In an order dated November 12, 2013, the Competition Commission of India ordered an investigation into Ericsson’s licensing of cellular patents that are subject to FRAND obligations for certain ETSI standards. This investigation is based on information provided by Micromax Informatics Limited (“the Informant”) that had been approached by Ericsson (“the Opposite Party” or “OP”) to take a license under the patents, followed by infringement litigation on those patents.
The order provides a background of the negotiations and litigation between the parties, including Ericsson’s requested royalty rate, an interim royalty agreement and mediation between the parties. Such mediation did not succeed, which the order indicates was based in part on Ericsson’s refusal to reveal licensing agreement terms under the patents with similarly situated parties.
The order touches on several issues, many of which have been considered in U.S.-based standard essential patent disputes.
SEPs. The order describes standardization as “a voluntary process” between market players for “developing and implementing technical standards.” And “[s]uch technological standards are termed as Standard Essential Patent, when they are patented and for which there are no non-infringing alternatives.” Thus, “[o]nce a patent is declared as Standard Essential Patent, it faces no competition from other patents until that patent becomes obsolete due to new technology/inventions.”
Patent Hold-Up/Royalty-Stacking. The order expresses concern about patent “hold-up” and “royalty-stacking”, but does not provide an analysis at this point of how much those concerns come into play here (U.S. courts have raised these concerns with varying views of their actual verses theoretical impact):
When … standard technologies are protected by patent rights, there is a possibility of “hold-up” by the patent owner–a demand for higher royalties or more costly or burdensome licensing terms than could have been obtained before the standard was chosen. 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. Similarly, royalty-stacking is when a single product uses many patents, of same or different licencors. As such, from the perspective of the firm making the product, all the different claims for royalties must be added or “stacked” together to determine the total burden to be borne by the manufacturer.
Discrimination/Royalty Base. The order indicates concern that Ericsson may have violated its FRAND obligations–particularly the ”non-discriminatory” requirement–by using the selling price of the entire GSM-capable phone as the royalty base, rather than the price of the GSM chip (an issue that U.S. courts deal with concerning what constitutes the smallest-salable patent practicing unit), stating:
The allegations made in the information and not refuted by OP [Ericsson] 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 licenses with licensees similarly placed to the informant, fortified accusations of the Informant, regarding discriminatory commercial terms imposed by the OP. For the use of GSM chip in a phone costing Rs. 100, royalty would be Rs. 125 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 softwares/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.
The order makes clear that the forgoing were just initial “observations” that should not “sway” the investigation: “Nothing stated in this order shall tantamount to a final expression of opinion on merit of the case and the DG shall conduct the investigation without being swayed in any manner whatsoever by the observations made herein.”
An investigation and report thereon is to be provided within 60 days of the order.