This guest post is authored by Meena Annamalai, a fourth year law student from the School of Excellence in Law, Tamil Nadu, Dr. Ambedkar Law University
Indian jurisprudence saw the birth of Standard Essential Patent (SEP) litigation only in 2009 when Koninklijke Philips Electronic N.V filed two suits in the Delhi High Court (DHC) alleging infringement of its Patent which was a SEP for a DVD Video Player. The judgment[i] pronounced by the DHC in this case was the base on which SEP jurisprudence was developed in India. However a lion’s share of SEP litigation in India goes to Telefonaktiebolaget LM Ericsson (hereafter Ericsson). A disputed topic under SEP litigation was about the jurisdiction and the role of the Competition Commission of India (CCI). Micromax and Intex filed an information with the CCI alleging abuse of dominant position by Ericsson. The CCI passed orders in favour of the informants. Ericsson challenged the jurisdiction of CCI over the passing of orders for investigation to determine abuse of dominant position, given that a suit for patent infringement was already underway against the same informants. However the judgment[ii] delivered by Delhi High Court (DHC) on 30th March 2016 upheld the jurisdiction of CCI.
What is still uncontemplated in the field of SEP Litigation in India is the royalty charged by the SEP-holder on a Fair, Reasonable and Non-Discriminatory (FRAND) basis. Unfortunately there is some more mud that needs to be cleared from the waters. The position regarding FRAND commitments is still a multi-million dollar question that needs assiduous consideration: Ericsson case against Micromax was the first 100 Crore patent litigation in India.
A well-known fact is that the two bodies which are highly famed for matters of SEP-Litigation are the DHC and CCI. After reading the pronouncements of both the bodies in such litigations, one can understand that there exists a scrimmage between the approaches voiced out by the DHC and CCI regarding FRAND commitments.
In the Ericsson case[iii] CCI held that royalty charged as a percentage of the Net Sales Price (NSP) would result in discriminatory charging of royalty as if this is done, the rates would differ according to the end product of every implementer though they all make use of the same Standard.
This leads to violation of the FRAND commitment viz-a-viz Section 4 of the Competition Act, 2002. Therefore the CCI considered royalty based on NSP as an anti-competitive practice.
Through the Lens of DHC:
The DHC in a subsequent SEP-litigation[iv] affixed the base for royalty calculation to be the NSP and not the ‘smallest saleable patent practicing unit’ (SSPPU). The raison d’etre for it being, the actual value of the Standards cannot be limited to the unit of Standard used alone, as the Standards value lies in the value created or added to the end product due its utilisation.
Thumb Rule Not Possible in FRAND – Royalty Base:
FRAND can be on the basis of SSPPU when the SEP is merely a part of the product and not the product itself. An example of this could be the 3.5 mm headphone jack, obviously for which there is a worked out alternative that allowed many smartphones to switch over to the USB-C / Wireless Bluetooth for audio. Even more realistic example is that the royalty charged for WIFi used in Xbox is based on the WiFi chip alone (SSPPU) and not the Xbox. However, this approach has its downsides. If this method is adopted as a thumb rule then it will lead to underestimating the improvement a SEP has contributed to a product.
Whereas FRAND can be on the basis of NSP especially for products whose demand is solely due to the SEP inculcated in it, such LTE in a mobile phone without which the mobile wouldn’t be on the purchase list of a customer. The other side of the argument is that, royalty based on NSP could result in over-compensation to the SEP-holder as he would not only be charging for his SEP but for every other component of the multi-component product. This would not only act as a turn off for the SEP-implementer, but even for the customers who are the victims of the showroom prices.
Consequences due to the clouded nature of FRAND commitments:
It is observed that due to the presence of FRAND commitments, many pros such as device interoperability, standard compliant products, making technology reach many customers, option of choice in the market etc. is achieved. However the stark reality is that the term FRAND is vague in context of the main purpose it seeks to serve i.e. Royalty Charges. This is a primary reason why the SEP-holders tend to abuse it and license their patents for an exorbitant price which not only acts as a potential turn-off for the SEP implementers but victimises the customers in the end by burdening them with high marginal retail price (MRP).
A commitment to licence SEP on FRAND terms is present, but what exactly FRAND is, is not dealt with by SSO policies or by any legislation until today. A SEP holder in the market might take advantage of the imprecision of FRAND commitments, which opens doors for undesired flexibility. This triggers anti-trust issues and significantly rises the transaction costs. To ensure a stable licensing environment, India should look into the guidelines that are drafted already by the EU after analysis of best practices and public consultation.
FRAND around the world:
In 2017, Communication[v] released by the EC[vi] addressed the issues of valuation of FRAND royalty rates. One notable approach that gained much support is the ‘Present value added’ method.[vii] This method is neutral between the questions of royalty base (NSP/SSPPU), as in the royalty rate needn’t be a percentage of NSP/SSPPU.
The Communication suggests taking into account the value of the patents that read on a standard through future revenue streams that are expected to be derived from the SEPs. This method lays emphasis on the present value of the potential future earning or income that might be derived from the SEP keeping in mind the future uncertainties. Therefore it strengthens the argument that the value of today’s income is valued greater than the value of the anticipated future income which is equal to or more than today’s income, due to the uncertainties glued to the future.
In order to acknowledge this fact, while calculating the current worth of future income, the future income is discounted and hence this approach gets the name ‘Net Present Value Calculation’ and not just ‘Present Value Calculation’.
So it is understood that capturing of the discount rate is crucial to assess the present value of future income. The discount rate is essentially a combination of the inherent risk rate and the devaluation of future earnings by potential non-technology specific developments (overarching market factors and macroeconomic Developments). Whereas the inherent risks are linked to the essentiality and validity of the patents, the future need for the specific technology in a revision of the standard, or more generally the risk that it becomes outdated before patent expiry.
To put it simple, this method advocates that a reasonable royalty should be based on the incremental value that the SEP adds to the product. It essentially seeks to determine the rate on the basis of the value of the product by questioning what it’s worth would have been if not for those SEPs in it.
This method has its own downsides that persist, as any method which involves a prediction of the future, is necessarily uncertain. However this method is not quite far from what technology companies adopt to estimate the market potential of a new product as a part of the investment decision. If this is worked out, this framework can be used to license the new kid on the block, 5G technology!
Somewhere in between in the solution?
All this being said, if one were to shed light on how FRAND based suits are being resolved over the world, it is quite evident that the world’s largest patent owner hub- China is going by the NSP rule followed by the US too!
There is definitely no one-size-fits-all solution for what FRAND is, but to facilitate the parties to reach consensus ad idem regarding FRAND, it is best to fix signposts regarding the same. Since both the above mentioned methods are two extremes, there is a need to strike a balance and reach equilibrium. A best solution would be to hit a middle ground in this regard. This is similar to what China did in a recent FRAND litigation. The royalty base was not based on the NSP but adjusted in such a way that the rate had a nexus to the economic value, the Standard added to the product. With growing technology, the world is soon to witness Standards in many industries. A pressing need and a welcome move is to list all possible methods[viii] and assiduously define the FRAND abbreviation which will stand as a touchstone to every FRAND agreement.
[iv] Telefonaktiebolaget LM Ericsson vs. Intex Technologies (India) Limited I.A. No. 6735/2014 in CS(OS) No.1045/ 2014
[v] “Setting out the EU approach to Standard Essential Patents” by European Commission. Though not legally binding, it received major attention by stake-holders and was positively received by industry.
[vi] European Commission
[vii] Pg. 11 https://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupMeetingDoc&docid=23716 ; Also see; https://ec.europa.eu/growth/industry/policy/intellectual-property/patents/standards_de
[viii] For example; Comparable Royalty Rates, Cost Approach, Top-Down Approach etc. See, Journal of European Competition Law & Practice, 2020, Vol. 11, No. 1–2, Economic Perspectives on FRAND by RoyaGhafele and Jan Schmitz, Pg. 93.
Authored by Meena Annamalai