EU: final proposal for FRAND regulation

Last week ended with the final proposal of the EU Commission for FRAND regulation of 27 April 2023. It was such a long and busy week with many discussions for the EU in the tech domain, e.g., AI Act.

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What is FRAND?

FRAND stands for Fair, Reasonable AND non-Discriminatory. The holder of a Standard Essential Patent (SEP) who has participated in standard development and declared its patent essential for the implementation of a technical standard adopted by a standard developing organisation (SDO, e.g., ETSI, IEEE), must commit to licence their SEP on FRAND terms and conditions. In exchange for such commitment when including a patented technology in a standard, the SEP holder shall gain certain market power over the firms using or implementing a standard, called as implementers of the standard by seeking licences from many of them in a larger market.

For example, you can find such standards in the following daily-used technologies for 5G, Wifi, video compression and decompression (MPEG, HEVC), data storage and exchange (CD, DVD), photo formats (JPEG), home audio and video interoperability (HAVi). Without using the methods or devices protected by SEPs, it is impossible for a manufacturer, or implementer of the standard to create standard compliant products like our smartphones, tablets. Thanks to interoperability across a wide range of products, standardisation, the production firms can reduce the costs and make products more valuable to consumers.

So, what is the FRAND regulation?

Actually, the regulation name is Regulation on standard essential patents and amending Regulation (EU) 2017/1001. The final proposal shall provide:

Detailed information on SEPs and existing FRAND terms and conditions to facilitate licencing negotiations;
Awareness of SEP licencing in the value chain, and
Alternative dispute resolution mechanism for setting FRAND terms and conditions.

The objective of this initiative are to:

Ensure that end users, small businesses (SMEs), EU consumers benefit from products using the latest standardised technologies;
Make the EU attractive for standards innovation;
Encourage both SEP holders, implementers to innovate in the EU, make, sell products in the area and be competitive in the outside-EU markets.

What are legal issues of the SEPs?

First, due to the lack of transparency on the ownership, applicability and essentiality of the SEPs, the firms may over-declare their patents as essential to a standard while they are not. Second, the shortage of information about the SEP licence fees – FRAND royalties hinders the implementers with little, or no expertise, resources to assess if the offered licence fees are actually FRAND. Third, the licensing negotiation and dispute are time and cost consuming. Finally, the widespread application of a standard, and its holder’s strong position can lead to holder’s anti-competitive behaviours.

What is new in this EC’s final proposal?

The proposal governs the SEPs in force in one or more Member States and concerns standards published by a SDO calling on SEP holders to commit to licensing on FRAND terms and conditions. But, it does not apply to SEPs which are subject to royalty-free intellectual property policy of the SDO publishing the standard and to claims of invalidity and infringement of SEPs out of the scope of this Regulation. With hope to resolve the issues as mentioned, the EC envisages in its proposal:

SEP register, database, essentiality checks. the EU Intellectual Property Office (EUIPO) holds the establishment of an obligatory register by SEPs holders of their patent and standard in detail. However, according to Juve Patent, while market players consider many mobile communications patents as over-declaration, selected SEPs are subject to a non-binding essentiality check (of the EUIPO).
SEP aggregate royalty. SEP holders will be able to notify in the register the expected maximum aggregate royalty. Alternatively, both SEP holders and/or implementers can ask a conciliator to recommend a (non-binding) aggregate royalty.
FRAND determination. In certain cases, SEP holders and implementers would have to try first to agree on a royalty during the FRAND determination of no longer than 9 months, before they could resort to litigation. It may reduce the pressure of litigation for implementers and limit the duration of protracted licensing negotiation for SEPs holders.
SMEs support measures. The SMEs may benefit from the following support for example, free advisory services, reduced fees for registration of SEPs and for essentiality checks and access to the SEP register, more favourable FRAND terms and conditions for SMEs.
Establishment of a ‘Competence Centre’ at EUIPO to administer the elements above (registry, database, essentiality checks, aggregate royalty, FRAND determination and SMEs support services).