[Harshit is a student at National Law University, Jodhpur.]
In today’s modern economy, ‘standard’ is the bread and butter of every industry ranging from 4G and 5G technology in telecommunications to even the staple usage of A4-sized paper. A standard can be understood as a set of technical specifications and procedures applicable to products, processes, services, or systems, and which is aimed at ensuring a common design or method of operation to achieve optimum reliability and effectiveness.
A standard mandates the usage of a specific technology in the production of products. Such technology which is already patented and is “essential” to be used in a product in compliance with the set standard is classified as Standard Essential Patent (SEP).
The licensing of SEPs to the implementers may lead to anti-competitive practices by the ultimate SEP license holders. The reason behind such anti-competitive practices can be traced to the commitment of SEP holders to license their SEPs on seemingly fair, reasonable, and non-discriminatory (FRAND) which can, in practice, be read as vague and unclear.
In view of the above, Part I of the article discusses the anti-competitive conduct often demonstrated by SEP license holders. Subsequently, Part II offers some solutions and suggestions to tackle the issues surrounding SEP licensing and anti-competitive conduct.
Ambiguous FRAND Terms and Anti-competitive Use of SEPs
A licensed SEP’s core features are exclusivity and essentiality, since the usage of SEP becomes mandatory and no alternative to such patent can be used under the standard set by standard-setting organizations (SSO).
The exclusive and essential nature of the SEP creates a monopoly in the hands of the SEP holder over the production and distribution of such technology, which in turn may put such holder in a dominant position, vis-à-vis other market players not having free access to the underlying technology in an SEP. The SEP holder can exercise their monopoly and dominance in such a market in an anti-competitive manner such as to license such SEPs at arbitrarily high royalty rates or completely refuse to license such SEPs to implementers. Such anti-competitive practices are detrimental to the innovation in the specific industry, consumers owing to restricted competition (and therefore the production of goods and/or rendering or services), and the overall macroeconomic health of the country.
In this regard, SSOs play a crucial role to avert such situations. All SSOs mandate SEP holders to license SEPs to the implementers on FRAND terms. However, the ambiguity of FRAND commitments may allow SEP holders to continue to engage in anti-competitive practices which are detrimental to the industry.
FRAND Terms and Its Ambiguity: Cause for Concern
As noted above, the FRAND terms directed by the SSOs are plagued by ambiguity. SSOs either do not define, or do not provide an interpretation of FRAND terms. This leads to a highly subjective application of the FRAND terms. Further, these SSOs do not define the manner of determining royalty rates and license terms, leading to possible disparities in the terms and conditions for SEP licensing, for similar patents.
The consequences of such ambiguity can be witnessed in the practice of SEP licensing wherein SEP holders abuse their dominant position and commit anti-competitive practices. Numerous judicial precedents under Indian competition law can illustrate such abuse of dominance.
Dominant Position by SEP Holders
The dominant position held by an SEP license holder may be addressed under Section 4(2) of The Competition Act 2002 ( Competition Act). SEP holders, due to the patent’s exclusivity, may not face any competition from their competitors (in terms of SEP usage) till such patent is made freely accessible. Hence, SEP holders’ position in the relevant market may qualify as a “dominant position” upon the Competition Commission of India’s (CCI) determination under Section 4(1) of the Competition Act.
Abuse of dominant position through exorbitant royalty rates and unfair terms
The existing ambiguities in FRAND terms may provide SEP holders to licence their SEPs at exorbitant royalty rates and subject unfair terms which is detrimental to the implementers & consumers. The imposition of such exorbitant royalty rates & unfair terms may attract claims of anti-competitive conduct and abuse of dominance, under the Competition Act.
In Micromax Informatics Limited v Telefonaktiebolaget LM Ericsson, Ericsson charged Micromax exorbitant and unjustified royalty rates for its SEPs in GSM technology used in mobile handsets. The royalty rates were charged on the price of the phone in which the SEP was being used instead of charging on the actual value of the technology being implemented. Such high rates may lead to high barriers to entry, and lead to adverse effects on competition. The CCI held such royalty rates as contrary and violative to FRAND terms.
Further, in Best IT World (India) Private Limited v. Telefonaktiebolaget LM Ericsson for the purpose of establishing SEP licence, Ericsson and iBall to agree to a non-disclosure agreement wherein arising disputes between the parties were to be settled through arbitration in Stockholm, Sweden which debarred iBall to adjudicate disputes in the jurisdiction where it carried out its business. CCI held such terms as unfair and concluded such conduct as an abuse of dominant position under Section 4 of the Competition Act.
Policies on the Elaboration of FRAND Terms: Need of the Hour
Anti-competitive practices in relation to SEP licensing will continue to rise at higher rates if the issue of ambiguity around FRAND terms remains unaddressed. Such practices are detrimental to a healthy competition culture which CCI strives to achieve and maintain. However, it may be noted that SSOs and nations have started to address such issues by publishing guidelines and policies which elaborate upon FRAND terms.
The CEN/CENELEC Workshop Agreement on Core Principles and Approaches for Licensing of Standard Essential Patent is an example which aims to reduce the ambiguity around FRAND terms. These policies may work to answer the pertinent question, which is what FRAND entails.
Further, India may consider drawing a lesson from these policies and establishing an independent set of domestic guidelines and policies that elaborate upon FRAND terms.
CEN/CENELEC Workshop Agreement over SEP’s and FRAND Terms
The agreement drafted by European Committee for Standardization and the European Committee for Electro-technical Standardization enunciate key behaviours and best practices that ensure compliance with FRAND terms in SEP licensing. The agreement consists of 6 core principles within SEP licensing.
Core principle 2 covers non-discrimination under FRAND and mandates that an SEP license should be made available to all the interested implementers of such SEP. Further, a refusal to license to certain implementers will be seen as “anti-thesis” to FRAND. Section 3.4 (b) of the agreement further elaborates on this principle and states that discriminatory pricing and royalties constitute a breach of FRAND terms.
Core principle 3 and section 3.4 (a)(3) elaborate upon the setting of royalty rate under FRAND terms. They enunciate that the royalty rate should reflect the value of the patented invention that it brings to the smallest component and not the end product under which such technology is being implemented.
Good faith negotiation guidelines
The parties contracting under an SEP licence may ascertain, through review and deliberations, whether the SEP license is FRAND compliant. When negotiations are done in bad faith by the SEP holder, an abuse of dominant position and higher bargaining power is witnessed wherein the weaker bargaining power of the implementer is taken advantage of in the form of intentional delay in negotiations and imposition of higher royalties for SEPs. On the other hand, negotiations done in good faith by the parties may ensure a successful SEP licence where the terms of such licence are FRAND compliant.
Numerous states such as Japan and USA have recognized the importance of establishing guidelines for ensuring good faith negotiations in SEP license negotiations. Japan rolled out its guidelines titled Good Faith Negotiation Guidelines for Standard Essential Patent Licenses on 31 March 2022. The USA is also in the works to roll out a policy that enumerates guidelines for SEP negotiations. It has released a draft policy statement and has invited reviews for the same.
The guidelines in such jurisdictions set the following standards for good-faith negotiations:
The SEP holder should present an offer for an SEP license in compliance with FRAND in good faith to the implementer. Under such an offer, the holder should supplement all the necessary information regarding its SEP.
The implementer after receiving such an offer, should assess the information and decide in good faith. The implementer can present a counteroffer to the holder in good faith. Further, the SEP holder should respond to such counteroffers and clarifications within a reasonable amount of time.
The issue of ambiguity around FRAND terms & anti-competitive practices in SEP licensing can lead to damaging consequences towards India’s MAKE IN INDIA initiative since such anti-competitive practices can deter Indian manufacturers to enter and manufacture indigenous products, reliant on access to SEPs.
It is the need of the hour is to take initiative towards the removal of the ambiguity of FRAND terms which efficiently address the issue of anti-competitive practices in SEP licensing by SEP holders.
CCI can draw inspiration from policies such as CEN/CENELEC Workshop Agreement and Good Faith Negotiation Guidelines released by Japan and USA. On such lines, the CCI should consider working towards establishing its own set of guidelines and policies that elaborate upon FRAND terms. Such guidelines can serve as the touchstone over which SEP negotiations can occur and FRAND-compliant terms and royalty rates of SEP licence can be achieved.
The constant innovations in technology will bring a rise in SEPs accompanied by higher number of SEP disputes. Alternative Dispute Resolution (ADR) for SEP disputes is an efficient alternative to lengthy, and resource-consuming SEP litigation. SEP ADR may ensure a confidential and quicker resolution to the dispute between the parties. Further, the CCI may consider establishing a special institution for the SEP ADR framework, which is enforced by, among others, subject matter experts.