India: SEPs and FRAND – litigation, policy and latest developments

Introduction

Standard essential patents (SEPs) have been an enigma in terms of enforcement, both under the patent law regime as well as under the antitrust laws. With SEPs being at the centre of the path-breaking technological developments in the telecommunications sector, courts across the world have been faced with issues relating to the enforcement of SEPs. India, having the world’s second largest telecommunication network is no stranger to this problem and has been dealing with disputes relating to SEP since over a decade now.

An SEP is a patent that claims technologies/specifications which have been recognised as standards, usually by the standard setting organisations working in particular fields. While the patent laws confer a monopoly upon the patentee, including the right to prevent unauthorised third-parties from using the patented technology, the antitrust laws ensure that such technology qualifying as SEP, is traded in the market in a competitive environment.

Nevertheless, with time, the patent regime has evolved to focus on promoting a fair balance between the patentee’s rights and public interest. One such initiative by the Indian government was to enact provisions governing compulsory licensing under the Patent Act 1970. Yet, to date no provisions have been enacted under the patent regime in India which define and/or govern the enforcement/licensing of SEPs.

This article, however, attempts to trace the journey of antitrust actions as well as SEP litigation in India with a focus on the SEPs in the field of telecommunications, including the recent judgement wherein the court have attempted to harmonise the basic principles of law with the international standards and decisions in foreign jurisdictions.

What are SEPs?

An SEP is not defined under the Patent Act. However, various definitions and explanations have been discussed and recognised by the courts in India while adjudicating SEP infringement disputes. Some of these definitions have also been recognised in the discussion paper published by the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry, India.^[1]

Essentially, a patent that protects technology that is essential to comply with a standard, set by a Standard Setting Organisation, is called a Standard Essential Patent (SEP).^[2] It is impossible to manufacture a standard-compliant product without using the technologies covered by one or more SEPs.^[3] Thus, any entity desirous of producing a standard compliant product is bound to secure permission /license from the SEP owner.

It is not only profitable for the company to have its patented technology adopted as standards, as it opens the prospect of licensing the SEPs to other market players, but also acts as an incentive to further invest in standardisation activities. Therefore, considering the critical value of such SEPs and corresponding monopoly held by the owners of SEPs, the Standard Setting Organisations have the responsibility to safeguard other market players by the SEP owners.

In this regard, while setting the standards, the Standards Organisations require their members to disclose and grant licenses to their patents that cover a standard that the organisation is developing.^[4] Moreover, the Standards Organisations usually set their IPR policies which require their members to undertake to license their SEPs on “Fair, Reasonable and Non-Discriminatory” (FRAND) terms. Such commitment from the members is essential to balance the commercial interest of the SEP owners and also the need of incorporation of technology in maximum products across the industry.

In case a patent owner does not disclose their patent or agree to grant licenses on FRAND terms for a patented technology that is required for the standard, it can result in a patent hold-up. The SEP owner may then demand excessive value for its patents, which may often be as high as the value of the standard itself.^[5] Such practices by the SEP owners also lead to antitrust issues, which have been dealt with the subsequent sections.

In fact, in the case of Micromax Informatics Limited v Telefonaktiebolaget LM Ericsson (Publ), the Competition Commission of India noted, “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.”^[6]

SEPs and FRAND

The idea behind securing FRAND undertakings by SEP owners is to ensure that other market players are not exploited at the hands of SEP owners, who in absence of FRAND commitments, may demand excessive royalties, which may result in elimination of all competition from the market. Thus, in order to prevent patent hold-up and to promote application of standards, it is essential that SEPs are licensed on FRAND terms. Rather, licensing of SEPs on FRAND terms is a foundation of the standards development process.^[7]

Thus, a FRAND commitment under the Standards Organisation, essentially limits the SEP owner’s rights qua exploitation of the SEP, subjecting the same to FRAND terms and conditions. It may also be argued that a FRAND commitment benefits the SEP owner by inclusion of the patented technology in the standards and at the same time prevents the SEP owner from abusing its dominant market position by virtue of having exclusivity over the patented technology.

While it is desirable to secure FRAND commitments and eventually execute SEP licenses based on FRAND terms and conditions, in absence of specific legal provisions, it is difficult to determine what exactly constitutes a FRAND practice. Therefore, the parties are left to negotiate the license terms based on their market positions, with the SEP owners insisting on royalty rates calculated on a wider royalty base and/or indulging in discriminatory pricing practices by resorting to confidentiality agreements.

SEPs and Antitrust laws

In principle, the antitrust regime, prohibiting anti-competitive practices and/or abuse of dominant market position, does not interfere with the IPR regime conferring exclusive rights on the patent owners. However, sometimes the standards setting framework raises certain antitrust issues, resulting from the adoption of standards attracting SEPs exclusively owned by competitors. In such situations, it is necessary to ensure that the relevant SEP owner does not abuse its dominant market position to the detriment of other market players, either by withholding the license for SEPs which are essential for implementing standards or by demanding exorbitant royalty rates.

It is in this regard as well, that FRAND commitments, particularly their enforceability, is beneficial to limit the SEP owner’s rights and protect the other market players from exploitation. The Competition Commission of India (CCI), the Indian antitrust authority, has dealt with several cases relating to standard essential patents and FRAND commitments since as early as 2013 and scrutinised the SEP owner’s licensing practices under antitrust regime and the Competition Act, 2002.

Micromax and Intex’s complaint against Ericsson

In 2013, Micromax had filed a complaint against Ericsson, the sole licensor of SEPs necessary for implementation of 2G and 3G wireless telecommunication standards, set by the European Telecommunications Standards Institute (ETSI), with the CCI alleging that Ericsson^[8] was abusing its dominant position in violation of Sections 3 and 4 of the Competition Act, 2002^[9], by charging excessive royalties and further insisting the licensee to sign a non-disclosure agreement (NDA). Micromax argued that Ericsson demanded royalties at a much higher rate, by using the sale price of the downstream product as the royalty base instead of the price of the smallest saleable component, such as the GSM or CDMA chip. Micromax further argued that Ericsson’s insistence on executing an NDA further enabled Ericsson to engage in discriminatory pricing.

Similarly, Intex Technologies (India) had also filed a complaint^[10] before the CCI against Ericsson in 2013, alleging that Ericsson was offering excessive royalty rates to license its SEPs and further proposed unfair licencing terms. Particularly, Intex argued that Ericsson’s condition to have prospective licensees sign an NDA indicated that Ericsson was engaging in discriminatory pricing and offering different royalty rates and licence terms to different licensees, all belonging to the same category. Intex further argued that the NDA not only prevent Intex from discussion the license terms with the other licensees and/or its vendors but also prohibited Intex from approaching the local courts in case of grievance, and rather forced Intex to seek redressal in a foreign forum in Singapore.

In both the cases, CCI in its preliminary orders identified the relevant product market and based on the size of Ericsson’s SEP portfolio relating to the 2G, 3G and 4G technologies, determined that Ericsson had a dominant position in the relevant market qua mobile phone devices that implement GSM standards, as there was no viable alternative to the SEPs owned by Ericsson. CCI noted that the royalty rates requested by Ericsson had no linkage to the patented product, as upon using the downstream product as the royalty base, the licensees would be required to pay different royalty rates for different products (depending on the price of the product), even when all the products used the same chipset. CCI further observed that Ericsson’s requirement for the licensee to sign a NDA also evidences Ericsson’s attempt to prevent its various licensees from disclosing their respective royalty rates and enabling Ericsson to charge higher royalty from one or more of the licensees. Further, in Intex’s case, CCI noted that preventing Intex from seeking redressal in a ‘country where both the parties were in business’, by virtue of a restrictive NDA, also evidenced abuse of dominant position by Ericsson.

Thus, in both the cases, CCI concluded that the Ericsson’s royalty offer was prima facie ‘discriminatory as well as contrary to FRAND terms’ and ordered further investigation in the matter.

iBall’s complaint against Ericsson

iBall had also filed a similar complaint^[11] against Ericsson in 2015, alleging that though it was “willing to enter into a license agreement with Ericsson as per FRAND”, Ericsson required it to agree to stringent terms, including a 10 years NDA and dispute resolution through arbitration in Stockholm, prior to entering into negotiation and that the said demands coupled with unreasonably high royalty rates and bundling of patents irrelevant to iBall’s requirements amounted to abuse of dominant position and were violative of the Competition Act, 2002.

Agreeing with iBall’s allegations and concluding that Ericsson’s alleged practices amounted to abuse of dominant position, CCI has ordered an investigation against Ericsson in the instant complaint as well. Subsequently, however, Ericsson and iBall entered into a settlement and iBall expressed its willingness to withdraw the complaint before the CCI.

Ericsson’s challenge against CCI

Ericsson, in 2014, appealed the aforementioned two orders of CCI before the Delhi High Court alleging that the Patent Act, 1970 ‘provides adequate mechanism to balance the rights of patentee and other stakeholders’ and that the CCI did not have jurisdiction to adjudicate and/or investigate Ericsson’s SEP licensing practices.

While the Delhi High Court initially agreed with Ericsson and directed CCI not to issue a final order with respect to the investigations against Ericsson, it subsequently, in 2016 held^[12] that there is no bar in law to the CCI proceedings against Ericsson for violation of Competition Act 2002.

However, the said respite for prospective licensee was short lived, as the appellate division of the Delhi High Court has vide its recent judgement^[13] of July 2023, concluded that the CCI does not have the power to investigate such SEP licensing practices. The Court relied upon the inclusion of provisions in the Patent Act, 1970 aimed at controlling anti-competitive practices of patentees such as provisions related to compulsory licensing as sufficient check-and-balance mechanism to address SEPs licensing as well and ruled that the Patent Act, 1970 being a specialised legislation much prevail over the Competition Act, 2002, a general law, when adjudicating the rights of a patentee under the Patent Act, 1970.

While the CCI adopted a stringent approach towards the licencing practices of SEP owners and compliance with FRAND terms and repeatedly expressed its concerns against the SEP owners’ practices of demanding excessive royalty based on downstream product price as royalty base and restrictive NDA requirements, the reign/role of CCI in further adjudicating/ investigating such licensing practices for SEPs and enforcing FRAND obligations has been ousted by the recent order of the Delhi High Court.

Unlike the position adopted by the CCI in case SEPs licensing practices, the Delhi High Court (all the SEP litigations in India till date have been filed before the Delhi High Court) has approached these disputes with higher reverence to SEP owner’s rights.

SEPs infringement litigations under the patent law regime

A patentee has a right to initiate infringement litigation against unauthorised users, remedies wherein include injunction and/or damages inter alia. The relief of injunction, however, is an equitable remedy granted at the court’s discretion, after examination of the three-pronged test^[14] of (i) a prima facie case; (ii) balance of convenience; and (iii) irreparable injury. Thus, for a patentee to secure an interim injunction in a patent infringement dispute, it would have to establish that there is (i) a prima facie case of patent infringement; (ii) balance of convenience in favour of the patentee; and (iii) that the patentee would suffer irreparable injury if the injunction is not granted.

However, FRAND obligation have been argued to evidence the SEP owner’s commitment to negotiate with the prospective licensees/ alleged infringer and offer SEPs licence on FRAND licensing terms, whereby the SEP owner will be compensated by way of royalty for use of the patented technology by the licensee and thereby, necessitating that in case of FRAND incumbent SEPs, the patentee should not be entitled to an injunction, which would rather cause irreparable injury to the prospective licensee, who will not be able to manufacture/sell their products without using the patented technology.

However, the Delhi High Court, has observed that an SEP owner may be entitled to an injunction against the infringer, even after having committed to license its SEPs on FRAND terms.

Right to Injunction

Ericsson sued Micromax^[15] and Intex^[16] in 2013 and 2014 respectively, for infringement of eight of its patents that were declared essential to comply with the 2G and 3G telecommunication standards and sought damages as well as a permanent injunction against the infringers.

The Delhi High Court observed that Ericsson had successfully asserted the same eight SEPs in previous legal suits, which sufficed the requirement for Ericsson to establish a prima facie case of patent infringement and balance of convenience. Further, without going into details, the Court observed that Ericsson would also suffer irreparable harm if the injunction was not granted and accordingly, granted an injunction in favour of Ericsson.

In the case of Ericsson v. Intex^[17], Ericsson contented that they had offered Intex a license for its complete portfolio of patents (including the eight suit patents), consistent with FRAND terms, however, Intex did not agree to the portfolio license and therefore, Ericsson was constrained to approach the court. On the other hand, Intex challenged the validity of Ericsson’s suit patents and submitted that no patent in India enjoys a presumptive validity, and therefore Ericsson could not be entitled to any relief until the determination of validity of Ericsson’s suit patents. The Court, however, opined that the premise of Intex’s compliant against Ericsson before the CCI was that Ericsson owns SEPs that are essential for implementation of 2G and 3G standards and therefore, Intex had impliedly admitted that Ericsson’s suit patents were SEPs and infringed.

These interim injunctions, however, were subsequently vacated by the Court with directions to Micromax and Intex to pay interim royalties, while using the SEPs during the pendency of the suit.

Thus, while the courts have granted interim injunctions in the initial stages of SEP infringement suits, such injunctions have usually been discontinued, allowing the defendants to use the SEPs during pendency of the suits, subject to payment of interim royalties, which have been determined keeping in view the comparable licenses given by the same SEP owner to other licensees.

What qualifies as FRAND?

FRAND has not been defined in any legislation and even the Standard Setting Organisations have left the scope of FRAND terms open to interpretation. The inherent idea is to secure licensing of SEPs on such terms that are fair to the licensee, include a reasonable royalty rate and are non-discriminatory but at the same time adequately compensate the SEP owners for their investment in the research and development of the technology and act as incentive for further innovation.

Courts in India have not yet determined what qualifies as FRAND and/or FRAND royalty in any of the infringement proceedings for SEPs. Nonetheless, the courts, while adjudicating suits for infringement of SEPs and determining interim royalties, have examined various issues concerning FRAND terms and conditions. In the recent judgement of March 2023 in the cross appeals filed by Ericsson and Intex^[18] against the Delhi High Court’s order of 13^th March 2015, directing Intex to pay interim royalties, 50% of which was payable at the interim stage and remaining 50% by way of bank guarantee, the appellate division of the Delhi High Court has examined some of the FRAND issues in detail, including determination of royalty base, requirement of NDAs, willing and unwilling licensee and portfolio licensing inter alia.

Royalty base

One of the most important factor in determination of FRAND royalty is the selection of royalty base. In practice, an SEP owner prefers to impose royalty based on the price of the downstream product – that is, on the net sale price of the final product, as opposed to the price of the particular component of a multicomponent product (such as a mobile phone) which uses/comprises the particular patented technology. In such situations the licensee is burdened to pay royalty to the SEP owner on even those components which do not use the particular SEPs. In such situations, the SEP owners are likely to be entitled to different royalty rates for the same technology (based on the different sale prices of the final product) but also to royalty on the value of components which do not use their patented technology, contrary to the concept of FRAND commitment.

Such practice also leads to the problem of royalty stacking in case of multicomponent products, wherein imposition of royalty for multiple components of the same multicomponent product leads to an exorbitant aggregate royalty, which may also exceed to net sale price of the product.

While the CCI had also expressed concern on determination of royalty on the price of downstream product as being discriminatory, the Delhi High Court vide various orders since as early as 2015, continued to reject the submissions of alleged infringers to calculate the royalty based on the smallest saleable component using the SEPs and upheld the calculation of interim royalty based on the price of downstream product. Even in its recent judgement in the appeal filed by Intex’s against an earlier order directing Intex to submit royalty based on the price of downstream product, the appellate division of the Delhi High Court has upheld the calculation of royalty based on the price of downstream product being in line with globally accepted practice.

Non-Disclosure Agreements

SEPs owners also often insist on execution of non-disclosure agreements (NDAs) by prospective licensees, sometimes even prior to entering into negotiations. These NDAs often also include restriction of redressal mechanism and jurisdictions, requiring the prospective licensees to submit to unfamiliar jurisdictions outside the country in which both the parties have their businesses. Moreover, the confidentiality of terms of negotiation as well as final settlement imposed by such NDAs further prevent the prospective SEPs from exchanging information and assessing the fairness of terms and in turn, enables the SEP owners to demand discriminating royalty rates from different licensees.

As in the case of royalty base, while insistence on restrictive NDAs was frowned upon by the CCI, the Courts have adopted a liberal approach towards the same, often reasoning that NDAs may be necessary in certain situations to protect the rights of the patentee. The Courts had while granting interim injunctions against Micromax and Intex in the respective infringement cases also rejected the alleged infringers’ submissions that Ericsson’s insistence on execution of NDAs amounted to violation of its FRAND commitments.

In this regard, while assessing the ‘non-discriminatory’ part of FRAND, the Delhi High Court in the appeal filed by Intex, observed that a ‘licensor [SEP owner] will be considered a willing licensor only if it gives a FRAND offer and in certain situations provides information necessary, subject to confidentiality agreement, for a licensee to evaluate an offer’^[19].

Unwilling licensees and patent hold-out

FRAND commitments have been interpreted to impose obligations on both the SEP owners and the prospective licensees. While the FRAND obligation require the SEP owner to be willing to offer the SEPs license on FRAND terms and further provides the prospective licensee a defence of sorts to a claim of infringement, it is also essential that the prospective licensee/implementer secures the license from the SEP owner and is not able to implement the patented technology without paying a reasonable market value for the license thereof – resulting in a patent hold-out.

It is in this background, that the Delhi High Court observed that the SEP regime ought to ‘envisage a candid and transparent negotiation between a willing licensor [SEP owner] and a willing licensee [implementer].’^[20] Therefore, Delhi High Court has observed that in case of unwilling licensees, the SEP owners may be entitled to injunctive relief, despite having agreed to FRAND obligations.

In the case of Ericsson v. Intex^[21], the Delhi High Court rejected Intex’s submissions that since Ericsson’s conduct and negotiation strategies did not comply with its FRAND obligations, Intex should not be considered as an unwilling licensee. The Hon’ble Court observed that Intex merely delayed the negotiations and despite being aware of Ericsson’s patents for years, started challenging the validity of their patents only when Ericsson asserted its patent rights vide the infringement suit.

Portfolio licensing as FRAND

The Delhi High Court has also opined on the issue of whether portfolio licensing is FRAND compliant or if the SEP owner is required to offer individual SEP licenses. This issue arose as one of the defences taken by Intex in the infringement suit was that the license offered by Ericsson was for the complete portfolio of patents, including the patents in India as well as other jurisdictions, which were not required by Intex for implementation of the standards in its products to be marketed in India and the said offer was therefore non-FRAND.

In this regard, the Delhi High Court has in the recent judgment observed that ‘value is in the technology which forms a part of standard’ and since the suit patents were just a representative of that technology, Ericsson was not required to offer individual or country specific patent licences and ‘that global portfolio licenses are capable of being FRAND’.^[22]

Abovementioned are only some of the FRAND issues which have been dealt with by the Courts in India. Nevertheless, since there has been no final decision in India on FRAND licensing, these issues and more may be subject to further judicial scrutiny in future, perhaps evolving a more effective enforcement regime for FRAND obligations.

Notes

^[1] Discussion Paper on Standard Essential Patents and their availability on FRAND terms, dated 1st March 2006, available at https://ipindia.gov.in/writereaddata/Portal/News/196_1_standardEssentialPaper_01March2016_1_.pdf

^[2] "Standard Essential Patents." Competition Policy Brief. Competition Occasional Discussion Papers by the Competition Directorate–General of the European Commission (European Commission), No. 8 (2014) available at http://ec.europa.eu/competition/publications/cpb/2014/008_en.pdf

^[3] European Commission Memo, Antitrust decisions on standard essential patents (SEPs) - Motorola Mobility and Samsung Electronics - Frequently asked questions, available at http://europa.eu/rapid/press-release_memo-14-322_en.htm

^[4] J. Gregory Sidak, The Meaning of FRAND, Part I: Royalties, 9 J. Competition L. & Econ. 931, 949 (2013), available at https://www.criterioneconomics.com/meaning-of-frand-royalties-for-standard-essential-patents.html

^[5] Microsoft Corp. v. Motorola, Inc., Motorola Mobility, Inc., and Gen. Instrument Corp. 104 U.S.P.Q.2d 2000

^[6] Micromax Informatics Limited v. Telefonaktiebolaget LM Ericsson (Publ), Case No. 50/2013, Competition Commission of India, (November 12, 2013), available at https://www.cci.gov.in/antitrust/orders/details/307/0.

^[7] Understanding Patents, Competition and Standardization in an Interconnected World, ITU, 2014 available at http://www.itu.int/en/itu-t/ipr/pages/understanding-patents,-competition-and-standardization-in-an-interconnectedworld.aspx

^[8] Micromax Informatics Limited v. Telefonaktiebolaget LM Ericsson (Publ), Case No. 50/2013, Competition Commission of India, (November 12, 2013), available at https://www.cci.gov.in/antitrust/orders/details/307/0.

^[9] Available at, https://www.cci.gov.in/images/legalframeworkact/en/the-competition-act-20021652103427.pdf

^[10] Intex Technologies (India) Ltd v. Telefonaktiebolaget LM Ericsson (Publ), Case No. 76 /2013, Competition Commission of India (January 16, 2014) available at https://www.cci.gov.in/antitrust/orders/details/301/0

^[11] Best IT World (India) Pvt. Ltd v. Telefonaktiebolaget LM Ericsson (Publ), Case No. 04 /2015, Competition Commission of India (May 12, 2015), available at https://www.cci.gov.in/antitrust/orders/details/221/0

^[12] Telefonaktiebolaget LM Ericsson (Publ) v. Competition Commission of India, W.P.(C) Nos. 464/2014 & 1006/2014 (March 30, 2016) 2016:DHC:2599

^[13] Telefonaktiebolaget LM Ericsson (Publ) v. Competition Commission of India & Anr, LPA 247/2016 (July 13, 2023) 2023:DHC:4783-DB

^[14] Gujarat Bottling Co. Ltd. v. Coca Cola Co., (1995) 5 SCC 545

^[15] Telefonaktiebolaget LM Ericsson v. Mercury Elecs. & Anr, CS(OS) 442/2013, Delhi High Court

^[16] Telefonaktiebolaget LM Ericsson v. Intex Technologies (India) Ltd, CS(OS) 1045/2014, Delhi High Court

^[17] ibid

^[18] Intex Technologies (India) Ltd v. Telefonaktiebolaget LM Ericsson, FAO(OS) (COMM) 296/2018 & Telefonaktiebolaget LM Ericsson v. Intex Technologies (India) Ltd, FAO(OS)(COMM) 297/2018 (March 29, 2023). 2023:DHC:2243-DB

^[19] Supra, note 19, para 69.

^[20] Supra, note 19, para 68.

^[21] Supra, note 15.

^[22] Supra, note 19, para 111.