Concerns relating to Standard Essential Patents and warring Smartphone makers

The smartphone market is no stranger to legal struggles – Apple and Samsung have had legendary battles over patent disputes but this has largely been the case in US & Europe. However, the ripple effect is beginning to show in the Indian and also around Asian market with growing competition between brands. In the last few years Patent holders like Ericsson, Google have been locked in litigation, around the world, particularly over Licenses relating to their Standard Essential Patents ( SEPs) given to Smartphone manufacturers.

Brands like Micromax and Karbonn have created a niche in low-cost phones using the standardized technology patented by established brands like Samsung, Ericsson or Google. These Brands license the use of their SEPs (Standard Essential Patents) relating to various mobile telecommunications standards and have committed to license these SEPs on FRAND (Fair Reasonable And Non-Discriminatory) terms.

So, why are these SEP owners dragging the phone makers to court?

Micromax was on the receiving end when Ericsson went to the Delhi High court alleging wrongful use of its patented technology ( SEPs) of 2G, 3G, 4G by Micromax, in their Smartphones, without payment of royalty. Other brands such as Xiaomi are also facing similar cases.

As directed by the court, Ericsson and Micromax agreed to negotiate the so-called Fair, Reasonable & Non-discriminatory royalty terms for their License Agreement and as an interim measure, Micromax was made to pay royalties at a reduced rate. Nonetheless, the rate of royalty was still higher than expected by Micromax. So, Micromax initiated an investigation against Ericsson before the Competition Commission of India (CCI).

In 2009, India repealed its 40-year-old Monopolies and Restrictive Trade Practices Commission and brought into force the new Competition Commission. The recently established CCI aims to promote fair play in the market. It watches anti-competitive conduct by companies which distort or stifle competition. Such a market watchdog is new in India and all over Asia, although it is modeled on well developed competition regimes in UK and EU.

The CCI is investigating the adverse impact on the smartphone market competition and entry barriers allegedly created by Ericsson by not granting the SEPs license of 2G, 3G, and 4G technology to Micromax on FRAND terms.

Standard is a method to equip a product, service or component to a certain uniform measure in order to ensure interoperability across all the devices, platforms and so on. For instance, the Wi-fi medium is a standard for all internet services just like the 2G, 3G Technology for Telecoms. Once a standard compliant product is made it becomes easier for the consumers to switch between products from different manufacturers. The telecom industry has announced that phone chargers will be standardized by 2017 so we will not need new chargers for different phones.

Why are SEPs essential for the smartphone business?

A patent that protects technology essential to a standard is called a standard-essential patent. It is impossible to manufacture standard-compliant products such as smartphones or tablets without using technologies covered by one or more SEPs. SEPs are different from patents that are not essential to a standard (Non-SEPs), such as design patents, for example, which protect the design features of an invention. This is because, generally, companies can invent alternative solutions that do not infringe a non-SEP (whereas they cannot design around a SEP). For example, Apple is battling with Samsung for infringing its patented design of “slide to unlock” that’s a Non-SEP technology.

Once a standard has been agreed and industry players have invested heavily in standard-compliant products, the market is de facto locked into both the standard and the relevant SEPs.

So, do the phone makers have any other choice?

Obviously not!

Competition issue around Standardisation – SEPs and FRAND licensing:

Standards are important for several reasons.

First, they facilitate the adoption and advancement of technology as well as the development of products that can interoperate with one another. Standards also lower costs by increasing product manufacturing volume, and they increase price competition by eliminating “switching costs” for consumers who desire to switch from products manufactured by one firm to those manufactured by another. They also lead to earlier adoption of new technology. There is, however, one downside to standards: they create “essential patents[1]

Once a patent becomes an essential patent, it gains undue significance as a result. Companies that produce products governed by a standard become “locked in” to the technologies included in the standard. Customers have no practical choice other than to buy products that comply with the standard. Thus, the owners of essential patents gain market power. “FRAND commitments” are intended to prevent owners of essential patents from acquiring too much of the market power that would otherwise be inherent in owning an essential patent.

How is the Market Power Exploited?

Effects of the ‘locked in’ Network – The SEP owner enjoys the monopoly power gained over the entire network of manufacturers. Thus, they are in a position to indulge in anti-competitive tactics like “holding up” users after the adoption of the standard, extracting excessive royalty fees, setting cross-license terms with competing licensees which they do not otherwise agree to. Royalty-Stacking is also a big problem when a product uses more than one patent by different licensors.

Therein lies the need to regulate the behavior of dominant firms to alleviate these market concerns and to ensure that the benefits of standardization are promulgated&actualized by customers and end consumers – SEP owners are required by many Standard Setting Organisations (SSOs) to commit to licensing their SEPs on FRAND terms.

FRAND commitments are designed to do two things:

(i) ensure that the technology incorporated in a standard is accessible to the manufacturers of standard-compliant products, and (ii) reward SEPs holders financially.

What are the consequences of companies refusing to comply with these commitments?

In the Samsung and Motorola cases, the European Commission clarifies that in the standardisation context, where the SEPs holders have committed to (i) license their SEPs and (ii) do so on fair, reasonable, non-discriminatory (FRAND) terms, it is anti-competitive to seek to exclude competitors from the market by seeking injunctions on the basis of SEPs if the licensee is willing to take a licence on FRAND terms. In these circumstances, the seeking of injunctions can distort licensing negotiations and lead to unfair licensing terms, with a negative impact on consumer choice and prices.

As a result of the Commission’s investigation, Samsung committed to not seek injunctions in Europe on the basis of SEPs for mobile devices for a period of five years against any potential licensee of these SEPs who agrees to accept a specific licensing framework. This licensing framework consists of a mandatory negotiation period of up to 12 months, and if the negotiation fails, third-party determination of FRAND terms by either a court, if one party chooses, or arbitration if both parties agree. The commitments make it clear that, if the parties raise concerns about the validity or infringement of the licensed SEPs, the judges or arbitrators will have to take those into consideration.

The Commission’s Motorola and Samsung decisions confirm the Commission’s balanced approach with respect to IP rights and competition.

Whilst IP rights are important for innovation and growth, they should not be abused to the detriment of competition and ultimately consumers.

In concrete terms, these decisions clarify that SEP holders should not abuse their market power by “holding up” willing licensees with injunctions.

These decisions provide further clarification and guidance to industry on the limitations on market control strategies imposed by competition law to SEP-based injunctions.

In case of any dispute, it would be submitted to arbitration.[2]

Royalties charged by Ericsson for its SEPs as on 5 November 2012:

●      GSM – 1.25% of sale price of the product of the Informant,

●      GPRS – 1.75% of sale price of the product of the Informant,

●      EDGE – 2% of sale price of the product of the Informant,

●      WCDMA/HSPA: Phones, Tablets – 2% of sale price of the product of the Informant,

●      Dongles – USD 2.50 per dongle.

On the other hand, is injunctive or exclusionary relief appropriate for the SEP holder against any party that wants to use the standard in its product/smartphone but is not willing to sign licensing terms?

Few would disagree that the SEP holder should be entitled to monetary damages in a situation where a SEP holder offers a FRAND license to a user of its standard, but the user delays the signing of the license complaining that the royalty rates are too excessive even though the manufactures sell the infringing product in the market.

The debate on this question was before the Delhi High Court recently. While considering the “appropriateness” of such relief—

Some would say injunctive relief should be rarely awarded to a SEP holder unless there were extraordinary circumstances as it would distort competition, harming competition in the vibrant market of technology/smartphones. Others would favor the patent holder’s right to exclude others from making, using, or selling a patented invention without the patent holder’s express authorization, fearing dilution of innovation and ultimately consumers.

The Delhi Court has granted relief to Ericsson (SEP owner) by injuncting Micromax (Phone maker) from using the SEPs without payment of royalty at prescribed rates. According to the Court, Micromax was delaying the signing of the license terms while it did not refute the validity of the patents – As admitted even in their complaint before the Competition Commission alleging abuse of market power by Ericsson through the ownership of the SEPs in question.

In the US and EU, sabotaging competing Brands through sham litigation is considered as an abuse of dominant position, gained through patents or licenses. Competition authority’s concern is to check companies that have key technologies & know how and can utilize SEPs to shut out rivals or demand unfair royalties from users.

Since injunctions generally involve a prohibition of the product infringing the patent being sold, seeking SEP-based injunctions against a willing licensee could risk excluding products from the market.

US chipmaker Qualcomm agreed to pay a record $975 million fine to settle a case brought against it by Chinese authorities. After facing investigations into allegations of anti-competitive behavior, in the US and EU, it faced an antitrust inquiry in China and South Korea.

Thus the current market scenario raises a question–

Whether Technology Giants like Google can monopolize their market of Technology (Android) especially when the buyers are gaining more bargaining power?.

Policing the platform may prove increasingly ineffective with competing technologies entering the market?

On the other hand, there are disputes over exclusive distribution rights granted to Micromax (India ) & Cyanogen (China ).

These territorial restrictions in contractual relationships with multi-jurisdictional manufacturers/distributors create overlapping / conflicting interests as the number of manufacturers continues to grow.

The economics of technology can be compared to the car Industry where each brand has a different look even though they may share a chassis technology. Let’s see in the smartphone market, how long will the world’s leading companies in the OS market – Google’s Android and Apple Inc’s iOS control the market as competition intensifies with competing brands.

[1]The term “essential patents” refers to patents that are essential to a standard and such technologies are selected by a standards development organization (“SDO”).