Building the house from the roof down: The Standard Essential Patent (SEP) Draft Regulation

It is well known that a stable house needs strong foundations. The same goes for EU regulations. Because a regulation is a binding legislative act that applies across the EU, its creation or amendment demands careful consideration.  Consequently, a regulation usually requires the joint agreement of the European Commission (EC), the European Parliament, and the Council.

Due to its impact, three requirements are needed before a regulation can be adopted: (1) Robust evidence that a problem exists, (2) a proposal to address such a perceived problem, and (3) a critical assessment concluding that its impact would be more positive than the status quo.

Last April, the EC published its Proposal for a Regulation on standard essential patents (SEPs). SEPs are patented inventions that are necessary to comply with a technical standard. SEPs are usually licensed under fair, reasonable, and non-discriminatory (FRAND) terms and conditions, which are determined by parties in good faith licensing negotiations. The FRAND commitment for SEPs is extremely important because it incentivizes companies to share their cutting-edge technologies. One example is cellular standards (2G to 5G), which are responsible for fast and reliable connectivity, and represent a central pillar of the Internet of Things (IoT).

Some of the EC’s justifications for intervening in the SEP/FRAND ecosystem through a regulation include:

• Increased SEP licensing disputes.
• Inefficient SEP licensing for standards such as 4G on which many IoT applications run.
• High licensing transaction cost.
• Concerns for SMEs who lack experience in SEP licensing.

Evidence tells another story:

• Low litigation: In an impact assessment study financed by the EC and published in 2023, Baron et al. concluded that SEP litigation is “low and not increasing over time”.
• Highly efficient SEP licensing: SEP licensing for cellular standards is so efficient that it has historically enabled tremendous market success.
• Low transaction costs: Although the IoT is in its early stages, the market has a proven ability to address new challenges, as seen with the creation of Avanci. Avanci is a platform currently licensing SEPs from 56 patent holders (reported to represent 80% of SEPs) for e-call, 2G, 3G and 4G to 47 automotive companies (estimated to represent 80-85% of the market). The royalties are as low as the price of a car wash.
• There is no ‘threat of an injunction’ for SEPs, since (i) according to Baron et all, litigation starts on average 2.9 years after the start of negotiations, (ii) SEP licenses are commonly signed 3.74 years after the licensee has started selling the standardized product in the market and (iii) the SEP owner must make a FRAND offer before the court will consider granting an injunction (CJEU Huawei v ZTE)
• No empirical study on the impact of SEP licensing to SMEs: Only 37 SMEs have provided input to the EC. This is 1,15% (!) of all SMEs in the EU that the EC believes might need a license. Thus, there is no substantiated evidence of a harmful impact on SMEs. In fact, SEP licensing programs rather seem to facilitate SME business growth.
• The SEP Expert Group appointed by the EC was unable to reach consensus on a concrete problem to be addressed.

Major European contributors of standardized technologies, Ericsson and Nokia, have recently warned that the Draft Regulation introduces “a wide-ranging and experimental system (…) without committing the resources and expertise needed to deliver on it”. Moreover, if implemented, the proposal will endanger European innovation, security, growth, and authority in standardization. In other words, the Draft Regulation appears to contradict the previous goals set by the EC in its Standardisation Strategy, which are to “strengthen the EU’s global competitiveness, to enable a resilient, green and digital economy”.

In the coming weeks and months, the Parliament and the Council will discuss the impact assessment for the SEP Draft Regulation.  It is now for both institutions to carefully evaluate whether the impact assessment from the EC contains sufficient robust empirical evidence that warrants the proposed intervention. As this is an indispensable requirement to pass a regulation, they should not hesitate to challenge it. Only then will we be able to build the strong foundations for a stable European house. A house that safeguards and further promotes the continent’s innovation strength.

Disclaimer: The views expressed herein are those of the author and do not necessarily represent those of Ericsson or 4iPCouncil.