Part two of the webinar series: A new framework for standard-essential patents (SEPs)

On 30 November 2021, ACT | The App Association held the second webinar in a series of public events covering standards and standard-essential patents (SEPs) and how they impact European innovation and competition (view online). The event also focused on the various issues European small and medium-sized enterprises (SMEs) face when using standards, including licensing SEPs, and the impact these barriers have on SMEs’ ability to innovate and compete across internet of things (IoT) markets.

One core issue in the discussion around SEP essentiality is how to accurately and fairly assess the validity and infringement of declared SEPs. Currently, essentiality assessments mainly take place during court cases, which is very late in the process when a dispute is already underway. This makes it hard for businesses (and SMEs in particular) to determine if the patent(s) they are allegedly infringing are, in fact, valid and essential to a standard. Today, a considerable number of ‘essential’ patents are not actually essential. According to expert estimates, only 10-47 per cent of all declared 2G/3G/4G patents are verifiably essential to the standard.

Jim Beveridge, intellectual property fellow at the Innovators Network Foundation moderated the panel, which consisted of:

  • Brian Scarpelli, Senior Global Policy Counsel, ACT | The App Association
  • Joachim Henkel, Professor of Management, Technical University of Munich
  • Nikolaus Thumm, Chair of Innovation Economics, Technical University of Berlin
  • Giuditta Caldini, Associate, Latham & Watkins LLP

Panel discussion

Moderator Jim Beveridge opened the discussion by outlining the current state of play for standardisation and SEP licensing, noting that the number of SEP holders has more than doubled in the past 10 years. The rise in the number of SEP holders has gone hand in hand with a growing number of self-declared patents, with the number of patents rising from 82,000 patents (12,000 families) in 2010 to about 305,000 (70,000 families) in 2021. The number of declared patents in 10 years has more than tripled.

 

Mr Beveridge emphasised that a significant area of concern is SEP holders’ self-declaring patents essential to a standard when these patents are not necessarily essential. The fact that this determination is made late in the process, when there is already a court case, makes it hard for businesses to determine which patents to license. Even with reasonable effort, innovators often have difficulties determining which SEPs are valid and, if valid, are essential, before concluding there is a need to license the SEP. If well-established multinationals have trouble with this determination, it’s hard to imagine an SME successfully accomplishing it.

To dive into some of the issues SMEs face when licensing SEPs, Mr Beveridge turned it over to Brian Scarpelli, senior global policy counsel at the App Association. Mr Scarpelli highlighted the broad range of issues on which stakeholders need clarity and certainty to contribute to a healthy standards ecosystem, and essentiality and validity are no exceptions. He added that several important opportunities for all stakeholders to come together and reach needed solutions exist. For example, considering essentiality, Mr Scarpelli suggested that it’s important to have an impartial and independent body conduct essentiality checks to avoid bias and preserve fairness. At the same time, Mr Scarpelli noted that we must resolve several practical challenges, including maintaining the important role national courts play in making final determinations in disputes. He also discussed how standard-setting organisations (SSOs) can and should provide support to those participating in their processes, building on patent policy clarifications leading SSOs like the IEEE Standards Association already made.

Mr Scarpelli echoed Mr Beveridge’s sentiment that there is an over-declaring of essentiality in the standard-setting process for patents that often turn out to be invalid and/or non-essential. This trend speaks to the need for broader transparency in SEP licensing, which SSOs can address to some extent, but they should prioritise it more. The inclusive, cross-sectoral, and consensus-based CEN, the European Committee for Standardization, workshop agreement CWA 95000 (Core Principles and Approaches for Licensing of Standard-Essential Patents) has addressed these issues in detail. CWA 95000 provides that SEP owners, who hold the best insights into their own patents, should provide timely and sufficient information at the earliest stages of interacting with a prospective licensee as to why their patent is valid, essential, and infringed.  Further, the excessive use of non-disclosure agreements (NDAs), which often obscure critical insights prospective licensees need and prevent comparability exercises, should decrease.  Mr Scarpelli invited policymakers to use CWA 95000 as a foundation in setting behavioural norms in the SEP licensing context and to advance transparency and fairness. Lastly, Mr Scarpelli stressed that transparency is just one piece of the puzzle. To address issues like the systematic abuses taking place in the SEP licensing ecosystem and flat-out refusals to license to willing licensees acting in good faith, more clarity on broader issues including on what fair, reasonable, and non-discriminatory (FRAND) terms entail is necessary. Essentiality checks must thus be part of a broader push to provide balance and fairness in standardisation and SEP licensing.

Joachim Henkel, professor of management at the Technical University of Munich, co-authored a pilot study for the European Commission on essentiality checks. He agreed that essentiality is particularly problematic due to over-declaration by patent owners. Under-declaration is also an issue, he added. The goal is to force patent owners to think about why their patents are essential, according to Prof Henkel.To determine the feasibility of an essentiality assessment, Mr Henkel’s team examined different assessment models to test. A key challenge for them was the lack of a prior benchmark, so they used patent pools’ availed patents as a baseline. They also compared cases with claim charts to those without, finding that cases with claim charts aligned with patent pools’ assessments. Mr Henkel expressed his belief that the study shows essentiality checks are technically feasible and encouraged policymakers to develop an essentiality assessment system. Further, many stakeholders in the experiment expressed interest in essentiality assessments.

Mr Henkel added that outside the telecoms industry, many businesses lack technical and legal knowledge regarding patents, especially SMEs. Firms often do not even know that there is a SEP issue even though it could impact them negatively. Reflecting on points by other panellists, Mr Henkel also noted that licensing on the device level is impractical and that, in the interest of innovation, licensing should happen on a low level in the value chain. He encouraged policymakers to take action to reinforce this priority.

Nikolaus Thumm, chair of innovation economics at the Technical University of Berlin, collaborated with Mr Henkel on the essentiality pilot study. Mr Thumm agreed that the testing of essentiality is technically and institutionally feasible, but its success largely depends on the specific design of such an assessment system. Further, the cost of establishing this system depends on the desired quality of the examination. One of the most important factors to consider is trust in the outcomes, which significantly hinges on the organisation that conducts the assessment, according to Mr Thumm.

Mr Thumm advised that a careful design of the jurisdiction of the essentiality check system is crucial, particularly the implementation of an appeals system in the assessment procedure. Further, we need to consider several factors regarding payments for essentiality checks, including who should pay, how to make a payment (e.g., lump sum), when to pay (e.g., at the beginning of the declaration of a patent essential to a standard), and how much to pay.

Giuditta Caldini, associate at Latham & Watkins LLP, remarked that implementing essentiality checks can improve the level of transparency in SEP licensing negotiations. According to Ms Caldini, small tweaks to SSOs’ intellectual property rights (IPR) policies could already accomplish a lot to increase transparency. Requiring SEP owners to identify specific IPR claims for their patents, for example, would inevitably increase transparency, while providing licensees with more information than they currently receive. She also discussed policy levers for accomplishing greater transparency, such as through the revision of the European Commission’s Horizontal Guidelines, among others.

Although essentiality checks can help to increase transparency, they come with certain associated risks. Ms Caldini agreed that patent holders’ tendency to over-declare essential patents is problematic but highlighted the crucial function courts can and do have in determining essentiality. Because having a system that is not independent presents a significant risk, Ms Caldini urged a careful approach in establishing an extra-judicial system for essentiality checks. Outcomes of these essentiality checks should also not be legally binding for courts, and they should not produce legal presumptions on essentiality, according to Ms Caldini. Courts should ultimately hold the power to determine essentiality. Ms Caldini also agreed with previous speakers that the burden of proof should remain with SEP holders and that this burden should by no means shift to licensees in the interest of equity and fairness.

Conclusion

Some of the main points our panellists made included:

  • The problematic practise of over-declaration of essentiality in SSOs impacts SMEs the most and further decreases transparency and certainty in the SEPs framework.
  • SSO FRAND-based IPR policies should require patent holders to early disclose information about patents potentially essential to the developing specification.
  • SEP licensing negotiations that take place after the development of a standard should continue to prioritise transparency.  Good faith SEP holders should provide sufficient information for each SEP to help the potential licensee assess whether a licence is necessary, and, if so, whether the licensor’s offer is FRAND.
  • The excessive use of NDAs is problematic and should be limited. While parties may choose to keep some information confidential as part of normal commercial practices, basic information that would facilitate FRAND licensing negotiations should not require confidentiality.
  • The cross-sectoral and inclusive CWA 95000 best practices for SEP licensing provide leading recommendations on ways to provide for a balanced and pro-innovation standards ecosystem and specifically address the types of non-confidential information that good faith SEP holders should generally provide to prospective licensees.
  • Ultimately, an independent, unbiased third-party assessment is likely a feasible method to approach SEP essentiality checks. However, an ultimate determination of essentiality must be reserved for the courts, who should have the final say in adjudicating legal disputes related to patents.
  • Rather than simply mandating essentiality checks, the European Commission should take a holistic view of the standards and SEP licensing ecosystem and clarify the determination of essentiality through relevant policy development processes such as its revision of the Horizontal Guidelines.
  • Essentiality assessments cannot solve separate but related challenges within the SEP licensing ecosystem, such as the improper seeking of injunctions on SEPs, refusal to license, and other SEP abuses.