An Open Letter to the Members of the European Parliament
As the European Parliament deliberates on the proposed EU Regulation on Standard-Essential Patents (SEPs), our members urge lawmakers to endorse this vital regulation.
The SEP licensing regime in Europe is fundamentally broken, placing far too much power in the hands of large SEP holders, and harming the ability of European businesses to develop exciting new internet of things (IoT) technologies. Recent court cases, academic studies, and small and medium-sized enterprise (SME) surveys in the EU and UK have proven that small businesses are being directly harmed by the status quo.You can hear directly from ACT | The App Association members about their concerns with SEP licensing here.
Adopting the proposed regulation, with certain changes outlined below, will provide much needed certainty and transparency to small businesses, empowering them to negotiate fair SEP licensing deals and leverage standards to innovate and compete with bigger businesses across multiple sectors of the economy.
Earlier this year, SMEs came together to send a letter to Members of the European Parliament urging their support of this regulation. Read the full letter and hear more from SMEs on this critical legislation below.
Dear Honourable Members of the European Parliament,
Re: The need to enact the European Commission’s proposed regulation on standard-essential patents for a balanced, transparent, and reliable framework for small and medium-sized enterprises
We, the undersigned, represent a broad coalition of small and medium-sized enterprises (SMEs) and start-ups in the European Union (EU) and United Kingdom (UK). Our developments advance every sector of the European economy, create jobs for European citizens, and benefit the daily lives of European consumers. We write to you to show support for the enactment of a European Commission (EC) regulation addressing standard-essential patent (SEP) licensing activities. We strongly urge the EC to ensure that the regulation enhances transparency, efficiency, and fairness, and provides European stakeholders, including SMEs, with needed certainty so that they can leverage standards to innovate and compete across markets.
Many of us have raised concerns to the EC in the past to highlight how some SEP holders volunteer to license their SEPs on fair, reasonable, and non-discriminatory (FRAND) terms, only to later exploit ambiguities in the meaning of FRAND or disregard those commitments. These SEP holders use their inherent market power in standardised technology-driven markets to control market entrance and to realise supra-FRAND returns on their SEPs, limiting competition in numerous European technology-based markets and, ultimately, harming consumer welfare. Indeed, the EC’s proposed SEP regulation appropriately recognises that the current landscape is inequitable for SMEs that already experience disproportionate hurdles to developing and bringing new technologies to market.
Clear guidance from the EC that sets FRAND norms to prevent SEP licensor abuses, supplemented by a FRAND determination process guided by experts under the European Union Intellectual Property Office (EUIPO), will do much to deter this strategy. Notably, this mechanism should provide SEP licensing parties with the basic information they need to conclude a relevant and necessary SEP licence under FRAND terms without undergoing lengthy and expensive litigation that causes SMEs significant financial depletion or forces a SME to halt innovation altogether. We believe that the proposed regulation on SEPs will take many meaningful steps in this direction through clarifications on what the EC considers to be FRAND SEP licensing behaviours and the establishment of new mechanisms (e.g. new measures to provide needed transparency for all stakeholders), which will assist businesses that contribute to the SME population that provides more than half of Europe’s GDP and creates products and services that are widely used across the European economy.
It is crucial that the EC advance its SEP regulation as soon as practicable to address this well-demonstrated problem and improve the standards and SEP licensing environments, as well as to provide global leadership. As the process continues, we note four key issues that we hope to see resolved:
1) Refusals to make licenses available for FRAND-committed SEPs
Despite the promise to provide FRAND access to their SEPs, some SEP holders systematically refuse to make licenses available to willing and reasonable licensees. This practice is a plain and flagrant violation of the ‘non-discriminatory’ component of the FRAND commitment and has proven to be highly disruptive to the supply chains of key European industries, such as automotive and wireless communications. The EC’s regulation must reinforce that a FRAND-committed SEP must be made available to any licensee, regardless of where they reside in a value chain.
2) Lack of transparency in SEP licensing
SEP holders often approach SMEs to negotiate a licence for patents declared essential to the relevant standard yet refuse to adequately substantiate claims of validity, essentiality, and enforceability. Since SMEs cannot afford the cost of investigating or litigating these claims for every SEP that they are approached with, they often agree to supra-FRAND licensing conditions under strict non-disclosure agreements (NDAs) to avoid being sued for infringement. EC guidance on how transparency must be advanced across SEP licensing scenarios, and an objective and consistently applied essentiality check procedure (with costs appropriately being borne by those making claims of essentiality) will do much to alleviate this burden for European SMEs and other stakeholders operating under resource constraints.
3) Seeking or threatening to seek injunctive relief on FRAND-committed SEPs
Despite making a voluntary promise to provide FRAND licenses to anyone (i.e., volunteering to cede their ability to exclude reasonable use of the SEP), some SEP holders systematically threaten or seek injunctions to coerce SMEs into accepting unreasonable licensing terms. If an SME is hesitant to accept the terms or seeks more information regarding the licensing agreement, we are often met with the SEP holder threatening to sue for infringement. For a small innovator, choosing to accept an unreasonable licence is a Hobson’s choice. The ability for a SEP holder to receive an injunction under any circumstance disrupts the business operations for most small innovators that rely on the FRAND commitments having meaning, directly impacting European consumers. The EC should clarify in its regulation, and support through its dispute resolution mechanism process, that injunctions for SEPs are only permitted in rare circumstances where monetary damages are not available (e.g., the potential licensee is in bankruptcy).
4) The imposition of supra-FRAND royalties on SEP licensees
SMEs, particularly those innovating in new internet of things (IoT) markets, often do not have the resources or experience to assess whether the SEP royalties they are being asked for are FRAND. This fact is not lost on seasoned SEP licensors. Notably, a UK court has recently described how a SEP licensor systematically imposes excessive royalty rates and unfair terms on SMEs and start-ups due to their lack of knowledge and resources in a SEP licensing negotiation in order to justify later making inflated demands on larger licensees with deeper pockets. The EC’s regulation must clarify, and its dispute resolution mechanism should ensure, that a SEP’s FRAND rate should be based on the value of the actual patented invention, apart from its inclusion in the standard, real or hypothetical downstream uses, or other arbitrary factors. This process allows European stakeholders to have access to important information regarding reasonable rates for a SEP licence that they are required to conclude.
We urge you to support the implementation of the European Commission’s proposed regulation on SEPs, which provides European stakeholders with much-needed guidance to enable an equitable and competitive SEP licensing framework.
Sincerely,
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