[Guest Post] Sisvel v Xiaomi, SEPs and the importance of declarations of essentiality

Katfriends Enrico Bonadio (City, University of London) and Luke McDonagh (London School of Economics) kindly provided the following post on a recent decision by the District Court of the Hague in the ongoing patent battle between Sisvel and Xiaomi [here, prior Katposts on the preliminary injunction proceedings here and here]. Like the prior decisions, the most recent instalment raises interesting issues of law--in this case, what to do about patents that are declared as essential to a given standard but later turn out not to be infringed by devices implementing that standard. Over to Enrico and Luke:

The existence of Standard Essential Patents (SEPs) – and associated litigation - has potentially disruptive consequences for the manufacture, marketing and distribution of complex products that include many patented standards, e.g. ICT products such as smart-phones incorporating a camera, a video, a web browser, wireless, text messages, etc, as well as an increasing array of IoT ‘networked’ products such as wearable devices and appliances for ‘smart homes’. By enforcing their patents, owners of SEPs could, if they wished, use the patent enforcement system to ‘hold up’ or prevent competitors from launching rival products that use the same standards. This raises serious concerns over competition in the marketplace and the need to maintain interoperability to ensure the IoT industry can develop. Therefore, acute tension exists between SEPs (which offer their owners R&D incentives/rewards in the form of monopolistic rights) and standards (which allow for widespread and collective use). This is particularly the case in the ICT and IoT fields, which have recently witnessed an increase in the number of granted patents, and related disputes.

Sisvel v Xiaomi

One such dispute has recently taken place in the Netherlands, i.e. Sisvel v Xiaomi, with Sisvel receiving a blow as the District Court of The Hague found in early November that one of its patents is non-essential, thus rejecting its patent infringement action against Xiaomi (case ID: ECLI:NL:RBDHA:2020:11108). This litigation is part of a broader pan-European battle between the two companies. Last September, for example, Sisvel started a patent lawsuit against Xiaomi before the Regional Court of Munich (case ID: 7 O 1154/20), as it claims that the mobile phones and tablets produced by the Chinese company infringes its two UMTS patents. Sisvel experienced another defeat against Xiaomi in the Netherlands in March 2020, when the Court of Appeal of The Hague denied a SEP preliminary injunction against the Chinese company (decision of 17 March 2020, case ID: ECLI:NL:GHDHA:2020:711).

Sisvel is an IP management company – sometimes described by scholars as a ‘non-practising entity’ or ‘patent assertion entity’ - that grew out of an Italian joint venture, but which is now a multi-national corporation curating and licensing a huge portfolio of patents. Within the Sisvel portfolio are several patents that have been declared essential to ICT standards vital for 4G such as Long-Term Evolution (LTE) and Global System for Mobile Communications (GSM). In line with the ETSI Intellectual Property Rights policy, Sisvel has committed to grant licences for such SEPs on ‘fair, reasonable and non-discriminatory’ (FRAND) terms.

Xiaomi is a Chinese company that manufactures smart phones and other devices. It has a significant global market share and recently began to expand its provision of goods and services in The Netherlands. In order for its devices to comply with the LTE and GSM standards Xiaomi must use the patented technology owned by Sisvel.

The recent proceedings at the District Court of The Hague have focused on Sisvel’s European Patent EP 2 139 272, which protects a system for attaching mobile equipment to a wireless communication network. The original owner of this patent was Nokia, which had submitted the patent as standard essential in the LTE standard for mobile communications. The patent was subsequently transferred to Sisvel together with a portfolio of over 450 patents. Xiaomi had argued in the proceedings that the LTE standard does not cover all elements of Sisvel’s patent claims – which means that such patent is non-essential and accordingly no infringement occurs. The District Court in the Hague sided with Xiaomi. 

Looking for interoperability

The importance of objective declarations of essentiality

This ruling raises once again the importance of relying on objective declarations of essentiality, and in general the lack of transparency in the context of SEP licensing frameworks managed by Standard-Setting Organisations (SSOs). Accessing correct information on the scale of exposure to SEPs is extremely important to the users of standards, especially small and medium-sized enterprises (SMEs) that have little experience of licensing practices and enter the relevant markets looking for connectivity – yet this information is not always easy to access. This was also highlighted by the European Commission’s Communication of 29 November 2017, which notes that ‘... currently the only information on SEPs accessible to users can be found in declaration databases maintained by SSOs which may lack transparency’ – a scenario that however leaves companies, particularly SMEs and start-ups, in a difficult situation with respect to licensing negotiations and risk management. Moreover, simply relying on declarations made on the basis of self-assessment carried out by SEP holders is not sufficient; indeed, such declarations may be flawed as they are not scrutinised by independent entities.

Therefore, as also indirectly confirmed by the District Court of the Hague’s decision in Sisvel v Xiaomi, the need for a higher degree of scrutiny on essentiality claims is crucially important. SEP-owners’ self-declarations that their technology is ‘standard’ is sub-optimal as an efficient mechanism. While the declaration process is important, to reassure the SSO and third parties that the SEP technology will be accessible and licensed under FRAND terms/conditions, the fact that the declarations are based on self-assessment by the patent owner, and are not scrutinised regarding essentiality, leaves open the possibility of mistake, and even deliberate over-broad claiming of a standard. As noted by the Commission in its 2017 Communication, several studies on important technologies have revealed that, when strictly assessed, only between 10% and 50% of declared patent are really essential.

Conclusion

This uncertainty leaves new entrants to the IoT market in a weak and uncertain position. In licensing negotiations, the de facto presumption of essentiality gives the patent-holder an advantage and places a significant burden on the licensee to check essentiality. A more reliable system involving more scrutiny of essentiality declarations is therefore needed. And accordingly the proposal to subject the essentiality claims to a review by an independent entity with technical capabilities (mentioned in the 2017 Commission’s Communication) seems sensible. The cost of such assessment – we believe - should be equally split between the SEP-owner and the implementer, with a percentage of the overall cost being also borne by the relevant SSO.

It will also be interesting to read a report which will be published in a few weeks. More precisely, in 2018 the European Commission’s Joint Research Centre (JRC) published a call for tenders on “pilot project for essentiality checks of Standard Essential Patents (SEPs)” to assess the feasibility of a system that ensures better essentiality scrutiny for SEPs. This includes both (a) the technical feasibility, (b) how better scrutiny could be carried out and institutional feasibility, (c) which institutions could set-up and implement a system of better scrutiny. The analysis is based on a set of concrete tests of SEPs in order to:

• (i) identify best practices on performing essentiality checks;

• (ii) find out the best cost-effective manner;

• (iii) consider policy and legal implications for a scrutiny mechanism for SEPs;

• (iv) identify possible benefits and incentives for the players to pass such a scrutiny.

The pilot project has eventually been managed by a consortium including Eindhoven University of Technology (TU/e), Technical University of Munich (TUM), Dialogic Innovation & Interaction (an independent research and consultancy firm, which develops and implement innovative methods for data collection), and several independent experts. The project was started in January 2019 and concluded a few months ago - and the final report will be published before the end of 2020.