The long awaited ‘SEPs Expert Group report’ has been published on Wednesday 10 February on the European Commission’s website (available here). As readers will recall (see here for further details and group members), the expert group was set up by the Commission in July 2018, with the task of providing economic, legal and technical expertise to assist the Commission in considering policy measures to ensure a balanced framework for the efficient licensing and valuation of standard essential patents (SEPs).
The expert group produced a massive report (230 pages), focusing on a broad range of highly debated topics, such as the need to increase transparency about SEPs and SEPs licensing, where to license in the value chain, how to establish fair and reasonable terms, when licensing conditions are non-discriminatory, how to facilitate negotiations and under what conditions injunctive relief should be available.
Interestingly, and reflecting the controversial nature of most topics, the report does not provide individual solutions (most importantly to the crucial issue of component level licensing in the value chain), and is instead more concerned about setting the framework and providing a pluralist account of the various positions (but this did not prevent one of the experts from writing a dissenting opinion – starting at page 187 of the report).
A few unanimous guidelines are nonetheless provided, as exemplified in the extracts below, confirming i.a. the centrality of the non-discrimination requirement (in contrast with a number of recent court decisions in Europe, including the UK Supreme Court decision in Unwired Planet – see here for additional details):
- The non-discrimination (ND) commitment requires the licensor to treat similarly situated parties in a similar manner. In the EU Treaty, a similar requirement follows from Article 102(c) TFEU, which prohibits dominant firms to engage in anti-competitive discrimination. It is generally agreed that the ND commitment does not require the SEP holder to offer the exact terms and conditions to all licensees. A SEP holder should be allowed to respond to different market situations by offering different licensing terms. However, in the presence of similarly situated implementers, differences need to be objectively justified based on a holistic view of the relevant elements, such as sales volumes, certainty of royalty payments, geographic scope, etc.
- Volume discounts, lump sum discounts and annual royalty caps are generally acceptable if offered to competitors that are similarly situated unless they greatly favor one or more licensees without any added benefits to the licensor.
- An offer falls outside the Fair and Reasonable (FR) range if the SEP holder’s compensation exceeds the incremental value that the patented technology adds to the licensed product. The terms and conditions on offer should not reflect any hold-up value, which may result from irreversible choices made by licensees during the development or the implementation of a standard. A licensing offer also falls outside the FR range if it fails to remunerate the SEP holder for the value added created in the product implementing the standard. In other words, a FR license should not reward hold-out, i.e. the unlicensed use of the patented technology by refusing to enter into good faith license negotiations or by delaying such negotiations.
As said, the report does not provide unanimous guidelines on component level licensing (i.e. where in the value chain licensing should take place). A number of principles that could guide the licensing of SEPs in the value chain have nonetheless been set out by some of the experts and have found room in the executive summary. These principles are the following:
- It may be more efficient if all relevant SEPs are licensed at a single level in the value chain (such level being dependent on the specific features of the vertical at stake).
- The royalty for a license for a SEP portfolio that is fully implemented in an end-product should be the same, no matter where in the value chain licensing takes place.
- The FRAND royalty is a cost element in the price of a component and should be passed on downstream.
A more detailed post may follow after we will all have had the time to digest all proposals. In the meantime, a number of interesting insights in the way the report was drafted and some of the considerations behind the positions taken on the main themes have already been provided by one of the group members (see here), underlining one of the main omissions in the report, namely the role and scope judicial FRAND determinations should have and the interaction between parallel court proceedings where one court has already been seized with a request for global determination.