On Thursday, the day after World Intellectual Property Day, the European Commission—the self-proclaimed world regulatory superpower—officially proposed a massive regulatory regime of patents that will benefit China and undermine Western innovators in both Europe and the United States.
Led by the Gaullist technocrat Thierry Breton, head of the Internal Markets Ministry, the European Commission released a new regulatory program to impose rate-setting of patents on standardized technologies like Wi-Fi and 5G, called “standard essential patents” by policy wonks in the EU Intellectual Property Office.
Notably, the EU Intellectual Property Office is a trademark—not a patent—office in the European Commission. Its director conceded last year that it has no competency in patent law.
These bureaucrats, even if well-meaning in intention, will upend more than a decade of court decisions following rules of evidence and due process on the legitimate licensing of, and proper royalties for, those standard essential patents.
In addition to the likely result of artificially lowering standard essential patents royalty rates below market prices, the new EU Intellectual Property Office regulatory regime will empower China to reinvigorate its policy of coercing Western innovators to charge lower royalties to China’s domestic device manufacturers.
Just last year, the European Commission filed a complaint against China in the World Trade Organization to sanction China’s blatantly discriminatory policies that advantaged its own mobile device manufacturers by having its courts enjoin holders of standard essential patents from using any court to validate their patent rights.
The U.S. and numerous other countries have since joined the European case in the World Trade Organization.
In sum, the primary beneficiaries of the European Commission’s proposal will be Chinese phone makers, and the losers will be research-intensive innovators in the West who created these revolutionary technologies.
The threat to the EU and U.S. innovation economies—and the bolstering of the competitive threat from China—cannot be overstated.
Standardized technologies in both hardware and software are the innovation platforms for all industries. The mobile revolution in wireless communications, such as 4G and now 5G, is the most important example of how these technologies can create a seamless global network. In coming years, emerging industries such as the Internet of Things (IoT) and self-driving vehicles will extend even more this technological and economic revolution into everyone’s daily lives.
The intellectual property rights in standardized technologies—the standard essential patents—are the legal platform on which these unprecedented economic advantages and efficiencies have been achieved. Innovators such as Qualcomm, InterDigital, and Ericsson invent and develop technologies like 5G, and they license their standard essential patents to manufacturers of smartphones and other mobile devices.
In the past decade, these U.S. and European innovators were challenged in courts and by antitrust agencies, who sought to force licensing of their standard essential patents at rock-bottom prices. China notoriously used both its courts and antitrust laws to coerce lower standard essential patent royalties to support its own domestic smartphone manufacturing companies, such as HTC and Huawei.
Apple is the only significant Western company that makes mobile devices. Some 81% of mobile devices are made by Asian firms; 58% are based in China. In 2021, the United States and Europe combined received $265 billion in royalty payments from third countries while China received only $18 billion, an overwhelming confirmation of Western technological leadership in mobile telecommunications.
Western courts respect due process, follow rules of evidence, and are committed to the norms of the rule of law, and thus the smartphone manufacturers and antitrust enforcers lost when they baldly asserted that owners of standard essential patents allegedly charged high prices—the royalties the owners of those patents receive through their license agreements with smartphone makers. Courts in the U.S. and in Europe consistently rejected such allegations.
Experts at Stanford and Berkeley, for example, found that, in addition to widespread availability of licensing agreements and relatively low royalty rates (2% to 5%) for standard essential patents, “SEP-reliant industries have the fastest quality-adjusted price declines in the U.S. economy.”
After repeatedly losing in the courts, smartphone manufacturers, app developers, and the automotive industry turned to lobbying European regulators to take action instead. The Internal Markets, Industry, Entrepreneurship & SMEs [small and medium-sized enterprises] division of the European Commission proved more receptive to their rhetoric.
The new regulatory regime, as implemented by the EU Intellectual Property Office, will directly regulate significant aspects of licensing of standard essential patents. If adopted as proposed this week, this massive new regulatory regime over telecommunications technologies will require registration of all standard essential patents with the EU Intellectual Property Office. That office will determine whether standard essential patents are truly “essential” to a standardized technology; it will set by regulatory fiat the royalties those patent owners may receive in their licenses; and it will impose mandatory (albeit nonbinding) arbitration of any legal disputes as a legal requirement before any lawsuits are filed.
If innovators do not register their standard essential patents, they are prohibited from licensing or litigating on behalf of their rights.
The cumulative economic impact of the new EU regulatory regime, which largely ignored normal European Commission procedures for new rulemaking, will harm the innovative firms in the U.S. and in Europe, such as Qualcomm, Interdigital, Nokia, and Ericsson. These companies invest up to 20% of their total revenues on research and development of new wireless technologies.
The licensing of their standard essential patents is protected by the law of patents and contracts, as applied by Western courts following the rule of law. The substantial body of evidence-based policymaking and law has created a settled set of rules for the licensing of those patents on “fair, reasonable, and nondiscriminatory” terms.
The technologies represented by their portfolios of thousands of patents are adopted by national and international standards-development organizations, private organizations composed of industry experts who reach a consensus on the best technologies to serve as standardized platforms.
The unprecedented success of the mobile revolution is a testament to these market-based institutions and the collaboration facilitated by reliable and effective patents and contracts. As the mobile revolution expands 6G, space-based systems, the Internet of Things, and self-driving cars, the value of market-based standard essential patents will only grow.
Shifting the balance of technological and economic capabilities away from research-based innovators in the U.S. and Europe to China is a result only a self-aggrandizing regulatory superpower could value.
The U.S. has effectively made the case of the national security and human rights dangers of the spread of Chinese telecommunications systems, an explicit geopolitical goal of the Chinese Communist Party.
If the EU adopts the new regulatory regime it released on Thursday, this will undo the success of this important effort by undermining the technological innovators in the West—the source of our economic prosperity and of the Western values of collaboration and free markets that are instilled in the basic infrastructure of the mobile revolution.
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