Submission on SEPs and Their Availability Under FRAND Terms

  1. Introduction

This submission is with respect to the discussion paper published by DIPP on Standard Essential Patents (SEPs) and their availability under FRAND terms. As one of the prime objects of IP laws is to promote/establish a fair balance between IP protection and Public interest, it is becoming essential for the governing bodies to have a closure look on the way SEPs are being commercialized.  In absence of any clear frameworks or guidelines by the government and standards-making organizations, a lot of concerns have been raised recently with regards to the working of standard essential patents.  It has been observed across the globe that there is no standard for terming any patent as Standard Essential Patent and there certainly are no standard /clear enforceable guidelines under which the SEPs should be licensed to interested parties.

In view of the issues raised during recent litigations and foreseen issues related to SEPs and the ways they are licensed, the DIPP has taken a welcome step to develop a suitable policy framework to define obligations of the essential patent holders and their licensees.  Though the discussion paper under the heading of “issues for resolution” attempts to explore a variety of issues, the objective appears to be conservatively defined. We think that the objective should be to develop a suitable framework/guideline for (a) Standards Setting Organizations (SSOs), (b) Government Bodies that approve or mandate any standard, (c) Rights holders of SEPs, and  (d) Potential Licensees; and to evaluate the need for change in domestic laws, if required.

Through this paper, we intend to submit our opinion on different issues listed for resolution and some other inputs to be evaluated further. We have also made an attempt to propose some obligations for each of the above-listed entities

  1. Legislative measure

Let’s start with the first issue listed for resolution.

  1. Whether the existing provisions in the various IPR related legislations, especially the Patents Act, 1970, and Anti-Trust legislation, are adequate to address the issues related to SEPs and their availability on FRAND terms? If not, then can these issues be addressed through appropriate amendments to such IPR related legislations? If so, what changes should be affected?

Though the Patent Act, 1970 incorporates several provisions (like compulsory license) to strike a balance between the interest of IP owners and public interest, the issues related to SEPs were never explored to be addressed by the law.  As the issues related to SEPs have the potential to directly impact public interest, it is the right time for the legislators to explore the possibility of suitable changes in the law or clarification of law to address the issues related to SEPs.

            The patent act 1970 through section 66 has also provided a tool for revocation of the patent in the public interest that reads as “Where the Central Government is of opinion that a patent or the mode in which it is exercised is mischievous to the State or generally prejudicial to the public, it may, after giving the patentee an opportunity to be heard, make a declaration to that effect in the Official Gazette and thereupon the patent shall be deemed to be revoked”.Though the provision has been rarely, in fact never,  invoked (at least to my knowledge), there should be some clarity on the term “generally prejudicial to the public”, and whether the section 66 can be a potential tool to revoke the SEP if the public interest is undermined due to abuse of dominance by the SEP holders.  Here are some of the proposals that can be incorporated through appropriate amendments after careful evaluation.

Proposed Legislative Measures:

  • Addition of grounds of revocation: An additional group of revocation under section 64 can be added to enable revocation of the patent in case of failure of timely disclosure of essential patents related to a standard by a member or non-member of the associated standard, especially when the patent makes a claim of it being a SEP, to avoid any potential patent hold-up issues.
  • The requirement under section 146 rules 131 requiring disclosure on working on patents in form-27 to clearly state if the patent is a SEP and associated standard, if any, for which the patent has the potential of becoming SEP. Though most of the SSOs require disclosure of the IP by members of the SSOs, the obligation is mostly contractual and may not have a binding effect in the law of land, and hence a suitable legislative measure in this regard is required to avoid the practice of patent hold-up.
  • Avoid injunction by the court if bonafide intent is shown by the potential licensee: Courts should refrain from granting injunctions in suits initiated by the SEP holders without giving reasonable opportunity to the potential licensee to prove a bonafide intent to take a license from the SEP holder.
  • Limiting the right conferred by a patent in case the patent is a SEP.
  • Provision for “license of right” should be explored in order to ensure the license of the patent to a potential licensee at RAND terms. Section 46 of the UK Patent Act 1977 (as amended) provides a patent proprietor with the possibility of having an entry made on the register that licenses are available as of right under a patent.   By having a patent endorsed “licenses of right”, a patent proprietor effectively offers any third party the opportunity to have a license under the patent, on reasonable terms. In terms of a license that cannot be agreed between the parties then the UK Patent Office sets the license terms. A similar provision can be made in India, as it benefits both the right holder and the potential licensee.  Through this provision, the patent holder can get rebates on the annuity fee as well.

Though it is a well-perceived notion that the interference of Government in IP commercialization can undermine the interest of the right holders, the same cannot be said for SEPs, as unregulated SEPs create an opportunity for abuse of the dominant position of right holders. Legislative measures to address issues related to SEPs have also been discussed and explored during the thirteenth session by the WIPO standing committee on the law of patents. The legislative measures are also required in absence of any strong enforceability within India for contractual violations by members of SSOs with respect to agreement of the members with the SSOs. The requirement of legislative measures has also been felt in recent cases which show uneven negotiating power of IP owner and potential licensor-especially in the case of SEPs, where mutual contracts-especially with unreasonable terms of NDA-may is not the right tool for executing the licensing agreement.  The advantages of these solutions are that they are universal, and also apply to non-participants in the standard-setting process.

  1. Guidelines for Standards Setting Organizations (SSOs)

The proposed policy framework should also define the guideline/obligation for standards-setting organizations, especially with respect to the adaptation of technology for setting the standard and terming any patent essential for standard. The rationale behind FRAND is that it benefits the inclusion of patented technology in technical standards while ensuring that the holder of SEPs should not abuse the dominant market position it gains from the widespread adoption of a voluntary technical standard. It has clearly been observed by the communities over the world that Patents are essential to implement chosen industry standards, and those patents (SEPs) cannot be exploited like any other patent, and certainly not to the exclusion of other market participants.

SSOs should also ask members to identify their most restrictive licensing terms and conditions, including the maximum royalty rate, the basis of royalty (whether smallest tradeable unit or the end product, etc.), that they would demand if access to their patents becomes necessary to implement the standard. Such disclosures, made in advance of a standard being selected, provide SSO members important information that allows them to choose a standard based not only on technical merit but also on the cost of accessing the IP needed to implement that standard.

The selection of SEPs should be one of the essential parts of the standard making.  Members should / must disclose all granted and pending applications, which should be examined by a team of SSO with respect to their essentiality and should be termed as SEP only if their essentiality is established at a broad level.  Members should also disclose in future any granted and pending applications in order to allow SSOs to evaluate essentiality and terming those patents as SEPs.  Members should essentially disclose the IPR which might be essential if that proposal is adopted and the law should be amended accordingly to ensure invalidation/revocation of IPRs in absence of such disclosure.

The SSOs should have a transparent system in which technology standards are adopted, and should have a clear IP policy requiring binding obligation on the members to disclose their IP.

  • Representation of Government

To make the system more transparent, wherever possible or for standard having the potential to impact the public at large, there should be a representation of the Government during the standard-making process.

  • Onus of SSOs to monitor SEP

Having technical experts in their panels, the SSOs should have an onus to monitor SEPs and evaluate IP declared by its members to determine whether the disclosed patent is essential for the standard or not.  There should be guidelines on what becomes an essential patent and what should be reasonable terms and conditions for licensing the SERPs.

Washington District Court in Microsoft Corp. v. Motorola Mobility, Inc. defined SEP as “A given patent is “essential” to a standard if the use of the standard requires infringement of the patent, even if acceptable alternatives of that patent could have been written into the standard.” A patent is also essential “if the patent only reads onto an optional portion of the standard.” Thus, it is impossible to manufacture standard-compliant products without using technologies covered by one or more SEPs.

The judgment very broadly defines the term SEPs and has never been examined by any other court in other jurisdictions, which leaves a question mark on the merit of the definition itself. With this very broad definition of SEP, the SSOs have to have an obligation to define a transparent way in which patents become SEPs and how they should be licensed. As some of the standards set by the SSOs are directly impacting the public interest, the SSOs can’t be an elite club of influential corporate houses and a tool for the elites to secure a dominant position.  SSOs should take the onus to get the license from the IP owners and make them available at FRAND terms.

  • IP Policy of the SSOs

IP policy of the SSOs should have some mandatory provisions to create binding obligations on the members. Some of the essential provisions are listed below

  • Disclosure requirement: IP policy should have a building clause for disclosure of patent or pending applications by the members in a timely manner (maybe within 6 months of a claim being grated or application is filed). The ANSI Patent Policy Guidelines suggest that, in order to encourage early disclosure of essential patents, one or more requests be made to participants during the development of standards for the disclosure of essential patents. Such a request could be made by including it in letter ballots or in requests that could be repeated at the working group(s) or by a semi-annual notice given to each participant. The Guidelines, however, clarify that participants in the standards development process are not required to conduct a patent search of their own or others’ patent portfolios. The Guidelines also suggest that ASD makes it clear that any participant in the process, and not only a patent holder, is permitted to identify or disclose essential patents. They state that it is desirable to encourage disclosure of as much information as possible concerning the patent, such as the identity of the patent holder, patent number, information regarding how it may relate to the standard being developed, and relevant unexpired foreign patents. Further, the Guidelines encourage disclosure of existing pending US applications, although there may be an issue of confidentiality regarding unpublished applications and uncertainty as to whether the application would mature into a patent and what the scope of the claims in the granted patent would be.
  • Disclaimer to offer a license on FRAND terms: Written declaration by the member to grant the license of SEPs on FRAND terms without any discrimination between existing or potential licensees should be mandatory. Agreement to grant the SEPS on FRAND terms should be the primary requirement when any technology is adopted by the SSOs and they must ensure that the FRAND terms are used in essence. Deviation of the set guidelines of FRAND should be treated as a violation of the agreement and should be linked with loss of IP rights.
  • Royalty base: Declaration by the members that they will negotiate Royalty for the SEPs based on the smallest saleable component. The same view on the royalty base has been suggested by the CCI and even by some SSOs for example IEEE-SA. There can be an indicative price of royalty set by the SSOs, and share/percentage of each member, which respect to the contribution of claim in the technology should be defined by the SSOs for each member. For example, the SSO can define that the highest royalty rate for a compliant smallest saleable component would be “X” percentage of the cost of that smallest component, and royalty share for company A be M percentage of X, company B be N percentage of X and like that.
  • Injunction Against potential Licensee: Member can’t seek or threaten to seek, an injunction against a potential licensee who is willing to negotiate for a license.
  • NDA: Terms of the NDA for the execution of the licensing agreement can’t hide the SEPs in question. SSOs around the world have raised the issue of Patent Hold-up and Royalty Stacking in view of the non-conformity of FRAND practices by licensors which gets complicated due to the discriminatory NDAs. Hence, there is a need to frame an acceptable framework for NDAs, in case both the licenser and licensees consider it as obvious in some cases.  To supplement, SSOs should seek advanced binding commitments from members before a standard is accepted.
  • Bundling of SEP patent with other patents: The member should not bundle SEPs with other patents of the members, as this creates an unfair practice and leads to abuse of dominance.
  • Patent Pool

The stacking up of royalty rates is a major issue, particularly in the IT industry where thousands of patents are involved in a single product.  In the instance of multiple royalty rates, that too with jacked-up values, at times the viability of profit diminishes, and thereafter, the burden shifts to the customer. A probable solution, although somewhat hard, would be a step-down royalty rate or total royalty pool.  For the step-down royalty rate, the share of each subsequent SEP holder will diminish as per a present declining rate. This makes sure that the multiple SEPs bring in their patents and the cost of the standard is disclosed to the SSO.

The patent pool managed by the SSOs can be a suitable option that may benefit all the members and potential licensees.  SSOs or any appropriate administrative body should facilitate the patent pool for SEPs and define a portion of royalty to be made to each SEP holders.  By doing so, the chance of a single member getting an unreasonable royalty and undermining the interest of other members can also be avoided.   SSOs/ administrative bodies can work in coordination with Patent offices and should keep an eye on any potential patent-hold up. An attempt should be made to include maximum patents, those are essential for standard. A suitable royalty model for the sharing of royalty among members can be explored.

In order to bring more transparency and predictability to the overall royalty price for the implementation of standards, some propose a new model (“Industrial Royalty Pie” model). In the telecom environment which is characterized by complex and dynamic standards having a broad technical scope and long evolution cycles over many years, it is felt that mere ex-ante disclosure of licensing terms at the SSO is not effective, since it is too early for prospective patent owners to put a meaningful price tag on the technology. The Industrial Royalty Pie model, therefore, combines the ex-ante process with other measures so that both individual royalty rates are FRAND-compliant and cumulative royalty rates are reasonable.

  • Special IP policy for Standards enforced/recommended by Government /Law

There should be guidelines from the Government for licensing of patents relating to technical requirements that are imposed by law, referred to as technical regulations based on a defined framework. There should be special guidelines for licensing SEPs under FRAND for SEPs related to standards that are enforced by Government/law (like encryption Techniques, security features in an automobile or medical devices, etc.).

  1. Miscellaneous

A further question arises about the scope of claim and rights protected for possibly changed claims in different countries.  As IP rights are territorial in nature, a complete family of a patent can’t be essential. For example, a patent granted in the US may be SEP, while the same patent granted in India may not be, as its scope of protection may have varied during prosecution, and again onus lies on the SSOs to compile the SEPs for different jurisdiction.

Special care should be taken by Government agency before issuing any ruling on a standard to be followed, keeping in view the potential IP licensing issues related to SEPs.

About the Author: Gyanveer Singh, Senior Patent Associate at Khurana & Khurana, Advocates and IP Attorneys and can be reached gyanveer@khuranaandkhurana.com and Harsh, Junior Patent Associate at IIPRD and can be reached at harsh@iiprd.com.

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