Devaluing SEPs: Hold-Up Bias and Side Effects of the European Draft Regulation


The EU Commission’s recent proposal for a regulation on standard essential patents (SEPs) envisages a radical overhaul of the current framework, introducing an essentiality check system, a conciliation process for fair, reasonable and non-discriminatory (FRAND) terms, and a mechanism to determine a reasonable aggregate royalty. However, both the economic justification and the approach endorsed by the proposal are questionable. Indeed, on one hand, there is no evidence of a market failure to justify the initiative and, in addition, the provisions appear to be one-sided, apparently being aimed only at addressing a hold-up problem and pursuing a value-distribution goal from SEP owners to implementers. Accordingly, this paper views the proposal critically, arguing that it departs from the well-established meaning and rationale of FRAND commitments by disregarding hold-out problems, and it jeopardises the suitability of SEPs to serve as valuable financial collateral, thereby endangering future investments in innovation.