India’s Approach to SEPs and FRAND Licensing: IPR and Antitrust Law Narratives

Introduction

The smartphones, laptops, pen drives etc. that we carry, function seamlessly because of certain standards, i.e., certain widely accepted technical rules that ensure interoperability. These standards are often built upon, SEPs or Standard Essential Patents. Standard Essential Patents, simply put, are the standardised and essential patents indispensable for the implementation of a technical standard. The indispensable nature of these SEPs makes it pertinent to examine the consequences and issues arising out of such monopoly held by the SEP owner. To address this licensing of these SEPs is required to occur on FRAND terms or Fair, Reasonable and Non-Discriminatory terms. The Indian legal system is still evolving and adapting to the balance between FRAND Licensing and Hold-out issues, shaped by Indian and foreign judicial precedents Thus, while there’s no formal policy established for regulation of SEPs and FRAND Licensing, courts and the Competition Commission of India (CCI) have laid groundwork through litigation. There continues a global debate upon the interpretation of what is ‘fair’ and ‘reasonable’. In the European Union, the landmark case of Huawei v ZTE established a structure or framework to balance the interests of the two parties involved in FRAND licensing of SEPs. In USA, the Microsoft v Motorola case clarified reasonable royalties as per FRAND commitments. In India, this aspect has been addressed and shaped by disputes such as Ericsson v. Micromax and Ericsson v. Intex highlighting the tensions between the application of intellectual property rights and competition law, with the Delhi HC and CCI holding separate stances. This article examines this growing field with judicial precedents, antitrust impacts, and assessing the foreign scenario.

SEP & FRAND Licensing: Background

SEP & FRAND Licensing bring about a need to adjust the IP regime with the antitrust policies in the legal and economic system. An SEP is an IPR essential for technology necessary to conform to the technical standard, ensuring interoperability of technology. Standard implies the guideline which exists for certain innovations. For instance, the USB standard used for pen drives and laptop/television/computer ports relies on SEPs, making a license essential for both device makers. The development of these standards is through Standard Setting Organizations (SSOs), which may be private, governmental or inter-governmental entities. An example of such SSO is the Development Organization of Standards for Telecommunications in India (DOSTI), a private SSO for the improvement of telecom standards in India.

Now, once a patent is implemented as a standard, it is compulsory for a manufacturer to follow this standard. Otherwise, that manufacturer’s product would be incompatible with other products, and thus would not be marketed. With this comes in the antitrust perspective, wherein, the SEP owner’s negotiating power rises and there’s no other alternatives for the licensees than to license the standard patent from the SEP owner. This would create a situation called a ‘Patent Hold-up’, where the SEP owner would take advantage of the SEP and try to impose unreasonably high royalty rates for the licensing.  On the other hand, ‘Patent Hold-out is a situation where the implementors of the SEP in their products, do not take a formal license from the SEP owner and instead hold out for the SEP owner to drag the matter to litigation, hoping to pressure the patent owner into lowering the royalty’. Additionally, royalty stacking is the condition where royalties are stacked or added one upon the other leading to a higher total royalty. This occurs when different SEP holders impose similar royalties on different components of the same product, which cause the royalties to even exceed the total product price. This issue was raised by the CCI before the Delhi HC in the cases on Micromax and Intex.

Thus, FRAND, Fair, Reasonable and Anti-Discriminatory Licensing terms become essential to level the field. Basically, FRAND Licensing is meant to tackle issues like royalty stacking and strike a balance between both the sides, described above as a lean towards either of the two sides would lead to risks associated with IP protection and fair market competition. However, in practice there are several setbacks faced with FRAND licensing in terms of a clear definition and demarcation of what amount to fair & reasonable terms and what does not, what amounts to a fair amount of royalty. In lack of a clear policy, courts are left to determine these aspects; Courts often examine the following aspects while determining what amount to fair, reasonable and anti-discriminatory terms:

1. Value of the patented technology- This scrutinizes whether the SEP genuinely contributed to the performance of the standard and to what extent.
2. Terms in similar licenses- This examines the royalty rates been agreed in similar licensing agreements, keeping in check the anti-discriminatory aspect of FRAND licensing.
3. Avoid monopolistic pricing- The royalty rate must reflect the value of the benefit added by the patent, not that fact that it is indispensable.

Judicial precedents and evolving landscape

Telefonaktiebolaget LM Ericsson v. Competition Commission of India (Delhi HC, 2016)

Ericsson owned the SEPs for mobile technologies. It develops and provides telecommunications and network infrastructure and software and support for 2G, 3G, 4G as well as 5G technologies. It had disputes with both Micromax and Intex over licensing regarding excess royalties, tied with the price of the entire phone rather than the chip itself. Micromax and Intex, both appealed before the CCI regarding the excessive royalty rates and unfair licensing terms proposed by Ericsson, amounting to a patent hold-up. Thus, the SEP held by Ericsson was alleged to have been misused by Ericsson. Furthermore, it was alleged that Ericsson offered unwanted licenses along with the requested ones by bundling them, in an anticompetitive manner. CCI ordered an investigation into the same, and this was challenged by Ericsson in the Delhi High Court, arguing that only the Patents Act applies in the present matter and not the Competition Act, i.e., the CCI does not have jurisdiction to investigate in the present matter. CCI, on the other hand claimed that the anti-competitive practices fall clearly within the Competition Act and thus, created a prima facie and valid direction to investigate.

The High Court rejected the contention that the patent law entirely excludes CCI jurisdiction. It noted that the competition act has an overriding element in section 60, CCI can examine anti-competitive conduct. And where the information discloses primer facie anti-competitive conduct, the CCI can form prima facie opinion and direct an investigation, validly. Essentially, the court held that the impugned investigation orders were valid, and refused to quash them.

The judgement confirms that anti-competitive conduct allegations with respect to SEP licencing can be investigated under the competition act by CCI. The Patent Act does not fully preclude SEP holders from scrutiny or check under competition law. The court, however, also stressed on the limited role of judicial review, that CCI only needs a prima facie case to investigate. What this means is that several SEP disputes can be channelled into CCI investigations and not final determinations.

Huawei v. ZTE (CJEU, 2015)

The Court of Justice of European Union adjudicated the case of Huawei Technologies Co. Ltd.v. ZTE Corp., ZTE Deutschland GmbH, regarding the enforcement action of SEP owners to infringe competition rules in EU. CJEU’s judgement holds a ‘middle path’ between the interests of the SEP holders and the implementors for the production of their products making use of the standard. The holder of the SEP has a commitment to grant licences on FRAND terms, and refusal to grant licenses will constitute abuse of dominance. Furthermore, the court stressed that the implementer must express a willingness to enter into a licence. And the holder of the standard essential patent must present a written licence offer, to which the implementer must respond diligently, in good faith without delaying.

Microsoft v. Motorola (US court of Appeals for the Ninth Circuit, 2013)

In the present case, Motorola sent Microsoft two letters offering licences at 2.25% of the product price. And claimed consistency with RAND licencing terms. Microsoft, on the other hand, alleged that the offers were excessive and contrary to the commitments of RAND and filed a suit alleging such breach. Motorola find patent enforcement actions in US District Court and in Germany seeking injunctions. The jury found that Motorola breached the commitments of RAND by excessive initial offers and by seeking injunctions. US courts treated RAND commitments as binding contracts enforceable by the implementers. Furthermore, seeking injunctions against willing licensees was said to be considered a breach of RAND and duty of good faith. Instead, courts can award damages, attorney fees as damages when injunction suits are considered to be inconsistent with RAND commitments.

4. LAVA International Ltd. v. Telefonaktiebolaget LM Ericsson (Delhi HC, 2024)

In the present case, Ericsson sued Lava for infringement of 8 SEPs relating to 2G, 3G & EDGE technology. It sought an injunction as well as damages for the same. On the other hand, Lava stated that not only did Ericsson’s licensing offers violated FRAND obligations, it also counterclaimed for patent revocation. While Ericsson argued that patients are essential and the rates are falling within the FRAND commitments, Lava claimed that the patents were invalid and the damages should be based on the specific part where the SEP was used, i.e., the chipset, and that Ericsson’s rates were excessive in nature.  Ericsson also contended that Lava, being an ‘unwilling licensee’ deliberately held-out the process, refusing to negotiate.

It was held by the Court that both the holder of the standard essential patent and the implementer must negotiate in good faith. Furthermore, the court found Lava to be an unwilling licensee as it delayed the negotiations. Eventually, seven of the patents were upheld and one was revoked. Furthermore, Lava’s phones used the SEPs and therefore infringement was proven. FRAND rate was considered adequate compensation for the infringement. The Delhi High Court considered comparable licensing agreements as the best evidence for FRAND rates, and held that Lava was liable to pay ₹244 crore as damages to Ericsson for infringement, based on FRAND rates. Additionally, an injunction was not granted, and instead of it damages were awarded, which were quantified on the FRAND royalty basis. This displays that Indian courts are rather cautious with the injunctions in such disputes pertaining to SEPs. This is mainly because SEPs must be licenced on FRAND terms and awarding injunctions would harm the consumers and the competition, and create an unfair market circumstance. The case reinforces a balance between IP law and competition law, and set a precedent on such cases pertaining to SEPs and FRAND Licensing.

Conclusion

The evolution of SEP & FRAND jurisprudence reveals a global attempt to balance the 2 competing sides-One, protecting the exclusivity of patent rights, andTwo, ensuring that the standardisation of these patent rights does not end up in abuse of monopoly.

The reading of the above landmark cases demonstrate this evolution. In India’s early involvement with SEP litigation, the question was mainly a jurisdictional one, as to whether the CCI could scrutinize such matters. The Delhi High Court had answered in affirmative, holding that Competition law applies even to prevent abuse of dominant position in patent contexts. This aligned India with European Union’s stance displayed in Huawei v. ZTE case. The CJEU laid down some basic requirements and expectations of both the SEP holder and the implementer for FRAND licensing. This reflected a stance, which at its core, established that patent rights exist, but their exercise must remain balanced and controlled within fair market practices.

On the other hand, however, in the Microsoft v. Motorola case, the US courts placed the RAND/FRAND terms under contract law. US courts treated these as enforceable commitments as contracts, with their breach being actionable by the implementers. An important aspect to be noted here is that the court restricted injunctive relief in such cases, stressing that FRAND/RAND terms were aimed at avoiding any hold-up. And, by 2024 the Indian courts had moved beyond the jurisdictional issues, as seen in the previous case of Ericsson v. CCI. In Lava v. Ericsson, The Delhi High Court clarified key elements, emphasizing upon negotiation in good faith, declaring that an implementer who delays is treated as an unwilling licensee. Furthermore, comparable licensing agreements for determining FRAND royalty rates were stressed upon, along with prevention of hold-up and hold-out by the parties. This aligns Indian judicial system with global cases like Huawei v. ZTE, reinforcing a balance between IP rights and competition law.

Author: Akanksha Ghorpade, in case of any queries please contact/write back to us via email to [email protected] or at IIPRD. 

References

Telefonaktiebolaget LM Ericsson (PUBL) v. Competition Commission of India, 2016 SCC OnLine Del 1951

Huawei Technologies Co Ltd v. ZTE Corp and another, [2015] Bus LR 1261

Microsoft Corp. v. Motorola Inc., 696 F.3d 872 (9th Cir. 2012)

LAVA International Ltd. v. Telefonaktiebolaget LM Ericsson, 2024 SCC OnLine Del 2497

World Intellectual Property Organization. “Standard Essential Patents (SEP).” WIPO. https://www.wipo.int/en/web/patents/topics/sep

“Delhi High Court awards Rs 244 crore damages to Ericsson against Lava for infringement of its Standard Essential Patents.” SCC Times, 6 April 2024. https://www.scconline.com/blog/post/2024/04/06/dhc-awards-rs-244-crore-damages-to-ericsson-against-lava-for-patent-infringement-legal-news/