Private Settlements in Standard Essential Patent Disputes: Unintended Consequences for Competition Law Enforcement

The recent judgment delivered by the Supreme Court of India, comprising of Justices J.B. Pardiwala and Sandeep Mehta, upheld the Delhi High Court’s ruling that once a settlement is reached between an informant and the party against whom information is filed, “the very substratum of the proceedings by Competition Commission of India (CCI) is lost”.¹ This precedent, while seemingly promoting alternative dispute resolution, raises profound questions about the regulatory vacuum emerging in the unregulated domain of standard essential patents (SEPs) and its implications for India’s competitive landscape.

The standard essential patent ecosystem

SEPs represent a unique category of intellectual property rights that protect technologies deemed indispensable for implementing specific technical standards. These patents are particularly prevalent in telecommunications, where compliance with established protocols like 2G global system for mobile communication (GSM), 3G universal mobile telecommunications framework (UMTS), 4G long-term evolution (LTE), 5G, and wireless fidelity (Wi-Fi) networks is mandatory for device interoperability.² Unlike ordinary patents, SEPs carry inherent market power due to their essentiality for standard compliance, creating potential for abuse through excessive licensing demands or discriminatory practices.

To mitigate this risk, SEP holders typically commit to licensing their patents under fair, reasonable and non-discriminatory (FRAND) terms when contributing to standard-setting organisations.³ However, India lacks a comprehensive regulatory framework governing SEP licensing, leaving the determination of what constitutes “fair” and “reasonable” to case-by-case judicial interpretation. This regulatory lacuna becomes particularly problematic when private settlements occur without regulatory oversight, potentially masking anti-competitive behaviours.

The significance of this issue is amplified by India’s burgeoning internet of things (IoT) sector, where devices increasingly rely on multiple SEPs for connectivity protocols. The global royalty income from SEPs was estimated at USD 20 billion in 2021, with projections indicating substantial growth as IoT technologies become more prevalent.⁴ In this context, unregulated private settlements risk creating precedents that could undermine competitive market dynamics.

The Monsanto judgment: A regulatory retreat

The Supreme Court’s decision in CCI v. Monsanto Holdings (P) Ltd.⁵ (Monsanto case) represents a significant departure from the traditional understanding of competition law enforcement as serving broader public interest. The Court’s reasoning that it “should not interfere with the impugned judgment passed by the High Court” in light of the “peculiar facts and circumstances” where “original complainants/informants have nothing further to say in the matter” establishes a concerning precedent.

The judgment’s most significant aspect lies in its implicit acceptance that private dispute resolution can terminate regulatory proceedings, even when broader market implications remain unresolved. This approach fundamentally mischaracterises the nature of competition law enforcement, which serves not merely the private interests of individual complainants, but the broader public interest in maintaining competitive markets.

The Court’s decision to keep “questions of law involved in this litigation” open “to be agitated in some other appropriate case” provides little solace for regulatory certainty. This approach creates a legal vacuum where SEP disputes, often involving complex technical and economic considerations with far-reaching market implications, can be resolved through private arrangements without regulatory scrutiny.

Forum shopping and strategic settlements

The judgment incentivises SEP holders and implementers to engage in strategic settlements to avoid CCI scrutiny. Large technology companies with substantial SEP portfolios could leverage this precedent to negotiate settlements that, while resolving immediate disputes, may contain terms that disadvantage smaller market participants or create barriers to entry for emerging competitors.

This risk is particularly acute in SEP licensing, where the absence of clear FRAND guidelines allows for wide variation in licensing terms. A settlement that appears reasonable between two large corporations might set royalty rates or licensing conditions that smaller IoT manufacturers cannot afford, effectively consolidating market power among established players.

Erosion of regulatory deterrence

Competition law enforcement relies significantly on deterrent effects to prevent anti-competitive behaviour. When regulatory proceedings can be terminated through private settlements, the deterrent value of potential CCI investigation and penalties is substantially diminished. This erosion is particularly problematic in SEP licensing, where the potential for abuse is high due to the essential nature of the technologies involved.

The Delhi High Court’s observation in Interdigital Technology Corpn. v. Xiaomi Corpn.⁶ that FRAND obligations create mutual responsibilities for both SEP holders and implementers becomes meaningless if these obligations can be privately negotiated away without regulatory oversight.

Market fragmentation and innovation stifling

Private settlements in SEP disputes often involve cross-licensing arrangements or portfolio-wide agreements that can create market segmentation. When these arrangements are concluded without regulatory scrutiny, they may inadvertently create technological silos or restrict access to essential technologies for certain market segments.

The Supreme Court’s approach in Ericsson Inc. v. D-Link Systems⁷, emphasising calculation of royalties based on the “smallest saleable patent-practising unit” (SSPPU), was designed to prevent excessive royalty demands that could stifle innovation. However, when settlements occur without regulatory oversight, there is no mechanism to ensure such principles are followed, potentially leading to arrangements that impose excessive costs on smaller manufacturers.

Regulatory arbitrage

The judgment creates opportunities for regulatory arbitrage, where parties can choose to settle disputes in India to avoid more stringent regulatory scrutiny available in other jurisdictions. This undermines India’s position in global SEP governance and may lead to a “race to the bottom”, where India becomes a preferred jurisdiction for avoiding meaningful regulatory oversight of potentially anti-competitive SEP licensing practices.

Comparative perspectives: Learning from global precedents

The European Union’s approach in Huawei Technologies Co. Ltd. v. ZTE Corpn.⁸ established clear procedural safeguards for SEP enforcement, requiring SEP holders to offer FRAND terms before seeking injunctive relief. This framework ensures that even when parties settle, the underlying FRAND principles are respected and regulatory oversight is maintained.

Similarly, the UK’s position in Unwired Planet International Ltd. v. Huawei Technologies (UK) Ltd.⁹ , establishing courts’ authority to determine global FRAND royalty rates, demonstrates how judicial intervention can provide clarity while maintaining competitive safeguards. The UK approach ensures that settlements occur within a regulated framework rather than completely outside regulatory oversight.

In contrast, the Monsanto¹⁰ judgment appears to abdicate regulatory responsibility entirely, leaving SEP licensing disputes to purely private resolution without considering broader market implications.

Recommendations for reform

To address the unintended consequences of the Monsanto precedent, several reforms are urgently needed, wherein, the lawmakers should clarify through an amendment to the Competition Act, 2002, that competition law proceedings serve public interest and cannot be terminated solely through private settlements between original parties. The law should explicitly recognise that CCI proceedings are in rem (concerning market conditions) rather than merely in personam (between private parties). And, India urgently needs comprehensive SEP legislation that establishes clear FRAND determination mechanisms, mandatory disclosure requirements for SEP holders, and procedural safeguards for licensing negotiations. Such legislation should include provisions preventing settlements that circumvent regulatory oversight when broader market implications are involved.

Adding to that, the courts require specialised training on the technical and economic complexities of SEP disputes. Clear judicial guidelines should be established for assessing when private settlements adequately address public interest concerns and when continued regulatory oversight is necessary. The CCI should be empowered to continue investigations even after private settlements when significant market implications remain unresolved. This power should include authority to review settlement terms for potential anti-competitive effects and to impose conditions ensuring compliance with competition law principles.

Conclusion

The Supreme Court’s decision in Monsanto¹¹, while promoting settlement as a dispute resolution mechanism, creates significant risks for competition law enforcement in the critical domain of standard essential patents. The judgment’s implicit acceptance that private settlements can terminate regulatory proceedings fails to recognise the broader public interest served by the competition law enforcement.

In the absence of comprehensive SEP regulation, allowing unrestricted private settlements risks creating a regulatory vacuum that sophisticated market participants can exploit to avoid meaningful oversight of potentially anti-competitive licensing practices. This is particularly concerning given India’s growing importance in global technology supply chains and the increasing prevalence of SEP-dependent technologies in everyday devices.

The questions of law that the Supreme Court has left, “open to be agitated in some other appropriate case” require urgent attention. However, waiting for another case to clarify these fundamental issues risks allowing further erosion of regulatory oversight in a sector where such oversight is critical for maintaining competitive markets and fostering innovation.

India’s technology sector, particularly the emerging IoT ecosystem, requires a balanced approach that promotes both innovation and competition. This balance cannot be achieved through purely private dispute resolution mechanisms that ignore broader market implications. Instead, India needs a comprehensive regulatory framework that ensures SEP licensing occurs under transparent, fair conditions while maintaining space for legitimate business negotiations.

The Monsanto precedent, while final in its immediate application, should serve as a catalyst for broader reform rather than a template for future regulatory abdication. Only through such reform can India ensure that its competition law framework remains effective in addressing the complex challenges posed by essential technology licensing in the digital age.