The author regularly advises the automotive and IT/technology industries. The views expressed in this article are personal.
As it stands, European manufacturers are at a disadvantage because patent holders around the world can remove devices implementing the standard from the market unless the manufacturers succumb to royalty demands.
The proposed EU SEP Regulation overhauls this dysfunctional system by increasing transparency, improving substantiveness and supporting the determination of total licensing costs.
European manufacturers currently face an unreasonable risk of having their products removed from the market.
Standards are needed to enable the connected economy. However, not leveraging technology standardization can give companies that contribute to the standard a disproportionately strong bargaining position. We can’t move forward without technology. In fact, standardization can eliminate technological competition. Many alternative technologies are typically available initially, but only some are included in the standard, making them literally mandatory. Manufacturers must license all technologies to be able to use the standard. To prevent abuse of market power, competition law requires patent owners to obtain standard essential patents (SEPs) on fair, reasonable and non-discriminatory (FRAND) terms in exchange for incorporating their patents into standards. You are required to commit to licensing the .
However, in practice, particularly in the EU, existing licensing frameworks based on “glamorous” FRAND commitments have failed. A manufacturer is not always able to license his SEP on true his FRAND terms, but rather faces the risk of having his product removed from the market and ends up paying excessive royalties. . This failure has plagued the telecommunications sector for years, but with the advent of connected devices and the Internet of Things, it is now undermining the competitiveness of EU manufacturing as a whole.
The main root cause of this failure surprises many small EU manufacturers. If the patent owner and prospective licensee cannot agree on the terms of the license, the patent owner can seek an injunction in court to prevent the device manufacturer from selling products using the standard. Product features that rely on standards account for only a small portion of the product value.A groundbreaking 2015 Huawei vs ZTE In this judgment, the Court of Justice of the European Union (CJEU) ruled that an injunction should not be granted against a willing licensee if an injunction is sought under a SEP that promises to grant a license on FRAND terms. It was ruled that no. Injunctions should not be granted against willing licensees, especially if the royalty rate requested is too high. However, FRAND is a nebulous concept, and there is little guidance as to what terms are fair and reasonable in a particular situation. EU national courts are Huawei vs ZTE Defenders are reluctant to determine a fair and reasonable level of fees, and instead seek to deviate from equipment manufacturers that deviate from a very strict set of “bargaining rules” directed against prospective licensees. has issued an injunction.
German courts in particular have set a high bar for “aspiring” licensees, and as a result the number of SEP injunctions granted against implementers of technical standards is lower than in other jurisdictions. This is by far the largest number in comparison. Of his 139 SEP infringement cases around the world that have resulted in injunctions since 2001 (based on Darts-ip and independent research), a whopping 65 percent were filed in Germany. Although the country accounts for only 3 percent of the world’s GDP, its injunctions are disproportionately high. -Large manufacturing base.
Number of SEP injunctions granted from 2001 to 2023
Companies operating in Germany are highly vulnerable to the threat of injunctions issued by German courts, as a ban on sales in Germany could cause significant economic damage. This will affect countless European device manufacturers across a variety of industries, many of which have already been threatened with SEP injunctions by German courts in the past. European car manufacturers such as Mercedes, Volkswagen and Stellantis, as well as other EU manufacturers such as Continental and Bosch, were on the verge of having their products using cellular standards banned from the German market. The same goes for German TV maker Grundig and German router maker AWM. Smart meter manufacturers and the wider IoT sector are next in line, threatening the innovative small and medium-sized enterprises that drive Europe’s economy.
What is particularly troubling is that EU manufacturers are currently at a disadvantage against foreign manufacturers whose activities within the EU are restricted. The threat of a product ban in Germany was used to force the EU-based automaker to accept an increase in headline royalties on global sales of the Avansi. In contrast, Chinese automakers largely avoid these royalties, although they are far less susceptible to German injunctions because they do not manufacture in Germany.
Foreign manufacturers, who do not have to fear product bans in Germany, enjoy the privilege of being able to resolve SEP disputes before non-EU courts that determine FRAND rates, such as those in the US, China, and the UK, decide on FRAND. Royalties were only a small part of the fees demanded by SEP holders. EU manufacturers who have to accept requested royalty rates on short notice to avoid production disruptions within the EU will not benefit from rate reductions decided by non-EU courts.
The threat of market exclusion is inhibiting investment, innovation and growth in Europe.
The threat of market exclusion is inhibiting investment, innovation and growth in Europe. Injunctions could force device manufacturers to stop selling their products or accept onerous licensing terms that transfer compensation for their research and development (R&D) efforts to SEP holders. I’m wary of that.
SEP regulations address current issues and enable innovation and growth. The regulation will facilitate licensing negotiations and reduce litigation risk by increasing transparency and providing guidance on the maximum royalty burden across the SEP stack for each standard, as well as providing an objective assessment of FRAND royalty rates. and minimize sales risk. Forbidden. This new environment will reinvigorate incentives for technology investment and innovation, fostering overall economic development. Evidence of such transformative effects can be seen in the aftermath of the landmark. eBay vs. MercExchange In the US case, injunctive restrictions encouraged increased research and development spending by companies that had previously been in trouble.
It is time for Europe to unchain its manufacturing economy from its opaque and dysfunctional licensing framework.