Introduction
According to a report[3] by India Brand Equity Foundation, the technology market in India has potential for tremendous growth, considering that it is growing currently at the rate of 30% annually. While its competitiveness in providing sourcing, services remains India’s unique selling point, accounting for its market share of 55-60% in the global sourcing services business, it is rapidly becoming a hub as several global IT firms have set up innovation centers in India.
A major thrust behind India’s rise in the technological market has been through the ‘Make in India’ policy, which has pushed for developing India’s manufacturing capabilities in order to increase employment. Since automation poses less threat to jobs in electronics market, it has been a major focus of the Make in India policy[4]. Even prior to that, India’s technological market was fiercely competitive, as evident by the telecom sector.
With the e-commerce revolution, the communication technology and the relevant interoperability requirements have become even more essential to compete in the markets. This is where the monopoly provided by intellectual property comes in conflict with competition policies that enhance efficiency of the market and promote consumer welfare.
Standard Essential Patents (hereinafter, SEPs) and their conflict with competition laws is just one facet of the interface between IP and Competition laws, however, due to the ubiquitous nature of technology, it is an important facet. Standard Essential Patents are patents over technology which is essential for complying with a particular standard, such as 2G, or 3G[5]. Such standards are generally set by standard setting organizations, with the aim of ensuring interoperability, dealt with in more details in this project
This project aims to deal with the issues that arise due to the delicate balance of power between technology developers and technology implementers which has been created by countering the monopoly of SEPs by Fair, Reasonable, and Non-Discriminatory terms of licensing commitments (hereinafter, FRAND commitments), and in particular, how the jurisprudence has evolved in India.
Standard Essential Patents and Standard Setting Organisations
SEPs are patents that are essential for the performance of a specific industry standard. It means that for the production of various electronic gadgets such as mobile phone, tablets etc., these manufacturers must use technologies enclosed by one or more SEPs. Standards are technical or specific requirements which aim to provide a general scheme for a product or process
However, standards are commonly set by Standard Setting Organization (SSOs) such as the European Telecommunications Standards Institute (ETSI) or the International Telecommunication Union (ITU). These SSOs identify certain technologies as “essential” that must be part of a product. All of the manufacturers who bring their products to the market are anticipated to meet those essential requirements with respect to their product market. These standardized technologies are often protected by patents and patents that protect technology that is essential to a standard are named “Standard Essential Patent (SEP)”. Almost all smartphones or tablets we use today are protected by one or more SEPs.
Non-standard patents (non-SEPs) can be bypassed or invented to avoid violations. An example of a non-SEP would be the “Slide to Unlock” technology used in the older iPhone models. Companies were able to invent this special feature in contrast to the standardized technologies, where a specific feature becomes indispensable for manufacturers.
Indian Perspective- The SEP concept developed in India when in 2011 Ericson questioned the import of phones from Kingtech Electronics (India)[6], as it claimed that the phones violated several of their SEPs in AMR’s Adaptive Multi-Rate (Codec) technology. This was the starting point for the SEP dispute in India. The Indian Patent Act of 1970 contains no special provisions for SEP. In addition, the law does not specify any specific criteria or conditions that must be met when licensing a patented technology.
In India, SSOs such as the Telecom Standards Development Society of India (TSDSI) and the Telecom Engineering Center (TEC) play a significant role in the development of standards for telecommunications services, equipment and interoperability amongst them. There is also a private SSO committed to the expansion of telecom standards apposite for Indian conditions known as the Development Organization of Standards for Telecommunications in India (DOSTI).
Abuse of Dominance by SEP Holders
Patent owners abuse market power most often through several practices, like refusal of licenses, excessive prices, unfair or discriminatory licenses, anti-competitive use of SEPs; Abuse of market dominance and delay in the entry of competitors into the market through abuse of the patent/regulatory process (supplementary protection certificates (SPCs)), excessive pricing and the conclusion of anti-competitive agreements (patent settlement agreements).
The SEPs grants their holders extensive market powers, and thus, the possibility to abuse it by implementing standards to eliminate competitors or excerpt excessive royalty fees, cross-license fees to which the licensee would not otherwise agree to. Following are the ways by which the SEP holders can abuse their dominant position in the market:
Patent hold up– When a patent is accepted as a standard and reaches commercial acceptance, it is “locked-in”. It is required by a manufacturer to use the same otherwise its product would be considered incompatible before the products of other companies and therefore unsaleable. Such a condition reinforces the bargaining power of the SEP holder, as the licensee has no replacements to the same technology. Patent holdup occur when Holder of a SEP exploits a locked-in patent by attempting to impose inappropriate license fees. Unless the SSO requires the compliance with FRAND licenses, the SEP holder may use the locked situation to obtain notably greater royalties than before the patent was introduced as a standard. However, such a situation may also arise even after the binding of SEPs to FRAND due to the imprecise disposition of FRAND.The Competition Commission of India (CCI) observed in case of Micromax[7] and Intex,[8]that;“hold-up can subvert the competitive process of choosing among technologies and undermine the integrity of standard-setting activities. Ultimately, the high costs of such patents get transferred to the final consumers.”
In such kinds of cases, the licensor also binds the licensee by NDA i.e. non- disclosure agreement with respect to the conditions of the license, which prevents the other licensees from obtaining information of the royalties levied on such prior licenses. This hampers the manner of license negotiations amid the parties and therefore heads to foremost competition concerns in FRAND proceedings.
Royalty Stacking- It is the condition in which royalties are superimposed, resulting in a bigger aggregate license fee. This occurs when distinct SEP holders charge similar royalties for diverse components of the same multi-component product, resulting in exceeding the royalties more than the total product price. A perfect example of this situation is the Micromax case[9] in which the Competition commission of India raised such concerns as in the abovementioned case the Delhi High Court ordered the Micromax to compensate according to the value of the phone, rather than the value of the technology worked in the phone. CCI stated that “For the use of GSM chip in a phone, Rs. 100 would cost Rs. 1.25, but if that GSM chip is used in a Rs. 1000 phone, it would be Rs. 12.5 The cost of a smartphone is due to various other software / technical devices and applications provided by the manufacturer / licensee for which it has to pay royalties / fees to other patent holders / patent developers. The fee for two different license fees per telephone booth for the Using the same technology is prima facie discriminatory and therefore reflects excessive pricing over expensive phones.”· Accessibility of Injunctive relief- A temporary injunction turns out to be a powerful weapon through which a SEP holder enforces its royalties, as in these kinds of cases, an SEP implementer considers the adoption of an inappropriate license fee to be less risky than mitigating a breach of contract. The usage of injunctive relief in contrast to willing licensees is prima facie a breach of the FRAND agreement, as the FRAND royalties are in themselves an equitable remuneration for the SEP. Such a measure is also regarded as to be abuse of a dominant position and thus a breach of competition law. An injunction should therefore be invoked only if the licensee is unwilling to pay the court-ordered FRAND royalty or if pecuniary compensation is inappropriate the main reason behind injunctive relief that if it is not granted then the party may suffer an irreparable loss. The Indian Injunctions laws are based upon the principles of equity. Therefore, under this, the legal remedy available to the SEP holder will be in the form of royalties. The only point to be noted is whether its quantum is adequate or not. In addition, an SEP owner who wants to set up an SSO inevitably sets the course for licensing the technology under FRAND terms. In such type of case, even if the license fee is less, an injunction should be issued only if the SEP holder has suffered irreversible damage.
Fair, Reasonable, and Non-Discriminatory (FRAND) licensing policy
The technologies are standardized to benefit consumers. But sometimes the absolute rights conferred by patents can defeat the entire goal of rendering standards accessible to the public. For the purpose of striking a balance, the SSOs have made the licensing of SEP owners compulsory on terms that are “fair, reasonable and non-discriminatory” (hereinafter “FRAND”). This helps the manufacturers to negotiate in a fair scenario, patent holders can receive adequate rewards for their research, investment and development, as well as for consumers it makes available the standardized technology at lower prices.
In order to affcet the licensing of SEPs, the SSOs have recognized such Licensing policy for patentees which reduce the risk of high licensing fees from SEP owners, especially when technology contributors are participants in the SSO process.
FRAND licensing framework is designed to ensure that owners of SEPs does not uses the menace of patent refusal or charge extremely high and unreasonable royalty (i.e. the royalty rate must be reasonable) or excludes an opponent from the industry by denying licensing (i.e. licensing need not be discriminatory) i.e. reducing the competition or manipulates the essential nature of the SEPs to extract fees for others non-SEPs or necessitate cross-licensing (i.e. the license terms must be fair).
There is as such no law or regulation that imposes a FRAND obligation. Rather they are made by SSOs (International Telecommunication Union and European Telecommunications Standard Institute) in response to those SSO members who claimed against other SSO members who exercised their SEPs.
The first groundbreaking case in FRAND litigation was the 2009 Orange Book [10] ruling by the Federal Court of Justice, which states that the asserted infringer can only efficaciously appeal to a competition law defense if he necessarily offers a license agreement with the SEP owner.
Subsequently, in Motorola case[11], the European Commission found that Motorola had abused its dominant position in EU competition law by requesting and effecting an injunction against Apple for infringing a FRAND-encumbered SEP. The European Commission stated that the SEP holder, after granting the patent for FRAND conditions, waives the right to institute an injunctive relief against a willing licensee under FRAND conditions.
In the Samsung case[12], the EU commission observed that Samsung took advantage od its dominant position by demanding an injunctive relief against Apple for use of its FRAND based SEPs.
Further, the European Union Court of Justice in a ruling in the case of Huawei v. ZTE[13] stated “specific requirements” that the SEP holder must meet in order to be competent to apply for an injunction devoid of abuse of their dominant position.
On contrary, in US, the holder of a SEP if proves that the infringement of the patent causes irretrievable damage to the SEP holder and the damage is insufficient to offset the losses of the SEP holders and if the balance the desired amid them and the alleged infringer justifies an injunction then the SEP holder may sue the alleged infringer for injunctive relief.
The two differences between EU and US legal process are that in EU any guidelines for the purpose of determining the amount of royalties are not given by the courts as well the EU commission may direct the SEP implementer to provide security preceding the litigation, whereas, in US either the SEP holder or the alleged infringer may request the court for fixation of the royalty rate and there no such advance security from the SEP implementers is required.
In India, unlike US and EU, the fair, reasonable, and non-discriminatory (FRAND) licensing terms for standard-essential patents (SEPs) is at a fairly emerging phase as the Courts and the antitrust authority (Competition Commission of India (CCI)) in India have just started to decide such FRAND licensing proceedings.
In India, the dispute between Ericsson and Kingtech[14], filed in 2011 was the first instance in the context of FRAND terms for SEPs. In March 2013, another case Micromax v. Ericsson[15], was filed in which Ericsson claimed that Micromax had violated eight of its SEPs, then in November 2012, Micromax agreed to pay the royalty at the rates proposed by Ericsson.
In April 2014, another case was filed between Ericsson v. Intex,[16] where Ericsson sued Intex for infringing its eight SEPs. Intex objected to the practices of Ericsson of charging royalties based on the retail value of the mobile headset as opposed to the return on the baseband processor/chip set selling price. The Delhi H.C., however, counted on the Ericsson v. Micromax [17] order and used the same license fees to calculate the Intex FRAND license fee.
In December 2014, another case was filed between Ericsson v. Xiaomi[18]. Xiaomi argued that the chipsets using technology patented by Ericsson’s had been obtained from Qualcomm, which had licensed Ericsson’s patented technology. Therefore, the Delhi H.C. permitted Xiaomi to import and sell only those devices that consisted the chipsets sold by Qualcomm to Xiaomi.
However, the Indian manufacturers (Micromax, iBall and Intex) have filed a complaint before the Competition Commission of India (CCI) opposing the Ericsson. The CCI made similar decisions in all three complaints and found that Ericsson abused its overriding position and forced the other parties to engage in NDAs and inflate excessive royalties.
However, there are still few loopholes in the application of the FRAND Licensing agreements such as the cases of Royalty base in which the whole concept of FRAND is rejected as the calculation of a license fee for the complete product carries a significant risk that the patentee will be unsuitably compensated for non-infringing components of this product. The appropriateness of a license fee (royalty) depends on the accurate assortment of the royalty base. SEP holders tend to charge the royalty on the net sales price of the ultimate product, not just the component that includes the infringed patent. This means that if SEP brought in use even in a single component of a multi-component product, the implementer is obliged to pay the royalties for those components that do not contain the SEP. In such cases, the entire conception of FRAND agreement is reduced. The Federal Circuit Court of Appeals, in Virnetx Inc. v. Cisco Systems[19] ruled that the royalty base must be meticulously related to the claimed invention rather than relating it to the overall price of the product
Conclusion
The jurisprudence regarding competition issues involved in standard essential patents is evolving in India, as opposed to being already developed in US and EU, and as such, the Supreme Court hasn’t yet had to deal with it. While the Delhi High Court has dealt with most of the cases relating to infringement of standard essential patents, there is an uneasy interface with the Competition Commission of India which relates whether granting of injunction would constitute abuse of dominance.
This issue has not been properly discussed in India, as opposed to the case law in EU and US, however, the court in Koniklijke Phillips Electronics v Rajesh Bansal[20], did refuse to discuss the question of whether patent pooling constitutes abuse of dominance by holding that in light of the existence of Competition Commission, it does not have the jurisdiction to address the issue. Clarification on the overlapping jurisdictions through legislative means would help in clearing the legal hurdles faced by market players, and in the long run, would help develop India as a hub for technological innovation.
Currently, India lacks laws and regulations that specifically deal with SEPs, or define FRAND commitments. While some of this ambiguity can be addressed by the courts through adoption of jurisprudence developed in foreign jurisdictions, this course of action would require that the question arises before the court. This implies that the current ambiguity must persist until resolved through case law. On the other hand, if this ambiguity is removed through even a policy document by the Government of India, the resulting certainty would enable increase of investment in India’s technological market.
Currently, the understanding of FRAND terms of licensing in India is at a nascent stage, and in quiet a few cases[21], the court has gone ahead and set its own terms of what constitutes FRAND licensing instead of letting the parties arrive at it through negotiations. A standard policy of determining what would constitute FRAND terms would guide the courts, and reassure the patent holders that their innovations would be treated fairly.
[3] IT & ITeS Industry in India, India Brand Equity Foundation, available at: https://www.ibef.org/industry/information-technology-india.aspx [as accessed on 13th October, 2018]
[4] Arpan Banerjee, ‘Background Note: Standard Essential Patents, Innovation and Competition: Challenges in
India’, 7 IP Theory 1 (2017
[5] Ericsson v Lava International, (2016) SCC Online Del 3716
[6] W.P.(C) 6878/2011 and C.M. No. 15811/2011
[7] Micromax v Ericsson, Competition Commission of India, Case No. 50/2013.
[8] Intex v Ericsson, Competition Commission of India, Case No. 76/2013.
[9] Id. at 5.
[10] Orange Book Standard Case, (2009), Az. KZR 39/06, Federal Court of Justice, Germany.
[11] Motorola Enforcement of GPRS Standard Essential Patents, (2014). Case no.-AT.39985, available at: http://ec.europa.eu/competition/antitrust/cases/dec_docs/39985/39985_928_16.pdf [as accessed on 14th Oct. 2018].
[12] Samsung Enforcement of UMTS Standard Essential Patents, (2014), Case no. AT.39939, available at: http://ec.europa.eu/competition/antitrust/cases/dec_docs/39939/39939_1501_5.pdf [as accessed on 14th Oct. 2018].
[13] (2015), Case no. C-170/13, available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62013CA0170&from=EN [as accessed on 14th Oct. 2018]
[14] Id. at 4.
[15] Id. at 5.
[16] Id. at 6.
[17] (2017) SCC Online Del 12702.
[18] (2016) SCC Online Del 2404.
[19] 767 F.3d 1308, (2014).
[20] (2018) 251 DLT 602
[21] See; Ashish Bharadwaj; Dipinn Verma,’ Failure Is Not Falling down but Refusing to Get up: Implication of Huawei/ZTE Framework (CJEU 2015) in Europe’, 17 J. Marshall Rev. Intell. Prop. L. 326 (2018).
Note: This article has been published in Legal Desire International Journal of Law, 19th Edition (ISSN:2347-3525)
