Standard Essential Patents — The Irony of Standardization


This century is continually being marked by the convergence of this goliath world into a global village. While this phenomenon is attributable to a number of factors, inter-operability of technology and adoption of common standards have acted as important catalysts in this process. As such, this convergence perforce requires that common standards are available on fair terms  to all. However, a number of components of these essential standards are patented i.e. are standard essential patents (SEPs), thereby implying the exclusive right of the patentee to use and exploit the SEP. It is at this juncture that a complex yet interesting legal wrestle between the competition law and intellectual property rights (IPR) regimes emerges.

In essence, SEPs encompass those patented technologies which have become essential to a standard. From an antitrust perspective, an SEP holder enjoys substantial, almost monopolising market power due to lack of substitute alternative technologies. The SEP holder is susceptible to engaging in abusive practices, such as refusal to license the SEP to other manufacturers, or charging exorbitant royalties. In order to balance this one-sided bargaining power, standard setting organisations (SSOs) across all jurisdictions obligate SEP holders to license their intellectual property on fair, reasonable and non-discriminatory (FRAND) terms. However, the multi-jurisdictional decisional practice elucidates that mere affirmation by SEP holders to SSOs does not preclude them from engaging in abusive practices, thereby necessitating an interaction between competition laws and IPR.

In India, while the debate over SEPs is nascent, it has raised several jurisprudential issues qua the interplay between the Competition Act, 2002 ( the Competition Act) and the Patents Act, 1970 (the Patents Act). For instance, the primary question raised is whether conduct relating to SEPs could be investigated under the provisions of the Competition Act and whether the Competition Commission of India (the CCI) has the jurisdiction to scrutinise the alleged anti-competitive conduct of an SEP holder including the fairness of the FRAND terms. It is pertinent to note that Section 3(5) of the Competition Act exempts restrictions imposed by IPR holders to protect the exclusive use of their IPRs from scrutiny under Section 3; however, the ambit of this exemption is limited as much as the exemption is granted only from Section 3[1] (and not Section 4[2]) perspective and extends only to reasonable conditions imposed in exercise of statute conferred rights.[3]

 To date, the CCI has initiated investigations in three cases[4] concerning inter alia the alleged contravention of FRAND licensing terms by Telefonaktiebolaget LM Ericsson (Ericsson) for the use of its 8 SEPs[5] implemented in the 2G and 3G wireless telecommunication standards. In all the three cases, the informants had raised similar contentions that being the only patent-holder of the 8 SEPs, with no alternative available technology, Ericsson had abused its dominant position by charging exorbitant royalty rates calculated on the basis of the value of the downstream product (mobile handset) rather than the value of the patented technology (chipset). In addition, the informants had also contented that Ericsson has resorted to patent hold up and royalty stacking by tying and bundling the licensing of non-essential patents with the 8 SEPs and by demanding the execution of Non-Disclosure Agreements (NDAs) by all prospective licensees which in effect, gave Ericsson the discretion to charge different royalty rates from different licensees for the same technology. Lastly, it was also contended that under the SEP-licensing agreement, Ericsson had subjected the licensee to dispute resolution in a jurisdiction where neither of them had any operations.[6]

The CCI observed that in the relevant market for SEPs in the GSM and CDMA compliant mobile communication devices in India, Ericsson held a dominant position as it was the largest holder of SEPs and there were no alternate technology. Further, observing that the contravention of FRAND terms threatened the very integrity of standard setting activities, the CCI held that the royalties demanded by Ericsson bore no reasonable nexus with the patented technology and amounted to discriminatory pricing given that different royalty would be charged from different licensees for the same technology due to the difference in prices of the mobile handset in which the technology was used. The CCI observed that the patentee is required to apply FRAND terms fairly and uniformly to similarly placed players. As such, this discriminatory/excessive pricing was held to be prima facie in contravention of FRAND terms and Section 4 of the Act. Further, the CCI noted that the mandatory execution of the NDA (which in essence reduced transparency in the market) implied a bar on sharing of commercial terms of FRAND licences amongst similarly placed licensees and imposition of a foreign jurisdiction for dispute resolution barred the patentee and the licensee from approaching the adjudicatory authorities in the country where both the parties operated. Therefore, imposition of such obligations were also held to be prima facie evidence of abuse of a dominant position by Ericsson.

On a jurisdictional challenge to the CCI’s investigation by Ericsson, the Delhi High Court in its order[7] carefully noted that though the Patents Act was a special statute insofar as patents were concerned and would override the Competition Act in case of inconsistency, the legislations could operate harmoniously given that the remedies offered by the two legislations were not mutually exclusive and both legislations contemplated the exercise of jurisdiction by different regulators.[8]

Additionally, the Delhi High Court noted that since patents qualified as “goods” within the meaning of the Competition Act, the SEP holders were “enterprises”, thereby being amenable to scrutiny under Section 4 of the Act. Further, it was observed that activities such as patent hold-up, royalty stacking or seeking injunctive relief against manufacturers willing to enter into licensing agreements on FRAND terms, may result in foreclosure of competition in the market. Interestingly, this observation of the Delhi High Court is in consonance with the ruling of the German Federal Court of Justice in Huawei Technologies Co. Ltd.[9] where it held that while injunction was a legitimate remedy available to an SEP holder, seeking the same against a willing licensee would amount to abuse of dominance. In this context, the European Commission has also opined that a willing/potential licensee does not become unwilling merely by challenging the validity or essentiality of the SEP under question. This proposition was also affirmed by the Delhi High Court.

In light of the existing undercurrent of innovation boom, worldwide and in India, and the corresponding increase in the patent applications, it is likely that the CCI will face more complex issues arising out of the use and licensing of SEPs in the near future. While the order of the Delhi High Court is significant in settling the jurisdiction of the CCI over antitrust aspects of SEPs, the final determination of this issue by the CCI in these cases remains to be seen. However, the CCI will have to cautiously tread this path, by making appropriate references to the patent authorities qua questions which it is not competent to resolve and will also have to steer away from acting as a price regulator in its determination of unfairness of royalty rates. Lastly, it will be interesting to see if there will be unison in the stance adopted by the CCI and patent authorities or whether there can be a catch-22 situation where the CCI regards the procurement of an injunction by a patentee to be an abusive act, and on the other hand, the patent authorities determine the licensee to be unwilling!

Anshuman Sakle is a Partner with the Competition Law Practice at Cyril Amarchand Mangaldas and can be contacted at anshuman.sakle@cyrilshroff.com. Anisha Chand is a Principal Associate with the Competition Law Practice at Cyril Amarchand Mangaldas and can be contacted at anisha.chand@cyrilshroff.com.

[1] This section relates to anti-competitive agreements.

[2] This section relates to abuse of dominant position by an enterprise or a group.

[3] Shamsher Kataria v. Honda Siel Car India Ltd., 2014 SCC OnLine CCI 96.

[4] Micromax Informatics Ltd. v. Telefonaktiebolaget LM Ericsson, 2013 SCC OnLine CCI 78; Intex Technologies (India) Ltd. v. Telefonaktiebolaget LM Ericsson, 2014 SCC OnLine CCI 8; and Best IT World (India) (P) Ltd. v. Telefonaktiebolaget LM Ericsson, 2015 SCC OnLine CCI 76.

[5] 8 SEPs comprise of Adaptive Multi-Rate (Indian Patents IN203034, IN203036, IN234157, IN203686, IN213723), 3G (Indian Patents IN229632, IN240471) and EDGE Technology (Indian Patent IN241747).

[6] Best IT World (India) (P) Ltd. v. Telefonaktiebolaget LM Ericsson, 2015 SCC OnLine CCI 76.

[7] Telefonaktiebolaget LM Ericsson v. Competition Commission of India, 2016 SCC OnLine Del 1951.

[8] Ss. 21 and 21-A of the Competition Act provide for reference by a statutory authority and the CCI to one another in case a decision taken in the course of proceedings is contrary to the provisions of the statute concerned or the Competition Act, as the case may be. In addition, S. 62 of the Act stipulates that the provisions of the Competition Act are in addition to and not in derogation of other existing laws. Further, S. 90(1)(ix) of the Patents Act provides that the Controller General of Patents can permit export of the patented product under a compulsory licence in cases where the licence is issued to remedy a practice that has been determined to be anti-competitive after a judicial or an administrative process.

[9] Huawei Technologies Co. Ltd. v. ZTE Corp., ZTE Deutschland GmbH, Case C-170/13.

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