The EU’s Response to National Judicial Determinations of FRAND Royalty Rates

Guest Post by Professor Jorge L. Contreras

On March 28, 2023, Reuters reported that a proposed European Parliament and Council Regulation would empower the European Union Intellectual Property Office (EUIPO) to determine “fair, reasonable and non-discriminatory” (FRAND) royalty rates for European patents that are essential to industry standards (standards-essential patents or “SEPs”), and also to assess the essentiality of SEPs to the relevant standards.  In this post, I compare the leaked EU Proposal to last year’s Standards Essential Royalty Act (SERA) to which the EU Proposal bears a notable resemblance, with some important differences. Overall, I believe that the EU Proposal makes a positive contribution toward the efficient and fair resolution of FRAND disputes, though its most valuable role may be to nudge stakeholders toward the preferred solution of global rate-setting arbitration.

The Leaked Draft

Even before the official release of the EU Proposal, a significant amount of material has become publicly available. A leaked text of the draft was posted on Kluwer Patent Blog, a summary and detailed synopsis has been posted on FOSS Patents, and a 248-page Impact Assessment by the European Commission (EC) has been widely circulated among stakeholders. As reported by Reuters, the draft EU Proposal was scheduled to be announced by EC Vice President Margrethe Vestager on April 26, but the leaked draft has already sparked significant commentary and debate (see summaries, with links, posted by Tom Cotter and Florian Mueller). Needless to say, a pre-release draft of proposed legislation does not carry the force of law, and as noted by Intellectual Asset Management and others, a lengthy legislative process lies ahead during which the EU Proposal could substantially change or be scuttled entirely. Nevertheless, it is worth discussing some of its potential impacts today.

The Problem: National Judicial Determination of Global FRAND Royalty Rates

The ambitious EU Proposal addresses numerous lingering issues that are inherent in the underspecified world of FRAND licensing, including whether or not patents declared as “essential” to particular industry standards are actually essential (Title V) (issue discussed here and here) and how FRAND licensing commitments can bind subsequent owners of essential patents (Art. 3) (issue discussed and here and here). On a positive note, the EU Proposal clarifies that “royalty-free licensing policies do not raise concerns” (recital 10) – a welcome acknowledgement in view of recent complaints about royalty-free SEP licensing requirements (see, e.g., here). These important issues, however, are beyond the scope of this post.

The biggest issue that the EU Proposal seeks to tackle is the recent tendency of courts in China and the UK (and potentially other countries) to establish FRAND rates for a SEP holder’s entire global portfolio (the Global Approach), rather than only for SEPs issued in that jurisdiction (the National Approach) (discussed in detail here and here). This phenomenon has led to jurisdictional disputes, escalating anti-suit (ASI) and anti-anti-suit injunctions (AASI) (discussed here, here and here), and an international “race to the bottom” as jurisdictions vie to become preferred destinations for resolving global FRAND disputes. As noted in the cited articles, European courts, following civil law principles, have generally been averse to anti-suit injunctions in global FRAND cases, resulting in royalties for European patents largely being established elsewhere. In addition, the European Union, along with the United States and others, is currently involved in a dispute at the World Trade Organization (WTO) over China’s ASI procedures in these cases (a detailed discussion of China’s ASI landscape can be found here).

Summary of the EU Proposal

Some of the key elements of the EU Proposal concerning FRAND rate determination are the following:

1 – Art. 21 would require SEP owners to register their European SEPs with a new “competence centre” (the “Centre”) established within the EUIPO; SEPs must be registered in order to be enforced in European courts (including the new Unified Patent Court (“UPC”));

2 – Arts. 17-18 would permit participants in standards-development organizations (SDOs) to collectively negotiate the aggregate (“top-down”) royalty burden for a particular standard, which would then be published by the Centre – an approach that would significantly improve the transparency and predictability of FRAND licensing negotiations (see here);

3 – Art. 36 would require SEP holders and implementers of FRAND-encumbered standards to request a FRAND rate determination by the Centre prior to initiating litigation over SEPs in a European court;

4 – Art. 40-41 establishes procedures for selecting the “conciliators” who would make the FRAND determination, including the proposal of five qualified candidates by the Centre, from which the parties would select two (though the means by which that selection would be made is not specified);

5 – Art. 60 provides that the determination of the conciliators will be confidential to the parties (a serious mistake, in my view, given the need for greater transparency in this area, as discussed here and here);

6 – Art. 58(4) provides that no European court or the UPC may rule on a case involving a European SEP unless it is notified of the resolution of this rate setting procedure.  While the Centre’s rate determination is not binding on a court, and there is no stated procedure for introducing the FRAND determination in a judicial proceeding, one would hope that the Centre’s determination will be used as evidence in most European judicial proceedings concerning the affected SEPs.

Comparison to the Proposed U.S. Standards Essential Royalty Act (SERA)

As noted in the introduction, concerns over foreign (particularly Chinese) ASIs and judicial determinations of global FRAND rates have also motivated federal legislators in the U.S. to propose a variety of measures designed to reduce the impact of these foreign proceedings on U.S. patents.  In 2022, two such bills were floated within the Senate Judiciary Committee: the Defending American Courts Act (DACA) (discussed here and here) and the Standard Essential Royalty Act (SERA) (discussed here and here). SERA would establish a U.S. judicial tribunal for the determination of FRAND rates applicable to U.S. FRAND-encumbered patents, notwithstanding the findings of any foreign court.  The recent EU Proposal shares some characteristics with SERA, but also has notable differences.  The Table below summarizes some of the areas of commonality and divergence between the U.S. and EU proposals.

Table 1

Comparison of Recent U.S. and EU FRAND Tribunal Proposals

Assessing the EU Proposal

The EU Proposal will likely improve some aspects of global FRAND litigation. For example, it could diminish the force of “global” FRAND rate determinations by non-EU courts in countries like China and the UK, create a more authoritative SEP database than that maintained by the notoriously hands-off SDOs, and eliminate some of the current concern over collective negotiation of aggregate royalty burdens for particular standards.

This being said, the EU Proposal also has a few significant drawbacks.  First, the EU Proposal creates a rate determination structure that is non-binding, thus opening the door to further debate and “new” evidence that could be introduced by parties seeking to convince European courts to deviate from Centre-determined rates. More importantly, the confidential nature of the Centre’s findings eliminates much of their potential systemic benefit, as other market participants will not be able to use the information developed by the Centre in their own FRAND negotiations, reinforcing the non-transparent system that exists today.  The U.S. SERA proposal overcomes both of these weaknesses by proposing a binding rate determination that will be open and transparent.

Another Step Along the Road to Non-governmental Global FRAND Rate-Setting?

Despite their advantages, both the U.S. and EU proposals suffer from a focus on individual party disputes rather than the overall royalty burden for a particular standard.  The most efficient, fair and transparent approach to global FRAND rate determinations is to involve all concerned parties (SEP holders and stakeholders) in a multilateral, multinational rate-setting procedure that addresses all SEPs covering a particular standard and then makes that determination publicly available, much like the copyright royalty rates determined by rate-setting boards in the U.S., UK and other countries (see proposal here).

While the international community has not yet embraced such a comprehensive, multilateral approach to FRAND royalties, an important first step in rationalizing the FRAND royalty system is eliminating the ability of individual jurisdictions (e.g., China/UK) pre-emptively to set global FRAND rates for patents outside of their jurisdictions (see here).  Processes such as those set forth in the U.S. SERA and the EU Proposal would significantly limit the bite of such unilateral global rate-setting efforts. As I have previously written, “country-by-country rate adjudication need not be the end game for global FRAND rate setting”.  If stakeholders find that legislatively mandated rate proceedings in individual countries are burdensome, they may be more amenable to a truly global, yet fair, solution to the FRAND royalty conundrum.

[Disclosures: The author declares no conflicts of interest regarding the subject of this article.]