Conflicts between holders of standard essential patents (SEP) and the companies that use those standards are on the increase, at considerable economic cost. If approved, the SEP Regulation could save holders and users both time and money.

Disputes between proprietors of patents that incorporate standardized SEP technology (such as 4G, 5G, Wi-Fi, HEVC or AVC) and the companies that use that technology are increasing. Implementing SEP is essential for the Internet of Things (IoT) and, in general, to provide connectivity to numerous products.

The commercial impact of these conflicts is enormous, precisely because of the vast number of products that use these technologies, ranging from telephones and cars to household appliances such as fridges and vacuum cleaners.

Recent judgments handed down in the US, China, UK and Germany illustrate the complexity of this subject that affects both patent law as well as competition law. This is mainly because SEP holders have to meet a series of requirements before bringing patent infringement actions, as the Court of Justice of the European Union (CJEU) ruled in Huawei Technologies Co. Ltd vs. ZTE Corp (C-170/13).

The judgment requires SEP patent holders to specify, before bringing an action for a prohibitory injunction, to specify: (i) the patents that have been infringed; (ii) the manner in which they have been infringed; (iii) the standards infringed; and (iv) to offer users the SEP license on fair, reasonable and non-discriminatory terms (FRAND terms). Implementers must in turn prove that they are willing to negotiate licenses on FRAND conditions from the time they receive the notice from the SEP holders.

At present, for patents to be considered essential, the proprietor simply has to provide an “essentiality statement”, without the need for verification by a standardization body such as ETSI to check that they do meet a certain standard. Neither are examinations conducted to verify the validity of the patents. As a result, one of the main criticisms of the current system voiced by users of standardized technologies is the lack of transparency.

In addition, determining the consideration for licenses on FRAND terms leads to disputes regarding both the applicable calculation methods, as well as the total cost that implementers may have to bear for the use of a specific standardized technology. This is because SEPs that comply with a particular standard are in the hands of various holders, with very different license policies, who apply different methods, of which users frequently have no knowledge. Consequently, users are often faced with a scenario in which the total cost of the standardized technology is difficult to envisage.

If this were not enough, some courts in non-EU countries are agreeing to determine FRAND terms for SEP licenses globally, leading to bitter disputes that can even spillover into geopolitical conflict. For example, the judgment by the Chinese Supreme Court of August 19, 2021 (no. 517 OPPO v. Sharp) held that the Chinese courts could establish FRAND rates globally at the request of one of the parties.Top of Form

This was the convoluted backdrop of the controversial proposal for a
regulation of the European Parliament and of the Council on standard essential patents (SEP Regulation”) which was approved by the European Parliament on February 28, 2024 – which we have analyzed on previous occasions (see here and here). However, it has yet to be approved by the Member States and there are many pressure groups with interests in the matter.

The SEP Regulation seeks to provide greater transparency on patents that really are essential and the determination of royalties on FRAND conditions. One of the most important new features of this proposal is the creation of a compulsory conciliation procedure at the EUIPO, with headquarters in Alicante, with the following characteristics:

  • During the conciliation procedure, which may not last more than nine months, patent proprietors may not bring actions for a prohibitory injunction;
  • A register of conciliators will be created comprised of experts in different technical areas that meet competence and independence criteria, as well as a repository of reports, the confidential version of which is only accessible to the conciliators;
  • Conciliators should be neutral, with extensive experience in dispute resolution and substantial understanding of economic issues related to FRAND licenses to ensure solvency in the resolution of the disputes;
  • The conciliation procedure may be initiated both by the SEP holder, as well as by the user or implementer of the standardized technology. Neither party may initiate an action in a court of any EU Member State until the conciliator has issued a report.
  • The conciliator will examine the offers and counter-offers of the parties, in light of the criteria of the CJEU judgment in Huawei vs. ZTE.
  • At the end of the procedure, the conciliator will issue a report recommending a FRAND rate;
  • Both parties have the option to accept or reject the report and/or recommendation of the conciliator; that is, the recommendation is not binding;
  • Both the conciliation procedure as well as the report that the parties receive at the end will be confidential;
  • The competence center will be provided with a non-confidential version of the report containing FRAND rates and the methodology used (excluding any confidential information) for publication.
  • The conciliation procedure will be conducted in English unless the parties decide otherwise.
  • All the costs of the conciliation procedure will be shared equitably between the parties. Each party will bear its own costs in the procedure.

In addition, the Unified Patent Court Agreement (UPCA) establishes the creation of a patent mediation and arbitration center for lawsuits within the scope of application of the Agreement, although patents may not be revoked or limited (article 35 UPCA). In this context, some believe that this court could be a much more appropriate institution to resolve these types of disputes because it has greater expertise in patents.

In short, this is a highly complex and controversial issue with a huge economic and political impact that requires the utmost attention, not just from companies that hold SEP patents, but also from the large number of companies that use standardized technologies.

Time will tell whether the proposal for a conciliation procedure in the SEP Regulation is finally approved and becomes a useful means of resolving complex and costly disputes. Indeed, the impact assessment report of said regulation estimates that the annual costs of SEP-related court proceedings can reach EUR 6 million in some jurisdictions.