EU Looks to Level Playing Field for Licensing Standards Patents

By Peter Leung

The European Commission’s newest guidance on patents essential to widely used technology standards clarifies the responsibilities for both patent owners and technology implementers, lawyers told Bloomberg Law.

The commission’s approach will likely be welcomed by patent holders, since it clarifies that those looking to get licenses also have obligations to negotiate fairly.

The shift to focusing on the obligations of would-be licensees, and not just patent owners, reflects changes in markets such as mobile devices, Richard Vary, a patent partner with Bird & Bird LLP in London, said. Previously, patent owners were the big companies, but now many of the implementers, especially successful smartphone manufacturers, have a lot of market power.

“It reflects a shift in the power dynamics,” he said.

The communication, released Nov. 29, clarifies that in SEP licensing discussions, the obligation to negotiate in a fair, reasonable, and non-discriminatory manner (FRAND) applies to both parties. For example, a company looking to license the technology must make concrete, specific counteroffers, the communication said.

The guidance isn’t binding law but, instead, provides a framework to determine if the parties are meeting their FRAND obligations. That’s particularly important when the patent holder seeks an injunction to block the would-be implementer’s products from market.

Licensing negotiations involving patents that apply to industry-wide standards can be especially contentious because of worries that patent owners can act as gatekeepers to entire industries. Because of these antitrust concerns, companies who declare their patents are essential to a standard are usually required to agree to give out licenses to the technology on FRAND terms, before the standard is finalized.

Responsibilities on Both Sides

The communication’s guidance on injunctions adopts the Court of Justice of the European Union’s approach in Huawei Techs. Co. Ltd. v. ZTE Corp. , which says SEP holders should not be allowed to get injunctions against implementers who are willing to take a license on FRAND terms.

The commission said the exact requirements on the parties will differ in each case and each industry but, generally, the SEP holder must offer a clear explanation about why the patent is essential, the allegedly infringing products, a proposed royalty calculation, and why the offer isn’t discriminatory.

The implementer’s counteroffer must similarly be sufficiently concrete in order to meet FRAND obligations, the commission said. A counteroffer that simply disagrees with the patent owner’s position and makes general references to having a third party determine an appropriate royalty rate isn’t sufficient, the commission said. What’s more, the implementer should respond in a timely manner, though whether a response is timely is case-specific, it said. Generally, the longer it takes to make a counteroffer, the more detailed that counteroffer should be, the commission said.

Rather than taking a more prescriptive approach, the commission is using “its discretion judiciously and have left the field open for the stakeholders to develop tailored and sector-focused FRAND terms while providing the general guiding principles that should be kept in mind while conducting good faith negotiations and discussing FRAND terms,” Rajesh Sagar, a patent managing associate with Marks & Clerk LLP in London, told Bloomberg Law.

More Precise Information

The European Commission’s communication also seeks to increase transparency in the standards setting process.

The standards developing organizations (SDOs) keep databases on what patents have been declared essential by the patent owners. That information forms the foundation of licensing negotiations, and there is concern about incorrect or out-of-date information.

Some of the commission’s proposals include having patent owners update declarations after a standard has been finalized and provide more information about why a patent is essential. It also recommended having a third party check whether a declared patent is actually essential, though acknowledging that such a process must not be too costly.

“The proposed ideas are radically different to the procedure and policies currently followed by most, if not all, SDOs,” Sagar said. Patent owners usually self-declare that their patents and applications are essential, and there is typically no method for checking this, he said, adding that since both the standard and the patent application can change significantly during the standard-setting process, the information in the database can often be incorrect.

Vary suggested there are also other mechanisms SDOs can consider. For example, requiring declaring parties to pay to maintain their declarations, he said, would encourage them to be more careful and update them.

Part of the issue is that SDOs previously tended to encourage over-declaration of potential essential patents, he said, because so-called “submarine” patents, or essential patents that were never declared and later used to sue implementers, were seen as a more serious concern.

But now, with the values of licenses getting higher and higher, there’s more demand for more accurate information, especially since declared patents tend to be presumed essential.

Having better information would be particularly helpful for industries with newer companies that have little patent licensing experience, like the internet of things market, the commission said.

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