EU FRAND regulation – what next for FRAND litigation in Europe?

On 27 April 2023 the European Commission published a draft proposal that, if passed, would significantly affect FRAND litigation and licensing in the EU. Since then the proposals have been subject to significant criticism, including from the president of the EPO, António Campinos, and UPC chief judge, Klaus Grabinski. As the proposed regulation proceeds through the EU parliament we take stock of its potential impact.

SEP register and essentiality checks

The first limb of the regulation involves the creation of a register and electronic database of SEPs. SEP holders and standard setting organisations would have to notify a newly formed 'Competence Centre' of standards and EU SEPs that are subject to FRAND commitments. If a patent is not recorded on the Register, then the patent owner will not be able to seek royalties or damages based on the implementation of that standard in the EU, until the point at which it is registered.

Evaluators at the Competence Centre would then carry out 'essentiality checks' on a sample of patents from each SEP holder selected annually by the Competence Centre. In addition to those selected by the Competence Centre, in any given year, any SEP holder or implementer may propose up to 100 SEPs from different families to also be subject to the checks. It is not entirely clear how deep these checks would go or precisely how they would be carried out. There are concerns that in reality SEP holders and implementers will both dispute the results and so in practice these checks will result in significant costs being incurred without achieving any real benefit.

Determination of an aggregate royalty

Another limb of the proposed regulation involves groups of SEP holders determining what they consider to be an appropriate 'aggregate royalty' for the implementation of a particular standard, which would constitute the maximum royalty due for infringement of all patents deemed essential to that standard. If SEP holders cannot agree, then a group collectively owning 20% or more of declared SEPs will be able ask the Competence Centre to appoint a conciliator, who will publish a non-binding opinion as to the aggregate royalty.

Again, it is not clear whether implementers would accept the results of these collective determinations. In any case, in the UK at least, this top-down approach has generally been found to be of limited value, and a greater focus has been placed on looking at comparable licences.

FRAND determination

In a similar vein, the third limb of the regulation allows a SEP holder to apply for conciliation to determine FRAND licence terms. The conciliator may consider witness and expert evidence and may even conduct an oral hearing if it is considered necessary and there is sufficient time to do so. The default position is that the conciliator’s FRAND rate will be global, unless otherwise agreed by the parties.

The most controversial aspect of this element of the regulation is that parties will not be able to commence litigation in the EU to determine FRAND licence terms before this process is complete (which, according to the draft regulation, shall not take more than 9 months). In the competitive world of FRAND litigation this would put EU courts at a significant disadvantage compared to other jurisdictions which have been willing to set global FRAND licence terms and have been doing so increasingly quickly – notably the UK and China.

Criticisms

The regulation has come under significant criticism from a range of industry players, lawyers and judges. One of the main concerns relates to the conciliation process, which must take place before litigation can be commenced. If this were to take the full 9 months then it would significantly prolong the period when an implementer can use the patents without scrutiny from a court, and some have argued it could infringe the fundamental property rights of the SEP holder (under art. 17(2) of the EU Charter) and their right of access to the courts (under art. 47 of the EU Charter).

Concerns have also been raised about whether the Competence Centre will really have the expertise to grapple with the complex issues surrounding FRAND licensing. Regardless of how reliable the determinations are, it would be surprising if both SEP holders and implementers accepted their findings, and so further costs are likely to be incurred in disputing essentiality and royalty rates regardless of the findings of the Competence Centre.

All of these issues combined will potentially make the EU and its courts (including the UPC) a less competitive jurisdiction to address FRAND issues. Courts in the UK, China and a number of other jurisdictions have proven willing and, indeed, eager to weigh in on global FRAND licence terms and if significant delays are placed on EU proceedings then it is likely the courts of other jurisdictions will resolve the issue before the EU can weigh in.

Next steps

At its first reading on 28 February 2024, the European Parliament voted by 454 to 83 to adopt the draft regulation. The version that was approved closely resembles the initial draft, after the Parliament rejected a number of last-minute amendments tabled by many different political groups. 

A number of legislative steps remain before the regulation can become law, including the Council’s position on the first reading and the trilogue discussions between the Commission, the Parliament and the Council. It will be interesting to see whether changes result in the regulation following the European parliamentary elections in June, or as a result of the steady criticism the regulation has received, but the coming months will be significant for the future of European FRAND litigation.