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Avoiding legal and regulatory pitfalls in digital transformation projects
This article first appeared in the September 2024 issue of Financier Worldwide.
Germany | Publication | November 2023
Standard essential patents (SEPs) are critical to standardised technologies. The best known SEPs are telecommunications standards such as UMTS, LTE, 5G and 6G, with the number of essential patents, patent holders and implementers soaring exponentially with each new generation. Other major patented standards on the Internet of Things are, for example, Bluetooth, RFID, Wi-Fi or HEVC.
Due to digital transformation, large parts of the industry and the services sector are impacted by SEPs. In April 2023, the European Commission estimated that there are 75,000 SEPs worldwide from 260 different holders, which are used by 3,800 companies doing business in the EU. A balance must be established between holders and implementers. The rapid technical progress in standardised technologies is built on tremendous research efforts. This can be capitalised on by requiring innovators in the standardisation process to license SEPs on “fair, reasonable and non-discriminatory” (FRAND) terms.
Innovative companies have a strong financial incentive to have their patented technologies integrated into the standard. Often too many patents are declared as standard-essential without being checked by the standardising bodies. The question also arises if it was permissible at all to grant the patents. These are the common issues arising when holders and implementers dispute the amount of FRAND royalty. However, SEPs regularly grant holders a dominant position which holders must observe when enforcing SEPs to avoid antitrust violation accusations. Given the countless number of holders, implementers often do not know whom to ask for a licence or have to fear that the number of licences required will make distribution of the products concerned uneconomical.
The high-profile patent infringement cases on smartphones and connected cars are just the tip of the large number of legal disputes that the EU Commission wants to reduce in future.
On April 27 2023, the Commission presented a final draft of a new SEP Regulation (COM(2023) 232 final) providing, among others, for the following measures to address the issues outlined above:
Criticism of the new regime is varied and, in part, fierce with affected parties questioning if such a regulatory initiative was needed at all. While some SEP proceedings have attracted significant attention worldwide, there are comparatively few disputes given the immense number of SEPs and implementers. Many FRAND licence disputes are settled out of court. The creation of patent pools and licensing programmes of large SEP holders help facilitate this process.
The Draft Regulation does not address the different court rulings on the interpretation of patent claims in the various member states. Which of them should be applied to the essentiality check? How should one deal with the fact that when simply considering the statistics, a high percentage of SEPs (in part) prove to be invalid in court proceedings? A standard essentiality check without consideration of a patent’s validity does not appear to be expedient. Neither does limiting the check to a single member of a patent family only, given that each member may have greatly differing claims.
It has also been rightly pointed out that, while FRAND determination at the competence centre is compulsory prior to initiation of patent infringement proceedings by the SEP holder or FRAND determination by a court at the implementer’s request, this does not apply in the reverse case, i.e. prior to a negative declaratory action for non-infringement by the implementer or FRAND determination by a court at the SEP holder’s request. This is not a balanced approach. Is the SEP holder not permitted to respond - as is common practice - with a positive non-infringement action to the negative declaratory action for non-infringement?
Key concerns exist with respect to the pool of experts that would be needed at the EUIPO, which to date has only dealt with trademarks and designs. Despite the efforts to establish standard essentiality and the sums invested to date, it is unlikely that the competence centre will be able to check randomly a substantial number of SEPs for essentiality or handle potentially hundreds of requests made per SEP holders/implementers per year. Unlike in two-party court proceedings, countless stakeholders may submit opinions. FRAND determinations will be no less effortful. In national proceedings, both sides often submit many comprehensive opinions and documents which occupy courts for years. The competence centre will have no choice but to perform its tasks superficially otherwise there would immediately be a backlog which would burst the strict and limited time limits, e.g. the nine month period for the FRAND determination, provided for in the Regulation.
The bottleneck expected to arise in connection with the FRAND determination process could deter many SEP holders. Therefore, courts in the EU (particularly in Germany or the new European Unified Patent Court) could become less relevant in the context of FRAND proceedings. It was certainly not the intention behind the Draft Regulation that Europe would be left out of the determination of global FRAND terms and conditions in future.
The Draft is currently in its first reading at the European Parliament. Given the partly justified criticism of the Draft and the unresolved uncertainties, it remains to be seen whether there will be changes in the further legislative process or whether the whole initiative will fail.
Publication
This article first appeared in the September 2024 issue of Financier Worldwide.
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The Digital Markets, Competition and Consumers Act (DMCC Act) received Royal Assent on 24 May 2024 and is generally expected to come into force in autumn this year.
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On 26 July 2024, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly released revised rules in respect of the investments into China’s financial market through the Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor (collectively, QFII) regime (the New Rules).
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