🎙️ Voice is AI-generated. Inconsistencies may occur.
The European Union is planning to establish a court to determine licensing fees on perhaps the West's most important commercial technology. The proposed plan, leaked to Reuters in late March, has one big beneficiary: China.
The EU proposal would give the European Intellectual Office (EUIPO) the power to set royalties for standard-essential patents or SEPs, arguably America's most valuable intellectual property rights. These patents have historically safeguarded American economic leadership, especially in 5G communications. And now, the EU proposes to take control of them.
The proposal would allow EUIPO to determine whether royalties are owed on patents and to set royalty rates. The proposal would also require companies holding SEPs to file their patents in a new registry before they can charge royalties or take court action in the EU. The leaked EU policy document justifies the new procedure on the grounds that it would "simplify and speed up negotiations."
In general, holders of SEPs voluntarily agree to license their patents according to FRAND—fair, reasonable, and nondiscriminatory—terms. Of course, SEP holders—America's Qualcomm, Finland's Nokia, and Sweden's Ericsson in the telecommunications area—and users often disagree on what constitutes FRAND terms.
"This proposal is a head-scratcher," Brian Pomper, executive director of the Washington, D.C.-based Innovation Alliance, told me. "What problems are they trying to solve in Brussels? What harm are they seeing? There are about twice as many mobile devices on Planet Earth as there are people. Where is the market distortion that justifies such an intrusion into the market?"
The dispute is more than just about what implementers will pay innovators. Standards are a hotly contested battleground between the U.S. and China. China's Huawei Technologies hopes to set the world's standards for 5G, which makes possible the much-discussed "Internet of Things" that will connect just about everybody and every device everywhere.
Of course, Huawei, which made headlines this month with the release of its groundbreaking Mate 60 Pro smartphone, does not have to worry about receiving royalties to support its research and development. At the end of 2019, the Wall Street Journal reported that Beijing had pumped in as much as $75 billion into the company through tax breaks, cheap financing, and other means.
Huawei is still receiving subsidies in various forms, but perhaps more importantly, for decades Beijing has made its government Huawei's sales force and protected the company from consequences for stealing intellectual property—most notably that of America's Cisco Systems.
On the other hand, the American company Qualcomm, the world's 5G-standards champion, has to rely almost entirely on its own funds to support critical research and development efforts. The San Diego-based company will be discouraged from making long-horizon, high-risk bets if European bureaucrats get to decide what patent users will pay—or don't pay—in fees.
That's why Europe's moves to reduce royalty flows undermines America's ability to compete with China.
China has many reasons to love the EU proposal. For one thing, the plan undercuts the EU's case against China at the World Trade Organization, brought in February 2022. Brussels contends—correctly—that China had infringed the right of SEP holders to negotiate FRAND terms free of "measures that restrict, or seek to restrict, the exercise of that right." The EU's leaked proposal, of course, effectively takes away that same right by establishing a rate-setting court.
The EU proposal also emboldened Beijing to propose its own top-down, government-mandated approach to setting royalties. On June 30, China's State Administration for Market Regulation issued a draft guideline interpreting the country's Anti-Monopoly Law with regard to SEP royalty rates.
"Beijing picked up on the European proposal and now sees a big green light to set up a patent royalty rate-setting body through new Europe-type regulation," David Kappos, partner of law firm Cravath, Swaine & Moore and a former undersecretary of Commerce for Intellectual Property told me. "This can't possibly be helpful to European or U.S. interests."
So why is the EU proposing a mechanism that undercuts European telecom companies? "This leaked proposal reminds us of Brussels's penchant for regulation," Pomper said.
There is also speculation that German car companies, big users of telecommunications tech, are more important to the EU bureaucracy than the Scandinavian giants Nokia and Ericsson. Moreover, some believe those car companies are pushing the EU plan because they know China would like it and they want to curry Beijing's favor.
"Why would Europe undermine the one area of 5G where we still have a tenuous lead over China?" Pomper asks. "Europe's proposal strengthens Beijing's position in the 5G race. There is a lot of concern in Washington about a world where the telecommunications backbone is built on Chinese technology."
It's a terrible idea for Europe to help China gain control of global telecommunications at a moment when just about every device will be connected to one worldwide network. Let's dustbin this proposal—before it's too late.
Gordon G. Chang is the author of The Coming Collapse of China. Follow him on X, formerly Twitter, @GordonGChang.
The views expressed in this article are the writer's own.
