4iP News

The European Commission and the value of patents for 5G and IoT

26 April 2016

Last week the European Commission unveiled its strategy on ICT Standards, strongly supporting the development of global 5G and Internet of Things standards needed to give life to Digital Single Market opportunities.

The Commission acknowledges that standardisation will continue to be primarily industry-led, voluntary and consensus-driven. Wisely, the Commission understands that to drive technology evolution, public policies must support the invention of those technologies that will underpin 5G and IoT standards. In fact, the Commission’s document ‘Advancing the Internet of Things in Europe’ recognizes that complex IoT technologies ‘may necessitate huge investment in research and standardisation development’ and so inventors need to be guaranteed a fair return on such investment.

The Commission’s approach to intellectual property rights is notable. It focuses on reasonable access to patents essential to implementing standards (SEPs), while also recognizing the need for owners of those patents to receive a fair return on their R&D investment so they are incentivised to innovate. This balance of interests is critical to a sustainable standardisation process; continued inventiveness; and competitive open markets. The Commission recognizes that FRAND-based intellectual property rights policies are necessary for such a standardisation regime. FRAND licensing (standing for Fair, Reasonable and Non-Discriminatory) has been the subject of much controversy and debate in the past but it is notable that there is an absence of the ‘hold up’ theory in the Commission’s documents. The Commission backs open standards based on the FRAND framework as an antidote to the ‘many proprietary or semi-closed solutions’ in IoT that would undermine the Digital Single Market.

The Commission sets out that certain improvements need to be made to enable easy and fair access to SEPs in the new IoT/5G paradigm involving the convergence and complexity of many technologies. Actions will include seeking to enhance transparency (e.g. access to reliable information on SEP holders, patent scope, SEP declarations) and facilitating ‘the efficient and balanced settlement of disputes’. Removing commercial and legal uncertainty for smaller companies is a particular focus of the Commissions. Interestingly the Commission also intends to work with standard development organisations (SDOs), patent offices, industry and the research community to clarify core elements around FRAND licensing principles, which the Commission stresses need to be equitable, effective and enforceable. As the Commission notes;

Against this background, a fast, predictable, efficient and globally acceptable licensing approach, which ensures a fair return on investment for standard essential patent (SEPs) holders and fair access to SEPs for all players – and especially SMEs - of the value chain would be beneficial’.

In its package of policy papers, the Commission already indicates some of what these key principles could be:

The first is that ICT standardisation must be based on the principles of transparency, openness, impartiality and consensus, effectiveness and relevance and coherence. These principles, that reflect international norms, are critical to ensure that standardization is not controlled by a small number of (usually) large players and that the rules elaborated by SDOs, including IPR policies on FRAND licensing, are balanced and impartial.

  • The second indication from the Commission is its reference to ‘access’ to standards that reflects a pragmatic approach because FRAND licensing enables access to standards to all participants of the value chain, whether companies take a royalty-bearing license or are otherwise ensured access to the standard by SEP holders. Commercial practice has been to seek FRAND royalty-bearing licenses at certain levels of what can be a long digital value-chain, rather than requiring licensing at all levels. Requiring royalty-bearing licenses at all levels of the value chain would result in massive complexity, increased costs, legal confusion and commercial discord, all leading to a loss of competitiveness and innovation.

  • The third is that FRAND principles require a ‘globally acceptable licensing approach’ given that many licensing contracts are global in nature. It may also be interpreted as a strong indication that the Commission understands the risks of the FRAND licensing parameters been set by a private SDO based outside the EU or in the case of regulatory intervention where one jurisdiction may be tempted to impose global licensing terms.

As relates to ‘licensing methodologies’, a number of conclusions can be drawn from the Commission’s statements:

  • First, the references to equitableness and FRAND must relate to the balance of interests discussed above. It cannot be right that only one part of an industry capture the value of standardisation; this should be shared equitably. In addition, in acknowledging the potentially huge R&D costs and the need to incentivise investment as well as access to the technology, the Commission does not only view the value of SEPs from one perspective.
  • Second, the notion of ‘effective’ methodologies is critical, because a number of theoretical or impractical ‘FRAND’ methodologies have been proposed over the years that are devoid of real-world relevance or aimed only at driving down royalty returns. The reference to the enforceability of licensing agreements is a significant recognition that there are very real infringement or patent ‘hold out’ risks, where implementers delay taking a license. This recognition reflects the European Parliament’s own concerns, raised in its 2016 resolution ‘Towards a thriving data-driven economy’, where it asked the Commission to, amongst other things, ‘adopt policies to address the current problem of infringements of standard‑essential patents’, considering it necessary to ‘strike an appropriate balance between those who invest in research and innovation aimed at developing such essential patents and those who benefit from the existence of those patents’. The Commission’s position is, not surprisingly also consistent with the balance set out by the Court of Justice of the EU in its recent Huawei decision to ensure that bad-faith implementers do not game the system or avoid their obligations to take licenses.
  • Finally, while not wishing to prejudge the outcome of its FRAND methodology discussions, the Commission makes an important qualification in the Commission’s IoT Document. The Commission notes that FRAND should reflect the value introduced by the patented technology for the use in question. This choice of words is very notable; it directly goes against the notions advocated by some that SEPs should not receive compensation for anything beyond the incremental value of the patented technology as compared to its next best alternative, a notion that ignores the investment necessary to invent and commercialise SEPs, which the Commission recognizes must be subject to a reasonable return. On the other hand, the Commission recognises that a standardised technology may have different value depending on its use (e.g. an irrigator sensor will probably not use the 5G standardised technology as much as a smartphone which primary goal is connectivity), guaranteeing fair demands for the corresponding licenses.

In all, it looks as though the Commission has taken a pragmatic and balanced approach towards IPRs that should encourage investors and innovators.

Positions in this paper do not necessarily reflect the detailed positions of individual 4iP Council members.