SEP Regulation: the draft regulation concerning the licensing of standard essential patents takes a significant step towards becoming law

The European Parliament has taken a significant step in approving the proposal for a regulation on standard essential patents (the SEP regulation). On February 28, 2024, the text was approved by a  large majority (454 votes in favour, 83 against and 78 abstentions). However, for the SEP Regulation to become law, it still needs to be negotiated and approved by the EU Member States.

As we mentioned in our previous post (see here), the SEP regulation concerns patents that protect technology essential to a standard such as mobile phone networks, Wi-Fi, etc. (standard essential patents or SEPs). The draft regulation aims to facilitate the negotiations taking place between SEPs holders and implementers who make use of technologies covered by SEPs. The objective of the initiative is to facilitate in the EU the conclusion of SEP licences on fair, reasonable and non-discriminatory (FRAND) terms.

The initiative comes against a backdrop of various non-EU national courts accepting to determine global FRAND terms for SEP licences. The SEP regulation can be viewed as an effort to make the EU an attractive region for FRAND licence terms to be determined.

While subject to various amendments, the draft approved by the European Parliament broadly maintains the main elements of the European Commission proposal. The key initiatives of the SEP regulation are the following:

1. Scope. In principle, the SEP regulation would apply only to future standards, i.e., those established after the SEP regulation has entered into force. Existing standards (such as LTE/4G and 5G) may, however, be covered if the European Commission subsequently considers it appropriate to do so.
2. SEP register, database and essentiality checks. Holders of relevant SEPs would be encouraged to register their SEPs, information on which will be accessible via a database. Registered SEPs would be subject to non-binding essentiality checks. Although strictly speaking registration would be voluntary, any SEP-holder wishing to obtain royalties in respect of an SEP must register it. It is hoped that this will allow implementers to better understand the SEP “landscape”, possibly before putting relevant products on the market.
3. Total royalties for a standard. The SEP regulation foresees the possibility for SEP holders to notify a proposed maximum total royalty (covering all SEP holders) for a given standard, and for SEP holders and implementers to request a third-party to make a non-binding recommendation as to the total rate. Again, it is hoped that this would create additional transparency and facilitate business planning.
4. FRAND determination. An expert-led out-of-court FRAND determination that would be mandatory (in the sense that one party can unilaterally impose it on the other) but non-binding in terms of its outcome. This process, which would be administered by a panel of third-party conciliators, would last for a maximum of nine months. During this procedure, but not thereafter, injunctions are to be “off the table” in the EU, which, it is hoped, will facilitate FRAND negotiations. An important innovation of this process is that unlike a typical court-based FRAND determination, it can be imposed by the implementer on the SEP-holder.
5. SME and start-up support. Various support measures for SMEs and start-ups, whether they are SEP-holders or implementers.

While the draft regulation does not contain any potentially binding rules on the level of the value chain at which licensing should take place, the European Parliament added, in what would be a non-binding interpretative recital a statement that a FRAND license should be available to any party seeking one, irrespective of the position of the potential licensee in the respective value chain.

The EU Intellectual Property Office (‘EUIPO’), based in Alicante (Spain), will play a key role in the functioning of the SEP regulation, essentially administering its various initiatives through a dedicated “Competence Centre”. For example, the EUIPO will not itself carry out essentiality checks or determine FRAND licensing terms etc, but it will be responsible for ensuring the smooth running of the various processes.

In terms of next steps, the draft regulation still needs to be negotiated and approved by EU member states, who will vote on a “qualified majority” basis rather than unanimity. Further, potentially significant, modifications to the draft regulation are therefore possible. There is no fixed timetable for these discussions. If there is broad consensus among Member States, the initiative may advance swiftly (by the standards of the EU legislative process). However, it seems likely that the draft regulation will be controversial and subject to intense debate before EU member states, as it was before the European Parliament, which is liable to prolong the process.