better deal from their perspective if the EU proposal was passed into law.

This is like if one of their customers said "yes, I'll buy the new E-Class because I think it's a good deal, but I want an even better one, so I'll ask lawmakers to regulate the market so I'll get it at a lower price next time."

The praise they heap on the EU proposal is premised on two assumptions:

• that the costs of an EU SEP Register and the related essentiality checks and FRAND determinations (to be conducted by expensive experts) will not only be borne but also internalized by SEP holders; and

• that the EUIPO-appointed "conciliators" will set low aggregate and bilateral royalty rates.

What Mercedes is hoping for here may very well be consistent with DG GROW's intention. But it may just not be how the market is going to work.

Mercedes is far from the only car maker to have endorsed the EU proposal. I will comment on various other submissions (and resumed my commentary on the EU SEP Regulation with yesterday's post on Dr. Justus Baron's new paper). They are, however, the first Avanci 5G licensee, which they clearly say made economic sense for them. In other words, Avanci 5G is part of the solution. The problem is practically solved given Avanci 5G's sky-high share of the overall 5G SEP landscape. There's not a lot of 5G SEPs left outside that pool over which anyone would have to fear infringement actions. The ones who do seek to generate licensing revenue overwhelmingly participate in the program.

The Avanci 5G rate is presumably a lot less than what Mercedes will charge its customers for just one year of mobile data service (after the first couple of years, which are typically included). Mercedes also knows for how many years its cars are used: typically like 15 years or more. The license fee, however, is paid only once per car.

All of that leaves me to wonder whether Mercedes is just trying to get a better deal or whether there is a difference between the business perspective ("good deal") and a legal philosophy ("we want more of an opportunity to hold out").

I'm sure that I'm not the only one who raised that question. EU lawmakers (in the Parliament as well as the Council's experts, who are de facto--though unelected--legislators) can easily see that the automotive industry has a solution for cellular SEPs that makes economic sense. Against that background, there is no case for massive legislative intervention. As FT columnist Brooke Masters wrote last week, "heavy-handed intervention from Brussels could be counter-productive" and "[g]overnment price-setting rarely works as intended."

It would be interesting to see "government price-setting" in the automotive sector, including for automotive data plans. When it comes to the transparency of fees, many purchasers of cars don't even know what they will be charged for data services after the first few years until they get an email or letter telling them to pay up. There's also no transparency of how the annual fees for those services are split between the car maker and whatever carrier it partnered with.

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