Vidya Bhushan Mehrish and Priya Anuragini at LexOrbis explain how the licensing of standard essential patents has strayed into the realm of competition law
The standardization of technologies is vital for ensuring interoperability and compatibility across different products, processes and technologies. Globally acceptable technology standards incorporate numerous patents commonly known as standard essential patents (SEPs). As they are potentially essential for the implementation of technological standards, SEPs have become an important source of revenue for the companies that own them. However, owners of SEPs are often unwilling to license them on fair, reasonable and non-discriminatory (FRAND) terms, despite an obligation to do so. And since this behaviour is detrimental to the growth and development of other companies in the industry, it becomes a case of SEP holders abusing their dominant position, which is contrary to competition law.
Most standard-setting organizations mandate that SEP owners grant irrevocable licences on FRAND terms, but in reality this rarely happens. All too often SEP owners demand exorbitant royalties or impose unreasonable licensing terms. And since the companies seeking to license SEPs would have already invested in the standard compliant products, they have no alternative but to comply. In extreme cases, SEP owners may even prohibit the entry of other players by not granting licences, thereby eliminating competition. All of this may make certain products unviable and severely disrupt the business activities of companies that use SEPs in their products.
Furthermore, with a single product sometimes using multiple SEPs that may or may not have a single owner, the ultimate cost to the consumer is of little consideration, as royalty rates for individual SEPs are fixed without any regard to the complete royalty burden of the product. It has even been reported that some SEP owners have charged royalties on the basis of the price of the product in which it is to be implemented. As such, they impose different rates on different implementers for using the same technology. This violates competition norms.
SEPs and competition law
Laws governing both intellectual property (IP) rights and the regulation of competition are designed to foster innovation and encourage investment. While there is no obvious conflict between the two laws, problems arise when the enforcement of an IP right leads to an anti-competitive environment. This makes it important to determine whether competition laws may be used to limit IP rights, and who would specify the scope of such a limitation.
The Competition Act, 2002, prohibits anti-competitive agreements and the abuse of a dominant position. It also stipulates that provisions of the act are in addition to, and not in derogation from, other existing laws. However, section 3(5) of the Competition Act provides a certain amount of immunity to IP rights by laying down that rights granted under the IP laws of India shall not be restricted by other provisions of the section. This exemption is only to the extent that IP rights do not impede the interests of consumers and competitors. As such, in the context of SEPs, it needs to be determined what are legitimate consumer and competitor interests, and which regulatory authority has the power to decide.
Litigation over SEPs is a recent phenomenon in India and has brought many legal issues to the fore. The most prominent are issues dealing with the status of the Competition Commission of India (CCI) in the enforcement and regulation of SEPs.
Ericsson, the world’s largest holder of SEPs for mobile communications, has already filed two writ petitions before Delhi High Court arguing that the CCI has no jurisdiction to investigate its licensing of SEPs and that the Patents Act, 1970, provides adequate mechanisms to balance the rights of the patentee and other stakeholders.
Ericsson had earlier initiated infringement proceedings against two local handset makers, Micromax and Intex, before Delhi High Court. This prompted the two companies to file complaints at the CCI alleging that Ericsson was demanding exorbitant royalties for its SEPs. Micromax and Intex alleged that Ericsson had also compelled them to sign non disclosure agreements, as a result of which users of SEPs are unable to know the terms of the royalty payments made by other users. It was argued that this was contrary to the spirit of FRAND terms.
The CCI held that there was a prima facie case of abuse of dominance and ordered an investigation. However, acting on the writ petitions filed by Ericsson, Delhi High Court restrained the CCI from passing a final order. The court also stipulated that the CCI was not to call any officer of Ericsson stationed abroad for investigation without obtaining its permission.
The CCI appealed the order but nothing significant came out of it. Both writ petitions remain pending and there is continuing uncertainty over the ambit of the CCI in matters involving SEPs.
Vidya Bhushan Mehrish is a partner at LexOrbis, where Priya Anuragini is an associate.
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