The Proposed EU SEP Regulation Would Harm, Rather Than Help, SMEs
The system the European Commission proposed for evaluating standard-essential patents (SEPs) would harm SMEs more than it would help them – despite the fact that simplifying SEP licensing for SMEs was one of the Commission’s justifications for the proposed Regulation.
In a previous post, we explained how licensing SEPs is not a pressing problem for European small and medium-sized enterprises (SMEs). In fact, in the European Commission’s own survey, which explicitly stated that it is not representative since it covered only about one percent of potential SME SEP implementers, most SMEs disclosed that they do not have a license for SEPs and do not expect ever to be invited to take such a license. The UK Intellectual Property Office’s survey shows the same thing. Moreover, the empirical evidence also shows that SEP litigation involving SMEs is rare, SME participation in Standard-Development Organisations is increasing, and the startup ecosystem in Europe is thriving.
Nevertheless, the Commission’s proposed SEP Regulation would radically overhaul the existing SEP licensing system in an apparent attempt to help SMEs. In this post, we explain how the proposed SEP Regulation may be counterproductive and result in increased costs for SMEs and a more complicated licensing framework.
Higher costs and complexity harm SME implementers
The Commission has proposed a new SEP register and database that would contain detailed information on patents and standards. But understanding and using such a vast amount of data requires technical experience that SMEs typically do not have. The Commission itself noted that SMEs do not have the necessary knowledge and resources to negotiate licenses for SEPs. SMEs would need to rely on outside counsel or hire internal experts to properly assess and understand all the information. Moreover, to obtain comprehensive information, SMEs would also need to consult databases of relevant standard-development organisations. Duplicative registers mean that costs and time for the assessment of the relevant information would double.
The mandatory FRAND conciliation process would also add to the costs. SMEs would need to pay for the conciliators and external lawyers representing them in the process. After the 9-month conciliation process, an unsatisfied party (or both parties) would likely still go to court. In other words, a mandatory FRAND conciliation will only add extra costs for SMEs without resolving any eventual dispute.
Disincentivising standard development and licensing for SME SEP holders
The proposed SEP Regulation will have a particularly negative effect on SMEs that hold SEPs. SMEs that innovate and develop new technologies intended for standardisation would need to pay for the registration of their SEPs and essentiality checks. The costs are the same even for those SMEs that simply want to hold patents defensively and do not intend to actively monetise them. Thus, even if an SME holds SEPs solely with the intention of being used for cross-licensing if others approach it, it would need to register those patents and submit to essentiality checks before it could license those SEPs or use them defensively in litigation.
SMEs that do want to actively license their SEPs will find the task much more difficult since the proposed Regulation does not provide any protection against stalling or “hold-out” tactics by implementers unwilling to take a license. SMEs would still need to use and pay for the FRAND conciliation, which is just a first step before going to court. But SMEs do not typically have the capital or resources necessary to wage expensive and time-consuming litigation. Large implementers wanting to avoid paying licenses for as long as possible are likely to use the FRAND conciliation process to delay licensing and throw up additional hurdles in front of SMEs.
Better alternatives abound
While the Commission has pitched the SEP Regulation as simplifying licensing, a closer look at the provisions shows that the proposed regulation would harm SMEs. The unintended consequences of the proposal are more costs and complexities for SMEs.
It does not have to be this way. Rather than overwhelming SMEs with information, providing assistance and guidance to SMEs in licensing negotiations would be a more cost-effective approach. SMEs could benefit from support in technical discussions by finding out if they may need to take licences, recognising the importance of the technology for their products, and understanding the relevant licensing practices and case law.
Another measure could be to promote existing alternative dispute resolution mechanisms such as WIPO’s FRAND arbitration and Mediation Centre, which has experience with SEP cases, or the UPC’s Patent Mediation and Arbitration Centre. Parties that voluntarily agree on ADR have a higher chance of resolving their dispute successfully without additional litigation.
As a result, we urge the Commission to withdraw and re-think its proposal. We also call on the European Parliament and the Council to carefully consider the proposal and commission their own impact assessments.
