EU Patent Licensing Reform Would Boost Tech and Curb Sales Bans

Last month, the European Parliament overwhelmingly approved a new proposed regulation on standard essential patents. If enacted after further review, this proposal could reshape the licensing of standard essential patents. These patents cover parts of standarized technologies such as 5G and Wi-Fi.

The impact could be profound and would keep Europe at the forefront of innovation. The proposed regulation aims to reduce judicial intervention in licensing negotiations and create a more balanced, innovation-friendly environment for Europe and the world.

Licensing reforms are urgently needed. The proposed regulation is designed to reduce government intervention in SEP licensing while making sure that everyone—both patent owners and potential licensees—is treated fairly.

These reforms have the support of an unlikely alliance representing a broad range of industries. They include leading companies in the automotive, consumer electronics, energy, infrastructure, and telecommunications industries—as well as many small, emerging companies that develop innovative technologies to support a healthier and more sustainable future.

Germany

For almost a decade, regional courts in Germany have been issuing judgments that favor companies seeking to monetize these essential patents, which has resulted in a tax on companies that market products who use these technologies. Companies with patents on standardized features deserve compensation based on the value of their patents. Yet there has been widespread concern that monetizers are using litigation tactics to obtain royalties far in excess of the amounts they fairly deserve.

The essential patents at issue cover international technologies, and the decisions made by German courts affect the sale of devices all over Europe. After a recent sales ban in Germany (the main tool used by the German courts) on Nokia branded phones, the devices started to disappear from stores across Europe.

The decisions of these German courts can have a global impact. In 2022, a German court found that Ford infringed on a single essential patent held by a non-practicing entity and issued an order that, if enforced, would have banned sales in Germany, shut down Ford’s German manufacturing, and required the company to recall and destroy its German stock.

Shortly after the order was issued, Ford agreed to the entity’s demands and entered into a global license agreement for a patent pool that included a large group of patent holders.

The heart of the issue lies in the nature of technical standards, which can involve hundreds of thousands of patents owned by hundreds of companies. To prevent any one company from using a single patent to leverage their position to extract more value than their technology contributes, companies agree to license patents fairly as a condition of having their technology included in the standard.

But German courts have largely ignored this commitment, allowing essential patent holders to credibly threaten market exclusion to extract unfair royalties. Economists at Charles River Associates found that over the past 20 years, German courts have issued 65% of all injunctions around the world for these patents.

These practices are particularly problematic for the German auto industry, given the role of cellular technology in modern vehicles. The risk of a manufacturing shutdown over a single patent has created a significant risk for companies with plants in Germany. Unsurprisingly, Germany’s delegation to the European Parliament voted overwhelmingly in favor of these reforms.

Desired Results

The status quo also significantly harms small and medium-sized enterprises in the internet of things sector. The financial burden and risk of market exclusion for SMEs that challenge unfair royalty demands often greatly surpasses any savings from securing a fair license.

Monetizers target SMEs, especially as they gain market traction—not for the royalties, which are often minimal compared to negotiation costs—but to use these agreements as inflated benchmarks in negotiations with larger manufacturers. This strategy depletes resources of innovative SMEs and disadvantages them against less innovative competitors that have gone unnoticed.

The proposal aims to create transparency regarding which patents may require a license and an estimate of the maximum total royalty burden a company can expect to pay if it adopts the standard. It also establishes a non-binding conciliation proceeding that parties must engage in before litigating essential patent issues in European courts. These measures are designed to provide objective information to parties so they may successfully negotiate settlements and avoid litigation—thus diminishing the courts’ role in setting industrial policy.

It also establishes a non-binding conciliation proceeding that parties must engage in before litigating essential patent issues in European courts. These measures are designed to provide objective information to parties so they may successfully negotiate settlements and avoid litigation—thus diminishing the courts’ role in setting industrial policy.

Requirements

The regulation imposes two main requirements on essential patent holders: to disclose information about the essential patents they seek to license and submit those patents to random essentiality checks. These aren’t burdensome demands.

A requirement for patent holders to disclose and register the essential patents they seek to license isn’t an undue burden. Any sophisticated licensee would require that information from the outset of license negotiations.

The disclosure requirement simply ensures that all companies can negotiate on a level playing field. It also allows emerging companies to better understand who they may owe licensing obligations, as this information isn’t currently accessible or available for many important standards.

Likewise, the introduction of essentiality checks shouldn’t be an additional burden for licensors acting in good faith. Studies have found as few as 10% of patents that are claimed to be essential actually are, so it’s already incumbent on licensors to evaluate whether the patents they’re seeking to license are actually used by the standard.

The regulation’s approach marks a significant departure from the heavy-handed tactics seen in German courts. Far from increasing government intervention, it will streamline and clarify the process by which companies can negotiate essential patent licenses.

While the Feb. 28 vote represents a significant milestone in enacting these reforms, it’s not the end of the legislative process. Next, the Council of the European Union, which groups representatives from each member state, will either accept the proposed regulation or after review propose further amendments. In the latter case, the amended proposal will return to the Parliament for the second reading.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Rafał Sikorski is a law professor at Adam Mickiewicz University in Poznań, Poland and senior partner at a Warsaw-based Polish law firm SMM Legal.

David Katz is an attorney at PacTech Law and specializes in SEP licensing and policy.

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