The European Commission’s Proposed Ruling on Standard Essential Patents
The United States and the European Union have long been leading developers of critical technological standards, and there is broad recognition that technological leadership matters not only for innovation but also national security. The Strategic Technologies Program at CSIS hosted a roundtable on June 27 to discuss the European Commission’s latest proposed reform for standard essential patents (SEPs) with experts, officials, and members of the business community. The EU proposal has sparked fresh conversations about regulation strategies and the future of technological innovation. The roundtable addressed the current state of SEP regulations, the proposal’s suggested changes to the patent regulation process, and potential complications that might arise from these suggested changes.
Why SEPs Are Important
Standard essential patents are critical to technological innovation. Standards, such as 5G, LTE, and Wi-Fi, are bedrock technologies that serve as a basis for product development and interoperability. When a company files for a patent, they are establishing a baseline technology for other companies to build on. The company must prove that their patent represents an “essential” technology for further development. Once a patent is obtained, the SEP holder will license the technology to different companies in exchange for royalties.
Under the current process, the SEP holder and the licensing party agree on royalties as long as they follow fair, reasonable, and nondiscriminatory (FRAND) guidelines. FRAND is not strictly defined, and its present interpretation is primarily derived from court cases.
Companies that lead in standards innovation include Nokia, Ericsson, and Qualcomm. They have spearheaded research and development efforts that have been crucial for furthering critical technologies for computers, cellular technology, biotechnology, and other products over the past several decades. Under the European Commission’s proposed regulation, SEP owners would need to get a FRAND determination from the European Union Intellectual Property Office (EUIPO). The EUIPO is the office that the commission assigned to manage all SEP-related questions, FRAND royalties, and patent disputes under this new proposal. The EUIPO currently manages EU trademarks and design rights, but not patents.
By altering the current patent regulatory structure, some roundtable participants believe the commission could risk damaging technological innovation practices that have led to today’s strong innovation process. Additionally, the EUIPO office would need to allocate a substantial amount of new resources—personnel, time, and more—to manage this new patent oversight responsibility. Many participants stated that it would be challenging, even for the most qualified body, to accurately determine the value of all the underlying technologies within a standard.
As several participants said, none of these proposed changes could happen overnight. The commission’s proposal could, according to some experts, increase timelines for patent approvals, with the potential consequence of destabilizing the patent environment, embedding unnecessary risk into the present system, and leading to noncompetitive patents making it to market. Given the important role SEPs play in today’s technology landscape, many participants stated that the current patent landscape would be harmed, not helped, by the commission’s proposal.
Concerns about IP
The commission’s latest ruling follows on the heels of the 2020 Action Plan on Intellectual Property, which declared the improvement of SEP transparency to be a primary objective. Some participants who were more supportive of the proposal said that it represents a major shift in intellectual property (IP) power away from present SEP holders, and towards those who would license the technologies. They stated that this course of action corresponds to one of the primary goals of the commission’s action plan, which is to empower small- and medium- sized enterprises (SMEs).
The proposed new regulation, in which the EUIPO would be empowered to gather data on contracts and make royalty recommendations, is an attempt to lower the cost of entry for SMEs, according to those same participants. Other adjustments, which include reducing SEP filing fees and establishing free advisory services, were seen by some experts as a means to further improve the standing of SMEs.
However, other participants believe that the shift in power toward licensers would also benefit another entity with demonstrated interest in patents: China. This proposal by the European Commission would, according to some participants, limit the ability of SEP holders to respond to cases of IP infringement. The primary concern from several participants is that China, which the European Union previously ranked as “priority 1” in terms of IP infringement, will be a major source of such cases.
Another main takeaway from participants who disagreed with the proposal was that the proposal represents a shift toward the regionalization of the international patent royalty system. Members of the business community voiced concerns that China would benefit from a less unified system. Some experts pointed out that China has long championed regionalization, both as a means for shifting global technology hegemony away from the United States and European Union and for the benefit of its companies.
The Economic Angle
The economic analysis of this proposed regulation is based on the understanding that the best approach to regulating SEPs is to redistribute profits from large SEP licensers, like Ericsson and Nokia, to SMEs, according to some participants. This approach implies that the commission believes SMEs would inherently become more financially competitive in the broader SEP system. Those same participants stated that the commission's attempt to enhance transparency in the FRAND ecosystem would benefit SMEs by establishing a more uniform licensing system, potentially allowing SMEs to become bigger players in the patent licensing ecosystem.
The commission’s intention with this regulation appeared, to some participants, not only to include strategies to supposedly level the playing field between large SEP holders and SMEs, but also to level the playing field between all standard patent holders and patent implementers. This proposed SEP regulation from the European Commission reflects a decision to rely more on administrative procedures to regulate patents, which is in line with the European pattern of regulation, rather than on markets and courts, as typically seen in U.S. regulatory systems. As some participating officials noted, the proposed regulation indicates that the commission believes large SEP holders have too much market power, with implementers bearing the brunt of this alleged misalignment.
On the other hand, several members of the business community said that they believe a primary reason for European leadership in the present patent application system is because it operates within a market-based system that champions strong and reliable patent rights and respect for the rule of law. They stated that this proposal could potentially disrupt this system, with detrimental consequences for the future of technology innovation. Other participants noted that licensing revenue from SMEs is far below that of leading patent companies. They stated that SME’s contributions to the system would not make up for the royalties lost by imposing greater barriers to entry for companies that currently lead in patent licensing.
Many participants agreed that creating a systematic approach to regulation may have some merit, but some said they believe that the commission’s proposed solution fails to account for how the SEP regulation process has evolved over the years. For example, SEP litigation counts in 2023 were far below non-SEP litigation counts, indicating that patent disputes for SEPs are decreasing globally and within Europe. The markets and courts have proven to be adept at mitigating SEP disputes; throwing a new regulation into this balance could damage system that appears to be working well, with potentially detrimental consequences for future patent development and implementation.
National Security Concerns
The European patent regulations would, according to the commission, allow Europe to keep its competitive advantage, protect its IP, and make Europe an attractive place for companies to innovate. A few participants said they believe this new ruling is essential to preserve the integrity and vitality of the current regulatory system.
However, Chinese companies like Huawei and ZTE have become increasingly competitive in the SEP landscape for mobile telephony. China’s rising global influence coincides with its increasing appetite to lead technological development. The European Union is a net exporter of innovation in the SEP landscape. China is a net implementer of standard patents, especially those needed for cellular technologies. Several participants stated that China has an interest in reducing prices for accessing those technologies. Some stated that if the European Union were to lower FRAND terms and impose greater costs onto SEP holders, China would feel emboldened to pressure Western innovators like Nokia and Ericsson to charge lower royalties to China’s SEP users. The net result would lead to less revenue that these companies could use to invest in research and development. A few participants said this could be a slippery slope potentially leading to less efficient patenting and harming the overall quality of patent production.
While China’s patent filings jumped by 15 percent in 2021—a sign of its relentless pursuit of leadership in technology—U.S. and EU companies still hold most important patents necessary for cellular technology. China’s “quantity over quality” approach could be further incentivized by this EU proposal, since some participants believe it would place China in a more competitive position vis-à-vis the European Union and United States.
A Possible Path Forward
Several participants noted that the upcoming European Commission elections could be a promising opportunity to reconsider regulations for SEPs without undermining the current patent regulatory framework. Some members of the business community voiced their desire for the commission to extend its consultation period regarding the regulation to enhance the commission’s future actions regarding SEPs. Several participants said that future discussions between the commission and present SEP leaders could potentially lead to better decisionmaking about how to move forward with plans to enhance patent licensing transparency while upholding key components of the present regulatory ecosystem. Those conversations would be essential to understanding the impact of potential regulatory changes to the patent environment.
James A. Lewis is senior vice president and director of the Strategic Technologies Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Julia V. Brock is a program coordinator and research assistant with the Strategic Technologies Program at CSIS.Aiden Render-Katolik is a research intern with the Strategic Technologies Program at CSIS.