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Communication from the European Commission: Setting out the EU Approach to Standard Essential Patents

November 29, 2017

Communication from the European Commission to the European Parliament, The Council and the European Economic and Social Committee, Setting out the EU Approach to Standard Essential Patents

Standards ensure that interoperable and safe technologies are widely disseminated among companies and consumers. Patents provide R&D with incentives and enable innovative companies to receive an adequate return on investments. Standards frequently make reference to technologies that are protected by patents. A patent that protects technology essential to a standard is called a standard-essential patent (SEP). SEPs therefore protect technologies that are essential for complying with technical standards and for marketing products based on such standards.

Standards support innovation and growth in Europe, in particular providing for interoperability of digital technologies that are the foundation of the Digital Single Market (DSM). For example, computers, smartphones or tablets connect to the internet or other devices via standardised technologies such as long-term evolution (LTE), WiFi, or Bluetooth, all of which are protected by SEPs. Without the widespread use of such standardised technologies, such interconnectivity would not be possible. In the hyper-connected era, interconnectivity becomes even more crucial. A wide range of new products need to be interconnected, as to provide consumers with additional products and services (e.g. smart house appliances) and to create new business opportunities for European companies.

The digitalisation of the economy creates great opportunities for EU industry. The estimated economic potential of IoT applications in devices for humans, homes, offices, factories, worksites, retail environments, cities, vehicles and the outdoors will be up to EUR 9 trillion per year by 2025 in developed countries. The digitalisation of products and services can add more than EUR 110 billion in revenue to the European economy per year over the next five years. The ability of connected devices and systems to work together is crucial for maximising this economic potential. Without interoperability, enabled by standards, 40 % of the potential benefits of IoT systems would not be reaped.Without formal standardisation and SEPs, there would be, for example, no connected vehicles. Telediagnosis or remote operations with distant hospitals or to exchange patient information would not be possible either.

Patent holders contribute technology for developing standards within standard developing organisations (SDOs). Once a standard is established and the holders of the SEPs have given a commitment to license them on fair, reasonable and non-discriminatory (FRAND) terms, the technology included in the standard should be available to any potential user of the standard. Smooth licensing practices are therefore essential to guarantee fair, reasonable and non- discriminatory access to the standardised technologies and to reward patent holders so they continue to invest in R&D and standardisation activities. This in turn plays a prominent role in developing a connected society, where new market players outside the traditional ICT sectors (producers of household appliances, connected cars, etc.) need access to the standardised technology.

The evidence however suggests that the licensing and enforcement of SEPs is not seamless and may lead to conflicts. Technology users accuse SEP holders of charging excessive licensing fees based on weak patent portfolios and of using litigation threats. SEP holders claim that technology users 'free ride' on their innovations and consciously infringe intellectual property rights (IPR) without engaging in good faith licensing negotiations6. Problems may be particularly acute when players coming from new industrial sectors who are unfamiliar with the traditional ICT business need access to standardised technologies. Disputes and delays in negotiations between technological users and holders may ultimately delay the widespread use of key standardised technologies. This can hamper the development of interconnected products in Europe, eventually affecting the competitiveness of the EU economy.

In its April 2016 Communication on Standardisation Priorities for the Digital Single Market, the Commission identified three main areas where the SEP licensing environment could be improved: opaque information on SEP exposure; unclear valuation of patented technologies reading on standards and the definition of FRAND; and the risk of uncertainty in enforcement of SEPs. In addition, the role of open source communities in the development of standards also should be assessed.

There is therefore a need for a clear, balanced and reasonable policy for Standard Essential Patents in the EU with the aim of contributing to the development of the Internet of Things and harnessing Europe's lead role in in this context.

Conflicting interests of stakeholders in certain SDOs may make it difficult for these organisations to provide effective guidance on such complex legal and intellectual property (IP) policy issues. Licensing platform initiatives in this area are still at an early stage and have not yet been adopted by implementers, who may well be hesitant given the uncertainty in the current SEP regulatory environment and who have little incentive to enter into a deal in this context. In addition, the standardisation of 5G and IoT is a global issue. Europe's industry retains a leading position in many sectors in global markets. The Commission notes the important role European standardisation plays in the global context.

The Commission therefore considers that there is an urgent need to set out key principles that foster a balanced, smooth and predictable framework for SEPs. These key principles reflect two main objectives: incentivising the development and inclusion of top technologies in standards, by preserving fair and adequate return for these contributions, and ensuring smooth and wide dissemination of standardised technologies based on fair access conditions. A balanced and successful policy on SEPs licensing should work to the benefit of start-ups in Europe and should serve all EU citizens by giving them access to products and services based on the best performing standardised technology.

This Communication draws on the responsibility of all actors in the SEP licensing context, and all stakeholders are encouraged to contribute to making this framework work in practice. It is not intended to represent a statement of the law and is without prejudice to the interpretation of EU law by the Court of Justice of the European Union (CJEU). It does not bind the Commission as regards the application of EU rules on competition, and in particular Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU).

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