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Standard-Essential Patents: An overview with FRAND Licensing and Litigation

Although India has the world’s second largest telecommunications network, Indian jurisprudence on fair, reasonable, and non discriminatory (FRAND) licensing practices for standard essential patents (SEPs) is at an incipient stage. The concept of standard essential patents (SEP) is new in India and gained popularity only after the Microsoft Ericsson dispute; when Ericsson challenged Indian Micromax to court to enforce its SEPs. These wars between the smartphone giants over the patent issues have brought into focus the importance of Standard Essential Patents (SEPs).

SEPs are patents essential to implement a specific industry standard. This implies that to manufacture standard compliant mobile phones, tablets and other electronic devices, such manufacturers will have to use technologies that are covered by one or more SEPs. Standards are technical requirements or specifications that seek to provide a common design for a product or process. Patents which are essential to a standard and have been adopted by a Standard Setting Organization (SSO) are known as SEPs.

SEP was also defined by the Washington District Court in Microsoft Corp. v Motorola Mobility, Inc., as “A given patent is essential to a standard if use of the standard required infringement of the patent, even if acceptable alternatives of that patent could have been written into the standard”. It is a universal truth that consumers prefer standard compliant products as they deliver an incorrigible quality. Thus, in order to save a spot in the demand market, the inventors are forced to adopt technologies conferred by Standard Essential Patents. In turn, these SEP holders gain a huge competitive edge in the market and do not face any competition until they expire and move into the public domain.

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.

The prospect of licensing of SEPs plays a vital role in a company’s incentive 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 SSO’s 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 investment in research and development.

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.

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 unfavourable terms, nor should the SEP holder be allowed to discriminate amongst its licensees by charging differential royalty rates among different players.

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.

The important conditions with respect to adoption of SEPs are:

  • Firstly, the members must disclose, prior to the adoption of a standard, IP rights that would be essential to the implementation of a proposed standard, and

  • Secondly, that members must commit to license their SEPs to third parties at FRAND rates.

These policies have to be adhered to ensure the widespread adoption of standards, the very purpose for which a SSO is made. Therefore, licensing SEP on FRAND terms is a voluntary contract between the SSO and the SEP holder. However, the meaning of FRAND has not been defined by SSOs; it depends upon the nature of the transactions between the SEP holder ("licensor") and the SEP implementer ("licensee").

Major issues involved in SEP litigation

  • Patent Holdup: Once a patent is adopted as a standard and achieves commercial acceptance, it becomes 'locked-in'. It is necessary for a manufacturer to use the same; otherwise his product would be incompatible with other companies' products and hence unmarketable. Such a situation strengthens the SEP holder's bargaining power because the licensee does not have alternatives to the same technology. Patent holdup occurs when a SEP holder takes advantage of a locked-in patent by trying to impose unreasonable royalty rates. Unless constrained by a SSO to comply with FRAND licences, the SEP holder can exploit the locked in position to obtain significantly higher royalties than it would have obtained before the patent was incorporated as a standard. However, even after committing to FRAND such a situation arises due to the vague nature of FRAND. Further, in such cases the licensor binds the licensee by a non-disclosure/confidentiality agreement with respect to the terms of the license which restrains the other licensees from acquiring knowledge of the royalty rates imposed on such previous licenses. This acts as an impediment in the conduct of licensing negotiations between the parties and thus leads to major competition concern in FRAND litigations.

  • Royalty Base: The reasonableness of a royalty amount depends on the correct selection of the royalty base. The SEP holders tend to impose the royalty rate on the net sale price of the final product rather than only on the component which comprises the infringed patent. This means even if SEP is used in a single component of a multi component product, the implementer would be liable to pay the royalty on the components which do not include the SEP. In such cases, the whole idea of FRAND diminishes as calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product.

  • Royalty Stacking: Royalty stacking is the situation where royalties are layered upon each other leading to a higher aggregate royalty. This happens when different SEP holders impose similar royalties on different components of same multi component product, leading the royalties to exceed the total product price.

  • Availability of Injunctive Relief: Threat of injunction becomes a powerful weapon when used by a SEP holder for enforcing its royalty rates, as in such a case an SEP implementer would think that accepting an unreasonable royalty would be less risky than curbing an action of infringement. The use of injunctive relief against willing licensees is prima facie breach of FRAND commitment as the FRAND royalty rates by itself are an adequate remuneration to the SEP. Such an action is also considered to be abusive of dominant position and hence a violation of competition laws. Therefore, an injunction should only be claimed when the licensee is unwilling to pay the judicially determined FRAND royalty or where monetary compensation is not an adequate remedy.

The underlying principle behind granting of injunction is that a party must suffer an irreparable damage if the same is not granted. The law on injunction in India is based on the principles of equity. In the said case, the remedy available to the SEP holder is in the form of royalty. The only thing which is to be determined is whether the quantum of the same is adequate. Further, a SEP holder indulging in setting up a SSO, inevitably accents to license the technology on FRAND terms. In such a case, even if the royalty is low, injunction should not be granted unless there is irreparable injury caused to the SEP holder.

The law with respect to SEP is unclear and judgements with respect to the same have differed from territory to territory. It has to be realised that SEPs are not used by the licensees due to a lack of choice of alternatives, but the same is done in order to maintain operability and compatibility between the symbiotic technologies. When licensed under FRAND terms and without controversy, SEPs can be a boon to the industry and consumers. With their ability to distribute innovations widely and promote competition, SEPs in and of themselves are beneficial to society. But when things go wrong, SEPs can be at the heart of big, ugly, expensive conflicts.

It has to be realised that a country such as India cannot afford to lose its global image on the basis of lack of development of IPR jurisprudence. While companies must be mandated to pass their technology on the basis of FRAND commitments, it is also pertinent to note that rights of the patent holder are also to be safeguarded. Therefore, in the disputes related to SEP it would be prudent if adequate trial is given to both the parties and rates are determined by the Court without prejudice to any party and keeping in mind the interests of the end consumers at large.

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