Sensible Injunctive Relief Policies in European SEP Regulation

Standards development is critical to global innovation and competition. Computing technology, from personal computers and phones to the World Wide Web and cloud systems, operate based on thousands of standards. Most standards are effectively adopted without major patent conflicts. Given this efficiency, lawmakers are reasonably concerned about the enforcement of patents related to standards-backed technology.

Once a technology is set and businesses invest in it by developing innovating products that adhere to the standard, they become “locked in” to the standard, making it impossible not to follow the standard without throwing away years of investment in time and resources. For this reason, standard development organizations (SDOs) require patent owners involved in setting the standard to agree to license on Fair, Reasonable, and Non-Discriminatory (FRAND) terms. However, some patent holders uninvolved with the SDO may claim to have standard essential patents (SEPs), and these entities did not agree to license on FRAND terms. These licensors often wait long after businesses become locked in to assert their patent rights, placing the licensor in a dominant position. This practice, referred to as “hold-up,” forces a business already heavily invested in the technology to either pay up or exit the market. This is a detriment to competition and innovation.

Worldwide, SEP disputes have escalated recently, particularly around communication standards like 4G, LTE, and 5G.^[1] Two main challenges have arisen.

First is a lack of transparency surrounding SEPs. There is currently no system in place anywhere in the world to establish whether patents are truly essential to these standards and what a FRAND royalty rate is for essential patents. The dearth of information leads to unpredictability in implementation costs, deterring investment into standard-governed technology. Using 5G as an example, as few as 10% of patents declared essential to the 5G standard are actually essential.^[2] As underscored by former USPTO Commissioner, Robert Stoll, there are “increasing commercial, geo-political, and legal incentives for companies to declare [essential] as many patents as possible.”^[3] Absent appropriate oversight, post-investment demands are often exorbitant.

The lack of transparency especially punishes small- and medium-sized entities (SMEs), who face challenges in licensing SEPs. For example, in Optis Cellular Tech. LLC v. Apple Inc., a UK court concluded that appropriate FRAND rate was less than 2% of what was demanded during negotiations, observing that the licensor had supported its proposed rates by citing “worse than useless” super-FRAND licenses wrung from SMEs who could not afford to fight the demands.[4] These kinds of cases are not uncommon.[5]

Second is the injunction problem. Countries differ on whether injunctive relief (halting the sale of products) is available when the parties fail to negotiate FRAND rates on their own. But countries should not adopt policies that enjoin companies who are willing to license SEP technology under FRAND rates, as this leads to “sue first, settle later” practices that drain resources and encourage bad-faith negotiations.

Policies that promote injunctive relief in the enforcement of SEPs are problematic because they give licensors significant bargaining power that exceeds their actual contributions to technology. They do so by creating an “anchoring” problem: instead of being tied to the value of the patent in question, licensing rates that are based on the threat of injunction result are anchored to value of implementor’s products, which often have features above and beyond what the patent covers. Thus, the implementor is charged not just for the use a patented technology, but also for its own innovations and investments that led to commercial success.

For these reasons, there should be a global effort to reduce the occurrence of injunctions, especially for SEPs. Specifically, no injunction should be granted against good faith companies willing to license SEPs under FRAND rates, and particularly not before the patent is found to be truly valid and essential.

Despite this, some jurisdictions have created a “race-to-the-bottom” to make themselves attractive venues for patent trolls and SEP patent holders by making injunctive relief near-automatic. And licensors are not shy of pitting jurisdictions against one another. For example, patent owners have filed suits with little notice in countries willing to grant early preliminary injunctions, like Brazil.[6] As another example, in a dispute involving Oppo and Xiaomi in the UK, patent owner Oppo expressly refused to agree not to pursue injunctive relief in more than a dozen enforcement actions against Xiaomi despite Xiaomi agreeing to abide by a global FRAND rate set by the court.[7] The court observed that given Xiaomi’s willingness to license under FRAND rates, there was no reason for Oppo to maintain the numerous actions it had filed other than to get the defendant “over a barrel” to force them “to pay more than FRAND.”[8] Oppo even conceded that there was no practical reason for enforcing an injunction in the Unified Patent Court or Germany when Xiaomi was agreeing to FRAND rates other than as a vague “point of principle.”[9] Such antics only serve to punish implementors wishing to act as good corporate citizens in licensing SEP patents by pushing them into endless lawsuits to extort licenses far exceeding fair and reasonable terms.

The EU Parliament is taking initiative towards sensible SEP regulation by promoting transparent and good-faith licensing involving SEPs as part of the EU patent package. The regulation concerns standards published by a SDO that calls on SEP holders to commit to licensing on FRAND terms and conditions. Earlier this year, the Parliament’s Legal Affairs (JURI) Committee adopted a position supporting the regulation, providing approval without a single vote against the regulatory initiative.

Of note, the SEP provisions in the package include a registration process, requiring patent holders claiming that their patents are essential in SDO technologies to register their patents within six months. Registered patents may be assessed to ascertain whether or not they are essential and to provide FRAND determinations identifying the terms on which a patent would be licensed. Finally, the package promotes alternative dispute resolutions to cut down on expensive and wasteful litigation, such as by establishing a nine-month mediation step as a predicate to litigation. These measures will ensure greater transparency and avoid surprise post-investment costs in the SEP space.

The package also assists SMEs by providing information and training to make it harder for them to be taken advantage of by predatory licensing practices. For example, the regulation creates a competence centre to provide training, support, and general advice on SEPs to SMEs, and it provides a three-person panel to provide expert opinions on the aggregate royalties for SEP patents to assist in licensing negotiations. Information regarding licensing would be registered and open to the public. Finally the competence centre would compile data on patent law and jurisprudence worldwide, creating a one-stop shop for everything stakeholders need to know about SEPs and litigation, with much of the information available for free.

The proposed regulation is a breath of fresh air in an era of opaqueness and over-declaration in SEP licensing. Additionally, by reducing litigation, it will reduce costs to stakeholders who are willing to engage in good-faith negotiations. Critics of the regulation suggest that it creates a barrier to entry in the enforcement of patents, but this ignores that validity and SEP essentiality challenges occur in litigation anyway. Additionally, the provisions will stimulate competition by supporting SMEs, who have historically been targeted as collateral damage in disputes between larger licensees and implementers. In this way, the SEP provisions in the package promote competition and cut down on abusive enforcement practices without diminishing legitimate property rights.

^[1] IPLytics, SEP Litigation Trends and Licensing Realities 7 (2021), https://actonline.org/sep-litigation-trends-and-licensing-realities-ipwatchdog-and-iplytics-march-2021.

^[2] Justus Baron et al., Eur. Comm’n, Empirical Assessment of Potential Challenges in SEP Licenses 24 (2023) (noting as few as 10% of patents declared essential to 5G are actually essential to the standard); see also John Hayes et al., Charles Rivers Assocs., A Critical Review of 5G SEP Studies 6 (Nov. 8, 2022) (noting studies have found SEP essentiality range from 8–33%), https://media.crai.com/wp-content/uploads/2022/11/09132755/Critical-Review- of-5G-SEP-Studies_Nov-2022.pdf; see also Unified Patents, 3GPP LTE and 5G Full Specification OPAL Methodology (Feb. 16, 2024), available at https://support.unifiedpatents.com/hc/en-us/articles/4447452742167-3GPP-LTE-and-5G-Full-Specification-OPAL-Methodology

^[3] Robert Stoll, 5G SEP leadership in 2021 (October 3, 2021), https://ssrn.com/abstract=393526, at 2-3.

[4] [2023] EWHC 1095 (Ch) ¶¶ 342, 467(iv), 494 (May 10, 2023).

[5] TCL Commc’n Tech. Holdings, Ltd. v. Telefonaktiebolaget LM Ericsson, 2018 WL 4488286

(C.D. Cal. Sep. 14, 2018) (initial royalty demand was 3%, while court found that FRAND rate was 0.45%); InterDigital Tech. Corp. v. Lenovo Group Ltd. [2023] EWHC 539 (Pat) ¶¶ 22, 944 (Mar. 16, 2023) (finding that appropriate FRAND rate for InterDigital’s SEP portfolio was only 40% of amount sought).

[6] Adam Houldsworth, Lenovo tests new SEP litigation tactics with UK and UPC actions, IAM (Feb. 14, 2024), available at https://www.iam-media.com/article/lenovo-tests-new-sep-litigation-tactics-uk-and-upc-actions.

[7] Panasonic Holdings v. Xiaomi Tech. Ltd., Claim No. HP-2023-000025, Proceedings in the High Court of Justice Business and Property Courts of England and Wales Intellectual Property List (Chd) Patents Court (Nov. 3, 2023).

[8] Id., 147:8-148:23; see also 152:6-12.

[9] Id., 148:24-151:9; see also 137:10-139:20.