IP Watchdog

New EU Regulatory Regime for SEPs Will Upend Mobile Telecommunications Sector

Adam Mossoff
Adam Mossoff
Chair, Forum for Intellectual Property and Senior Fellow
Women using iPhone in financial district. (Oscar Wong via Getty Images)

The European Union is considering a new regulatory regime for the licensing and litigation of standard essential patents (SEPs) that will destabilize the global telecommunications market. This proposed regulatory regime is unbalanced in favoring implementers over innovators, and thus it threatens to hamstring the explosive technological and economic growth in this vital sector of the modern innovation economy. Although the EU has finally awoken to the competitive and geopolitical threat posed by China, this regulatory proposal undermines efforts by the EU and the United States to sustain their global technological leadership.

The Proposed Regulatory Regime for SEPs

The EU’s proposed regulatory regime will be released on April 26 by the Directorate for the Internal Market, Industry, Entrepreneurship & SMEs (DG GROW) of the European Commission (EC). The regulatory proposal was recently leaked, which suggests that there are some EU officials who recognize its serious flaws. Still, it is ironic that DG GROW will release its proposed regulatory regime for standard essential patents (SEPs) on World IP Day this year, because the regime is fundamentally unbalanced against innovators. It will undermine the incentives provided by reliable and effective patents for innovators to invest and commercially develop next-generation technologies like 5G and artificial intelligence (AI).

This proposed regulatory regime mandates that SEP owners must register their patents in a database maintained by the EU Intellectual Property Office (EUIPO). The EUIPO would become the sole arbiter of all SEPs. The EUIPO will determine what patents are SEPs (called “essentially checks”), it will determine royalty rates for the licensing of SEPs, it will mandate public disclosure of licensing agreements, and it will prohibit the licensing or litigation of any potential SEPs that are not registered, confirmed as essential, and designated with a royalty rate set for all the relevant SEPs.

This massive regulatory regime is a blatant example of regulatory overreach. It lacks any evidentiary basis that would justify this far-reaching intrusion into the licensing and litigation of SEPs. The legal and commercial evidence demonstrates that this regulatory regime is unnecessary, at best, and destructive of innovation and economic growth, at worst.

The EUIPO Has No Patent Law Expertise

In addition to the many substantive concerns, the disregard for evidence-based policymaking is manifest in authorizing the EUIPO to administer this massive regulatory power over the mobile telecommunications market. For Americans, the EUIPO sounds similar to the European Patent Office (EPO), but these are separate EU agencies. The EUIPO has no knowledge nor experience in patent law; it has jurisdiction over trademarks. Last year, the Executive Director of the EUIPO, Christian Archambeau, stated, “Of course, we will never have [] competency in patents.”

Despite its lack of legal or economic knowledge about patents, especially of patents on technological standards like 4G developed by organizations like ETSI, the EU is proposing to give the EUIPO absolute regulatory authority over the complex technological determination of what counts as an “essential” patent for a technological standard and the equally complex determination of the valuation of these SEPs for specific innovators, implementers, and end-user devices in determining royalty rates for smartphones, laptops, automobiles, home appliances, etc.  The ostensible justification for administrative agencies is expertise. The EUIPO has none—either in patent law generally or in patents covering technological standards specifically.

Unjustified Regulatory Intrusion into an Efficient Mobile Telecommunications Market

 In addition to the obvious failure in institutional choice in granting this extensive regulatory power over SEPs to the EUIPO, there are serious substantive failings in the EU’s proposed regulatory regime. It is a classic example of a solution in search of a problem.

There is no market failure in the mobile telecommunications market that justifies this regulatory regime. Several studies have shown that mobile device manufacturers pay an aggregate royalty for mobile devices in the single digits. This fact stands in stark contrast to the prediction of “holdup theory” of an aggregate royalty rate of 30% or higher per device. Moreover, quality-adjusted prices for mobile devices have fallen, and, even more impressive, they have fallen at a faster rate compared to products produced in non-SEP-intensive sectors of the innovation economy. This consistent trend of lower prices and increased innovation for mobile-connected devices explains why these technologies have been adopted throughout the world and mobile telecommunications technologies have served as a launching pad for innumerable innovative businesses that have transformed everyday life for everyone. It is now estimated that more people in the world own smartphones than have access to potable water.

Admittedly, there are scattered complaints by some judges and lawyers about lack of certainty and transparency in SEP licensing negotiations, but no empirical study has confirmed that this is a systemic problem causing higher prices or reduced innovation. At best, these claims are just another example of the nirvana fallacy at work in patent law. At worst, they are self-serving arguments by implementers engaging in “holdout,” as found by many courts. Even if one assumes these sporadic complaints are valid, they do not justify creating a massive, top-down regulatory regime that entirely displaces private licensing, adjudication of disputes by courts, and private arbitration for SEPs in the massively successful and efficient mobile telecommunications sector of the global innovation economy.

In sum, the commercial and legal evidence confirm that the mobile telecommunications sector is efficient and successful. It has exhibited an unprecedented pace of new innovations in devices and services, new firms entering the market, and consumers paying prices for mobile devices that have been consistently falling in quality-adjusted prices for over a decade.

As further evidence that the mobile telecommunications sector is functioning well, the innovative licensing platform company, Avanci, has now licensed 80% of the automotive market for 4G telecommunications technology. If there was widespread uncertainty about what patents counted as SEPs, what is the proper range of a fair, reasonable and non-discriminatory (FRAND) royalty, and if litigation was out of control and massively expensive for all parties, then none of this would be happening and we would not be witnessing the successful new licensing of SEPs in the automotive sector in this next phase of the mobile revolution (which was predicted to have the same problems as the “holdup theory” had predicted about royalty rates for smartphones).

EU Proposes to Replace Evidence-Based Decision-Making by Courts in SEP Disputes

When there are disputes over SEP licensing and parties are unable to reach an agreement, courts have performed their institutional roles in resolving these disagreements according to rules of evidence and due process, resulting in evidence-based legal decisions. Almost a decade ago, the EU Court of Justice’s decision in Huawei v. ZTE reaffirmed that an SEP owner’s right to obtain an injunction against an implementer engaging in holdout does not violate the EU competition laws. Since Huawei, national courts in multiple jurisdictions, such as in Germany, the Netherlands, and even England (despite no longer being an EU member), have followed Huawei and developed the relevant law in cases in which implementers are found to have engaged in “holdout” (see, e.g., herehere, and here). Courts have also done excellent work in evidence-based adjudication using comparable licenses in determining the proper range of a royalty in a FRAND-compliant license of an SEP (see, e.g., herehere, and here).

Courts have worked assiduously to craft reasonable legal rules and evidentiary conditions in reaching decisions in SEP disputes that have balanced the legitimate rights and duties of innovators and implementers alike. Beginning approximately 10-15 years ago, implementers began asserting that SEP owners exercise illegal monopoly power in licensing negotiations, that SEP owners were per se precluded from receiving injunctions as a remedy for infringement, that SEP royalties must be calculated at the component level, and that SEP licenses must be offered to component suppliers requesting such licenses, among other claims. Courts have adjudicated these arguments according to the requirements of patent law, antitrust law, and contract law, as well as according to long-standing rules of procedure and evidence. They have consistently rejected these arguments as lacking any basis in either law or evidence.

Now that implementers have failed to convince courts, which must operate according to due process and the rules evidence in reaching decisions, they have taken their arguments to regulators and elected officials, who are not constrained by the same legal rules. Policymakers do not have ill motives, and they very likely believe earnestly that they should adopt new laws or regulations that promote technological innovation and economic growth. But lacking the evidentiary and procedural rules that ensure that courts function as a crucible of truth, these officials are more susceptible to the effects of misdirection by rhetoric and junk science data that are known all too well in the U.S. patent policy debates over the past 10-15 years.

Inadvertent Support for China’s Challenge to EU and U.S. Technological Leadership

If the EU adopts this new, massive administrative regime staffed without patent law experts imposing top-down regulatory mandates on SEP licensing and litigation, this will undermine the policy efforts by both the EU and the U.S. to counter the competitive threat from China. China will exploit this shift toward a regulatory regime and away from evidence-based decision-making by EU courts. As in the past, China will pursue its domestic industrial polices and geopolitical agenda through similar-appearing administrative processes and actions. This is not a mere prediction: when China previously exploited its antitrust laws to artificially depress SEP royalty rates paid by its domestic implementers to Western innovators, it relied on and referenced policy statements and other actions by U.S. antitrust officials to justify these actions. It will once again use the EU’s proposed regulatory regime for SEPs as superficial cover to mask its continuing discriminatory treatment of Western innovators in favor of its own domestic industries. As the EU and U.S. complaint in the WTO proceeds against China, it will again quote back to EU and U.S. officials the same policy statements and administrative actions in this new regulatory regime for SEP licensing.

A Deeply Flawed Proposal

DG GROW should reconsider its proposed administrative regime for SEP licensing and litigation. Failing this, the European Commission should reject this massive regulatory intrusion into an efficient marketplace that has produced unprecedented technological innovation and economic growth in the continuing mobile revolution. It is a deeply flawed proposal offering a solution in search of a problem. People now carry supercomputers in their pockets that they purchase at affordable prices, and which connect them with the entire world; many people carry two or three mobile devices. Mobile connectivity is now spreading throughout a myriad of consumer products—such as automobiles, thermostats, and refrigerators, to name a few.

This unprecedented technological innovation, economic growth, and the revolution it has wrought in the daily lives of everyday people, will continue only if the innovators and implementers are left unimpeded to continue to create their inventions and negotiate licenses. The EU should recommit to the rules and institutions that have served so well as a legal platform for these historic successes, in which courts have applied balanced doctrines in patent law and contract law under the established rules of evidence and due process in protecting the equal rights of innovators and implementers.

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