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Lakshmikumaran & Sridharan Standard Essential Patents: Treatment by antitrust regulators
 
Area
Competiton Law
Authors
Abir Roy | Joint Partner
Date
03 October, 2015


Introduction


The interface between regimes of competition law and intellectual property laws often described as “friends in disagreement”, has never been as intense as in the case of enforcement of standard essential patents (SEPs). Today, several key antitrust regulators are dealing with the issue of SEP litigation. As such, even Competition Commission of India (CCI) is currently investigating into the prima facie cases of abuse of dominance by a SEP holder (Ericsson). The issue which is being investigated by the CCI is dealing with the issue of excessive and discriminatory pricing.


In this article, the allegations against Ericsson (i) and the prima facie case passed by the CCI is discussed. Thereafter, a comparative perspective of evaluation of such issues before other global competition authorities is also presented.


CCI’s analysis of SEP issues


There are pending investigations which are being conducted by the Director General investigating the conduct of Ericsson on the licensing terms of SEP.

 

Based on the information received, the CCI observed that Ericsson holds a large number of GSM and CDMA patents. Further, the CCI noted that since Ericsson holds SEPs and there is no other alternate technology in the market, it enjoys “complete dominance” over its present and prospective licensees in the relevant product market.

 

On the issue of license terms, the CCI prima facie noted that that the royalty rates charged by Ericsson had no linkage to the patented product since the technology resided only within the chipset but Ericsson calculated its royalty on the retail price of the entire phone. In this regard, the CCI, in its prima facie order noted:

 

The allegations made in the information concerning royalty rates make it clear that the practices adopted by the OP were discriminatory as well as contrary to FRAND terms. The royalty rates being charged by the OP had no linkage to patented product, contrary to what is expected from a patent owner holding licences on FRAND terms. The OP seemed to be acting contrary to the FRAND terms by imposing royalties linked with cost of product of user for its patents. Refusal of OP to share commercial terms of FRAND licences with licensees similarly placed to the informant, fortifies the accusations of the Informant, regarding alleged discriminatory commercial terms imposed by the OP. 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””.

 

In this light, it is vital to note the appreciation of this issue by other jurisdictions. E.g. the Guangdong High People’s Court in China (affirming the second decision in Huawei v. IDC) following the decision in Microsoft v. Motorola has concluded that royalties to be paid by Huawei for IDC’s Chinese SEP should not exceed 0.019% of the actual sales price of each Huawei product.


Further, CCI has also expressly opined in the prima facie order against Ericsson that licensor holders must refrain from imposing unreasonable conditions related to the use of such SEP. Here, CCI probed into the existence of NDA (an otherwise commonplace industry practice) which was used by the Licensor to discriminate amongst various classes of licensees who would otherwise not even be aware of such discrimination meted to them. CCI clarified that apart from imposing excessive and discriminatory royalty rates (as discussed above), competition law also condemns the use of tools such as Non-Disclosure Agreements signed in relation to SEP which have stringent conditions regarding the use of SEP. Therefore, refusal to share commercial terms and royalty payments on the grounds of NDA strongly suggests that Ericsson was indulging in discriminatory licensing policies. In this regard, the CCI observed as follows


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. NDA thrust upon the consumers by OP strengthens this doubt as after NDA, each of the user of SEPs is unable to know the terms of royalty of other users. This is contrary to the spirit of applying FRAND terms fairly and uniformly to similarly placed players.‟ Transparency is hallmark of fairness. Both forcing a party to execute NDA and imposing excessive and unfair royalty rates prima facie was abuse of dominance and violation of section 4 of the Act.

 

SEP enforcement as an abuse of dominance claim- So far, disputes have only arisen within the contours of Section 4 of the Act pertaining to abuse of dominance. This situation can be contrasted with other jurisdictions, e.g. in China where a recent October 2013 decision held that IDC (SEP holder)’s conduct violated China’s competition law by not just charging excessive royalty from Huawei but also tying and licensing of essential patents to non essential patents and seeking grant backs from Huawei. In India, a Section 3 violation of the Act in the context of SEP (anti-competitive agreements e.g. by vertical restraint) is yet to emerge. In this regard, one must note that, interestingly, even though the Indian Act provides for IPR exemption in competition analysis for Section 3 disputes, no such exemption has been defined for Section 4. Therefore, the jurisprudence of CCI especially in the context of SEP and an alleged Section 3 violation and it’s interface with the IPR exemption would be an interesting evolution.


It must also be noted that in the meanwhile, CCI’s jurisdiction has been challenged and Delhi High Court has opined that CCI must not pass the final order in this matter till it’s question on jurisdiction is disposed before the courts. However, keeping aside the technicalities in this matter, it is likely that the outcome of the case would soon be adjudicated upon.


Furthermore, it is more likely that no SEP related issues would further be brought before competition regulator in India. In this light, analysis of similar issues across various jurisdictions becomes crucial. Some of these issues are core to SEP, which have arisen before other jurisdictions and may resurface before CCI sooner or later. Some of these issues have been discussed as below:


Whether SEP holder’s injunctive claims (for enforcement of SEP) constitutes an abuse of dominance or unfair trade practice?
A global trend is emerging that injunctive relief on FRAND SEPs should be granted only in rare circumstances.(ii) However, in the context of an essential facilities violation, some competition regulators have held that injunction claims do not constitute a refusal to use or access essential facilities because FRAND encumbered SEP holder is obligated to permit licensing, and thus certain limits are imposed on the exclusive ownership or control of SEP. Similarly, increasingly since many companies hold SEP related technology, it is not the case where only one essential facility exists.(iii) In between the two ends is the “safe harbor” approach for standard implementers or willing licensees who adhere to the payment and conditions of FRAND terms and wish to exploit the SEP license. In such cases, when the licensee is willing, SEP holder’s enforcement of an injunction for its SEP technology against such licensee may be determined as an abuse of dominant position.(iv)


Conclusion


To conclude, Indian competition regulators have only begun to face the heat of SEP disputes. However, such disputes have manifested in complex forms across various jurisdictions recently. In the years to come, Indian competition law jurisprudence would be greatly shaped by SEP disputes. The trends of SEP adjudication across the globe would thus impact CCI when it is set to determine questions e.g. Who is a willing licensee? Who bears the burden of proof prior to seeking injunctive relief? Would preclusion of injunctions have an extra-territorial reach? Would the “safe harbor” apply only for future or even pending injunctive claims? And, whether courts or arbitrators or any other body define reasonable royalties in relation to SEPs?

 

(i) Case No. 50/2013, Micromax Informatics Limited v. Telefonaktiebolaget LM Ericsson (Publ), 12 November 2013 & (Micromax-Ericsson); Case No. 76/2013, Intex Technologies (India) Limited v. Telefonaktiebolaget LM Ericsson (Publ), 16 Jan 2014 (Intex-Ericsson)

(ii) DOJ and PTO Policy Statement on Remedies for SEP subject to voluntary FRAND commitments at 7-8 (Jan 8, 2013)

(iii) KFTC Press Release (Feb 26, 2014)

(iv) EC Press Release, “Antitrust: Commission finds that MMI infringed EU competition rules by misusing standard essential patents (April 29, 2014). EC’s approach is similar to FTC’s approach in MMI/Google


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