Europe Commission’s SEP Proposal

Europe Commission’s SEP Proposal

This week marks the 50th anniversary of the first phone call. Since then, mobile has become the most ubiquitous technology in human history. Not only has it directly generated trillions for the global economy, but it has also changed every other industry in profound ways. The industry has kept with the times and continues to evolve with new technologies and more products being introduced every day. One of the fundamental tenets in this journey has been the role of standardization. Right from the 1G days with AMPS and then the global standardization process with GSM, the reason the market grew so rapidly and continues to evolve is the role standards play in bringing a new technology to the market at scale. Absent that, it will take years more to introduce something new and the fragmented sub-scale market won’t attract investment.

All of this might come to a screeching halt if Europe Commission’s SEP (Standard Essential Patents) proposal becomes law. It is problematic on so many counts that it is hard to cover them all in one post so I will focus on the high-level implications for innovation, standardization, and competitiveness.

To provide context, SEPs are patents that are necessary for the implementation of industry-wide standards, such as those for mobile communication. Fair, Reasonable, and Non-Discriminatory (FRAND) licensing ensures that companies license their SEPs on fair and reasonable terms, fostering widespread adoption of standardized technologies.

The basic proposal from the Commission has three main points. Firstly, SEP owners will have to register with the EUIPO (Europe Intellectual Office) all their SEP and the commission will do a lightweight check to ensure that the patents are indeed essential. This is pretty harmless, something that ETSI does already.

Secondly, the commission wants the players in the industry to publish aggregate royalty rates from any entity who participates in the standards process and not just the ones who claim SEPs. The due process is absent and there is really no clarity on how this is going to work in practice.

Lastly, there is a new FRAND determination process administered by the EUIPO. Again, no due process and no set of governing rules that we can discern in the draft.

It is no secret that licensees use the court system to slow down or reduce the rates or negotiate using the court system. This is especially true for players working with the SEP licensors. Let’s be clear, there is significant risk behind developing the technology that powers much of the ecosystem. Implementors are free to develop their own technology, but they benefit from and depend on someone else doing the R&D on modems or LIDARs or AI or GPUs, etc. That way, their own focus can remain on things the company is good at. Additionally, the implementors are always welcome to contribute to the IP creation and standardization process. These are open forums after all.

But the current proposal is one of the worst ones I have seen in the history of attempts to regulate the SEPs. The perception that some of the implementors want to create is that too much is being asked for a technology that is commodity in their view. However, the technology didn’t get into the market without a laborious and years long process to create standards that products need to adhere to before launch. This reduces the go-to-market timeline and costs. It is hard to believe that the commission doesn’t see through the plethora of unintended consequences that will ripple through the technology ecosystem.

Inventors are incented to invest because they see a fair risk-reward framework. EU’s proposal will strike at the heart of this system. Players will stop declaring their patents as SEPs and just go directly to the implementors for IP negotiations. The technology stack will get fragmented and the industries that lobbied to put these changes into the legislation at the last minute will suffer from higher IP, product, and operational costs – complete opposite of what they are trying to use this legislation for. The licensing cost of SEPs is inconsequential in the overall cost of the vehicle for example but not having the license to be able to incorporate the latest technology into the vehicle could be a death knell for that model.

Assessment of patent portfolio is a complex process. One has to have not only the technical expertise but also the industry landscape understanding along with a sense of where future is headed. Each industry segment will require professionals who are experts in their respective domains both on the technical and business fronts. Having worked in the IP space for over 25 years, this is not an easy task. EUIPO has no such expertise and will need to hire permanent experts across domains in a hurry.

To make matters worse, none of the outcomes of the process are binding so the new regime is primarily to delay the inevitable negotiations between the licensors and the licensees.

There is another big problem with the proposal and that is of global competitiveness. It is no secret that we live in a highly charged geopolitical environment. Being late to the technology ecosystem and IP frameworks, China has been rapidly asserting itself to create its own rule that international companies should adhere to. FRAND licensing is generally global. It makes it a cleaner and a simpler process for all parties involved. Trying to do it piecemeal or by geography will complicate the negotiations, process, and time to market. By essentially creating their own rules without due process, EU is giving China a green light in enforcing their IP frameworks on the market. The licensing mechanisms will become too fragmented that will have a direct impact on two critical elements of technology development – economies of scale and time to market.

The commission must follow due process of consultation with all stakeholders not just the ones who lobby the hardest. The changes will be too disruptive and counterproductive to their mission. To foster a healthy technology ecosystem, innovation and disruption should be revered, not penalized. It will be better for EU to go back to the drawing board and develop a fairer and more progressive framework that is aligned with the interest of the consumers.