One would normally assume that when the executive branch of the government of the world's third-largest economy endeavors to regulate the enforcement of standard-essential patents (SEPs), it would--at minimum--come up with a proper definition of those key terms. Not so. The dumpster fire that is the draft EU SEP regulation (see the previous post for a list of links to earlier commentary and analysis) doesn't even get the basics right, starting with fundamental terminology. And it was apparently authored without taking antitrust law into consideration.
I don't know about you, but I find it hard to trust the people who came up with such a highly deficient draft that they fully understand the practical implications of what they are doing. As a litigation watcher I can tell that they clearly never analyzed an infringement case in detail. They may never have read and understood a single SEP claim. And it remains to be seen whether the quality of the input they received from "researchers" is as low as one must fear--though I hope it's not that bad--based on the draft impact assessment.
So, let's continue with the "bug hunt" (identifying mistakes).
Definition of SEP (Art. 2 (1) and (2))
(1)
‘standard essential patent’ or ‘SEP’ means any patent in force in one or more EU Member States that is found to be essential to a standard;
(2)
‘essential to a standard’ means that the patent contains at least one claim for which it is not possible on technical grounds to make or use an implementation or method which comply with a standard, including options therein, without infringing the patent under the current state of the art and normal technical practice;
Whoever wrote that definition got confused by the fact that colloquially people always talk about "essential patents", while in reality essentiality is a claim-by-claim question. I doubt that 100% of the claims of any of the SEPs-in-suit in the countless infringement cases I've watched over the years are essential, simply because dependent claims narrow the scope and I've never seen a SEP holder assert the narrowest claim of a SEP in litigation.
I'm not being nitpicky; the issue is real. For the envisioned regulation, it has implications including (but not limited to) the following:
Art. 26 (1)(c) requires the removal of a "claimed SEP" from the register in the event of a "judgment that the patent is not essential to the standard for which a registration is made". Apart from the fact that they don't take into consideration that courts in different countries in which a European patent is in force may arrive at different essentiality determinations, and that such decisions may be appealed, there's another fundamental problem:
It's hardly ever going to happen. Why? Because in infringement litigation, parties practically never assert all claims of a given patent. Now, if there are dependent claims that further narrow the scope of an independent claim, and the independent claim is held non-essential, then you can cut off a whole branch from the tree. But SEPs--and I've analyzed many of them--typically have different claim groups, such as a set of system claims, a set of method claims, a set of device (apparatus) claims, a set of software claims. I've often seen what could be visualized as a two-dimensional matrix if you have the different types of claims outlined before but separate groups within each category that read on the end-user device, on the network infrastructure (base stations), and on an entire system consisting of infrastructure and end-user devices (such claims exist though it's hard to imagine a single infringer).
So, what does happen in practice is that a SEP owner asserts one or more select claims from a patent-in-suit, and maybe a court of law will deem those non-essential. But that doesn't mean you get a decision on the patent as a whole. You hardly ever will.
Even invalidation (Art. 26 (1)(b)) is a claim-by-claim question.
It makes no sense to have those "FRAND conciliators" perform valuations of non-essential claims, much less with a top-down approach.
With a view to the EU's own fundamental rights and international law, the EU can't impose restrictions and additional costs with respect to non-essential patent claims. Imagine a patent that has three essential and nine non-essential claims: what if the patent owner wants to enforce any of the 75% of non-essential claims? The draft regulation would apply regardless of the non-essentiality of a claim-in-suit, which would be unconstitutional, infringes international law, and violates treaties.
A patent can be essential to a standard even if its holder never participated in standardization and, therefore, never made an essentiality declaration
The draft SEP regulation imposes a registration obligation on SEP owners that is debatable in any event, but undoubtedly unreasonable if a patent holder (even if we assume that--as the draft regulation envisages--prior owners' obligations are transferrred) never participated in the relevant standards development process.
Someone can make an invention, obtain a patent, and it may turn out later that it reads on, say, 5G. That company never participated in standardization, never made a FRAND pledge, never declared the patent essential. But under the language of the draft regulation, it would have to register that patent just like those who actually do participate in the relevant standard-setting process.
What happens all the time in certain fields of technology--video codecs being a great example--is that different groups work on different standards, but some techniques will be used in more than one standard.
Why should a company have any obligations due to the decision of a group (consisting exclusively of third parties) to include in a standard a technique on which that company happens to hold a patent?
Ambiguity of "enforcement"
The draft regulation fails to define the term "enforcement" (or the verb "to enforce", for that matter).
If you were (or--like some of my readers--actually are) a judge and a SEP owner filed an infringement complaint in your court, what should you do if the requirements imposed by the envisaged SEP regulation (particularly the FRAND determination) have not been fulfilled? Dismiss the complaint? Stay the proceedings? Or go forward anyway because it will take some time before any enforcement in the sense of the enforcement of a final judgment will occur?
If interpreted broadly, the EU would disallow that a patent holder files an infringement action of any kind. Even if one wanted to understand it as broadly as possible while remaining reasonable, what about a declaratory judgment action? You could file a complaint and seek a determination that your patent is valid and infringed (i.e., essential), and possibly even ask the court to furthermore hold that the implementer is an unwilling licensee.
The narrowest interpretation would mean what litigants refer to as "enforcement" when they seek so-called "anti-enforcement" (as opposed to "antisuit") injunctions: they argue that litigation can go forward, but an injunction cannot be enforced. Some might argue that you shouldn't collect a damages award either, but the recitals of the draft regulation actually suggest there's nothing wrong with damages claims.
Think of another scenario that is not unheard of (though it occurs less frequently in Europe than in the U.S.): what if the implementer sought a declaratory judgment that your patent is invalid and/or not infringed? The regulation doesn't mention the term declaratory judgment even once. That's because the people who drafted that bill don't seem to know how litigation works.
Let me give you an example from last year: OPPO sought a declaratory judgment against Nokia in the Netherlands over two patents (from the same family) that the Mannheim deemed valid and essential. Nokia then counterclaimed. In the U.S., such counterclaims are compulsory, and even in European jurisdictions a patentee may actually weaken its position by not responding to a DJ claim with an infringement counterclaim.
The actual decision makers need to understand that if they actually put anything similar to that draft regulation on the table, it will be inconducive to the reputation of the European Commission and even the EU as a whole.
Unclear distinction between "FRAND determination" and "assessment"
On his Comparative Patent Remedies blog, Professor Thomas Cotter has shared multiple interesting observations on the draft regulation. I believe I can address his first item ("license to all" vs. "access to all") though: the draft regulation just wants the EUIPO to raise awareness for the licensing level as opposed to taking a firm position. Now, the part I want to focus on in this section is item #5, from which I'll quote now:
"Only the 'methodology and the assessment,' however, and not the FRAND determination itself, would be made public absent consent of the parties, see article 60), though it's not clear to me what the difference is between the 'assessment' and the 'FRAND determination.'"
This is another terminology issue with the draft regulation. Art. 59 (2)(b) says the FRAND determination report will come with "a confidential assessment of the FRAND determination" and then there's a reference to "a methodology and the assessment of the FRAND determination by the panel" in Art. 59 (2)(d).
One possible interpretation would be that the assessment is everything minus the exact terms held to be FRAND. But that would mean that terms of other (comparable) licenses would be disclosed, and they will typically be confidential.
What do they want? What do they mean?
Potential conflict with cartel laws (EU and beyond)
Item 4 of Professor Cotter's post also raises a valid and serious issue:
"The regulation contemplates that 'contributors to a standard for which FRAND commitments have been made' could jointly agree on aggregate royalty burdens relating to that standard; and, in the event these contributors can't reach agreement, could ask the EUIPO for assistance in facilitating such agreements (see recitals 15-18, arts. 17-20). This raises a question of whether such agreements violate antitrust law. Perhaps not, for reasons dating back to the U.S. Antitrust Modernization Commission's analysis from 2007 if not earlier, but I imagine this could be a potentially contentious issue."
The draft regulation mentions the word "antitrust" only once (Art. 15 (5): "shall make such disclosures accessible to antitrust authorities, courts and stakeholders"). "Cartel" doesn't occur at all. "Horizontal [cooperation]" comes up five times, but only with reference to existing rules.
The EU risks requiring parties to commit violations of the bloc's own cartel rules. The Court of Justice of the EU might hold that compliance with the SEP regulation just cannot constitute a violation, but even that isn't certain: it really depends on what terms they set. What if the contibutors to a standard agree on an unreasonably high or low aggregate rate? Where does price fixing begin?
Also, parties to such an agreement may still be liable under other jurisdictions' antitrust laws, where an EU SEP regulation would not have an exculpatory effect.
There will be more issues with the draft regulation than the ones I've already identified in my various blog posts on the subject. Some of those problems are structural, and that's why the Commission should engage in proprer consultation on the basis of specific ideas, and get advice from those who know how SEP licenses are negotiated and how SEPs are enforced in court.
In my next post on the draft SEP regulation I plan to comment on various stakeholder reactions (from net licensors as well as net licensees and their respective groups). It appears that even some key implementers are not really "sold" on the draft in its current form. What I would encourage all net licensees to ask themselves is this: are you sure that (a) those "FRAND conciliators" will set the low royalty rates you're dreaming of (when it's actually better for their own business to arrive at rather high rates) and (b) SEP holders won't figure out ways of gaining leverage over you in other jurisdictions, through non-SEPs, and because the judges hearing infringement cases in some key venues would vitiate that regulation beyond recognition?
Both sides should have an interest in helping the Commission to put together a draft that the EU can be proud of.
