Among numerous legal, economic and commercial concerns about the European Commission’s proposed legislation for Standard Essential Patent (SEP) licensing, its plans for aggregate rate setting and mandatory Fair, Reasonable and Non-Discriminatory (FRAND) rate determinations in various technology standards raises all kinds of issues and alarms.
Following publication of the proposed legislation and impact assessment
on April 27, the Commission has been seeking online feedback submissions by August 10,
2023.
In a previous posting here and in my initial feedback submission the Commission 14th June, I have argued against the Commission’s apparent intention to abandon the established
approach of using comparable licensing agreements directly as benchmarks in
FRAND rate determinations, and instead apportion rates among SEP owners based on their respective shares of total SEPs using
the top-down approach.[1] For
example, I was critical about use of patent counting methods. My new feedback submission to the Commission focuses on aggregate royalty rate
setting.
Any aggregate royalty
rates set must be precisely defined, derived and applied. Aggregate rate
setting for standards, as proposed by the Commission, will enable proposed
rates to be depicted and manipulated in ways which are anticompetitive, unfair
and will under-value patented standard-essential technologies. According to the
proposed legislation, “‘aggregate royalty’ means the maximum amount of
royalty for all patents essential to a standard.”[2]
The Commission also indicates “uncertainty about the SEP royalty burden” and that
“Stakeholders consider that the FRAND licensing concept could benefit greatly
from some clarification, notably with regard to the determination of an
aggregate royalty burden.”[3]
Aggregate royalty
rates proposed to or set by the EUIPO could be in quantification of the total payment
burden to be paid or of the rate to be used in determining individual FRAND royalty rates
with the top-down approach.[4]
The latter should be a higher figure than the former to allow for SEPs that
remain unlicensed and for which there is no payment.
Either of these aggregate
royalty rate percentages might be derived somehow from among various different
formulations of aggregate rates reported. However, these reported rates vary
enormously, for example, global rates from more than 35% to less than 5% of a
smartphone’s selling price. The maximum aggregate rate burden implementers will
have to pay and the correct Aggregate Royalty Rate for Apportionment (ARRFA) in
a top-down approach FRAND determination will fall well within those two
extremes.
An alternative
approach in aggregate rate setting is to estimate value in standards with use
of techniques including hedonic pricing or conjoint consumer preference
analysis, and then apportion value somehow between SEP licensors and
implementers.
If aggregate rates are
to be set at all—as they are for patent pools in their rate cards, but in the
opinion of many is unnecessary and dysfunctional in bilateral licensing[5]—such
rates must be derived in the applicable context. Collective action—such as in
patent pools—where some major licensors are typically also major licensees will
tend to set rates that are lower than would be agreed bilaterally. Another
crucial difference is that patent pool aggregate rates are the rates licensees
actually pay.
In FRAND
determinations for bilateral licensing there is always a shortfall between the ARRFA
and what is actually paid because the SEPs in any given standard are never
fully licensed. The aggregate rates from which bilateral licensing rates are
derived are never fully paid due to notional royalty allocations to patents
that remain unlicensed. Any aggregate royalty setting must recognize this
difference if such rates are to be used to determine FRAND rates using the
top-down approach.
To mitigate
shortcomings in rate setting, some guiding principles must be established on
what the “SEP royalty burden” and ARRFA should include and exclude, as well as
how and by whom such rates should be derived and applied. The interests of both
SEP owners and implementers must be safeguarded while reflecting industry
realities with the many factors that shape varied financial and other terms in
established licenses. Application of economic theory must have full and proper
regard for what royalty figures reported in the industry represent and how
licensing actually gets done.
My full submission to the Commission can also be downloaded from WiseHarbor.
[1] Feedback
on draft EU legislation by Keith Mallinson, WiseHarbor; June 14, 2023
[2] Article 2
(10).
[3] Proposed
regulation (page 8) and Impact Assessment (2.3.2)
[4] “A SEP
holder or an implementer may request the competence centre for a non-binding
expert opinion on a global aggregate royalty.” Article 18
[5] Various
court decisions including Unwired Planet v. Huawei and InterDigital v. Lenovo have avoided or
explicitly rejected aggregate rate setting, while others including Optis v
Apple, also in the UK, have also primarily used comparable licensing
benchmarks in their FRAND determinations.
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