European Commission’s Draft Standard Essential Patents Regulation puts the emphasis on Patent Valuation

patents valuation

Further to our post of last week, we now discusses the SEP regulation as published by the European Commission.

With only a few minor tweaks to the various leaked versions we saw beforehand, the European Commission went forward with its Standard Essential Patents (SEPs) Regulation Proposal.

The valuation of SEPs is at the core of the draft regulation

At its core, the draft regulation reflects the European Commission’s desire to take further ownership of thevaluation of standard essential patents. The planned SEPs regulation is written from the perspective of enhancing transparency in markets for standard essential patents and ..fostering predictability of wireless communications markets.

In this spirit, the proposal is eager to establish further clarity as to what is and what is not a standard essential patent. It also shows a keen interest in the valuation of standard essential patents.

The draft regulation foresees (1) the  establishment and maintenance of an electronic register and database for SEPs; (2) the establishment  and administration of a system for assessing the essentiality of SEPs; (3) the creation  and administration of a process for FRAND determination and (4) the administration of a system for an aggregate royalty rate determination. All of this is to be administered by the EUIPO, the European Union Intellectual Property Office.

It is remarkable that among the many valuation approaches that exist to determine the economic worth of SEPs, the European Commission  has opted for an aggregate ex-ante rate for the standard. Such an aggregate is to be determined just shortly after the standard has issued. If the contributors to the standard cannot find an agreement among themselves, the EUIPO may then get involved.

While none of this is binding, one wonders to what extent such an approach may mimic an OPEC type of approach to oil price setting, namely that oil producing nations set the global oil price in a cartel like fashion in view of collectively maximizing their profits, which in turn strongly affects the global economy.  

Global FRAND Rate Setting

Another worthwhile point  is that the European Commission’s proposal foresees the setting of global FRAND rates. In my opinion, this will further engender  vigorous international debate over who is to set the rate, and who is to follow a global FRAND rate set by an extraterritorial authority.

In our opinion, the U.K. got the ball rolling on that. After the Supreme Court confirmed in Unwired Planet vs Huawei that the UK is entitled to setting Global FRAND rates, I was certain that other parts of the world would feel equally strongly about setting global FRAND rates.

In the aftermath of the British decision, China issued mandatory global FRAND rates. In the current international climate, Europe probably had no other choice, but to equally make its claim to global FRAND rate hegemony. Likely, this will do little to counter the risks of anti-suit, anti-anti suit and so on injunctions.

Essentiality Checks and Alternative Dispute Resolution (ADR) to be reinforced

The other crucial point the draft regulation touches upon are the  much-debated essentiality checks. Random SEPs samples are to be selected on a regular basis and against the standard. This shows the desire of the European Commission to further associate FRAND valuation with essentiality checks.

Lastly, the draft regulation reinforces alternative dispute resolution. A FRAND dispute must first be addressed via the EUIPO before the case can be taken to court.

Voices Heard on the Proposal

In conversations with market participants and judges, I heard mixed opinions. Judges raised concerns about how this will affect the work of the Unified Patent Court (UPC). After all, they expressed,  essentiality checks, FRAND determination and royalty rate valuations were meant  to be part of the work undertaken by the UPC.

Furthermore, the emphasis on alternative dispute resolution mechanisms may run afoul of the desire of the European Commission for transparency since  such decisions are usually not publicly available.

SEPs owners said  that they are  strongly opposed to the proposal: ‘If it works, why fix it?’, is the argument.  Downstream innovators, to the contrary, , spoke quite highly of the proposal–‘the regulation may need some minor tweaks, but overall it puts the emphasis on the economic value of SEPs and that is important.’

How can this work out in practice?

The EUIPO will need to  devote time and budget to attract the right talent. Essentiality checks and standard essential patent valuations are areas which require a very specialized skill set.

If the EUIPO choses to retain experts on a consulting basis, then such experts will eventually likely  face a conflict of interest. If, however, they  select people who are not active in the field of patent valuation or essentiality checks, then it is doubtful that such individuals  will have the necessary skill set.

Remains the solution to offer professionals with the necessary expertise  permanent jobs in the envisaged competence centre of the EUIPO. This again may  further enhance the tax burden of Europeans, while reducing entrepreneurship because such individual would no longer work in business but pursue a career as international civil servants. Provided the draft regulation goes through, the European  Commission will need to think how to crack this puzzle.

These issues will be further considered at the 8th IP and Competition Forum, here.