Recent 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 quirements 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.
The concept of SEPs evolved in
India when Ericson in 2011 objected to the importation of handsets by Kingtech
Electronics (India), claiming that the Handsets infringed several of their SEPs
in AMR Codec (Adaptive Multi-Rate) technology. This was the starting point for
SEP litigation in India. The Indian Patents Act, 1970 (the “Act”) does not
contain any special provision for SEPs. Further, the Act does not lay down any
specific criteria or terms and conditions to be complied with while licensing a
patented technology.
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.
Standard Setting Organization and
Standard Essential Patents Framework SSO scan be governmental,
quasi-governmental or private. These are responsible for setting, developing,
coordinating, interpreting and maintaining standards. The Bureau of Indian Standards
is India’s national SSO. In the Information and Communications TechnoloGies
sector the Telecom Engineering Centre is the only formally recognized telecom
standards/specification/type approval body in India. Global ICT tandardization
Forum for India,Telecommunications Standards Development Society, India
(TSDSI), and Development Organization of Standards for Telecommunications in
India are private SSOs in the Indian ICT sector.
The Institute of Electrical and
Electronic Engineers and International Telecommunication Union are prominent
SSOs in the cellular and Wi-Fi space. The TSDSI is the first SSO which was
established in India in 2013 with an aim to develop and promote India specific
requirements in the field of telecommunications.
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 important conditions with respect to adoption of SEPs are that,
1) 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
2) Secondly, that member 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 voluntarycontract
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
1. 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.
In the cases of Micromax and
Intex the CCI1 noted,“hold-up can subvert the competitive process of choosing
among technologies and undermine the integrity of standard-setting activities.
Ultimately, the high costs of such patents get transferred to the final
consumers.”
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.
2. 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.
In Virnetx Inc. v. Cisco
Systems2, the US Court of Appeals for the Federal Circuit held that the royalty
base must be closely tied to the laimedinvention rather than the entire value
of the product.
3. 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.
This concern was raised by the
CCI in the cases of Micromax and Intex3 wherein the Delhi High Court had
ordered Micromax to pay royalty to Ericsson on the basis of net sale price of
the phone rather than the value of technology used in the chipset incorporated
in the phone which was said to be infringed. CCI noted that “For the use of GSM
chip in a phone costing Rs. 100, royalty would be Rs. 1.25 but if this GSM chip
is used in a phone of Rs. 1000, royalty would be Rs. 12.5. Thus increase in the
royalty for patent holder is without any contribution to the product of the
licensee. Higher cost of a smartphone is due to various other software /technical
facilities and applications provided by the manufacturer/licensee for which he
had to pay royalties/charges to other patent holders/patent developers.
Charging of two different license fees per unit phone for use of the same
technology prima facie is discriminatory and also reflects excessive pricing
vis-a-vis high cost phones.”
By:-
Dipak Rao and Nishi Shabana
