In this blog post, Aishwarya Sujay Kantawala, pursuing M.A. in Business law from NUJS, Kolkata, talks about FRAND licensing in India & the 10 essential points to keep in mind.

The Universal Declaration of Human Rights in Article 27 states that –

‘Everyone has the right freely to participate in the cultural life of the community to enjoy the arts and to share in scientific advancement and its benefits.’ Further, everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author.’

-(UN General Assembly. 1948)[1]

As outlined above, intellectual property being intangible are yet bound by ownership and such benefits accruing are to be in the favor of the owner. These rights are awarded by the state and the user can exercise these rights to restrain others from using them without his consent.[2] The world today is dynamic with constant interaction through different platforms often, this leads to infringement of intellectual property rights.

There is an acute difference between infringement and competition.

Competition enables improvement and amelioration of services or products constantly. This works in the favor of the consumer as there are more effective advancements in respective commodity or service markets. In India, The Competition Act, 2002 regulates the practices that result in an adverse effect on competition in the markets in India.[3] The Act seeks to promote and sustain competition markets, protects consumer interests and ensures freedom of trade in the markets in India.[4]

A ‘Standard’ in layman’s terms means a defined quality, level or league. In this context –

‘a set of technical specifications that seeks to provide a common design for a product or process.'[5]

This means that a certain expectation is created. A standard is the presumption or anticipation of a certain prospect being the actual outcome or a characteristic.

The Thirteenth session of Standing Committee on the Law of Patents brought about interesting ideas of standardization.

• The document prepared by the secretariats introduces the importance of conformity which basically means stressing on the needs/wants of the consumers.

• Further, the document mentions that apart from practical convenience even assurance of various factors is necessary i.e. quality, safety and reliability.

This essentially means that the product/service has to be of such an archetype so as to survive in the market.

• The essence of standardization is widespread varying from the products to service depending on the most vital requirement. This could be safety, hygiene, environment, health, technology, etc. It is an approval of a specification.

The general vocabulary, according to the ISO/IEC Guide 2:2004, standardization and related activities of “standard” is defined as a “document, established by consensus and approved by a recognized body that provides for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context”.

• Further, an extension to the definition was –

“Standards should be based on the consolidated results of science, technology and experience and aimed at the promotion of optimum community benefits”. This definition provides credibility to a ‘standard’ which cannot be simply acclaimed or appraised without certain recognition or credentials.

Simply, this is for the benefit of the consumers so they cannot be tricked into using a product or availing a service dangerous to their safety. Improvement of the quality of human life is one of the important reasons for the evolution of standards.[6]

• The committee has bifurcated standards into two types being de-facto standards and de-jure standards.

• A de-facto standard is created when a particular technology is widely implemented by market players and accepted by the public so that such a technology becomes a dominant technology in the market even if it has not been adopted by a formal standard-setting body.

• De-jure standards are, in general, set by standard setting organizations (SSOs). The role of SSOs is to coordinate and facilitate a standard setting process with the involvement of various stakeholders and is international, regional or national.[7]

SSOs develop, support and set interoperability and performance standards among others which help to facilitate the adoption of new technologies.[8]

Interoperability means the sustainable and common use through compatibility of various products. The technical know-how expenses of a manufacturing company can be avoided through an already existing simplified design. This is also easier for consumers to be on the link of technology rather than change from one kind of product to another with an entirely different functionality. Hence, if there are multiple compatible products in the market it is a healthy commercial endeavour.

On the recommendation of the SSO, if an invention must be used to comply with a standard it is known as an Essential Patent or Standard Essential Patent.[9] One cannot use another’s patent without authorization. The owner of Standard Essential Patent is under an obligation to license its patented technology which sets a standard for the industry and such license must be granted on FRAND terms i.e. licensing of Standards Essential Patents (SEPs) on Fair, Reasonable And Non-Discriminatory (FRAND) terms is the foundation of the standards development.[10]

As the rightful owner of the patent, FRAND is a voluntary licensing commitment that SSO’s acquire on the permission of such owners.[11] This is primarily for the adoption of an already existing patented technology to be operated through other various manufacturers and producers. This is wholly simplified and less complex initiating a user-friendly interface.

FRAND is a policy included in the bylaws of the SSO’s agreement. The SEP holders are permitted to license their patents only on FRAND terms to eliminate the cream advantage of SEP’s and an ‘added incentive of immunity from punitive action.’[12] Other benefits from FRAND licensing include certification and branding for standards-compliant products which may further result in both shared costs and early access to information regarding a related but evolving standard.[13] Royalty accrued from patent licenses are wholly based on the commitment of remuneration, such being charged on the basis of deservance.

SSO’s should commit to licensing SEP’s on FRAND terms also, for patent owners being able to protect their technology and at the same time, ensure a reward mechanism for investments in research and development of such patent.[14]

A few points to keep in mind about FRAND licensing are as follows-

• Understanding  FRAND

‘It is widely acknowledged that in fact, there are no generally agreed upon tests to determine whether a particular license does or does not satisfy a RAND commitment.’[15]

FRAND emerged to initiate promotion of technological sharing through legal measures and preventing a sprain on the movement of patent growth. If there aren’t terms implemented to curb the unfair use of licenses, it would be equivalent to underwater basket weaving.

In a capitalistic economy like India, there are major market players that can reverse the tides and change the face of consumption. Naturally, if one cannot take away the rights bestowed through Patent Invention, one can effectively introduce the interoperability of such.

As discussed earlier, certain inventions like chip technology etc cannot be used independently of a device. This results in the standardization of the product. When the patent holder of this chip technology licenses it to the licensee viz. device manufacturer, it is done to prevent either the parties from causing exploitation or infringement through one another. The origin of FRAND was to lay down terms to prevent exploitation and infringement, also can be termed as a harmonious footing to promote athletic rivalry.

Summarizing the following, ambiguity in the definition of ‘FRAND’ is one of the core problems in the licensing of rights to patents, essential for the implementation of a written technical standard.[16]

• Fair, The F in FRAND

It seems extremely debatable as to what is fair and what isn’t. It is fair for striving developers to charge or impose restrictions on the product of their handwork and intellect yet, isn’t it fair for others to utilize the same for progression.

The ambivalence is important to an extent so as to not subvert various situations that may arise. Fair means an equitable set of terms which should be laid down so as to allow competition to thrive. Any agreements which are anti-competitive due to non-compliance of FRAND terms can be challenged in the Competition Commission of India.[17] Generally, the term “fair” relates to the underlying licensing terms and describes them as not being anti-competitive and not unlawful.[18]

• Reasonable. The ‘R’ in FRAND

Companies are formed primarily to focus on profits, unlike the other companies, a steady revenue can be accrued by licensing patents which would persist for a long time. Without forgetting the importance of profit margin and the benefit of the SEP holder, the royalty rate/charge has to be reasonable.

As investors, they cannot be denied their basic right to remuneration for using/licensing their product, however, as mentioned above, standardized patents have to be offered to licensors, such enjoyment should be within the purview of practicality and realistic.

Sometimes companies require such SEPs to function and would be ready to lower their profit margin considerably due to the royalty rates, such deprivation should not be allowed, which is why FRAND includes reasonable. Reasonable in this context has to be subjectively considered.

• The Non-Discriminatory in FRAND

Non-discriminatory means non-prejudicial. This is generally mentioned so as to prevent SEP holders to selectively grant licenses to certain licensees. It is often seen that in the chaos of competition, multiple rivalries arise. When one of these competitors become huge market players they essentially try to boycott the remaining.

Non-Discriminatory also relates to the royalty pricing which cannot be different for different licensees, as mentioned in the cases below there is a clear understanding of such and how the Competition Commission took cognizance of the same.

It will be seen how certain parties charged excessive royalty which was discriminatory due to its opaque nature that being non-transparent due to non-disclosure agreements. The charging of different license fees per unit of phone for the same technology is discriminatory.

It should be mandatory for patent licensors to within the patent licensing agreement mention a clause for strict adherence to FRAND terms or a separate FRAND contract. Any breach or violation of FRAND terms should be treated equally as that of other contractual terms. It is important to clearly mention the purpose of FRAND, adjudication and remedial measures.

• Royalty Rates

The royalty rates being charged by the licensor being the patent holder has to have a linkage to the patented product, not the whole finished product. Fair, Reasonable and Non-discriminatory terms can be subjective and defined widely.

Common sense would prevail that royalties should be charged on the patented part of the product and not the whole hence, royalty charges on the selling price is wholly unreasonable.

This has been demonstrated in Micromax Informatics Limited Vs Telefonaktiebolaget LM Ericsson, where the royalty was charged on the entire selling price of the product. Hence, if a phone was manufactured for Rs.50 which included using the patent technology of Ericsson under a license at Rs.10 and sold for Rs.100 to consumers, the patent-holder in this case viz. Ericsson charged royalty on Rs.100 rather than simply the patent technology worth Rs. 10. Now, a phone has various functions which necessitate various licenses and technology developed outside the purview of the manufacturers. This requires licenses to be issued.

The question posed in simple terms is why a mobile manufacturer should pay the royalty for one particular patent from the complete cost/selling price of the phone. Has such patent holder contributed completely in creating the product? No, the reason being 10 patents are applied for to manufacture a device, why should the benefit of excess royalty be shadowed leaving the manufacturers to cost ridden. This has been discussed further where Micromax Informatics Limited Vs Telefonaktiebolaget LM Ericsson has been expanded upon. [19]

• Uniformity of Licensing Terms

The license granted by such patent holding licensor to licensees should be uniform for all i.e. the conditions and royalty rates should not significantly differ. Facilitating uniformity in licensing requires sharing commercial terms and conditions with all the licensees. Not only is this extremely transparent and progressive but it also facilitates healthy competition and prevention of fair use.

In Micromax Informatics Limited Vs Telefonaktiebolaget LM Ericsson, it was held that non-disclosure of commercial terms with different licensees is contrary to the principles of FRAND. The reason being that it wouldn’t be fair to other licensees as the royalty rates could significantly differ also, being it would be unreasonable to disallow transparency as one licensee could be cogently cheated through stricter conditions and less flexible rates while others could be favored. Hence, as held below the commission ruled such practice to avoid sharing of commercial terms is against FRAND policy.

Micromax Informatics Limited Vs Telefonaktiebolaget LM Ericsson

The information was filed by popular mobile handset manufacturer Micromax Informatics Limited under Section 19(1)(a) of the Competition Act, 2002. The opposite party, Ericsson group, is one of the prevalent, globally established telecommunication companies. Micromax held that unfair, discriminatory and exorbitant royalty demands were made by Ericsson regarding its GSM technology.

This stands for Global System for Mobile communications which is an open, digital cellular technology used for transmitting mobile voice and data services.[20] Notices had been sent by Ericsson to Micromax to secure FRAND licenses from it as Micromax had allegedly infringed essential GSM patents of Ericsson. Following the same, Micromax made a request for details of the FRAND licenses from the Ericsson but the same were not provided.

Thereafter, Micromax entered into a non-disclosure agreement with Ericsson where FRAND licenses were disclosed. Demanding more, Ericsson wanted Micromax to accept licenses on FRAND terms within 25 days otherwise, it will be construed as a refusal to sign FRAND license agreement. The royalty rates imposed by Ericsson were as exorbitant which resulted in immense litigation from both ends.

On approaching the commission Micromax set forth the following arguments-

• That Ericsson was aware of its dominant position with an over advantage of being the only sole licensor of technology without alternatives. They imposed steep royalty rates. Also that companies did not have any other means but to license such technology through Ericsson due to them holding Standard Essential Patents of globally acceptable technology standards.

• The royalty charged was not on the product but on the value of the phone, this means that the sales price generated royalty rates which are strange as another technology manufactured by Micromax was included. The remuneration granted was not based on its sole addition to the product but on the device as a whole.

• Micromax argued that the royalty should be charged on basis of value of technology/chipset used in the phone and not the complete price of the device. This escalated the price of the royalty to more than 10 times as such phones were the smartphones equipped with features highly contrasted to ordinary phones.

• Interestingly, Micromax contended that while the chipset gives no additional value to a smartphone, such misuse of SEPs would ultimately harm consumers.

The agreements put forth by Ericsson were-

• That the royalty rates paid by Micromax had in fact as per the interim arrangement recorded by the Delhi High Court.

• The dispute being of commercial and civil nature that the commission should not acquire the role of a price setter or concern itself with excessive prices.

The Commission held-

• The practices adopted as aforementioned by the Ericsson were discriminatory as well as contrary to FRAND terms.

• The royalty rates being charged by Ericsson had no linkage to patented product, contrary to what is expected from a patent owner holding licenses on FRAND terms. These imposed royalties are linked with the cost of product of the user.

• Ericsson had refused to share the commercial terms of FRAND licenses with the licensees similarly placed as Micromax i.e. which licensed similar patents. This was noticeably fortifying the accusations of discriminatory commercial terms imposed by Ericsson.

The court further enumerated through demonstrating via an example being for the use of GSM chip in a phone costing Rs.100, royalty would be Rs.1.25 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 the 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.[21]

• Non-disclosure agreements are opposed to FRAND terms

In Intex Technologies (India) Limited Vs Telefonaktiebolaget LM Ericsson, the information filed in the Competition Commission of India was by Intex Technologies (India) Limited, an incorporated Indian company of which the product portfolio includes more than 29 products including mobile phones, multimedia speakers, desktops LED / LCD TVs CRT, DVD players, computer UPS, cabinets, headphones etc. Also mentioned was the affordability and high-end technology provided by Intex along with custom made mobile devices etc.

On the other hand, Ericsson is a global player in the telecommunications sector, the business is of manufacturing network/ base station equipment and setting up and managing telecommunications networks. The revenue mostly accrues from the handset business and importantly patent licensing/monetization. Ericsson held 33,000 granted patents and was the largest holder of Standard Essential Patents for mobile communication covering 2G, 3G and 4G technologies. Intex alleged that Ericsson refused to share the commercial terms and royalty payments on the grounds of non-disclosure agreements.

This clearly suggests that it is most probable that different royalty rates/commercial terms were being offered to the potential licensees belonging to the same category. For instance, if A, B, C were potential licensees, A would be given a different royalty rate to be paid in comparison to B and C.

The pertinent question is why else would transparency be declined? Moreover, the NDA was a necessary pre-condition for letting Intex know about the details of the alleged infringement. The absurdity lies in the fact that notifying the infringing party of the infringement required an NDA to be signed for not letting such information leak.

It has to be kept in mind that purpose of FRAND terms was to reduce the friction between the SEP holder and the licensee, having such conditions of non-disclosure are equivalent to pompous threatening. Clearly, this assertion of dominance with an attitude of ‘take it or leave it’ is in contravention to FRAND terms. Hence another enumerated characteristic of FRAND is transparency. [22]

• The reason for standard setting and FRAND compliance

Often patent holders would deem it unnecessary to partake in adhering to a standardization which would eventually require compliance of FRAND terms. Without such, there is an immense possibility of realized profits and unanimous budgeting of royalty rates. This kind of unchallenged advantage is attractive as a concept yet defeated due to the obligation to declare technology that would require standards.

Further, evolving into such standard-setting activities would impress patent licensees in a form of security and safety. This would, in turn, increase the number of licensees significantly as there would be fixed and unbiased FRAND terms as rescuers. As mentioned there would be a ‘guaranteed pool of licensees’, without such assurance the patent would be left unutilised.

• Purpose of FRAND terms to prevent stacking up and patent hold-ups

Usually, patent hold-up occurs due to an exceptional advantage of the patent holder over the patent licensee. And patent hold-up is more likely where a company uses its SEPs to exclude competitors from the market.

The commissioner for competition of the European Commission has expressed similar concerns (Alumnia, 2012) –

‘To build a smartphone, one needs thousands of standard-essential patents. The holders of these patents have considerable market power and can effectively hold-up the entire industry with the threat of banning competitors’[23].

By threatening to use injunctions, these companies make demands that their commercial patent licensees would never imagine or concede to under normal circumstances. Injunctions are remedial being of interim (temporary measures) or permanent in nature. Injunctions are not often given unless there is a rational basis to prevent infringement. FRAND terms help to prevent such misuse of injunctions by the patent holder to disadvantage the patent licensee. Yet again, non-adherence to FRAND terms also results in litigation hence, there is no per-se remedy to cater to such disputes.

• Loopholes within FRAND

FRAND terms require adherence yet again, there is no transparent system of remedies available. The most practical advice would be for the potential licensees to clarify with patent owners or patent licensors through investigations. The SSO’s bylaws have to be read and agreed upon before the patent is licensed. [24]

One remedy can be the breach of contract i.e. the FRAND contract. This being more attractive to licensees rather than patent licensors upon the breach of FRAND terms.[25] In a contract, a separate clause can be dedicated to the adherence to FRAND terms if not a whole separate contract. The remedy post-breach can be damages awarded after being adjudicated upon. The jurisdiction of the contract should be the same for breach through noncompliance to FRAND or other actions.[26]

There is no law stipulating necessity to mention FRAND clauses or a separate contract for FRAND terms which is why this is more in vogue after the cases mentioned above. It is high time the legislature should divert some clarity to curb the arbitrary process of licensing and improve the efficacy of FRAND implementation.

That’s all about FRAND licensing. Do you have something to say? Feel free to mention your queries/views in the comment box below & share the article.

 

References –

[1]Universal Declaration of Human Rights, G.A. Res. 217A (III), U.N. Doc.A/810 at 71 (1948).
[2]Shippey, Karla C. “A Short Course In International Intellectual Property Rights.” World Trade Press, N.D.
[3]The Competition Act, 2002, No. 12, Acts of Parliament, 2003 (India).
[4]Kochhar& Co, Introduction Of The Competition (amendment) Bill, 2012 In India, (2012), http://www.kochhar.com/pdf/Rationale%20For%20Competition%20Laws%20-%20SALIENT%20FEATURES%20OF%20THE%20BILL%20AND%20THE%20IMPLICATIONS%20THEREOF..pdf.
[5]Hovenkamp H, Janis M &Lemley M, IpAnd Antitrust: An Analysis Of Antitrust Principles Applied To Intellectual Property Law (aspen Law & Business, Ny). 2003-04, Supplement P. 35.1.
[6]Wipo, Standing Committee On The Law Of Patents Thirteenth Session, Http://www.wipo.int/edocs/mdocs/scp/en/scp_13/scp_13_2.pdf.
[7]Wipo,Supra note 6.
[8]See, e.g., U.S. DeptOf Justice & Fed. Trade Comm’n, Antitrust Enforcement And Intellectual Property Rights: Promoting Innovation And Competition 33 N.1 (2007), Available At http://www.ftc.gov/reports/innovation/P040101PromotingInnovationandCompetitionrpt0704.pdf.
[9]Shapiro, Carl, ―Navigating The Patent Thicket: Cross Licenses, Patent Pools, And Standard-setting‖, Forthcoming Innovation Policy And The Economy, Volume I, Mit Press, 2001 Available At http://faculty.haas.berkeley.edu/shapiro/thicket.pdf
[10]Understanding Patents, Competition And Standardization In An Interconnected World,Itu, 2014 Available At http://www.itu.int/en/itu-t/ipr/pages/understanding-patents,-competition-and-standardization-in-an-interconnectedworld.aspx.
[11]Layne-Farrar, Anne; Padilla, A. Jorge; Schmalensee, Richard (2007).”Pricing Patents for Licensing in Standard-Setting Organizations: Making Sense of FRAND Commitments”.Antitrust Law Journal.74: 671.
[12]RaghaviViswanath, Demystifying the Indian FRAND Regime: Interplay of Competition and Intellectual Property, http://nopr.niscair.res.in/bitstream/123456789/34083/1/JIPR%2021(2)%2089-95.pdf.
[13]Frand V. Compulsory Licensing [Vol. 14]Implementation Of A Standard By Licensing At Exorbitant Prices.
[14]Yann Ménière, Fair, Reasonable and Non-Discriminatory (FRAND) Licensing Terms, JRC Science and Policy Report, http://is.jrc.ec.europa.eu/pages/ISG/EURIPIDIS/documents/05.FRANDreport.pdf.
[15]Daniel G. Swanson & William J. Baumol, Reasonable and Nondiscriminatory (RAND) Royalties, Standards Selection, and Control of Market Power, 73 Antitrust L.J.1, 5(2005).
[16]Larry Goldstein And Brian Kearsey, Technology Patent Licensing: An International Reference On 21st Century Patent Licensing , Patent Pools And Patent Platforms.

[18]Saumya Srivastava, Standard Essential Patents And Competition Law, Competition Commission Of India, 15–16 (2013).
[19]Micromax Informatics Limited Vs Telefonaktiebolaget LM Ericsson, (2013) Case No. 50 of 2013, Competition Commission (India).
[20]GSMA, GSM About Us, http://www.gsma.com/aboutus/gsm-technology/gsm
[21]Supra note 16
[22]Intex Technologies (India) Limited vs Telefonaktiebolaget LM Ericsson , (2013) Case No. 76 of 2013, Competition Commission (India).
[23]Keith E. Maskus& Stephen A. Merrill, Patent Challenges For Standard-setting In The Global Economy: Lessons From Information And Communications Technology (2013).
[24] See Kraig A Jakobsen, Revisiting Standard-Setting Organizations’ Patent Policies, 3 NW. J. TECH. &INTELL. PROP. 43, 50 (2004), available at http://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=102 7&context=njtip.
[25]SrividhyaRagavan, Brendan Murphy & Raj Davé, Frand V. Compulsory Licensing: The Lesser Of The Two Evils, http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1285&context=dltr.
[26]Supra note 25.