Standard Essential Patents: The FRAND-ly exchange of Competition Law and Patents Law in India

Mohit Khanna, Rashmikant and Partners

Introduction

In this technology driven world where the liberalised economy sustains on the merits of innovation, it has become paramount to set certain technical standards to ensure interoperability, interconnection and compatibility between products of different manufacturers globally. The important question that arises in the course of development of technology is the balance of rights of a developer and the consumer interest inherent within. On one hand patent law viz. the Patents Act, 1970  provides protection to developers’ interest and on the other, anti- trust law viz. the Competition Act, 2002 seeks to safeguard the interest of the consumers in the market. This leads to an inherent tussle between the two.

Juxtaposition of Patents Law and Competition Law

The Delhi High Court in the case of Telefonaktiebolaget lm Ericsson v Competition Commission of India [1](Ericsson order), has raised some very important questions in the field of Patents and Competition law. The Delhi High Court in the Ericsson Order held that the remedies available under the Patent Act, 1970 and the Competition Act, 2002 viz. section 84 (for grant of compulsory licence of a patent) and  section 27 (orders that can be passed by the competition commission in case of abuse of dominant position)  are different, mutually exclusive and the grant of one is not destructive of the other. The Court further held that in the absence of any irreconcilable conflict between the two statutes, the jurisdiction of the Competition Commission of India to entertain and try complaints relating to abuse of dominance in respect of patents rights cannot be ousted. The Ericsson Order is the first case in India dealing with the tussle between the two Acts.

With FRAND-ly (Fair, Reasonable and Non- Discriminatory) exchange taking shape in India, this article seeks to analyse the inter-play of competition law with patents in India alongside the process of standardization and importance of a FRAND commitment for patents.

Generally the process of standardization involves an organisation that defines the technology that must be incorporated in the product to meet a particular standard. These organizations, referred to as Standard Setting Organizations (SSOs) operate at national, regional and international levels which set standards with the active involvement of the industry and government bodies. The metamorphosis of innovation into standards is continuous which ensures transparency and includes decision making at every step. This, however, is not free from criticism. The process of standardization monopolizes the market power in the hands of a few which leads to protectionism and obstruction of market access which results in loss of variety to manufacturers and consumers.

Calibration of Standard Essential Patents

As Uncle Ben[2] aptly exclaimed, ‘With great power comes great responsibility!’ Standard Essential Patents (SEP’s) which is the aftermath of standardization, confers substantial market power on the patentee. SEP’s are defined as patents that are essential to the standard (in that they must be practiced to accomplish the standard)  in a specific industry. This essentially implies that it is impossible to manufacture standard- compliant products such as smartphones or tablets without using technologies that are covered by one or more SEPs.[3]

SEP owners often abuse this power to demand unfair and discriminatory royalties from willing licensees. In order to remedy this unfair and discriminatory demand, the SSO’s require the patentee to enter into a FRAND commitment with the SSO. These FRAND commitments are voluntary contracts between each SEP owner and the SSO, with standard implementers as third party beneficiaries.[4] Large SSOs such as the European Telecommunications Standard Institute (ETSI), Institute of Electrical and Electronics Engineers Standards Association (IEE- SA), International Telecommunication Union (ITU), etc. require the participants to disclose the patents that they believe are standard- essential along with a FRAND licensing commitment for each disclosure.[5]

The objects of Indian Competition Law statute

The salient features of the Indian Competition Act of 2002 is quite visible from its preamble, which are-

The objectives of the act is to provide for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets in India, to protect the interest of consumers, and to ensure freedom of trade carried on by participants in market in India and for matters connected therewith or incidental thereto.[6]

Therefore, it is the object and duty[7] of the Competition Act to “protect the interest of consumers” and to “prevent practices having adverse effect on competition”.

Seeking exorbitant royalty rates in case of SEPs- An abuse of dominant position

Section 4(1) of the Competition Act states that no enterprise or group shall abuse its dominant position. However, the ascertainment of the relevant market is essential for analyzing a case of abuse of dominance.[8] The dominant position of an enterprise or a group within an identified ‘relevant market’ has to be established first.[9] When determining what constitutes a relevant market, due regard must be given to both the relevant product as well as the geographic market.[10] All those products or services which are regarded as interchangeable or substitutable by the consumer form part of the same relevant product market.[11] Therefore, relevant product market is primarily determined by gauging product substitutability from a consumer’s perspective.[12] It is significant to state that the ‘relevant geographic market[13] should also be taken into consideration to identify the relevant market.[14] Hence, after determining the relevant market, the question of dominance can be ascertained within the scope of the defined market.

“Dominant position” means a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to operate independently of competitive forces prevailing in the relevant market.[15] According to the test laid down in United Brands[16] and Hoffman[17], a firm would be able to behave independently of competitive forces, if it has acquired a position of economic strength.[18] This position of economic strength can be understood to be one of substantial market power.[19] However, the Competition Commission of India stated that independence in the context of dominance does not mean absence of any other player in the relevant market.[20]

An enterprise is said to violate S. 4(2)(a)(ii) of the Act, when it directly or indirectly imposes unfair or discriminatory price in purchase or sale of goods or service. Sometimes, injunctions are employed as a bargaining tool allowing companies holding patents to charge high royalty rate.[21] Manipulation of prices would be abusive when it imposes unjustified costs on the consumers[22] or threatens to destroy competition and injure customers.[23] There is no set procedure to determine what a reasonable royalty is, but normally it is based on negotiations between a willing buyer and willing seller that take place at the time infringement begins and has to be decided on a case to case basis.[24] Royalty should be based on the true technical value of the patented technology and not the artificial inflated value of the entire product which incorporates the technology[25]

Seeking injunctions in case of SEPs- An abuse of dominant position

A suit of injunction denying market access becomes an abuse of dominance if, the act was initiated solely to harass the infringing party and impede competition[26]. As stated above, SEP holders confer market dominance. While recourse to injunctive relief is generally a legitimate remedy for patent holders in case of patent infringements, the European Commission has held the invoking of injunctions by SEP holders as an abuse of dominant position in violation of Article 102 of the Treaty on the Functioning of the European Union when the potential licensee is willing to negotiate a license on FRAND terms.

The Powers of Competition Commission u/s 27(g) are of Wide Import

The Competition Commission can u/s 27(g) pass any order as it may deem fit. The powers under this section are of wide import and can be exercised in any manner so that the provisions of the Competition Act are not defeated. In Competition Commission of India (CCI) v. SAIL[27], the Hon’ble Supreme Court of India held that the powers conferred upon the Commission are of wide magnitude and are of serious ramifications. The powers of the Commission include the power to issue such directions as would achieve the object of the Act and ensure its proper implementation. Similarly, it has been held that the CCI has “very wide, residuary powers” which confers “jurisdiction” on the commission to pass orders u/s 27 of the Act.

Therefore, it can be argued that the Competition Commission can issue orders prohibiting the charging of exorbitant royalty rates in case of SEPs as an abuse of dominant position under the statutory framework.

Reasonable rate of royalty can be set by the Competition Commission

The Preamble to the Competition Act as referred earlier states that the statute establishes a Commission to prevent anti-competitive practices, promote and sustain competition, protect the interests of the consumers and ensure freedom of trade in markets in India.[28] The commission has the duty to eliminate practices having adverse effect on competition, promote and sustain competition, protect the interests of consumers and ensure freedom of trade carried on by other participants, in markets in India.[29] It is the duty of the commission itself to prevent the abuse of dominant position by the enterprises. If the enactment is construed liberally, the statute does confer upon the CCI, powers to issue compulsory licenses under section 27 and 28.[30]

Countries all over the world are granting compulsory licenses for making the patent workable and to prevent the patent holder to use its dominant position. Many countries all over the world have provisions in their IP Laws as well as in antitrust Laws to deal with compulsory licenses.[31] The Indian enactment is based on the lines of the USA antitrust laws which are often argued to only deal with the compulsory licensing regime.

The exorbitant royalty rates charged by SEP Holders violates S.4 (2) (a) (ii)

S.4 of the Act deals with the prohibition of abuse of dominant position or the use of market domination by individual enterprises or a group to drive out competing businesses from the market. S.4(2)(b) and S.4(2)(c) of the Act deal with the limiting or restricting of production of goods, services or markets or indulging in practices undertaken which result in denial of market access. It has been held that if an enterprise or group is found to be in a dominant position pursuant to Explanation (a) to S.4(2) and indulges in practices that result in denial of market access to customers in the relevant market, it is no defense to suggest that such exclusionary conduct is within the scope of intellectual property rights of the enterprise. Firms in a dominant position are in principle allowed to compete by using normal methods of performance based competition, but other forms of conduct that harm competitors or are unfair to customers may be regarded as an ‘abuse’ of that dominant position.

Conclusion

The solutions of standardizing the SEP rates lies in the Competition Law regime in India. The Competition Act gives powers to the Competition Commission to sufficiently regulate the market in relation to abuse of dominant position of certain entities. Therefore, exorbitant royalty rates in case of SEPs being an abuse of dominant position or the seeking of injunctions in such situations can be set aside by the Competition Commission itself. Reasonable royalty rates can be implemented and compulsory licensing sector be regulated with the use of the CCI’s powers under Section 27 and 28 of the Competition Act, 2002 in turn keeping in check the abuse of dominant position or any appreciable adverse effects in the relevant market. 


Mohit Khanna is an Associate at Rashmikant and Partners. He can be reached here.

Views are personal.


Photo Credits: Priyanka Parashar/Mint

Notes:

[1] W.P.(C) 464/2014 & CM Nos.911/2014 & 915/2014.

[2] This has been derived from the Marvel comic: Spiderman

4 Antitrust decisions on standard essential patents (SEP’s)- Motorola Mobility and Samsung Electronics- Frequently asked questions, European Commission, Memo 14- 322, 29 April 2014, available at-http://europa.eu/rapid/press-release_MEMO-14-322_en.htm, last accessed 13th June 2020.

[4] European Commission, Fair, Reasonable and Non- Discriminatory (FRAND) Licensing Terms- Research Analysis of a Controversial Concept 2015, available at, http://is.jrc.ec.europa.eu/pages/ISG/EURIPIDIS/documents/05.FRANDreport.pdf , last accessed 13th June, 2020.

[5]Bekkers et al., 2014.

[6] Competition Act, 2002, Preamble.

[7] Kashi Prasad v. State, AIR 1950 ALL 732.

[8] Prints India v. Springer India Pvt. Ltd., Case 16/2010, para 9 (Competition Commission of India)

[9] Competition Act, 2002, explanations to Section 4.

[10] Competition Act, 2002, Section 19(5)., Section 2(r)

[11] Competition Act, 2002, Section 2(t).

[12]F. Wijckmans, and F. Tuystchaver, Vertical Agreements in EU Competition Law, 2nd Ed, 2011, pg, 106.

[13] Competition Act, 2002, Section 2(s).

[14] Competition Act, 2002, Section 19(5).

[15] Competition Act, 2002, Explanation to Section 4 (2)(e) (a)

[16] United Brands Co. v. Commission, 1978 ECR 207, para 65 (ECJ) [hereinafter, United Brands].

[17] Hoffman- La Roche & Co. AG v. Commission, 1979 ECR 461, paragraph 4 (ECJ).

[18] United Brands, supra note 15.

[19] Guidance on Article 102 Enforcement Priorities in Applying Article 82 EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings, OJ 2009 (C 45), para 10.

[20] Kapoor Glass Pvt. Ltd v. Schott Glass India Pvt. Ltd., Appeal No. 45/2012, para 20 (Competition Appellate Tribunal now National Company Law Appellate Tribunal).

[21] EBay, Inc. v. MercExchange LLC, 547 US 388 (2006).

[22] Haridas Exports v. All India Float Glass Mfg. Association, [2002] 6 SCC 600.

[23] FTC v. Morton Salt, 334 US 37.

[24] Daralyn J. Durie, Mark A. Lemley, A Structured Approach to Calculating Reasonable Royalties, 14 LEWIS & CLARK L. REVIEW 627 (2010).

[25] Brian T. Yeh, Availability of Injunctive Relief for Standard Essential Patent Holders, CRS REPORT FOR CONGRESS Sept. 7, 2012 at 7.

[26] ITT Promedia NV v. Commission of the European Communities, Case T-111/96; Protégé v. Commission, Case T-119/09.

[27] 2010 (10) SCC 744.

[28] Competition Act, 2002, Preamble.

[29] Competition Act, 2002, Section 18.

[30] Rohil Bandekar and Maithili Parikh, Reverse Patent Settlement in India, (2017) 9 Law Rev. GLC 119.

[31] Survey on Compulsory Licenses granted by WIPO Member States to Address Anticompetitive uses of Intellectual Property Rights, CDIP/4/4 Rev/STUDY/INF/5.

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