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Tech licensing regulation: A common-sense attempt at balance

Tech licensing regulation: A common-sense attempt at balance

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The European Commission’s legislative proposal to improve standardized technology licensing in the EU is a common-sense attempt to restore balance and add transparency to a system that needs it. The European Parliament and the Council should endorse it.

The Parliament and EU member countries are currently finalizing their initial views on a European Commission proposal for a regulation to increase efficiency of the licensing of standardized technology in the EU. The Commission’s proposal seeks to increase transparency in a way that leads to fairer outcomes for consumers and greater competitiveness for European business.

What should be relatively uncontroversial has provoked significant debate. This debate must not lose sight of the legislation’s goals. It is critical that an effective regulation is passed to improve the currently opaque licensing environment and to ensure balance between competing commercial interests. 

The Commission’s proposal seeks to increase transparency in a way that leads to fairer outcomes for consumers and greater competitiveness for European business.

We often take for granted that a smart device of one brand on one network will be able to seamlessly communicate with that of another brand on another network. What is needed to ensure this is a fair and efficient connectivity standards system. Stable technical norms incorporated in standards mean that different companies’ products can communicate effectively. This in turn means that companies can focus their development efforts on making the best and most innovative products possible, so that we all benefit as consumers. Standards will only become more important as more products communicate with each other in the 5G/internet of things world. Many small and medium-sized European companies are new to the game and need a predictable environment.

However, standardization can lead to significant market power being concentrated in the hands of one or a few companies. Standards require the choice of one company’s technology for the relevant technical norms. This means that even if there were many competing technologies beforehand, the company whose technology is chosen for the standard will be in a position of economic strength simply by virtue of the standard: every other company will need access to its technology in order to comply with the standard, via patent licenses.  

It is critical that an effective regulation is passed to improve the currently opaque licensing environment and to ensure balance.

Because of this market power that standardization can create, competition law requires that companies whose technologies are included in standards promise in advance that they will license any relevant patents included in the standard on fair, reasonable and nondiscriminatory (FRAND) terms. This is only fair: it is a natural quid pro quo to promise to license at a reasonable rate to all companies that want to comply with the standard.

The Commission has in recent years had to intervene in a number of cases (which I managed during my time at DG COMP) where that promise was not lived up to – where a patent holder sought injunctions in national courts as leverage to obtain higher royalties than it would otherwise have been able to. The Court of Justice of the EU (CJEU) upheld the Commission’s approach in its landmark 2015 Huawei v ZTE judgment and held that, where there was a willing licensee, it was an abuse of a dominant position for a company which had given a FRAND commitment to seek injunctions based on its standard essential patents (SEPs).

This judgment was held to bring balance, setting out the obligations of both licensors and licensees. However, that has not been the reality. Most patent litigation in Europe takes place in Germany, where the environment has historically been very patent-holder friendly. German courts have been following neither the letter nor the spirit of the CJEU judgment. Injunctions based on SEPs are readily granted without examination of the patent holder’s behavior or whether the claimed patents are indeed essential to the standard, and even where the licensee has indicated its willingness to take a license to any relevant patents. While the intention of standardization is to ensure that all market players have fair access to the relevant standards, it has in practice become a lucrative licensing vehicle for many patent holders, allowing them to use the leverage of the standard to achieve outcomes that would otherwise not have been possible.

Stable technical norms incorporated in standards mean that different companies’ products can communicate effectively.

The Commission’s legislative proposal is in part an attempt to redress this imbalance and a recognition that SEP holders can still gain undue leverage over licensees. The measures include requiring patent holders to register the patents that they claim are essential to standards, undergo an assessment of whether they are indeed essential, specify the terms on which any patents would be licensed and have a nine-month mediation before litigation can be initiated. Critics seek to portray these as controversial. While any system of course needs to be appropriately designed, the measures are in fact a common-sense attempt to restore balance and transparency, and should be endorsed as such by co-legislators.

Nicholas Banasevic is a former EU official, serving in the European Commission’s DG COMP for 25 years.

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