Europe’s tech sector is thriving. In fact, it could ultimately overtake America, according to a recent report from venture capital firm Creandum.
Of course, that continued growth — and all the jobs that come with it — depends on a supportive policy environment. And unfortunately, the European Commission is considering new rules that would thwart further progress.
The Commission has proposed regulations governing “standard-essential patents.” SEPs cover shared industry practices known as “standards.” Industries establish standards to ensure the interoperability of their products. Think USB ports, wi-fi, or jpeg files. 5G is another example of a standard through which a shared telecommunications network ensures that an Apple phone can receive a call from a Samsung phone.
When companies incorporate a standard into their products, they may be required to use patented technology. Such patents are considered “essential” to conforming to a particular standard, hence the name: standard-essential patents.
SEP rights holders are required to make their patents available for other companies to license on fair, reasonable, and non-discriminatory terms. These rules exist to ensure that a single SEP owner can’t hold up an entire industry by refusing to license its intellectual property.
Companies arrive at SEP licensing rates through negotiation. Ideally, rates should be high enough to encourage innovators to develop new standardized technologies, but not so high that they discourage manufacturers from incorporating patented technology into their products. Third-party standard-setting organizations also often play a role in setting the context for SEP licensing discussions. And if negotiations hit roadblocks, SEP owners and licensees can turn to the courts.
Europe’s current SEP regulation framework is a global leader, often articulating the balance between SEP innovators and implementers that courts elsewhere follow. But Brussels’ newly proposed rules would throw the baby out with the bathwater, replacing a familiar and fair system of negotiations with an agenda-driven, top-down scheme based on government decree.
The plan is for a newly established “Competency Centre” at the European Union Intellectual Property Office (EUIPO) — an extra-national body with no history or experience handling SEPs — to assume control over all SEP licensing and regulation.
The Commission’s proposal would undermine the current regulatory framework in two important ways. First, it would reduce the enforceability — and thus the value — of SEPs, which would erode incentives to develop new technology for use in standards. Second, it would cause major uncertainty across the European and American systems for standards-implemented innovation, ceding hard-won technological leadership to competitors elsewhere.
In particular, the new regulation would make it much more difficult for patent holders to seek recourse from companies that intentionally steal their technology. It would do this by imposing new bureaucratic hurdles on SEP owners. They would be required to register their patents with the EUIPO, which would subject them to onerous “essentiality” tests to verify that the technologies in question truly are essential.
SEP holders would be barred from enforcing their patents in court until they have jumped through these regulatory hoops and the EUIPO has unilaterally determined a “fair” licensing fee.
In practice, this regulatory mess would afford patent thieves a guaranteed period of “no rules,” during which they could infringe a SEP without accountability. This would constitute a major departure from long-standing law, which holds that patent owners have a right to stop infringement or, at the very least, receive monetary compensation for their losses.
Moreover, in determining SEP royalty rates, EUIPO bureaucrats are expected to start from the presumption that current rates are too high, a false notion peddled by large corporations that want cheap access to SEPs held by smaller competitors. For example, wealthy, politically powerful companies — automakers in particular — want to pay the lowest possible rates for using SEPs.
The effects of the European Commission’s proposal would reverberate beyond Europe. If the EUIPO sets patent licensing rates below what private parties would have agreed to, courts in the United States and other countries will feel pressured to reduce rates for the same technologies in their own jurisdictions. The result would be a global race to the bottom for SEP licensing fees.
Europe’s and America’s rivals would love nothing more. Chinese government officials have worked to depress Western SEP royalty rates as much as possible, and have tried to prevent SEP holders from enforcing their IP rights in Western courts. The European Commission’s proposal would only make Beijing’s task easier.
Brussels’ plan would upend precedents that innovators have relied on for decades, raising uncertainty around whether patents truly grant meaningful rights, or are simply government favors that can be retracted or have their value reduced by bureaucrats under the political influence of more powerful corporate interests.
European Union citizens need to speak up to protect their technology innovation sector — before it is too late.