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.

Share|

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.

Share|

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.

Share|

European Commission's DG GROW takes inconsistent positions on majority voting in standard-essential patent policy context: DG GROW-commissioned researcher voices criticism

This week, EU politicians and officials are returning to Brussels from their summer vacations (their "rentrée"). As they catch up with news, I hope that those concerned with regulating standard-essential patent (SEP) licensing and enforcement will agree that some additional industry-led solutions have recently been put in place (see Ericsson-Huawei cross-license, Avanci 5G, and Huawei's differentiated IoT patent licensing terms). The case for intervention has definitely become weaker over the summer.

What should also give policy makers pause is the fact that one member of the group commissioned by the Directorate-General for the Internal Market (DG GROW) to conduct an impact assessment study, Dr. Justus Baron, has published a paper (SSRN) advocating that Articles 15-18 (the part on aggregate royalty determinations for entire standards) be stricken. I largely agree with that new paper, while I disagreed with parts of his work for the Commission, particularly in the context of essentiality checks. Arguably, Dr. Baron is the most relevant member of that research group: there's no question that he is a researcher (as opposed to self-serving corporate representatives of service providers like IPlytics and Darts IP), and in addition to his contributions to the impact assessment study, he authored a separate one on essentiality checks.

It is fair to mention that his new paper was supported by 4ip Council, which is SEP holder-friendly. It is equally appropriate to note that Qualcomm stands most to lose from a strict top-down approach (as its share of overall cellular SEP royalties is extremely high), and patent pool administrators--while primarily concerned with the excessive requirements that might be imposed on them--would also find those aggregate royalty determinations unhelpful. But even a company that collects relatively modest royalties relative to the size and strength of its portfolio--Huawei--has publicly criticized the proposed EU SEP Regulation as a whole. And Dr. Baron's paper makes a number of valid points that cannot be attributed to anyone's agenda.

I agree with Dr. Baron that--in my words, not his--the overall perception of the legislative initiative is that it is meant to bring down SEP royalties. And I, too, consider it symptomatic of DG GROW's devaluation agenda that the proposal would result in actual aggregate royalties being paid that would be substantially below a determined aggregate rate as some SEP holders never collect royalties (in some cases presumably because they know their declared-essential patents are of questionable value). If there truly was a concern that excessive royalties resulting from the construct called "royalty stacking" reduce the output of implementing products, the focus would be on what is paid on the bottom line.

There's a lot more to say about his paper, and I'll be sure to reference it going forward. For today I just want to focus on something that is easy to understand and shows some of what's wrong with that legislative proposal: DG GROW's inconsistent positions on the reliability of majority votes among experts.

There is a risk of the aggregate royalty determination process being overused. Theoretically there are deadlines, but as Dr. Baron notes, "there are yearly new releases of the hundreds of technical specifications that define complex technologies such as 5G" and there are new types of implementations all the time, so there would always be some event to point to when requesting another aggregate royalty determination. The paper explains that net licensors and net licensees are unlikely to agree, with or without aid from so-called conciliators. Therefore, the most common outcome will be an expert opinion by the panel. With each panel member spending only two workweeks (that's the budget that DG GROW has in mind), those expert opinions won't be all that well-considered given the complexity of the technical and economic questions involved. And a majority of two members will be able to adopt a decision over the objection of the third member.

Judicial panels of three typically do decide by majority vote. But they do so after thorough briefing, and above all, they're independent. They may hold certain views, but they're not picked from a pool of consultants as DG GROW envisions it to work.

The combination of an insufficient budget, many pool members being potentially very biased, an opaque process, and majority voting is troubling (if not toxic). This has the potential to turn aggregate royalty determinations into a lottery.

While there can be no doubt about DG GROW's intention, I'm not even sure that net licensees would be all that happy in the end if this regulation got passed into law. There might be "buyer's remorse" once the first royalty determinations (aggregate royalties as well as those relating to a particular licensor-licensee combination) actually do come out. Where we are now, policy makers can't base their decision on any reliable prediction of what the outcomes will be. The question is now whether the contemplated structures and mechanisms make sense.

Dr. Baron rightly recalls that "[t]he Commission itself discouraged the 15 experts it had appointed to the SEP Expert Group from voting on policy proposals." Let that sink in: the Commission didn't want to rely on a majority vote among 15 experts, but it would delegate important decisions to random panels of 3.

It's telling and not really funny that the Commission itself ultimately didn't even care about what the majority of 15 experts determined. The proposal to make aggregate royalty determinations for entire standards was viewed unfavorably by the majority of the members of that group. In fact, the related proposal (proposal 43) in the Expert Group Report, which received only 2.5 stars, "was overall viewed less [favorably] than neutrally by the group’s members, and is among the 8 least endorsed of the 79 proposals included in the Report." In other words, it's in the bottom 11% of all proposals, which didn't dissuade DG GROW from making it part of a legislative proposal.

Whenever the proposal is criticized, DG GROW defends itself by pointing to the multi-year consultation process. They have not answered (and probably never will) to the very specific criticism that any past consultation did not take place on the basis of specific proposals. And in that consultation process they include polls among the participants in webinars, or the SEP Expert Group Report even where they adopt proposals that were disfavored by that group. DG GROW also relies on the "research group" rather selectively. They point to those studies as if they supported the proposal at hand, which in some respects is not even the case.

All of this shows that there isn't even a sufficient evidentiary basis for starting the legislative process. I'm concerned that they'll go ahead anyway in Brussels, but it would be better to send the EC back to the drawing board.

Share|

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

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

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

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

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

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

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

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

Why now? How is this urgent?

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

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

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

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

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

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

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

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

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

Share|

Instead of messing up standard-essential patent licensing, EU institutions need to take their time and obtain advice from their legal services on fundamental rights, access to justice, comity

If the standard-essential patent (SEP) licensing system was in a state of acute crisis, with small and medium-sized enterprises (SMEs) going out of business and car makers being unable to obtain critical parts due to patent injunctions, no one would deny a need for swift and decisive action.

If SEPs were a topic of concern to wide swaths of the electorate, one could see why politicians believe the passage of a SEP bill into law--before the end of the current term--increases their chances of being (re)nominated, (re)elected or (re)appointed.

None of that is the case, though:

• There are no SEP assertions against SMEs in court--or if there are any, they must be so few and far between that I've never seen any, despite keeping a close eye on SEP litigation not only but also in Europe. To the extent that the impact assessment accompanying the proposal presents "evidence" of SME-specific problems, it's anecdotal evidence at best and some lobbyists' fiction at worst.

• Virtually the entire car industry is licensed to the Avanci 4G pool, which covers the vast majority of patents essential to the 2G-4G cellular standards. A solution for 5G is in the works. License fees are small when considering the much longer period of time that cars are in use compared to smartphones, and relative to the fees car makers charge their customers for data services after the first two or three years. Europe's automotive sector is clearly facing huge problems, but a license fee that's a minor cost of doing business equally affecting all car makers doing business in Europe is not a competitiveness issue. If anything, stronger SEP enforcement and higher SEP royalties would result in the small minority of still unlicensed car makers getting sued in Europe to put an end to infringement.

• It's hard to imagine even a single voter who would choose a party or a candidate because of their stance on SEPs--or a single party member who would support someone's nomination over such an arcane issue where a webinar that attracts more than 300 participants is, relatively speaking, a blockbuster success.

There are enough serious issues on the European political agenda. There's no need to fabricate a sense of urgency here.

It is downright iressponsible to forge ahead with an ill-conceived proposal over well-founded objections and against stern warnings:

• The U.S. government has already expressed its concerns and is going to do more. The current head of the USPTO, Kathi Vidal, is balanced and has already taken measures that help major implementers such as Intel against licensing firms, while her predecessor consistently sought to give patentees more leverage.

• Instead of publicly criticizing the EU approach, the UK is simply doing its own thing. But it is telling that the UK IPO warns against hasty and overreaching changes to the system, and that a high-profile UK judge has described the EU proposal as "a wholly bad idea."

• The chief judge of Europe's own Unified Patent Court has raised concerns over restrictions of parties' access to justice.

• The European Association of Research and Technology Organizations (EARTO) published a four-page position paper (PDF) in April that explains a lot of what is wrong with the bill.

• I could give even more examples, such as a memorandum by the Dutch government and statements by Europe's two wireless infrastructure companies (Nokia and Ericsson).

Policy makers must come to their senses now. There are serious issues. Even if one didn't know much about SEPS, one would just have to look at the linguistic "quality" of the proposal and the accompanying material to see that it's not a professional piece. There are countless typos and grammatical errors. I've never seen anything like that in official EU documents, not even during the early stages of the pandemic when political papers had to be cranked out under severe time constraints.

It is just not realistic to believe that a co-legislative process with numerous, potentially inconsistent or at least incoherent amendments is likely to solve the problem. The topic is complex, and the initial proposal does not serve as a starting point.

At minimum, the EU Council and/or the EU Parliament should obtain advice from their legal services.

The tasks of the European Parliament's legal service include "helping the committees with their legislative work." The legal service of the General Secretariat of the Council "gives opinions to the Council and its committees, in order to ensure that Council acts are lawful and well-drafted."

That is the kind of advice that should be obtained when voices to be taken seriously, such as the top judge of the UPC, articulate concerns over the EU's fundamental rights (access to justice, property rights), and when the EU's main international trading partner has communicated its opposition and the EU's compliance with its obligations under international treaties is called into question. Furthermore, the extent to which the proposal would leave important decisions (such as on the very scope of the regulation) to the Commission requires further analysis, unless the EU institutions want to give EU skeptics (of which there's no shortage in the European Parliament) another opportunity to criticize the EU for its democratic deficit.

The EU institutions have obtained advice from legal services on less complicated topics, with compulsory licensing being a good example of something that is difficult enough to justify the involvement of the legal services though much more straightforward than SEP enforcement with its international ramifications (i.e., international comity).

Also, it would make sense for the EU Council to ask the Commission various questions about the proposal before it can do any meaningful work on substance.

This is a time for responsible policy makers to hit the brakes.

Share|

U.S. government steps up resistance to proposed EU SEP Regulation: USPTO director Vidal voices concerns at Senate hearing, announces 'all-of-government approach ... data-driven by feedback'

There are policy areas in which the European Union cannot vigorously defend the EU economy's interests without some transatlantic antagonism. Subsidies are an example. Standard-essential patents (SEPs) are not. Much to the contrary, a couple of major European SEP holders generate very significant revenues from licensees based in the United States.

But the EU's proposed SEP regulation is so fundamentally flawed that voices of reason from outside the EU are needed. One of them is the UK IPO with its very careful approach. Another example is the Biden Administration, and I just can't see why an initiative that harms European SEP holders is worth a rift between the EU and the United States.

Almost three months ago I reported on U.S. Secretary of Commerce Gina M. Raimondo having said at a Senate hearing that the U.S. government has officially commited "concerns" over the proposal to the European Commission. Yesterday (Wednesday, July 26) the Senate's Subcommittee on Intellectual Property (chairman: Sen. Chris Coons (D-Del.)) held a USPTO oversight hearing, toward the end of which the following was said:

SENATOR COONS: This is my last question. ... I've been following with genuine concern recent proposed regulations by the European Union for what would essentially be an SEP rate court. That regulation, I'm concerned, validates China's practices ... and I had shared those concerns ... and [Secretary Raimondo] agreed the proposal is problematic. What steps has the USPTO taken to communicate concerns to our European colleagues and what steps do you think the Administration can and should take to guard against restrictions on SEP licensing in the EU and globally?

DIRECTOR VIDAL: As I mentioned in my opening remarks, that's one of the things that I'm keenly focused on: it's standards, because I think it's critical to our economy. I will say that when we withdrew the 2019 policy statement around SEPs with NIST and DOJ, it was because we see standards as an international issue that individual countries weighing in in these ways could be extremely problematic. So what we've done when it comes to the EU directorate is I've met with the EUIPO in Geneva [presumably a WTO/WIPO meeting] just a week and a half ago. I've also spoken to other stakeholders in Europe about this. We also are issuing soon an FR notice, a Federal Register notice, to seek feedback from U.S. stakeholders on international SEP policy so that we can inform an all-of-government approach. That's gonna be not just the USPTO. I'm doing that with NIST, our standards and technology group, and ITA, our international group within [the Department of] Commerce, so that we can get an all-of-government approach that's data-driven by feedback.

Share|

EU policy makers should have listened to judges before standard-essential patent proposal that is 'wholly bad idea' for lack of 'extraordinary care'

The separation of powers obviously rules out that the judiciary makes the laws it is meant to interpret. That bedrock principle, however, does not preclude European policy makers from drawing on judicial expertise when drafting legislative proposals. Case in point, the German justice ministry invited almost as many judges as industry representatives to a May 2019 roundtable labeled as an "expert talk" while contemplating a statutory amendment relating to patent injunctions.

Even if the reason for a legislative measure is policy makers' disagreement with jurisprudence, judges can provide valuable feedback to draft statutes and do not have the interests of particular companies in mind.

The problem with the "consultations" conducted by the European Commission's Directorate-General for the Internal Market (DG GROW) relating to the proposed regulation on standard-essential patents (SEPs) is not that they didn't talk to, and solicit input from, stakeholders over an extended period of time. It's that they didn't request feedback to specific proposals (and that they didn't make more of an effort to have industry provide researchers with confidential information). That webinar series, for instance, was pretty good, and I gladly contributed to one particular part of it, but there was nothing that set those webinars apart from what the likes of Concurrences organize all the time. By contrast, the UKIPO has just recently stated the right way to go about it:

"Any significant policy recommendations/interventions subject to public consultation."

"Significant" would actually be an understatement for the incisive measure proposed by DG GROW.

That's why I support IP Europe's call for a do-over: it would be an opportunity to arrive at a well-considered and balanced proposal, giving the European Parliament and the EU Council a far more reasonable basis for their legislative work.

I am unaware of a single European judge having commented favorably on the EU proposal. I do know that many of them are reluctant to speak out publicly and decline any related invitations. To the extent that anything has been said by judges, it has been not only negative but damning.

In early June I mentioned what the President of the Unified Patent Court's Court of Appeal, Judge Dr. Klaus Grabinski, said at his court's inaugural event:

• He voiced concern over "access to justice" issues, given that the right to request a judicial review of certain types of decisions is "a core fundamental right" under the EU's own charter. In fact, access-to-justice deficiencies were also among the first problems about the proposal that I highlighted (based on a leaked draft).

• Judge Dr. Grabinski urged DG GROW to rethink the plan.

The UPC has just received its first SEP infringement complaint(s), but some people in Brussels don't want to give the new court the chance to develop its jurisprudence without legislative intervention--and try to sideline the UPC's dispute resolution center, too.

Judge Dr. Grabinski was, in fact, among those invited by the German government to the 2019 roundtable I mentioned further above. But apparently no EU policy maker cared to ask for his opinion on the proposal before it was formally submitted.

While Huawei v. ZTE is still "good law" in the UK (though there is a potential for future deviation), the EU SEP Regulation won't apply there at all. That makes it even easier for British judges to share their views. At a recent Concurrences event (to which I contributed as well), Mr Justice Marcus Smith--the President of the Competition Appeal Tribunal who also presides over High Court of Justice patent cases such as Optis v. Apple--didn't mince words:

• He called the proposal a "wholly bad idea" (which sums it up nicely).

• Like his country's patent office, he says that any regulation in this complicated area "needs to be treated or regarded with extraordinary care."

While not specifically related to the EU proposal, I'd also like to quote the former Chief Judge of the United States Court of Appeals for the Federal Circuit, Randall R. Rader. He said the following at Huawei's Innovation & Intellectual Property event last week:

"The marketplace works quietly, silently, and voluntarily. Indeed, most of the use and benefit of intellectual property comes through voluntary agreements. Licenses. Those licenses by definition are beneficial to both parties because they have both voluntarily entered them. Now, we're accustomed to perceiving intellectual property in terms of legal conflicts but in fact the story of intellectual property is the story of a system that enhances cooperation, coordination, joint efforts to improve human situations."

The fact that most agreements fall into place without litigation doesn't mean that the SEP dispute resolution system couldn't be improved. But there is no urgent need for massive intervention, and especially not with respect to small and medium-sized enterprises (SMEs). The impact assessment accompanying the EU proposal has no hard evidence for actual SEP enforcement against SMEs to offer. All that one can find there amounts to unverifiable and partly rather dubious anecdotes.

If DG GROW gave this another try, they might also want to ask the judges whether SMEs are frequent targets of SEP assertions. The smallest defendant I've ever seen in European SEP litigation is the dominant market leader (70% market share) in the German WiFi router market. That one is not even an SME by EU standards.

Share|

Dubious anecdotal evidence from SMEs adduced to justify EU proposal for regulation on standard-essential patents

On Friday, industry group IP Europe continued its series of blog posts on the proposed EU regulation on standard-essential patents (SEPs) with an article that focuses on small and medium-sized enterprises (SMEs). Above the article one can see a typewriter with "Fake News" coming out, and to my dismay I must admit they have a point. The lobbying efforts for the legislative proposal are steered and bankrolled by large corporations (essentially Apple and some automotive industry players), but places the emphasis on SME concerns, for which there is simply no evidence.

In fact, there isn't even evidence for hold-up affecting large corporations. It's worth nothing that Nokia just announced the renewal of a patent license agreement with Apple, six months prior to expiration of the one that is currently in force and without any litigation. This means Apple has recently renewed its license agreements with Ericsson, Nokia, and InterDigital, and only in one of those cases a limited amount of infringement litigation (it lasted less than a year) was needed. In the near term, there is nothing that Apple has to fear from the enforcement of SEPs in EU Member States. If anything, Apple has a long-term plan to keep SEP royalties down, and in the mid term it may be interesting to see what happens if Apple uses its own baseband processors and then negotiates a new patent license with Qualcomm.

The IP Europe article I mentioned further above explains that there is no evidence of SEP enforcement against SMEs, particularly no assertions of wireless SEPs. And it discusses the active participation of SMEs in standardization projects by the European Telecommunications Standards Institute (ETSI).

So there are no numbers. Not even anecdotal evidence in terms of verifiable accounts of actual problems. Just stories. Let's take a closer look at the problems allegedly "faced by SEP implementers" according to the impact assessment published by the European Commission's Directorate-General for the Internal Market (DG GROW) in April:

1. Remote patient health monitoring

"A manufacturer of medical devices for the treatment of critical health disorders may wish to implement cellular communication functionality in its products to enable remote patient health monitoring and efficiently improve patient adherence to treatment. Considering the multi-year (e.g. 5-10 years) medical device development process for homologation and certification from network operators, the company needs certainty at an early stage regarding the aggregate FRAND royalty for SEP licenses as it must take such factors into account during the development and commercialization phase and as it considers total cost and alternative technologies. In addition, the inability to negotiate with dozens of SEP holders individually and the prospect of being excluded from the market for an infringement of a single SEP is a further disincentive for using the connectivity standards risking the continued access of patients to telehealth services which are crucial for public health."

COMMENT: That story looks like it was authored by lobbyists/astroturfers trying to leverage a "public health" concern with buzzwords like "critical" and "crucial". While we can all agree on the potential benefits from remote patient health monitoring, the story itself fails a plausibility test:

• Royalty rates are definitely not the only cost factor for which a device maker with a development cycle of "5-10 years" won't have definitive certainty "at an early stage". A lot of things can change in 5-10 years, and inflation is a reality, too.

• Such specialized devices are sold at prices that dwarf cellular SEP royalties.

• The alleged "inability to negotiate with dozens of SEP holders individually" is not explained, and in any event, the proposed EU SEP Regulation would not result in a single pool license.

• The alleged "prospect of being excluded from the market for an infringement of a single SEP" makes no sense, given that SEP holders have no interest in excluding a device maker from the market (particularly not from a market in which they don't operate).

• The "continued access of patients to telehealth services" is not in jeopardy: an injunction might affect the device maker, but not the patients. Even in the rare situations in which such devices are already in use but must be replaced, courts can tailor their injunctions as to allow repairs and replacements.

It just makes no sense. It's propaganda.

2. Smart meter manufacturer and its supplier

"A smart meter manufacturer is invited to take a licence from a SEP holder not only for the future but also for 5 years back.

What else did the Commission expect? Royalty-free use for the first few years?

"The smart meters are purchased by utility companies by public procurement contracts in order to promote the reduction of energy consumption under the EU Gas and Electricity Directives."

We're all in favor of energy efficiency. But then we must also ensure that the cellular technologies that enable certain energy-saving methods are funded, and patent royalties are the way to do that.

"The smart meter manufacturer buys communication components, which it integrates in its products. It directs the SEP holder to its supplier and the SEP holder prefers to negotiate with the smart meter manufacturer as it is its understanding that it can choose who to license. The smart meter manufacturer requests its supplier to indemnify it for the SEP royalties as per supply contract. The royalties are higher than what the supplier is willing and able to pay."

What the supplier is "able to pay" would have to be analyzed based on specific numbers.

"The supplier expresses its wish to take the licence itself as it used to have such licences in the past. However, it is unable to get such a licence at the conditions that are acceptable to it. Its (non-EU) competitors continue promising indemnifications to their customers."

The Commission itself has already recommended the solution to any competitiveness issues arising from (non-EU) competitors' infringement: enforcement.

Those non-EU competitors may have a different legal framework at home, but once they sell in the EU, they--or in this case, their customers--face the risk of patent infringement lawsuits there. So there is a level playing field with respect to the EU market.

"The supplier is pressured by all its worried customers manufacturing not only smart meters but also payment terminals, wireless charging, medical devices, tracking devices, etc. to keep the indemnification clauses and bear the risk of SEP licensing."

There is no indication (much less evidence) of why indemnification is a problem. All costs--including intellectual property licensing costs--must be factored in when setting prices for end products or for components.

3. Construction robot

"An EU SME developed a robot assisting in construction works. It is innovative due to an inventive electro-mechanical structure of the robot arm, wheel drive and motion control. The user controls this robot with a tablet comprising a specific Human-Machine-Interface. The communication between tablet and robot could be wired or preferably wireless. The most desired option would be WiFi, but due to the SEP license, Bluetooth fully licensed at chip level will be implemented. Another option is a wired USB connection, which also works but does not meet customers’ expectations."

WiFi patent royalties are relatively low (compared to cellular standards). The description of the product sounds like it is rather expensive, so it's unclear why that SME couldn't afford WiFi. If Bluetooth was chosen to maximize profitability, that's the device maker's choice.

4. Smart home appliance maker "not aware" of need to license WiFi SEPs

"An EU SME developed a smart home appliance for energy consumption control in a household. It can lower energy cost and optimise usage of renewable energy (solar, wind…). Collected data is sent to the company’s central server for analysis. Initially WiFi was considered to connect to a router in a household. The company was not aware that WiFi is subject to a SEP licence. To avoid SEP costs/litigation they chose a wired connection to a router instead."

What? First, how can someone assume that WiFi is royalty-free? Second, if they decided not implement WiFi for fear of SEP assertions, that proves that eventually they became aware of the fact that WiFi SEPs exist, and apparently long before they put out a product.

Smart meter maker unaware of chip not being licensed

"An EU SME developed a smart meter which is now implemented in hundreds of projects. Data between meters is sent using mostly Bluetooth, but for remote locations a chip with WiFi and 4G functionality was embedded. The company was not aware that the chip was not licensed for WiFi and 4G. If faced with litigation it will disable this chip in all its devices."

The unwareness problem could have been avoided in various ways. There must have been a disclaimer in the purchase agreement. Maybe the device maker should simply have read that contract. Alternatively, one may argue that the chipmaker should have alerted its customer to that fact beyond a clause in the agreement. None of that is the fault of SEP holders. And it does not seem unfair that a company making connected devices learns about SEP licensing.

From a patent law point of view, the last sentence makes no sense: if the chip infringes, then just disabling it won't do the trick with respect to product (apparatus) claims.

5. Health data reporting and choice of wireless standard

"An EU SME developed a product to help individuals track their health metrics and report results to their doctors in real-time. The SME and its competitors had a choice of technologies to choose from when developing their product regarding wireless connectivity. After unsuccessful attempts to license various wireless technology directly from known patent holders, the company built the product. After a robust and successful market developed, and after the point in time when the product design was “locked” in and could not be changed, numerous wireless patent holders approached the company and demanded they take a license. This effectively deprived the SME of choosing an alternative wireless technology and the patent holder did not consider other wireless technology that could have been used as a comparable value when deciding the royalty rate that was demanded."

Again, telehealth is great--but that's not the question.

Why were those "attempts to license various wireless technolog[ies] directly from known patent holders" unsuccessful, and why did they seek royalties later but declined to make an offer beforehand? Why would those patent holders not have complied with their obligations under Huawei v. ZTE? It's (at best) a mystery.

Who "deprived the SME of choosing an alternative wireless [standard]"? They made a choice at some point. No one forced them to implement a particular standard.

6. Global navigation satellite system receiver

"An EU Global Navigation Satellite System (GNSS) receiver designer and wireless cellular modem designer was asked by customers to reduce the “footprint” of their modules that were used in an end product. The EU design company could not accommodate the request because it could not directly license patents from the patent holders and the “have made” rights held by the end product company did not allow the designer to innovate. It could only “make” the product design given to it by the end product company. A non-EU competitor of the GNSS receiver and wireless cellular modem designer seized the opportunity."

Why would the company have to license SEPs to reduce the "footprint" of those modules? What exactly is meant by "footprint"?

Why would the "non-EU competitor" have had an advantage? Once its products (or those incorporating it) are sold in the EU, there is no strategic advantage based on country of origin. EU SEP enforcement rules will apply.

Oddly, there is a second version of that "EU Global Navigation Satellite System (GNSS) receiver designer and wireless cellular modem designer" story in the impact assesment, right after the first one. The second one largely overlaps, but then tells a different story. How credible is that? I mean, how likely is it that the Commission got feedback from two different companies of that kind reporting the same unspecified request for a reduced "footprint" but then telling stories with different outcomes?

Here's the second EU GNSS story:

"An EU Global Navigation Satellite System (GNSS) receiver designer and wireless cellular modem designer was asked by its EU customers to reduce the “footprint” of their modules that were used in an end product. The EU design company had a license with several cellular patent holders and took on the project. However, the EU end product company was warned there would be a significant price increase because their cellular patent license royalties were based on the average sales price of the module/modem and the combined GNSS/cellular module average sales price would be 3X higher. The EU end product company asked why the GNSS function was considered when determining cellular royalty owed and not removed from the average sales price. They learned it was standard practice in wireless licensing. The EU end product company abandoned the design improvement request."

7. IoT wireless module company

"An innovative EU IoT wireless module company that had been licensed for years by cellular wireless patent holders is now being denied licenses. The patent holders are changing to licensing only at the end product level. The patent holders claim the value of the patents they hold has increased by 4-6 times what the previous licenses demanded in royalties although many of the 3G and 4G patents have expired/are expiring and new high-speed 4G patents are not needed by the EU IoT company. The patent holders are demanding that the EU IoT companies license patents from their patent pool and that the EU IoT company acts as an agent between their customers and the patent pool, receiving a “kick-back” for doing so."

The impact assessment describes that company as "innovative" without explaining why. Such buzzwords do not enhance the credibility of a document accompanying a legislative proposal.

The paragraph is confusing. The last sentence refers to "the EU IoT companies" as well as "the EU IoT company". The plural term apparently means device makers while the singular term refers to the module maker.

It is not clear whether the licensor side or the licensee side are right in this case. Patent holders want more money and device makers want to pay less. That's normal, but without more information it's impossible to form an opinion on whether there is/was an issue.

8. Supplier lost IoT business opportunities

"Supplier explained that its sales teams regularly get questions from prospective Cellular and Wi-Fi IoT customers about “patents”, “IP rights” and “indemnification”. They consider themselves in a vacuum because there is no easy way to obtain a licence or to even know the price of such licence. It is unable to sell its products with all IP rights included, nor is it able to indemnify its customers should they receive an infringement or license claim in the future. The company has lost several Cellular IoT business opportunities to both EU and non-EU competitors making misleading or false statements with regards to “selling a licensed product” or “providing full indemnification”."

If those competitors make "misleading or false statements" concerning the licensing status of their components, then their customers will find out sooner or later. And whether or not there is "full indemnification" depends on what's in the agreements that those customers sign.

The remaining stories in that section of the impact assessment aren't more plausible or verifiable.

9. Confidential "testimonies" collected from FSA members

Why does the Commission outsource its job to the Fair Standards Alliance (FSA)? The FSA's members are free to communicate with the Commission, and the FSA can (as it presumably has) encourage them to do so.

The SME stories in DG GROW's impact assessment are not even anecdotal evidence. Frankly, some of them sound like fiction, and none of them points to a verifiable problem.

Responsible policy-making needs a much more solid basis.

Share|

EU proposal on standard-essential patents envisions "Competence" Center that will never get to build competence on SEPs: major misnomer

It is par for the course in politics that action plans, measures, or entire institutions are named euphemistically or at least optimistically in the sense that they reflect a laudable goal for the future rather than a present reality. For example, the "America Invents Act" primarily made it easier to challenge patents through PTAB IPR petitions, for which there were good reasons, but which has nothing to do with encouraging more patent filings and incentivizing more inventions.

The European Commission's Directorate-General for the Internal Market (DG GROW) chose a nonjudgmental name for its proposed regulation on standard-essential patents (SEPs). It would have been unusual for the EU to do otherwise. But there is one label that is pervasive throughout the highly controversial proposal and doesn't withstand scrutiny: "Competence" Center.

It's actually just the smaller of two problems with that name that the EUIPO--which would be more accurately called EUTMO (a trademark office)--knows nothing about patents and particularly not about standard-essential patents. The EUIPO's outgoing Executive Director, Christian Archambeau, once even said the EUIPO would never have patent competence.

That smaller problem could theoretically be solved. The quality of life in the coastal town of Alicante (near Barcelona) is high, and relative to what the governments of the EU Member States pay their employees, EU public servants are well-paid. Licensing professionals who run patent pools or serve as expert witnesses and arbitrators are too much in demand and would probably not be interested, but at least the EUIPO would not be in a worse position to recruit talent than the European Patent Office (which is not an EU institution, and which according to rumor declined to get involved with this SEP regulation initiative).

So what's the bigger issue about?

It's that the proposed EU SEP Regulation makes it practically impossible for the "Competence" Center to acquire SEP competence. Ever.

Even if they hired people with the potential to learn about SEPs in technical and/or economic terms, it's not going to happen because all that they're going to do is of a purely administrative nature:

• The envisioned SEP register will contain SEPs that are reported by the SEP holders (or by third parties) and the results of essentiality checks performed by external technical experts ("evaluators"). Even the database system will presumably be set up by consultants.

• The FRAND determinations for entire standards or for particular licensor-implementer relationships will be made by external consultants ("conciliators").

So what will the EUIPO's SEP "Competence" Center really do?

It's just going to be an outsourcing operation. They'll see which of those SEP evaluators (who perform essentiality checks) and conciliators (who propose FRAND rates) are reliable in terms of meeting deadlines and showing up for appointments. They won't even have or acquire the internal knowledge to assess whether those external consultants do good work, except that over time there will be some statistics as to how often a SEP evaluator's findings are affirmed by another evaluator in the event a peer review is performed. Only a reasonably large statistical sample would yield meaningful results, given that a disagreement between two peer reviewers is not as instructive as a decision by an appellate body (where the appellant will challenge particular errors as opposed to a second review taking place without the benefit of an appeal that raises particular issues).

Contrary to a "Competence" Center, that is an Outsourcing Operation, or a Database Secretariat.

The executive branch of the EU government won't become more knowledgeable about SEPs, at least not significantly so. There won't be a better basis for future policy decisions--given the flaws of the proposal that is currently on the table, progress of that kind would be highly desirable and room for improvement abounds--or for giving advice to small and medium-sized enterprises (SMEs) with respect to SEP licensing.

The proposed regulation purports to tackle a problem that the underlying impact assessment is unable to show: patent hold-up. The "researchers" on whose work DG GROW relied even stated explicitly that there is no hard evidence for either hold-up or hold-out. Some of the provisions make no technical or legal sense, such as that an essentiality check of a single patent shall serve to clarify the essentiality or non-essentiality of a entire patent family. Fundamental rights would be violated, such as access to justice--an issue that I highlighted early on (shortly after the first draft leaked in March) and which has recently been raised by the president of the UPC appeals court, Judge Dr. Klaus Grabinski. "Back to the drawing board" is the best advice one can give DG GROW in this situation--and the fact that the so-called "Competence" Center won't ever become truly competent is one of various reasons for that suggestion. There's no shortage of reasons, actually...

Share|

IP Europe's call for do-over of EU SEP Regulation proposal is supported by absence of evidence and growing chorus of voices that matter

In policy debates the challenge is always to understand what's in the public interest despite different stakeholders pursuing their particular interests. Stakeholders are inherently self-serving, but that doesn't necessarily make every concern a pretext.

What's unusual about the proposed EU regulation on standard-essential patents (SEPs)--but can be adequately explained with the complexity of the topic--is that it has flaws that even those seeking to benefit from it can't deny with a straight face. For instance, the effort of performing countless essentiality checks of (samples of) existing SEPs, as opposed to merely updating an existing database as new SEPs are declared, would require years of full-time work by more experts than there are on this entire planet. The Commission's Directorate-General for the Internal Market (DG GROW) does not provide evidence of the feasibility of what is envisioned.

If the debate was over whether under the current legal framework SEP holders have too much of an opportunity to engage in hold-up or whether it is too easy for unwilling licensees to engage in hold-out, everyone would obviously be entitled to their opinion. But there are hard facts that make the EU SEP Regulation proposal unworkable and objectively unhelpful, such as the one I mentioned above (the effort of performing the initial essentiality checks) or the geographic incongruence I discussed in my previous post on this subject.

On Thursday, IP Europe--an industry body whose members are net licensors of SEPs--published its position paper, which calls for a new impact assessment. In order to do the necessary homework and fix some of the obvious and serious issues with the proposal, the Commission would have to withdraw the current one or at least the legislative process would have to be put on hold. IP Europe asks the EU Council (where the EU Member States cast their votes) to:

"(1) demand a thorough impact assessment of the Commission’s detailed proposals; (2) convene subject-matter experts to comment on the proposals; and (3) if necessary, ask the Commission to withdraw the entire SEPs proposal pending further review and amendments."

None of that is the ordinary course of business in EU legislative processes. But rarely is a Commission proposal as flawed as this thing put forward by DG GROW.

The impact assessment does not address some questions that must be answered. It appears that the proposal took a different direction shortly before a first draft leaked in late March. FRAND determinations were not part of the original plan. The absence of evidence in that context is striking. For instance, DG GROW's impact assessment does not refer to any data (much less to any truly empirical study) when claiming that up to 70% of all SEP infringement litigation could potentially be obviated by performing a FRAND determination first. That number is just someone's opinion (and we don't even know whose). Theoretically, any change to the legal framework could even help parties avoid 100% of all litigation. But why 70% in this case? Why not 5%, 50%, or 95%? They have no facts, no numbers, just an agenda.

The impact assessment doesn't even take into consideration that the FRAND determination stage often doesn't have to be reached: many cases settle simply because an unwilling licensee gets sued and then takes a license. There are parties who hope for years that they're not going to be sued: someone else will. The EU proposal would result in FRAND determinations in many disputes in which they would never be needed.

Absence of evidence is not evidence of absence, but in this particular case there is evidence of the absence of serious evidence.

Throughout this process I will form my own opinions every step of the way. At this stage, I agree with IP Europe that--in other words--the Commission can do better than that, the EU deserves better than that, and the co-legislator institutions (Council and Parliament) should be provided with quality work so they can start to do their job.

IP Europe keeps updating a blog post that summarizes key third-party comments on the proposal for an EU SEP Regulation. Some of that was already mentioned on this blog, too, but I've found some new information, particularly what a Dutch ministry told its country's parliament. I also believe decision-makers should take note of a paper (PDF) by the European Association of Research and Technology Organizations.

I'll discuss it in a dedicated blog post soon, but I also find the editorial quality of the proposal and the impact assessment shocking. The density of linguistic errors and typos contrasts starkly with every other official Commission document I've seen. Even at the height of the COVID pandemic, when time was of the essence, the policy proposals and statements that were cranked out by the Brussels machinery were more or less impeccable. The substantive issues with the proposal are obviously the more pressing reason for an overhaul, but it would also be in the Commission's institutional interest to withdraw an utter embarrassment for the institution as a whole (though only a small number of people are to be blamed).

Share|

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Share|