CCI’s Investigation of the Indian Smartphone Industry – Licensing of Standard Essential Patents

Posted on September 19, 2020

Authored by Tanya Varshney*

Acknowledgement: Thanks to Prof. (Dr.) Manveen Singh* for sharing his inputs and reviewing this article.

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In simple terms, Standard Essential Patents (“SEPs”) are the patents that have been declared as “essential” to implement the industry or technology standards and ensure uniformity and compatibility in the technology sector worldwide. Such standards are laid down by various Standard Setting Organizations (“SSOs”) such as European Telecommunication Standard Institute (ETSI) which lays down the standards for the telecommunication industry and particularly 2G, 3G, and 4G (LTE) and Institute of Electrical and Electronics Engineers (IEEE) which lays down the standards for WiFi. In the smartphone industry, some examples of SEPs include 4G/5G technology, GPRS, Qualcomm processors, etc.

The antitrust concern with respect to SEPs arises because of the immense market power the SEP holder has because their patented technology is now a part of the essential standard. Due to this, the SEP holders often have the power to include unfair and discriminatory terms during licensing negotiations for their patents. In fact, in many instances, the SEP holders have filed for (or simply used the threat of) injunctive reliefs against third parties to completely restrain the use of their technology, forcing third parties to agree to the SEP holder’s terms. However, in contrast to ordinary patents, without the use of such standardized technology, third parties often cannot manufacture their products and face huge financial implications. This article aims to discuss the jurisprudence on the interface of antitrust concerns and the intellectual property rights of the SEP holders in India with the help of the precedents set in European Union, as seeking injunctive relief by SEP holders has been alleged to be anti-competitive conduct and abuse of dominance in itself.

Ericsson’s SEPs – Injunctive Reliefs Triggering the Jurisdiction of CCI

Ericsson’s plethora of SEP litigations began with Ericsson v. Xiaomi where Ericsson filed a suit for permanent injunction against Xiaomi in relation to AMR, 3G and EDGE technologies in the field of telecommunication pertaining to 2G and 3G devices patented by Ericsson which were recognized as a ‘standard’ by ETSI. Ericsson and Xiaomi had been involved in licensing negotiations for some time but before such negotiations were concluded, Xiaomi launched some products that contained Ericsson’s patented technology in about 2014. The High Court of Delhi granted the injunction restraining Xiaomi from manufacturing, assembling, importing, selling, offering for sale or advertising any present or future devices containing the AMR, 3G and EDGE technologies. Xiaomi challenged the said order on the ground, amongst others, that the interim injunction would defeat the licensing norm of “fair, reasonable and non-discriminatory terms”, commonly known as FRAND terms.

With respect to Ericsson, the smartphone wars continued with similar cases seeking injunctions against Lava, Micromax, Intex and iBall with licensing negotiations exceeding 40 months with each party. In fact, negotiations between Ericsson and iBall lasted about 60 months. Interestingly, injunctions were granted in all these cases. Amongst these parties, Micromax, Intex and iBall lodged complaints before the Competition Commission of India (“CCI”) alleging that Ericsson is abusing its dominant position under the Indian Competition Act, 2002 by demanding unfair, discriminatory and exorbitant royalties.

Thus, the CCI launched its investigation and the matter was heard in Ericsson v. CCI. The evidence led by the parties included the notice of infringement by Ericsson, documents indicating willingness to enter into negotiations on FRAND terms and proposed terms of license. Intex alleged that the royalty rates proposed by Ericsson were based at the end value of the mobile device rather than the components of the device using the patented technology. Micromax asserted that as a consequence of Ericsson’s demand for excessive royalties, the Indian handset manufacturers were denied market access in respect of the GSM market. It was also alleged that Ericsson was charging differential royalty rates for different companies, and tying and bundling its SEPs for a collective license. In view of the fact that in case of SEPs, there is no possibility of using a non-infringing technology, CCI formed a prima facie view that Ericsson enjoyed complete dominance over its present and prospective licensees in the relevant product market and royalties linked with the cost of the end product were contrary to the FRAND obligations under ETSI’s policy. The court clarified that when there is a question of abuse of dominance (under Section 4) or reasonability of the terms of agreement (under Section 3), such a matter can only be decided by CCI. The Court stated that it must be determined whether the allegations in the complaint would indicate the abuse of dominance.

Dominant Position

While there are many factors to take into account, such as the ones listed under Section 19 of the Indian Competition Act, while examining the dominant position of an entity, the position of dominance of an SEP holder is a little more evident. In Ericsson v. CCI, the court noted that an SEP holder is generally in a position of dominance and has significant bargaining power in relation to the other implementers of that technology. In Ericsson v. Intex, the court further observed: “As a result of its huge portfolio of standard essential patents, for which there are no non-infringing alternatives, the company is in a position to operate independently of any competitive forces/ pressures in the relevant market. Based on the power of its ownership over a large pool of SEPs, Ericsson is in a position to set the terms and conditions for making its SEPs available to the customers without any constrain and thereby alter the market in its favour.” Along similar lines, the European Commission has also acknowledged in Oscar Bronner v. Mediaprint that owner of the intellectual property of an ‘essential facility’ may be in a dominant position. Thus, it is more likely than not that a SEP holder would be in a dominant position.

Abuse of Dominance

Although the Indian courts have noted that inclusion of a patented technology as a SEPcould place the patent holder in a position of substantial market power[1], these courts have not provided an overall guiding principle as to when it constitutes abuse of dominance[2]. In Ericsson v. CCI, the court noted that Section 4 of the Indian Competition Act would also cover abuse of a dominant position as proscribed by Article 102 of the Treaty on the Functioning of the European Union (“TFEU”) as cause (a) and clause (b) of Section 4(2) of the Competition Act are similar in their import as clause (a) and (b) of Article 102 of TFEU. Clause (d) of Article 102 of TFEU and clause (d) of Section 4(2) of the Competition Act are also similarly worded. Since it has been established that the Indian and the TFEU provisions are similar, the European Union case laws will be relevant to the present analysis.

The European Union’s antitrust regime has heavily emphasized on FRAND terms when it comes to licensing of SEPs to curtail any abuse of dominance or market power by the SEP holder. This comes as a limitation for the companies who are investing heavily into research and development. If seeking injunctive relief is considered as abuse of dominance or violation of FRAND terms, then SEP holders are put in a difficult position when licensing negotiations are dragged on and third parties start using the infringing technology. On the other hand, allowing injunctive relief may place a lot of power in the hands of the SEP holder who could monopolize the specific industry. The Indian Patents Act is silent on any compulsory or statutory licenses with respect to SEPs, and no concrete governing law on this matter has been set by the Indian judiciary so far in respect of the policies set by the SSOs, apart from general guidelines and principles referred to by the Delhi High Court in the Ericsson cases

Conduct of the Implementer

The European Commission (“EC”) has often taken into account the conduct of the SEP holder while examining abuse of dominance. In Samsung EC[3], while the Commission did not deliver its final decision on Samsung’s abuse of dominance, it was held that there should be an objective justification for a refusal to license the SEP or an unwillingness to license by the potential licensee. The EC held that the mere presence of a patent does not constitute as an objective justification for refusal to license or for seeking injunctive relief if the SEP patent holder refuses to enter into a contract on FRAND terms. An SEP holder may refuse to grant a license or seek a interlocutory or permanent injunction in cases wherein (i) the potential licensee is not able to clear theirdebts or they may be in financial distress; (ii) the potential licensee is located in a jurisdiction wherein there is no sufficient adjudication system that can allow for enforcement of damages; and (iii) in a situation wherein the potential licensee refuses to enter the agreement on the basis of the FRAND terms and conditions, ultimately denying the SEP their FRAND compensation due for the usage of their patents. Samsung claimed injunction under this scenario as they claimed that Apple refuses to enter into a contract with them which is based on FRAND terms and conditions. However, the Commission came to the conclusion that Apple’s conduct did not portray their unwillingness to license based on FRAND terms and conditions.

In Motorola EC[4], the Commission noted that the SEP holder may file for infringement without constituting abuse if the potential licensee is unwilling to enter into a licence agreement on FRAND terms and conditions, with the result that the SEP holder will not be appropriately remunerated for the use of its SEPs. In Huawei v. ZTE[5], the guiding principal was laid down as – in injunctive cases, the SEP holder may be dominant but the conduct would not be an abuse of dominance save in exceptional circumstances. The Huawei case also laid down that the first duty is of the SEP holder to alert the alleged infringer of the infringement by identifying the SEP at issue and “specifying the way it has been infringed” and to make an offer on FRAND terms. The alleged infringer should then ‘diligently’ respond to the patent holder’s offer without any delaying tactics on its part. If the alleged infringer does not accept the offer made to it, it must submit a counter-offer on FRAND terms “promptly and in writing”.

Even in Indian cases with respect to injunctions on failure of licensing of SEPs, the Courts have given due weightage to the conduct of parties – willingness of the licensee[6]. For instance, in Ericsson v. Lava, the Court looked at the negotiations to assess whether the SEP holder was willing to enter into an agreement. Ericsson had sent a list of patents and claim charts along with a notice, the court observed that this was sufficient information to initiate a discussion on the execution of the agreement. In Ericsson v. Intex, the Court found that there was a lack of bona-fide intention on the part of the potential licensee to obtain a license on FRAND terms as the licensee proceeded to file a competition complaint, before the negotiations for license, without informing the SEP holder. The court also said that the negotiation period, of about 4 years, is a delaying tactic on the part of the potential licensee. In Ericsson v. iBall, the court observed that iBall had not taken any step towards the execution of the FRAND Agreement. By filing a complaint before the CCI, iBall admitted that Ericsson was the holder of some patents while contending non-infringement at the same time.

Therefore, both EU and Indian cases have looked at the conduct of the SEP holder and the implementer. Both the jurisdictions have also clarified that seeking injunctive reliefs by an SEP holder in certain circumstances may amount to abuse of its dominant position. In such cases, it will also be important to assess whether the implementers acted in “good faith”, i.e., were willing to enter into a license on FRAND terms.

Threats of Infringement Suits and Injunctions by SEP Holders

As per Ericsson v. CCI, threats of infringement suit by the SEP holder may amount to abuse of dominance if it is done to compel the implementer to accept the license on non-FRAND terms. In Samsung EC, the EC took the preliminary view that the seeking of an injunction for SEPs can constitute an abuse of a dominant position in the exceptional circumstances of this case – where the holder of a SEP has given a commitment to license these patents on FRAND terms and where the company against which an injunction is sought is willing to negotiate a FRAND license. It was argued that Samsung’s refusal to grant a license (to Apple) is effectively eliminating Apple as competition and also putting it in a disadvantageous position because of the unfavorable licensing terms it would have to admit in case the injunctions were permitted. Where a commitment to license SEPs on FRAND terms has been given by Samsung, and where a potential licensee, in this case Apple, has shown itself to be willing to negotiate a FRAND license for the SEPs, then recourse to injunctions harms competition. Since injunctions generally involve a prohibition of the product infringing the patent being sold, such recourse risk excluding products from the market without justification and may distort licensing negotiations unduly in the SEP holder’s favour.

In Sisvel v. Haier[7], the ECJ noted that “if the patent holder did not offer a FRAND-conforming license to the infringer, the infringer is not obliged to show his willingness with a counter offer in conformity with the FRAND-principles. The SEP holder had offered discounted royalty rates to third parties, and the offer was discriminatory. Thus, it will be important to assess that the SEP holder did not file for injunctive relief to compel the implementers to accept license on non-FRAND terms.

Conclusion

Whilst the intellectual property and competition law interface has evolved its jurisprudence with respect to SEPs in the European Union, India has largely focused on abuse of dominance by SEP holders filing for injunctive relief following the “smartphones wars” due to several infringement suits filed by Ericsson in 2016. Understandably, there is a concern that SEP holders may file injunctive suits or threaten third parties with the same to force them into entering into non-FRAND terms. It is evident that an SEP holder has a lot of market power by virtue of their patent being an ‘essential’ in the market. However, the assumption that SEP holder seeking injunctive relief is anti-competitive or abusing its dominant position would make the patent redundant and may deter further research and development in the technology sector. The author agrees with the stance taken in the Huawei case that the courts must take into account if an SEP holder took certain steps before seeking injunctive reliefs against third parties and the injunctive reliefs were not to ensure that the SEP holder remains the only player in the relevant market.


*Tanya Varshney, Founder and Chief Editor of IntellecTech Law, is a practicing lawyer based in New Delhi focusing on Intellectual Property, Technology-Media-Telecommunications, Data Protection, Commercial Disputes and Corporate-Commercial work.

*Prof. (Dr.) Manveen Singh is an Associate Professor and Associate Dean at Jindal Global Law School (JGLS). He is also the Director of the Graduate Program and one of the founding faculty members of the Jindal Initiative on Research in IP and Competition Law (JIRICO). 

[1] Ericsson v. CCI

[2] Gupta, I. et. al., Trends in pre-licensing negotiations of standard‐essential patents, 22(3-4) The Journal of World Intellectual Property Law Journal (2019)

[3] (COMP/C-3/39.939)

[4] (Case COMP/C- 3/39.985)

[5] C-170/13 – Huawei Technologies

[6] Gupta, I. et. al., Trends in pre-licensing negotiations of standard‐essential patents, 22(3-4) The Journal of World Intellectual Property Law Journal (2019)

[7] Case No. I-15 U 66/15

One thought on “CCI’s Investigation of the Indian Smartphone Industry – Licensing of Standard Essential Patents

  1. […] The joint appeals raised issues that are important to the international market in telecommunications, and concern actions for infringement of UK patents said to be essential to the implementation of international standards for mobile telephony, such that it is not possible to make, sell, use or operate mobile phones and other equipment that is compliant with the standards without infringing the patents. Patents of this kind are called Standard Essential Patents (“SEPs”), an earlier analysis of which was covered here. […]

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