IP Europe The Alliance of European Organisations on Innovation and Industrial Property

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1 H.E. Mr Vice-President Andrus ANSIP H.E. Mr Vice-President Jyrki KATAINEN H.E. Mrs Commissioner Elżbieta BIEŃKOWSKA H.E. Mrs Commissioner Margrethe VESTAGER H.E. Mrs Commissioner Cecilia MALMSTRÖM H.E. Mr Commissioner Carlos MOEDAS Cc: H.E. Mrs Commissioner (designated) Mariya GABRIEL Members of the European Commission Avenue de la Loi, Brussels Brussels, May 17, 2017 By mail & electronically Dear Vice-Presidents Ansip and Katainen, Dear Commissioners, We are writing in relation to the Roadmap on Standard Essential Patents (SEPs) for a European digitalised economy, published on April 10, and the forthcoming Communication that will inform the policy of the Commission on this matter. The development of core standardised technologies protected by the patent system (SEPs) is a vital element of the European system of open standards and innovation sharing. This system has yielded considerable benefits worldwide by creating the foundations for mobile telephony and Internet services. It has also underpinned the success of European R&D intensive companies and institutes. Thanks to the ingenuity of our European inventors and engineers, the global smartphone industry generates revenues in excess of USD $500 billion every year, in exchange for paying a tiny fraction thereof in licensing fees. Currently, under this open innovation system, research-intensive businesses in the telecommunications sector give multinational manufacturers access to their inventions based on the understanding that Fair, Reasonable and Non-Discriminatory (FRAND) licensing terms will be negotiated in good faith. The focus has been on ensuring fast user access to the best standardised technologies, rather than requiring a broad ecosystem of manufacturers and innovators to negotiate a complex web of licensing contracts in advance. Page 1 of 5 Transparency Register:

2 Ensuring a regulatory framework that encourages investment Open standards and access to SEPs are fundamental to the long-term competitiveness of Europe s technology sector and our ability to realise the great opportunities of 5G, the Internet of Things (IoT), Industry 4.0 and Connected Car technologies. However, many of the 5G and IoT standards do not yet exist, which means that if the EU wants to lead in this sector it must maintain a regulatory framework that encourages investment in core technologies that generate the best, most reliable and highperforming technical solutions. Considering what is at stake for European innovators and the European economy in general, we are deeply concerned that in the Roadmap on Standard Essential Patents the Commission does not capture the legitimate concerns of European R&D-intensive companies and instead seems set to proceed with the forthcoming Communication without a thorough, comprehensive, impact assessment having been conducted. Supporting European SME growth Such an impact assessment should include an analysis of recent developments and of possible future policy changes on our small and medium sized enterprises (SMEs) particularly those that contribute technology to standards. This would, of course, be consistent with the oft-repeated EU objective of supporting the growth of this crucially important segment of our industrial base. Without such an assessment, this Communication could be detrimental to European innovators, including European SMEs. They are already exposed to the kind of free-riding on their patented inventions that we have witnessed from certain major non-european companies in recent years. The Communication should not have the effect of encouraging more free-riding. We would like to receive assurances that the EU will not give in to the heavy lobbying pressure, being applied by USbased companies in Brussels and Member State capitals, to export to Europe the coup d état already undertaken in the US at the IEEE 1. This is already undermining the licensing environment not only in the US but also in Asia, and has created significant uncertainty that is having an impact on European R&D investments in 5G and IoT related technologies. Ensuring flexibility In addition, the Communication should not introduce an overly formalistic approach that is not workable and contrary to decades of proven best practice. The current system has enabled the unprecedented success of the global smartphone industry. Changes that will create significant 1 New empirical evidence reveals 83% decline in essential patents contributions to the IEEE Page 2 of 5 Transparency Register:

3 transaction costs and legal uncertainty will discourage investment and innovation and should not be undertaken in the absence of a comprehensive impact assessment. For example, patent owners should not be required to licence at a particular point, or multiple points, in the supply chain (in a poorly disguised attempt to lower royalties). Similarly, implementers should not be forced to take a licence if the existing licensing regime provides them with access to the technology. A fair approach to pricing Similarly, it would be absurd to impose the one size fits all approach to pricing advocated by some. This approach is contrary to established law which universally recognises that patent revenues are priced based upon the value they bring to a product. One size fits all pricing would undermine open standardisation. For example, 5G chips will provide a different magnitude of value to driverless cars, where they will be responsible for critical safety issues, than to vending machines where they will be used to request restocking. These very different applications are not comparable in terms of value. If the price was based on the value provided to driverless cars, that price would make the patent unaffordable for vending machines. Conversely, if the price was based upon the value provided to vending machines, nobody would have an incentive to invest in developing the technology. If innovators are to continue to innovate, the true value of developing a technology and of its application must be reflected in its price. The threat to European open standards In considering the need for a thorough impact assessment, it is important to be very clear about the threat that the European system of open standards is facing. This threat, which comes from a handful of powerful Silicon Valley companies, is two-fold. The immediate threat is the financial impact of their ongoing strategy of patent infringingement but in the longer term the apparent objective is to dismantle the entire system of open standards and innovation sharing. Remove the incentive to standardise, and contributors to standardisation activity, including SMEs, universities and research institutes, will pull out and the system will gradually collapse. The vociferous lobbying effort 2 undertaken in Brussels by these companies, and some of their front organisations - purporting to represent European SMEs - speaks volumes. Over the last few years, some of the world s largest and most profitable multinational companies have benefited from the commitments enabling them to include new European innovations in their products, but then refuse to license these key enabling technologies. The courts are also being used to apply additional pressure on European patent holders to accept ruinously low financial offers. Most European innovators, including SMEs, simply do not have the financial resources or international reach to even consider taking Silicon Valley or Asian manufacturing giants to court in one, let alone 2 Silicon Valley tech lobbyists swarm Brussels (Politico) Page 3 of 5 Transparency Register:

4 multiple jurisdictions. In one unfortunately typical David Vs. Goliath patent hold-out case, a French SME was forced to spend 24 million to enforce its rights - which was borrowed from a sovereign investment fund. In this instance, the company managed to stay in business, but many have been driven into bankruptcy by patent abusers, or simply cannot afford access to justice. Unless this is urgently addressed, we believe that this abusive behaviour, and the unnecessarily costly and cumbersome legal system that supports it, could lead to the extinction of European technology innovation. This problem is of such importance that it should be addressed in an impact assessment. Our principal and single most pressing request is for the European Commission to adopt supporting measures that ensure fair access to justice for IP-intensive SMEs. Countering abuse in a post-truth environment Critics of FRAND often use the language of George Orwell s 1984 to position themselves as defenders of open innovation, SMEs and creating a level playing field but in today s post-truth landscape what this really means is that they wish to maximise their short-term profits, irrespective of the damage this will cause to European innovators, and to replace the current system of open standards with one based on proprietary technologies and platforms, owned by a handful of gatekeepers. Those gatekeepers would only increase their domination of the multi-trillion digital economy market. Your colleagues in other parts of the Commission are very much aware of the anti-competitive risks. There can only be a level playing field when fundamental legal rights, including international commitments such as the TRIPs Agreement, remain intact and are not undermined by prejudicial fake-facts about the EU legal framework. Contradictory positions Motivated by potential short-term financial gains from marginally lower prices for standardised open technologies developed by third parties, some car manufacturers have been supporting the efforts of this Silicon Valley-led offensive. However, as car manufacturers also recognise that insufficient financial remuneration for SEPs, and the disappearance of open technology standards and platforms, will give the Silicon Valley gatekeepers a stranglehold over proprietary systems, their position is becoming increasingly contradictory. Recognising that destroying innovation sharing will undermine their ability to provide the means to connect cars and to develop sustainable data-driven business models, they are now also forming alliances with SEP holders. The alliance between car manufacturers and the mapping company HERE, and ongoing efforts between European companies, including the 5G Automotive Association and the Automotive-Telecom Alliance managed by ERTICO, provide a clear acknowledgement that they recognise the threat. Page 4 of 5 Transparency Register:

5 Creating a globally competitive Digital Single Market If Europe is genuinely serious about seizing the opportunities of the digital economy and creating a globally competitive Digital Single Market, we should be strengthening not undermining one of our key economic assets: our system of open and innovative standards. In doing so, any policy should foster SME participation in the development of open standards rather than discourage innovation by making it more cumbersome, expensive or likely to require lengthy legal battles, which are simply unaffordable by our European SMEs. Considering the threat, and what is at stake for Europe in terms of innovation and our digital economy agenda, it is vital that the Commission provides clear support for the open standardisation system and bases any potential communication on a thorough assessment of the implications of the proposed changes, with a particular focus on SME participation, their problems, their contribution and the benefits they and we all - reap from open standards. Leading European open standards contributors, including SMEs that are both investors and beneficiaries of open standards and innovation sharing, stand ready to assist you and your services in this critical endeavour. Mogens Peter Carl Executive Chairman IP Europe Alliance IP Europe is an alliance of innovation intensive companies headquartered in the EU. Its members and scientific advisors, including AIRBUS, ERICSSON, FRANCE BREVETS, FRAUNHOFER INSTITUTE, NOKIA and ORANGE are committed to funding, sharing, protecting and promoting European innovation. ABOUT IP EUROPE -- Page 5 of 5 Transparency Register: