UKIPO publishes industry opinions on future of SEP licensing

As part of the government's bid to establish the UK as a future hub for science and technology, the UK Intellectual Property Office conducted a survey among SMEs regarding the efficiency of the current framework for standard essential patents. Now the government body has published the responses. It is expected to present its findings to ministers later this year.

With technical standards and SEPs of rising importance for the UK economy, the government has set out an Innovation Strategy and Telecoms Diversification Strategy in a bid to establish the country as a “science and technology superpower and innovation hub” by 2035. As part of this policy, the UK Intellectual Property Office (UKIPO) has conducted research into prevailing industry attitudes towards the UK’s current system for SEPs.

UKIPO calls for views

In March 2023, the UKIPO asked small and midsized enterprises (SMEs) to answer a questionnaire. This followed a call for views from stakeholder groups, lasting twelve weeks from December 2021 to March 2022. The objective of the questionnaire was to determine if the UK’s current SEP system functions fairly and efficiently, and whether the government needs to make changes to the system.

In conducting its survey, the UKIPO aimed to answer the following questions:

Do companies have sufficient information on how their innovation relates to SEPs?

Is the current system fair for everyone involved in the licensing and implementing of SEPs, or is change needed?

If companies use a licence, were they offered it on fair, reasonable and non-discriminatory (FRAND) terms?

Do companies have enough information on the pricing of SEPs that they licence or may licence in future?

What has been companies’ experience in respect of licensing disagreements and how were these resolved?

The summary of responses clearly shows conflicting views and attitudes among SMEs regarding the SEP framework. While some view the current system as balanced and not requiring intervention, others perceive it as favouring either SEP holders or implementers.

Power (im)balance

Some SEP holders advanced the argument that “implementers derive power from the requirement to offer FRAND terms, which gave them the ability to ‘hold-out’ or delay entering into licences, while these terms were negotiated and litigated”. On the other hand, implementers claimed that SEP holders “used the threat of injunctions to coerce implementers to accept non-FRAND licences (so called ‘hold-up’).”

While many respondents said pricing is sufficiently transparent for standardised technologies, such as mobile communications, pricing for new technologies is more opaque. Some implementers complained that non-disclosure agreements hindered negotiations, as licensees are unable to assess whether opponents are offering them the best rates. Furthermore, licensees say they cannot always determine whether a patent is genuinely essential to a standard.

However, some SEP holders argued that there are justifiable reasons for charging different licensees different rates. These cited the Supreme Court judgment in Unwired Planet vs. Huawei, where the court rejected the argument that “differences in pricing terms for SEPs is presumptively problematic”. Instead, the court stated that “the non-discrimination element of FRAND does not mean that every licensee is entitled to the same rate.”

SEP holders said different rates can still be compliant with FRAND because they “reflect the market-based value of the licensed SEPs or differences in the value created by different uses of the technology (e.g. in cars compared to domestic appliances).”

Value chain doubts

A major issue on which respondents commented was the value chain and at which point SEP holders should offer licences, i.e. to the manufacturer of the end product, or to the manufacturers of components implemented in the end product. There was some consensus that it is more efficient to licence “to a single point on the value chain” and that for some, this was the end product manufacturer. Furthermore, some respondents claimed “component manufacturers are sufficiently protected by licensing terms which grant rights not just to make but to ‘have made’ the technology covered by the patent.”

However, it is clear that this issue causes doubts regarding infringement. Some respondents argued, “while component suppliers are unable to obtain licences to indemnify their customers for patent infringement, companies seeking to develop innovative products based on components face uncertainty regarding their exposure to infringement claims”.

This also affects the calculation of royalties, with opinions once again varying. Some SEP holders said royalties should be based on the end product because, “it better captured the value of the contribution of the standardised technology to the consumers”. Meanwhile, implementers claimed royalties should be based on the “selling price of the smallest saleable component of a product that implements the SEP”. This, they said, “ensures royalties reflect the value added by the SEP, and not the value of any further end product innovation by the implementer.”

Court fairness, FRAND and the role of ASIs

When asked about fairness within the context of the global SEP market, many respondents said the system is unfair. They cited reasons such as the varied approach across different jurisdictions in granting injunctions and damages, as well as the inconsistent costs of enforcement. Specifically concerning the UK court system, many respondents perceive it as SEP-holder-friendly, again citing Unwired Planet vs. Huawei.

While many participants said the “setting of global licensing rates can be more efficient than pursuing litigation in multiple jurisdictions”, implementers insisted that “national courts should not be able to compel a party to accept a determination of global licensing terms”. Many respondents consider this to be “judicial over-reach” which “undermined the ability of potential licensees to challenge patents in different jurisdictions”. Some view the UK courts setting global FRAND rates as a threat to UK innovation.

In addition, some respondents said enforcement of injunctions and anti-suit injunctions (ASIs) is “costly and slow, or difficult”. There are differing opinions concerning injunctions. For example, SEP holders claim injunctions should be “available in SEP cases as for other patents” while implementers insist that courts use injunctions only rarely, so that it does not pressure implementers into accepting a non-FRAND licence.

Some participants said the use of ASIs could help prevent conflicting decisions from different jurisdictions. Implementers argued that ASIs are a useful tool in preventing SEP holders from forum shopping. On the other hand, some suggested that courts should view ASIs as “a sign of being an unwilling licensee”. However, many respondents said that global FRAND licences and the use of ASIs is an international issue, requiring jurisdictions to cooperate.

Call for intervention

While some respondents are broadly happy with the current system, seeing no cause for change, others proposed various solutions to its perceived problems.

On the issue of pricing, some participants said greater use of patent pools could help provide clarity regarding rates. Others said removing non-disclosure agreements and obliging SEP holders to disclose rates, either publicly or to a relevant body, would also aid transparency. However, some participants went further and suggested an independent tribunal should establish prices.

Furthermore, opinions differed as to whether an independent third party should carry out essentiality checks. While some asserted that the parties involved were in a better position to carry out checks themselves, others argued third-party checks should be introduced, with the involvement of governments, regulators and patent offices.

In Europe too

The issues of rates and essentiality are also subject to discussion in Europe. In April 2023, the EU Commission put forward a proposal for a European FRAND regulation that would see stricter monitoring of the standard essentiality of SEPs and more transparent licensing.

According to the proposal, the commission plans to establish a competence centre under the umbrella of the European Union Intellectual Property Office (EUIPO), which would maintain a list of SEPs and their holders. The latter must then sign up with the EUIPO to charge patent fees or take legal action against implementers. The EUIPO would also carry out non-binding essentiality checks.

The involvement of the EUIPO is not without controversy, however. Since the office is mostly concerned with copyright and trademark issues, experts have criticised its limited expertise in SEPs and FRAND.

Addressing the balance

Regarding the perceived imbalance of power at UK courts, some called for a change in UK legislation to restrict injunction use. Implementers that see themselves as disadvantaged by “the preference of SEP holders to provide licences at a specific, downstream, level of the value chain” called for changes to the ‘Horizontal Guidelines’, which cover issues of potential market power in relation to SEPs.

These could, say respondents, examine more closely the point in the value chain at which SEP holders offer a licence. Others suggested the Competition and Markets Authority should conduct investigations into rates and potential abuses of market power.

Due to the variety and conflicting nature of the responses provided by the call for views and questionnaire, the UKIPO says it “will require a further period while we assess the issues and, as appropriate, consider the merits of the proposals submitted.” The body says it will solicit further input from businesses, before presenting its findings to UK government ministers in 2023. The UKIPO also says it will undergo further consultation before it implements any policy interventions.

Looking forward to the future

With the recent launch of the Unified Patent Court, it is more important than ever for the UK to assert its position as an important jurisdiction for patent and SEP cases. In this context, the criticism of the EU Commission’s SEP proposal could work in the UK’s favour. For example, many critics are predicting the end of Europe as a centre of technology. Some in the industry fear that patent holders will move to other jurisdictions for SEP litigation in the future.

Furthermore, some observers claimed the proposal is too implementer-friendly, meaning more SEP holders could turn to the UK courts, which are seen by some in the industry as SEP-holder-friendly.

Two years ago, the reform of German patent law showed how economically important new legal conditions are for SEPs. Following intense public discussion and lobbying, the German government decided to give its patent judges more leeway to suspend the automatic injunction.