What the proposed EC SEP regulation might mean for US litigation

The European Commission’s proposed regulatory scheme aims to create new and potentially resource-intensive processes for SEP registration and rate setting. The current draft is not final or in force, but it does lay out a large-scale and labour-intensive regulatory scheme for SEPs that would represent a significant change in SEP jurisprudence. While it may change substantially before adoption – or may never be adopted at all – its scale and possible impact necessitates consideration of how it will alter the worldwide SEP landscape, including that in the United States.

The proposed regulation sets out a scheme that would introduce an SEP registration system and a process for assessing essentiality of certain registered SEPs, which would be overseen and administered by the EU Intellectual Property Office (EUIPO). Given the European Union’s market size and number of patents, this could easily become the largest public registry of SEP-essentiality assessments in the world, with potential use in litigation in EU or possibly US courts. 

The EUIPO would also introduce a process for determining aggregate and individual FRAND royalty rates through inter partes procedures. The applicability of these rates would likely be vigorously debated in US litigation, especially as US and European FRAND practices diverge. Interestingly, the inclusion of an aggregate FRAND rate-setting process implies endorsement of the top-down method, a leading way to calculate FRAND rates. Under the proposal, the EUIPO would have a formal mediation-style proceeding that may include limited discovery and expert testimony to determine an individual FRAND rate. However, the increase in regulation and regulatory oversight could ultimately impair SEP owners because it would oblige them to register their SEPs and obtain a FRAND rate (in many cases) before enforcing their patents in any European court, including the new Unified Patent Court (UPC).

The proposed regulation differs widely from current US practices. While it does not directly affect SEP determination and rates in the United States, it could certainly have an indirect impact should it come into force.

Impact on US SEP litigation

The proposed regulation could theoretically increase transparency by creating a one-stop registry with third-party essentiality determinations. If the registry succeeds, its benefits could be substantial and it could be a helpful step towards addressing the over-declaration concerns that surround most standards. However, it would be a monumental and potentially burdensome undertaking. Concerns remain as to whether it is possible to implement such a process in practice, and whether the EUIPO could build and maintain an accurate, up-to-date registry and apply consistent and precise assessments of patent essentiality, especially given the number – and variety – of worldwide standards, the number of SEPs within each standard and legal differences between jurisdictions. Some estimates conclude that approximately 200,000 patents and applications have been declared essential to 4G and/or 5G alone, all of which could, in theory, be considered for inclusion in the EUIPO registry.

Essentiality assessment

The essentiality assessment portion appears to be the largest and potentially most burdensome undertaking, however, it also has the potential to benefit both SEP owners and implementers, as well as the public. While it is uncertain how such a process would work in practice, it does appear to resemble the patent prosecution process, which can be costly and take years, and even then, there are questions about how rigorous such a process is, both in the United States and Europe. For example, in the first few years of the United States’ inter partes review for challenging patent validity, as many as 70% of challenged claims were found unpatentable. Knowing this, there is likely to be considerable doubt over the value of essentiality determinations until the process has been sufficiently tested and validated across a meaningful number of patents.

While no equivalent registry exists in the United States, US litigators have a growing set of case law precedent available relating to determining essentiality. Even though litigation is inherently risky, the large body of US case law means that the risk is easier to assess for SEP owners that are considering filing a suit in the United States. In Europe, however, if the proposed regulation proceeds, there could be more substantial near-term uncertainty and risk, which is compounded by the higher risk of the untested UPC. For these reasons, if the proposal is indeed adopted, many SEP holders may adopt a ‘wait-and-see’ approach to European SEP suits and rely more heavily on US suits in the interim.

Aggregate and individual rate setting

The aggregate and individual rate setting would be unique additional procedures. For aggregate royalty rates, the proposed regulation would allow an SEP holder to submit a notification – within 120 days of a standard’s publication or new implementation – identifying the global aggregate royalty rates and estimated percentage that it owns for that standard. Since this is a unilateral notification by an SEP holder, there are concerns that it could overstate both the aggregate royalty and its ownership share of SEPs. The proposed regulation also allows an SEP holder or implementer to request a non-binding expert opinion on the aggregate royalty, which may include input from any interested stakeholder. For SEP holders with at least a 20% share of all SEPs of a standard, a special procedure can involve the appointment of a conciliator to attempt to set an aggregate royalty. 

These aggregate royalty procedures are unique because they involve a global aggregate rate, even though these are generally limited to SEP holders and implementers within EU member states. While the expert opinion is both non-binding and limited to European entities – at least, in theory – it may have undue weight in US litigation, if allowed. For this reason, future US litigation may involve disputes over whether the non-binding expert opinion on aggregate royalty may permissibly be presented to a US jury. As they are non-binding and may not be used in US litigation, it is highly unlikely that these aggregate royalty procedures will eliminate SEP litigation in the United States.

FRAND determination

Likewise, the proposed regulation has a new procedure to attempt to reach a FRAND agreement before resorting to litigation. According to the current draft, a patent owner must complete this process before filing an SEP complaint before the UPC or EU member states’ courts for litigation. The individual rate-setting procedure includes the parties, may involve limited discovery and experts, and may result in a FRAND determination. A successful result would include either an agreement between the parties or acceptance of the conciliator’s FRAND determination; an unsuccessful one would include the creation of a confidential report of the FRAND determination and a non-confidential report of the methodology and assessment to be recorded in the EUIPO database. Even if the proposed regulation is adopted as is, it remains an open question whether this inter partes FRAND determination procedure will result in agreed-to settlements or outcomes with a relatively quick nine-month adjudication, or whether this will act as an additional hurdle for SEP holders before filing suit. In some instances, even where a FRAND rate is not agreed to or set during the proceeding, it may serve as a practical assessment of a party’s position and affect a party’s demands during subsequent litigation, including litigation in the United States.

Shift in the balance?

Ultimately, a key question is how the proposal might alter the balance of SEP litigations in Europe relative to the rest of the world, particularly the United States. While many SEP owners might adopt the wait-and-see approach – particularly with regard to whether the aggregate and individual rates are higher or lower than expected elsewhere – others may be interested in pursuing SEP enforcement in Europe, given its substantial market size and the potential advantages of this new system. Multinational SEP owners with patents in countries across the globe will always seek the most opportunistic fora to enforce their SEPs if they aim to obtain a worldwide licence. To the extent that the proposed regulation may negatively impact the ability to obtain this, SEP owners might choose fora other than the European Union. As always, the cost of litigation, time to resolution, market size for potential damages, injunctive relief and other considerations will affect forum choice. If the proposed regulation is implemented, this will certainly be one more crucial factor for SEP owners to consider.

It is too early to tell what the final regulation will look like – or even if it will be adopted in any form. However, the European Commission appears to be trying hard to reach new levels to standardise SEP essentiality assessments and rate setting, which, if successful, could serve as a roadmap for other jurisdictions to follow.