Europe's SEP Legislation Draws Attention

And it's not all positive. Standard Essential Patents are in the news, and new EU legislation is making waves

This week Europe took a big step towards upending the global posture of Standard Essential Patents, or “SEPs.” The European Parliament voted to move a regulation past committee by an overwhelming vote of 454 to 83. The proposed new legislation would overhaul SEPS worldwide, creating a European database, changing F/RAND terms and royalty structures overnight, and perhaps most controversially, changing the way that a patent is determined to be standard. The result has been quite a lot of uproar and many claiming that this has been rushed. Some trade groups, like the automotive industry, support the legislation; others, like many SEP patent pools, oppose it.

Europe is in the process of overhauling its patent process more generally. It is working on a Unitary Patent, for example, which the head of the EPO called a “game changer.” So perhaps it is no surprise that SEPs are in their crosshairs as well. What potential changes are in store, and what would this mean for practitioners worldwide? That is the topic of this week’s Nonobvious.

Taking a Big SEP of Innovation

SEPs are an important part of the tapestry of patents. Many core technologies have become “standards” that everyone in a field relies upon, especially in electronics, like Wi-Fi, 4G, and charging standards. SEPs are typically managed by a Standard Setting Organization, to which its members pledge patents to be licensed under a F/RAND, or “fair, reasonable, and non-discriminatory” basis, though sometimes individual companies may license their patents under a F/RAND regime on their own.

SEPs are inherently controversial because they touch so much of the economy. Some argue that SEPs are critical to economic development and that hindering them can even threaten national security due to the well-known “holdup” and “royalty stacking” problems. Others say that these fears are overblown and that enhanced SEP enforcement can even decrease innovation. Either way, aside from one paper, the empirical evidence is thin.¹ That has not stopped governments from getting involved, however. SEP patents have even been subject to antitrust scrutiny, like In re RAMBUS and FTC v. Qualcomm, both of which ended favorably for the companies involved.

This sets the stage for the European proposal. As written, it would be a massive change, to be the least.

The centerpiece is a central database and “center of competency” at the EUIPO. This central database would keep track of all SEPs, along with their owners, relevant technical standards, legal data, and availability. Patent pools will also be required to provide much more transparent information online. In general, this proposed legislation requires transparency around aggregate royalty rates, and if they are not disclosed the EU will have an expert commission a (non-binding) public proposal.² When a standard is recognized, patent holders will have six months to register their patents with the EUIPO with a devastating hammer: patent holders of unregistered SEPs will not be able to bring infringement claims related to the standard, effectively creating a new prerequisite for admissibility of SEP-related infringement claims. This is intended to help with a standard criticism of SEPs, specifically that it can be difficult to determine which patents belong in a standard.

Where things get really controversial is changes to the judicial procedure. The European legislation allows for an independent check at the new center of competence to determine whether a patent is “truly” standard essential, meaning that it is actually necessary to implement a standard-compliant product. It also creates a new out-of-court process for determining which license terms are F/RAND. Although the courts must toll the proceedings while the out-of-court F/RAND proceedings occur, courts can still issue “financial” injunctions, like asset seizures. The European Commission considered but ultimately abandoned a “SEP clearing house,” so there are at least some lines it won’t cross. And remember, many of these determinations remain advisory only, though presumably they would carry weight in a negotiation or legal proceeding, perhaps tipping the burden of persuasion for any party that deviates.

This would all be done by the new center of competence, which would be unproven and potentially very expensive. F/RAND terms, for example, are complex and subject to much debate; will a new agency have the firepower it needs to review these disputes? Some, however, favor these proposals for creating more transparency and creating faster, cheaper resolution avenues outside of court for SEP disputes. And certainly, just because something is untested doesn’t necessarily mean you don’t take the risk if you think it’s a good idea.

In any case, this legislation reflects a political victory for the “top-down” approach to SEPs. This approach involves choosing an aggregate royalty for a standard and applying a percentage of that royalty to a SEP holder, typically on a percentage basis, though there can be adjustments made for factors like quality, patent life, and the size of the patent family. However, this approach is a break from the “bottom-up” approach where individual patents are valued, typically in a judicial process. Proponents of the top-down approach primarily argue that it helps prevent royalty stacking, but opponents argue that this standard is top-down in more ways than one: it takes the royalty-setting rate, both in aggregate and for particular patents, out of the market and into the government.

Notably, Europe is not the only region re-looking at SEPs. USPTO previously extended the comment period for input on official United States policy on SEPS to November 2023. SEPs have very high stakes, and so it is unsurprising that the battle over their use and determination will continue to be fiercely fought. And European counterproposals are already flying. Although this proposed legislation has been opposed by not only the United States patent office but also the European patent office, and even though savvy observers have noted that there is no guarantee that this bill will pass, there is also no guarantee it will die. After all, despite much criticism, the European Union passed the AI Act and has not overturned controversial rules like the Right to be Forgotten or GDPR.

Weekly Novelties

• A heartwarming story of an individual inventor who started with a lemonade stand in Durham, NC (The News and Observer)

• Eli Mazour’s Clause 8 podcast on IP now has a newsletter as well (Voice of IP)

• TikTok doesn’t just help you find music—a new patent will help it use AI to make you music, too (Music Business Worldwide)

• Two professors of law argue that AI can help small practitioners level the playing field with big firms; naturally, we agree (Cato Institute)

• Toyota emerged as the top automaker in 2023 for USPTO patent issuance (Cision)

• iRobot and SharkNinja, two highly competitive robot vacuum leaders, settled their last remaining patent suit (Law360)

• The Federal Circuit’s Daedalus decision indicates that post-KSR, the law of analogous arts is inching towards a very broad determination of analogous fields (Patently-O)

1. Though this may seem surprising given how many SEPs there are, this problem seems like it suffers high endogeneity problems, which would make econometric studies impossible.

2. One imagines these proposals will be stingy, thus incentivizing the publication of those royalty rates.