Standard-Essential Patents & FRAND licensing in India

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The requirements regarding licensing terms and procedures for enactment of national standards especially in the field of information communication technologies is an important development in the regulations which affect a business enterprise’s licensing negotiations. In a device, the technology in each component has to work together, i.e. Devices typically need to comply with some standards or protocols by which devices communicate with each other and other technology to achieve their functionality. For example, smart-phones made by different manufacturing companies, are designed to be compliant with 4G standards so as to be able to function in international markets without making variations according to each country. These standards, in turn, may implicate a number of patents that claim parts of the technology used in combination to make the devices work.

Article 15.6 of the Annex 6 contained in the Rules of Procedure of the European Telecommunications Standards Institute, defines ‘Essential’ as “as applied to IPR means that it is not possible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operate equipment or methods which comply with a Standard without infringing that IPR.” The said provision further clarifies that “in exceptional cases where a Standard can only be implemented by technical solutions, all of which are infringements of IPRs, all such IPRs shall be considered Essential.”

Patents which are essential to a standard and have been adopted by a Standard Setting Organization (SSO) are known as Standard Essential Patents (SEP). The prospect of licensing patents that are essential to standards on an industry-wide scale plays a vital role in a company’s incentives to invest in standardization activities, besides other motivations such as directing the standard development towards technological solutions where the respective company is strong and can offer specific services or infrastructure. However, the exclusive rights conferred by patents on inventors may defeat the object of making standards available to all for public use. In order to address this problem, most SSOs have defined IPR policies where; SSO members must commit to licensing their SEPs on terms and conditions that are “Fair, Reasonable and Non-Discriminatory” (FRAND). These commitments are meant to protect technology implementers while ensuring that patent holders receive an appropriate reward for their investments in research and development.

Recent trends show that the mobile phone industry is perhaps the most affected by the vagaries of the SSO-SEP-FRAND framework. In 2013 Ericsson filed a lawsuit against Micromax Informatics Ltd, one of India’s largest mobile phone manufacturers, in the Delhi High Court, seeking damages and an ex parte permanent injunction against Micromax with regard to any products infringing its SEPs relating to 2G, 3G and 4G technology.

The Delhi High Court in its decision directed Micromax to pay a royalty that amounted up to 1% of the selling price of its devices to Ericsson for using the patented technologies of Swedish equipment maker’s that were essential to manufacture the products. The interim order holds until December 31, 2015, which is the deadline set by the court to conclude the trial.

News reports have suggested that development in the case of Ericsson v. Micromax could prove counter-effective for Prime Minister Narendra Modi’s Digital India push. In a statement to the press, Ericsson remarked that Digital India requires encouraging the domestic industry to start manufacturing low-cost but high-feature mobile phones in India. However, some of the biggest road blocks are the policies adopted by patent holders in arm twisting the Indian industry by demanding huge amounts of royalty based on totally discriminatory policies.

The SSO-SEP framework confers considerable power on the SEP holder. An entity that wishes to use a technological standard must obtain permission from an SEP holder, which the latter may choose to withhold by refusing to license its patent. The FRAND declaration attempts to balance inequalities with the idea that an entity should have the right to obtain a license to desired technology on FRAND terms. However, working out a FRAND-encumbered agreement and determining what constitutes a FRAND practice is controversial. Also, in practice, it is almost impossible to determine what a FRAND royalty actually amounts to.

In India, the situation is more complicated because of the predisposition to make everything public policy oriented. The public good is a legitimate tool available to an Indian licensee and is most likely be used in all instances. In addition, many domestic manufacturers are ending up on the radar of big global players, this is testified by the fact that several suits are pending against local Indian companies and Chinese manufacturers in the Indian Courts. The sheers volume of suits being filed against domestic manufacturers in the Telecom industry indicates that the mobile phone wars are now becoming increasingly local, as opposed to the global war being fought in the damages-friendly United States. Although it is still too early to know which way the tide will turn, perspectives from both sides of the battle should be considered.

From an Indian licensee’s point of view, neither should western-style capitalism find its way into India, which would most likely result in the SEP holder playing Goliath and trying to intimidate licensees into negotiating on allegedly unfavorable terms, nor should the SEP holder be allowed to discriminate amongst its licensees by charging differential royalty rates among different players.

On the other hand, SEP holders do not want the government to stop businesses from taking their own course; they prefer each licensee to be bound by confidentiality, with licensing terms dependent on the negotiating power (or prowess) of the parties. After all, a licensee with a sizeable portfolio of its own should not have to pay the same rate as a new player, even though they are targeting the same market with similar products and using the same SEPs. In addition, from a SEP holder’s perspective, the threat of injunction or the injunction itself – which is arguably the best option available to a patentee in India – is a necessary tool; especially since the classification of a patent as a SEP positively reinforces the patent’s strength (patents are not considered to be presumptively valid in India). Furthering their position, SEP holders argue that if SEP enforcement requires many additional steps before an injunction may be available, the prospective licensee has no incentive to license a portfolio of SEPs, as is typical in existing business practice. An unwilling licensee should not be able to hide behind competition or public good to force the SEP holder into a royalty rate – that would make it a compulsory license.

The reality is that the threat of injunction will bring the licensee to the discussion table – an outcome that may not otherwise materialize in India. Based on the fact that mobile phones use hundreds of different patents, determining standard FRAND royalty for one (or several) SEP is an uphill task, and therefore impractical. If this is encouraged, the patentee may be incentivized to hold up patents and not submit them to the SSO, thereby increasing the anti-competitive aspect of the situation. Also, SEP holders must realize that India is a high-volume/low-margin market (unlike the West), and the royalty numbers should reflect this difference.

Finally, accelerating the adoption of critical standards and ensuring that their benefits fully materialize through FRAND commitments will require careful coordination and input from India’s responsible agencies, thought leaders and judicial system, in consultation with international agencies.

Authored by Subhashree Sahoo

Sources: 1, 2.