Technology plays an important role in mundane as well as important tasks. Electronic devices such as laptops, smartphones, and tablets have become indispensable in industrial as well as personal work. These electronic devices comply with industry standards for communicating with each other to achieve the desired functionalities. These industry standards are defined by patents that claim or disclose the underlying technology. These patents are therefore termed as Standard Essential Patents (SEPs) i.e. the patents that are essential for implementation of a particular standard.
The standards are essential for the wide adoption of new technologies, especially in the Information and Communications Technology (ICT) domain. The Standard Setting Organizations (SSOs) and the companies involved in the research of the corresponding technologies together establish and propagate the standards. The SSOs also create and maintain a list of SEPs for the established standards. The SEPs are then licensed by companies all around the world, resulting into worldwide adoption of the standard. However, this might lead to conflict of interest among the owners of the SEPs. While the owners of the SEPs have a vantage point in view of the widespread use of technology adopted in the standard, the owners of the SEPs would also profit by dominating the market. Openness of the owners of the SEPs to license the SEPs results into widespread use and evolution of the standard and also benefits the licensees. However, if the owners of the SEPs attempt to dominate the market by restricting the licensing of the SEPs, it adversely affects the business of the potential licensees.
Therefore, to seek a balance between the interests of the licensees and the rights of the owners of the SEPs, SSOs have encouraged the use of Fair, Reasonable, and Non-Discriminatory (FRAND) licensing policy, that is, the owners of the SEPs should offer licenses to the potential licensees of the SEPs on a FRAND basis. In this paper, we provide the comparative analysis of the subject across the world and analyse the implementation of FRAND licenses in Indian jurisdiction.
During the implementation of FRAND licenses, the interests of the licensors and the licensees are in direct conflict. Since these problems are generally difficult to resolve, intellectual property policies are set by the SSOs. These IP policies are used as guidelines for handling such issues.
One such guideline is prepared by the European Commission (EC). The EC has provided FRAND terms and conditions, for ex post licensing in Article 81(3) and 82, which are presented below for ready reference:
“…an industry standard [can lead] to a situation in which there is little competition in terms of the technological format. Once the main players in the market adopt a certain format, network effects may make it very difficult for alternative formats to survive. […] in order for the agreement to comply with Article 81(3), it must be ensured that the agreement does not unduly restrict competition and does not unduly restrict future innovation”. (EC 2003 Technology Transfer Guidelines, paragraph 152)
“It will normally be required that the technologies which support such a standard be licensed to third parties on fair, reasonable and non-discriminatory terms.” id. (EC 2003 Technology Transfer Guidelines, paragraph 164)
“Where the pool has a dominant position on the market, royalties and other licensing terms should be fair and non-discriminatory and licenses should be non-exclusive.” id, (EC 2003 Technology Transfer Guidelines, paragraph 226)
Since the FRAND agreement typically arises as a contractual obligation, the governing law is not uniform. Therefore, in FRAND litigation, the focus of the litigation is directed towards the exact form of relief that may be recovered. The position taken by the parties in the Microsoft v. Motorola litigation, as provided in the next section, illustrates the different perspectives which are difficult to unavoidable in arriving at a “reasonable” royalty rate.
The first landmark case in FRAND litigation was the German Federal Court of Justice’s 2009 Orange Book judgment (case no. KZR 39/06) - it stated that the alleged infringer can successfully rely on a competition law defence only if it offers to enter into a licence agreement unconditionally with the SEP holder.
Later, in the Motorola case (Case no. AT.39985), the EU commission determined that Motorola had abused its dominant position under EU competition law by seeking and enforcing an injunction against Apple for infringing a FRAND-encumbered SEP. The EU Commission stated that after agreeing to license the patent on FRAND terms, the SEP holder foregoes the right to seek an injunction against a willing licensee on FRAND terms.
In the Samsung case (Case no. AT.39939), when Samsung demanded injunctive relief against Apple for infringing its SEPs, the EU commission held that Samsung abused its dominant position by demanding injunction for use of its FRAND-encumbered SEPs.
Later on, in a ruling in the case of Huawei v. ZTE (Case no. C-170/13), the EU court of Justice went deeper on the lines of Motorola (Case no. AT. 39985) and Samsung (Case no. AT. 39939) and set out “specific requirements” with which the SEP holder needs to comply in order to be able to seek an injunction without abusing its dominant position. According to the requirements set by the ECJ, the SEP holder must alert the alleged infringer. After the alleged infringer has expressed its willingness to take a FRAND licence, the SEP holder must present to the alleged infringer a specific, written offer for a licence on FRAND terms, specifying the amount of the royalty and the way that royalty is to be calculated. Then, the alleged infringer must diligently respond to the SEP holder’s written offer.
In US, however, the SEP holder may sue the alleged infringer for injunctive relief, provided it proves that the infringement of the patent causes an irreparable damage to the SEP holder, and if the damages are inadequate to compensate for the losses incurred by the SEP holder, and if the balance of hardships between itself and the alleged infringer warrants an injunction.
As a point of difference between the EU and the US litigations, the ECJ does not provide any guidelines for determination of the amount of royalties, whereas, in US, either the SEP holder or the alleged infringer may ask the court to set the amount of the royalty rate. In another point of differentiation, the EU commission may order the SEP implementer to grant security in advance of litigation, whereas, the US courts do not require any such advance security from the SEP implementers.
In India, the first instance of the litigation was filed between Ericsson v/s Kingtech related to FRAND terms for SEPs in 2011, when Ericsson objected the import of goods by Kingtech. In its decision by an order dated August 22 2013, the Delhi High court directed Kingtech to refrain from importing any devices that infringed Ericsson’s AMR patents.
In March 2013, another case was filed between Ericsson v/s Micromax, where Ericsson had claimed that Micromax infringed eight of its abovementioned SEPs. Micromax agreed to pay the interim royalty to Ericsson at the rates that Ericsson had proposed in November 2012.
In April 2014, another case was filed between Ericsson v/s Intex, where Ericsson sued Intex for infringement of the abovementioned eight SEPs. Intex challenged Ericsson’s practice of charging royalties on the basis of the sale price of the mobile phone as opposed to the profit margin on the sale price of the baseband processor/chipset. The Delhi High Court, however, relied on the order issued in Ericsson v/s Micromax and adopted same royalty rates to calculate FRAND royalty rates for Intex.
In December 2014, another case was filed between Ericsson v/s Xiaomi. Xiaomi argued that it had obtained the chipsets, which used Ericsson’s patented technology, from Qualcomm which had licensed the patented technology from Ericsson. Hence, the Delhi High Court allowed Xiaomi to import and sell only the devices that contained the chipsets sold to Xiaomi by Qualcomm.
Meanwhile, the Indian manufacturers: Micromax, iBall, and Intex filed a complaint against Ericsson at Competition Commission of India (CCI). The CCI delivered similar decisions in all the three complaints and held that Ericsson abused its dominant position and forced the other parties to execute NDAs and imposed excessive royalty rates.
The basis of determination of the royalty rates has been a matter of debate. In one method of determination of the royalty rates, the royalty rates are calculated as a percentage of the price of the smallest saleable component. In another method of determination of the royalty rates, the royalty rates are calculated based on the net selling price of the device that uses the SEP. In this method, the amount of royalty is far more than amount of royalty based on the price of the smallest saleable components. However, in India, the calculation of royalty rates is based on the net selling price of the entire device as a whole, instead of basing it on the value of the chipset that contributes to the infringement of the SEPs.
However, considering that the jurisprudence in India regarding the FRAND terms of licensing is still in its nascent stage, a large number of SEP litigations are expected in the coming decade. Further, it would be interesting to study the development of guidelines issued by the Indian Standard Setting Organizations (SSOs). After the development of definitive guidelines by the SSOs, Indian courts and the SEP owners in India will be in a better position to carry on the future litigations related to the infringement of SEPs and the FRAND terms of licensing the SEPs.