How Will SMEs be Affected by the European Commission’s Proposal to Regulate Standard Essential Patents (SEPs)?

  • On 27 April, the European Commission’s (EC) proposal to regulate Standard Essential Patents (SEPs) was officially made public

  • The initiative set out to make SEP-related information more accessible, publicising existing SEPs and providing guidance on how to negotiate Fair, Reasonable and Non-Discriminatory (FRAND) terms and conditions

  • It also raises awareness on alternative dispute resolution mechanisms, and on the different impact of SEP licenses along the value chain – of crucial importance to SMEs

Standard Essential Patents (SEPs) have been a growingly visible issue of contention in the last few years. An SEP is defined as “a patent that protects technology that is essential to implementing a standard”. Therefore, it is crucial for any company which commercialises, for instance, connectivity devices (like 5G or Wi-Fi) to understand if any of the components they use has SEPs associated to it, to make sure they are not accidentally infringing upon a third party’s property rights.

Given that SMEs lack access to the necessary resources and knowledge to understand whether a patent is essential to a standard and how to negotiate with SEP holders, several regulatory authorities have started looking into the topic. This power imbalance is reinforced by the fact that most SEP holders are big companies with substantial market power. In this context, empowering SMEs to acquire greater bargaining power in their negotiations with them includes helping them understand what SEPs are and which companies own them, as well as learning about any cheaper alternatives that might free them from having to pay any royalties in the first place. Regulatory initiatives vary according to the jurisdiction and the economic characteristics of its market, but given the nature of our organisation, this post uniquely focuses on the European Union’s approach to regulating SEPs.

The main element of importance in the EC’s proposal is the creation of a competence centre within the European Union Intellectual Property Office (EUIPO). In the intentions of the Commission, this centre would provide training and support on SEP-related matters, monitor the market, conduct studies on SEP licensing (in the EU and worldwide) and promote alternative dispute resolution mechanisms in the field. While most of this information would be freely accessible, more detailed materials (e.g. reports from FRAND determinations) would be available for a fee upon request.

The first problem that this proposal seeks to redress is the widespread lack of awareness of SEPs’ existence and ownership. In response, the competence centre would be in charge of an SEP register, to which any company seeking to enforce their SEPs in the EU would have to register within 6 months of acquiring their license. Failure to do so in the aforementioned timeframe would render the company unable to pursue royalties or claim damages for the time elapsed. Upon the pertinent payment, information regarding the number of SEPs applicable to a standard, as well as their ownership status and which parts of the standard they cover would be made public, and could henceforth be enforced.

The second puzzle that this regulation addresses is determining whether a patent is indeed essential to a standard or not. With this purpose in mind, the regulation includes essentiality checks to be conducted by a pool of independent evaluators on this register. Through testing random samples of patents, as well as investigating those cases proposed by either SEP holders or implementers, the EUIPO would not only ensure the quality of the register, but also publicise any outcomes of the investigations, which would be informative for third parties. Said resolutions would come at a fee and remain nonbinding, but useful during negotiations and in court.

Thirdly, the EC undertakes to provide conciliation during the determination of an SEP’s FRAND terms and conditions and aggregate royalty (maximum price to be paid when using it), in order to achieve a swifter agreement which better advocates for the interests of smaller parties too. Despite being nonbinding, accessing this conciliation process (or, at least, requesting an expert opinion on it) would provide an alternative to entering a litigation process. Both holders and implementers can request it for a fee, and even if no agreement is reached, recommendations would be partially made public, once again providing guidance to third parties undergoing similar processes.

Above all, DIGITAL SME welcomes the wide array of SME-tailored measures envisioned by the proposed regulation, to which Title VIII is uniquely dedicated. Companies who fall under this category are entitled to free and personalised training and advice, and possibly to reduced fees for administration, essentiality checks and conciliation services. SMEs are also exempt from random essentiality checks, and when they are SEP holders, they may request to limit the territorial scope of the FRAND determination of their SEP. Furthermore, all other SEP holders are encouraged to offer more favourable FRAND terms to SMEs, and to consider discounts or royalty-free licensing for low sales volumes (irrespective of the implementer’s size).

Our past engagement in this discussion has already proven fruitful, as many of our members participated in the survey that was central to the public consultation preceding this proposal (see: pages 6 & 7). We will closely follow the discussion that will unfold in the upcoming months, and encourage all of our membership (as well as any other SMEs) to continue to share their insights on the topic with us, so we can best represent their interests in this debate.