Dynamic technological progress is rapidly replacing existing technologies with innovative, revolutionary, new and more efficient ideas. Such progress leads to a competitive marketplace, where innovators and suppliers must constantly re-invent and update existing technology, not only to stimulate progress, but also to maintain market share. While the Competition Law, 2022 aims to stop exploitation of dominant position, Patent Law grants monopoly rights on an invention (with a few exceptions for preventing abuse of said rights). Thus, Intellectual Property Rights and the policy of Antitrust Laws intersect at the point of public interest. This is achieved when a patented technology becomes essential to attain a standard specification, in respect of particular goods. Therefore, the main idea behind the Standard Essential Patents (SEPs) is to re-unite patents, which are intended to be exclusive and private, with standard specifications but are a universal requirement.
The term ‘Standard’ may be defined as ‘a set of technical specifications that seeks to provide a common design for a product or process’. According to the ISO (the International Organization for Standardization) and IEC (the International Electrotechnical Commission) Guide 2:2004 Standardization and related activities General vocabulary, the term “Standard” is defined as a ‘document, established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context’5 . Such standards may be voluntary or mandatory (when enforced by law).
An example of one of the commonly used standard is A4 size for paper sheets. Another example includes a charger of a mobile device. Such examples belong to two major categories of technical standards, including de facto standard and de jure standard. A de facto standard is produced when a particular technology is extensively executed by sellers in the markets and widely accepted by the public due to which the technology attains dominant position in the market, even though the technology may not have been adopted by a Standard Setting Organization (SSO). On the contrary, the de jure standards are set by the Standard Setting Organizations. The Standard Setting Organizations (SSOs) include, but are not limited to, the International Telecommunication Union (ITU), the European Telecommunications Standards Institute (ETSI), and The Institute of Electrical and Electronics Engineers Standard Association (IEEE-SA), etc.
A Standard Essential Patent (SEP) refers to a patent claiming an invention that is utilized to comply with the standard. Such a patent is also required “if the patent only reads onto an optional portion of the standard”. Therefore, it is not feasible to produce standard compliant products without employing technologies covered under one or more Standard Essential Patents (SEPs). In other words, an inventor is required to use certain patented technologies in order to produce a product in compliance with certain set standards. The utilization of such patented technologies require obtaining licenses from the owners of these patent.
Therefore, the SSOs require their members to grant their patent licenses covering the standards set out by the organization to various companies interested in adopting relevant standards for producing standard compliant products10. However, if the members do not grant their licenses to the companies, then the companies will not be able to conform to the requisite standard, and may be charged unreasonable amounts as royalties for a license.
The standard set out by the SSOs include key features that must be met by a device or product to be in compliance with a certain standard. When a device is in compliance with a particular standard, it may be permitted to exhibit a mark, indicating such compliance to the public.
In order to encourage the application of the standard and to prevent extortion under monopoly by SEP patent holders, such patent licenses must be available to the public under FRAND (Fair, Reasonable and Non-Discriminatory) terms. Therefore, the owner of the SEP is legally bound to license its patent to companies/industries on FRAND terms. The FRAND terms ensure that the owners of the SEPs do not misuse their privileged position in the market, acquired from the adoption of an industry standard requiring utilization of their patents, to extort outrageous sums in royalties from entities looking to comply with the standard.
The Standard Setting Organizations (SSOs), also known as, Standard Developing Organizations (SDOs), may be governmental, quasi-governmental, or private organizations. The primary function of the SSO is to develop, co-ordinate and facilitate a standard setting process which involves the participation of various stakeholders. The organizations are involved in developing, amending, re-issuing and interpreting the technical standards that take into consideration the needs of the adopter of the standards. Such standards may be adopted at various levels including worldwide, national and/or regional level. The market players usually develop products that comply with the standards, as non-compliant products end up being a big commercial failure. Therefore, the standards aid in enhancing quality and compatibility of products in the market. Moreover, the standards prevent consumers from fraudulent acts by ensuring safety and quality of the products, safeguarding the trust and confidence of consumers in the products.
In order to reduce likelihood of the patent hold-up, the SSOs adopt an IPR related policy, requiring their members to disclose the patents that may be needed to comply with the standard selected by the organization. Moreover, the SSOs may also require the members to establish universal licensing terms and conditions beforehand. Such terms and conditions may include maximum royalty rate that the members may demand if access to their patented technology becomes mandatory to implement the standard. This helps the SSOs in selecting a standard on the basis of both technical merit as well as the cost of evaluating the intellectual property (IP) required for implementation of the standard.
ESSENTIAL PATENT (SEPs) IN INDIA Indian jurisprudence on FRAND (Fair, Reasonable, and Non-Discriminatory) licensing for SEPs is still at a nascent stage. It appears promising that SEPs may develop gradually in India as the stakeholders have already approached the Competition Commission of India (CCI) and the High Court of Delhi on a number of occasions. In India, a number of SSOs have also come up over a period of time to develop standards in various sectors. Several SSOs have also developed their IPR related policies, requiring patent holders to disclose their patents along with a requirement to oblige to FRAND terms of licensing.
There are various SSOs in India, including the Bureau of Indian Standards (BIS), Telecom Standards Development Society of India (TSDSI), Telecommunication Engineering Center (TEC), Global ICT Standardization Forum for India (GISFI), Development Organization of Standards for Telecommunications in India (DOSTI) and The Institute of Electrical and Electronics Engineers Standard Association (IEEESA). The BIS is a national level SSO in India. The TEC is the only formally recognized body for approving telecom standards, while the TSDSI, GISFI, and DOSTI, are some private SSOs in the ICT sector in India. The IEEESA is an organization within the IEEE that forms global standards across a wide range of industries, such as biomedical and health care, power and energy, telecommunication and home automation, information technology and robotics, information assurance, transportation, nanotechnology, etc.
Overview of proceedings before the Competition Commission of India (CCI)
In 2013, Micromax Informatics Limited filed a complaint with the CCI inter alia claiming that Ericsson had misused its dominant position by forcing extortionate royalties for using its SEPs, thereby breaching the Competition Act, 2002. Micromax alleged that the royalty rates claimed by Ericsson should have been based on the value of the chipset technology in the phone. Micromax further asserted that Ericsson should not arbitrarily evaluate the royalty as a percentage of sales price of the licensed, downstream product (generally, a mobile phone handset). Further, Micromax added that utilizing sales price of the downstream product as the royalty base may result in misuse of the SEPs. Micromax further alleged that Ericsson was demanding extortionate royalties, taking advantage of lack of alternate technology as Ericsson was the only licensor for the SEPs necessarily implemented in 2G and 3G Wireless Telecommunication Standards. The CCI, in its preliminary order on 12th November, 2013, initially defined the pertinent product market as the market for the GSM and CDMA standards, with the relevant geographic market being India. Further, the CCI stated that Ericsson was the largest holder of the SEPs in respect of 2G, 3G and 4G patents utilized for tablets, phones, etc., for which there was no existing alternative to prospective licensees. The CCI concluded that, depending on the strength and large number of Ericsson’s patents, Ericsson holds a dominant position in the market for devices that utilized the GSM or CDMA standards. The CCI further stated that the main purpose of FRAND licensing is to prevent royalty stacking and patent hold-ups. The Commission also observed that patent hold-up impairs the competitive process of selecting a technology, thus threatening the integrity and functionality of the SSOs.
The CCI stated that the royalty rates demanded by Ericsson were exorbitant and discriminatory, considering that the prices were being set as a percentage of the price of the downstream product instead of percentage of the price of the GSM or CDMA chip. The CCI concluded that the royalties claimed by Ericsson had no connection with the patented technology, and therefore were unfair as well as contradictory to the FRAND terms. Since Micromax had established a prima facie case that Ericsson had misused its dominant position by demanding excessive royalties for its SEP portfolio from Micromax, CCI concluded that, those allegations warranted further investigation by the Director General16. Ericsson challenged the order of the CCI before the High Court of Delhi in W.P No. (C) 464/2014.
The Hon’ble Delhi High Court heard the petition on the question of whether there is any conflict between Sections 21 and 21 A of the Competition Act with the Patents Act. After hearing the detailed submissions of both the parties, the Hon’ble Court took a view that the two legislations could be read hand in hand in a symphonic manner, since on a profound interpretation of the question it becomes apparent that there is no fundamental conflict between the Acts, as “patent laws define the contours of certain rights, and the anti-trust laws are essentially to prevent abuse of rights.”
The issue of FRAND terms between these parties as challenged before the Hon’ble High Court of Delhi, was deliberated upon in depth by the said Court.
The tussles between Micromax Informatics Ltd. and Telefonaktiebolaget LM Ericsson have earlier been covered by us (https://ssrana.in/ip-laws/patents/ patenting-wars-smartphone-technology/)
In May 2015, Best IT World (India) Private Limited (owner of the brand “iBall” for mobile devices) filed a complaint against Ericsson with the CCI. iBall stated that Ericsson wanted iBall to execute Patent Licensing Agreement and an NDA to license the use of Ericsson’s SEPs in WCDMA-compliant and GSMcompliant products. iBall further stated that it was willing to enter into a license agreement with Ericsson as per FRAND terms, however, Ericsson put forward arduous terms through the NDA. iBall alleged that Ericsson’s conduct including demand of arbitrarily high royalties that were calculated as a percentage of the price of the standard-compliant products; alleged threat of patent infringement proceedings; as well as bundling patents irrelevant to iBall’s products in the licence agreement; breaches Section 4 of the Competition Act. The CCI stated that the licensing practices of Ericsson appeared to discriminatory and contrary to the FRAND terms. Further, the CCI stated that the practice of compelling a party to execute the NDA and forcing exorbitant and unfair royalty rates, prima facie, adds up to misuse of market dominance, thereby breaching Section 4 of the Competition Act. The CCI directed the DG to conduct an investigation on licensing practices of Ericsson. Ericsson further filed an appeal against the order of the CCI in the High Court of Delhi.
The Hon’ble High Court in the Appeal, dealt with issues pertaining to SEPs and their accessibility on FRAND terms. The Hon’ble Court used the net sales price of the downstream device as a royalty base in calculating amount of royalty and held that, the value of the downstream product as a royalty base and comparable licenses to determine a FRAND royalty was consistent with sound economic principles, and also indicated that the Court was responding to the judicial and industry trends in the rest of the world. Further, Ericsson also filed an appeal against various orders passed by the Competition commission of India, wherein it directed investigation by the Director General. The Hon’ble High Court has granted stay on all such orders passed by the Commission in their cases.
The tussle between Best IT World (India) Private Ltd. And Telefonaktiebolaget LM Ericsson was earlier covered by us in 2015(https:// ssrana.in/articles/iball-ericsson-notfrands/)
Overview of proceedings before the High Court of Delhi
In March 2013, Ericsson filed a lawsuit against Micromax for infringement of its eight patents registered in India essential to the 2G (Second Generation) and 3G (Third Generation) standards. Ericsson sought damages and a permanent injunction against Micromax. Ericsson and Micromax initially decided to negotiate a FRAND licence, and pending the negotiation, Micromax decided to make interim royalty payments to Ericsson at the rates put forward by Ericsson in November 2012. Table 1 illustrates the interim royalty rate that Micromax decided to pay to Ericsson. Further, Micromax agreed to pay $2.50 to Ericsson for each data card sold by Micromax, which included the allegedly infringed patents.
However, both the parties did not attain a cordial arrangement and Micromax did not enter into an agreement to procure license SEPs of Ericsson. As a consequence, the Hon’ble Court directed Ericsson to present its 26 licences that it had previously signed with other Indian parties. After considering the royalty rates in the licences presented by Ericsson, on 12th November, 2014, the Court passed an order dated 12.11.2014, directing Micromax to pay royalty amounts to Ericsson in accordance with the percentages of the net selling prices of the products including the 2G and 3G standards. The Court also elucidated that the rates were not a determination of the FRAND rates for Ericsson portfolio but were only an interim arrangement pending the final conclusion of the trial.
The Court relied on comparable licences for determining FRAND based royalty rate. Further, the Court also utilized the net selling price of the downstream product as a royalty base, which acts in accordance with the latest judicial trends and reliable economic reasoning.
In the above landmark case on SEPs in India, the Hon’ble Court demonstrated through this excellent ruling that the IPR system and the Competition Law, 2022 are both important for fostering innovation and thus, have to be harmoniously worked with. However, it can be said that the order also suffers from seeing the problem from a narrow lens, because it is still unclear if CCI can also permit FRAND license as a remedy, although Section 27 of the Act gives considerable discretion to penalize enterprises for engaging in anti competitive practices as it deems fit. Nevertheless, this decision’s depiction of evolving concerns in the SEP-FRAND law through its analysis of international antitrust rulings is a significant addition to SEP jurisprudence in India.
Presently, policies and jurisprudence in India on matters associated with the Standard Setting Organization (SSO) IPR policies and FRAND licensing disagreements are in developmental stage, and the related concerns involved at the base of all such matters are presently being argued on a world-wide level. In what way India chooses to frame its policies associated with Intellectual Property (IP) enforcement and FRAND licensing matters, will be thought provoking for world-wide dialogue. More importantly, it would be significant in deciding the future of India the worldwide wireless value chain. Further, with the government’s attempt on “Design in India” and “Make in India,” it is crucial that the adopted IPR policies are of value both to implementers and inventors of novel technologies, so as to ensure that local investment in manufacturing and Research and Development (R&D) is profitable and for activities in India to ascent further in the value chain towards long-standing innovation.
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