Weekly take: Why transparency and certainty are crucial for SEP licensing
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Weekly take: Why transparency and certainty are crucial for SEP licensing


John Mulgrew, vice president of IP at Lenovo, says the EU's proposed regulation will readdress imbalances in the bargaining power of SEP owners and implementers

The European Parliament’s recent vote in favor of the proposed regulation on standard essential patents demonstrates a keen recognition of the need for more transparency, predictability, and certainty in standard essential patent licensing at a global level.

SEPs play a vital role in the development and implementation of technological standards, and broad access to standards is crucial for continuing innovation cycles that drive sustained economic and job growth.

To promote the use of standards in critical new technology applications, we must address the shortcomings in the current system for obtaining access to SEPs and curb the abuses that can have a devastating effect on the future availability of important standards.

The proposed regulation will provide a clear and predictable framework for licensing SEPs and ensure that licence terms are fair, reasonable, and non-discriminatory (FRAND).

This will benefit businesses of all sizes big and small across Europe and promote European technological sovereignty by supporting further investment in R&D to develop innovative products.

In an ecosystem underpinned by such a regulatory framework, companies can engage in collaborative efforts leveraging standard technologies with greater certainty and fairness of IP costs, catalysing technological growth across the EU and increasing jobs in a range of industry sectors.

As a direct employer of thousands of EU citizens, an innovator, and manufacturer within the region, fostering economic and technological development in the EU is something Lenovo supports strongly.

Over the last two decades, the gap between the positions of SEP owners and implementers with respect to SEP licensing has widened considerably, creating a significant imbalance in the bargaining power of SEP owners compared to implementers.

In large part due to the threat of expensive litigation and injunctions, implementers have been forced into taking licences with rates that are too high and outside the bounds of FRAND; alternatively, many of these companies choose to either not implement a standard or to forego investment, job creation and sales in particular regions.

This is particularly true, and will continue to be the case, for SMEs that lack the knowledge or resources to respond appropriately to high royalty demands.

Correcting this imbalance in negotiating leverage and creating more transparency are important building blocks for a successful standardisation system moving forward. And ultimately, for SMEs to use the latest and greatest standards in the development of innovative, often lifesaving, products.

Policies and regulations concerning standardisation and SEP licensing must balance the interest of all stakeholders and promote technological growth, which will, in turn, result in job growth across Europe and help the EU move towards a digital green economy.

That is precisely what the SEP regulation at issue is designed to do. Standardised technologies have value when implemented in products and services, for the benefit of consumers and society.

The goal of standardisation is not to enrich contributors based on their SEP portfolios, but rather, to develop standards that can be incorporated into innovative products and services – for example, most recently in internet of things (IoT) segments such as energy, healthcare, smart home devices, automotive, etc.

This balance needs to be restored – SEP owners should be compensated fairly for their R&D efforts while reducing the burden of creating innovative products based on those standards.

Transparency lacking

The current SEP licensing system can be cumbersome and inefficient, hindering innovation and fair competition, especially for SMEs.

One of the greatest challenges in SEP licensing is a lack of transparency. Transparency should be maximised in an open and innovation-orientated society. It is a fundamental principle in nearly every aspect of IP policy. To make progress, we must be able to see what's ahead. We need light, not darkness.

The proposed regulation goes far to promote such transparency in multiple respects, including shedding light on the essentiality and ownership of SEPs, allowing for a fair determination of the total royalty burden for incorporating the standard in a product and creating a reasonable and efficient process for parties to agree on the appropriate royalty rates to be paid for a SEP portfolio.

This added transparency in turn significantly streamlines the resolution of disputes and reduces lengthy and costly litigation that is a drain on the innovation ecosystem.

Despite heavy criticism of the proposed SEP regulation by companies that are considered aggressive SEP licensors, the goal of the regulation is not to simply reduce royalty rates.

On the contrary, by introducing more rationality and fairness into the SEP licensing ecosystem, it will promote continued innovation in the EU, both in standardisation and development of products using those standards, ultimately bolstering the position of EU industry globally.

The systemic imbalance in SEP licensing must be addressed to create more of a level playing field for product companies.

Today, companies that implement standards in their products generally fall into 4 SEP licensing categories:

(i) Companies that are peers to those that own SEPs and sign cross-licences, paying little or no royalties to each other;

(ii) Top-tier market leaders who are able to leverage their position to obtain broad licence rights at steeply discounted rates;

(iii) Mid-tier market participants that are often charged multiples of what market leaders pay in SEP royalties and;

(iv) Small/mid-size companies that are largely ignored because SEP licensors openly state that they're not worth pursuing for royalties.

All these companies are critical to the innovation cycle and there is no good reason for them to be treated in such vastly different ways.

The SEP regulation approved by the European parliament goes far to address these problems by introducing four key components to promote transparency and fairness in SEP licensing:

1) An SEP register identifying who owns relevant SEPs;

2) An essentiality check process to confirm that the SEPs are in fact what the owner claims them to be;

3) A process for obtaining expert opinions on the total royalty burden for implementing a standard and;

4) A conciliation process for parties to determine what is a fair and reasonable royalty for a SEP portfolio.

The overall effect of this approach is to assist in more efficient and less costly resolution of disputes between parties to a licensing negotiation and licenses being signed more quickly – this benefits the SEP owner and the licensee, as does the elimination of costly and burdensome litigation in many instances.

In turn, a more efficient and fair system will result in an improved climate for standards and product development, leading to more job creation in the EU.

Globalisation trends will continue, in large part because companies in major jurisdictions such as the US, Europe, and China have become major SEP owners as well as implementers that commercialise their products in multiple regions.

And, with the growth of the IoT segments and the entry of SMEs and new innovators, the need to have a properly functioning global licensing system is now even more critical.

Not just critical for the stakeholders, but more importantly, for the EU economy as a whole, for job growth, and consumer welfare.

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