In this article, Deepshikha Sarkar discusses Standard Essential Patents and FRAND Litigation.

The concept of standard essential patents (SEP) is new in India and gained popularity only after the Microsoft Ericsson dispute. Where the multinational Ericsson brought Indian Micromax to court to enforce its SEP’s.

In order to understand what are “Standard Essential Patents,” one has to first know what is “standard” and “essential” in relation to the term.

What is standard in a SEP?

The meaning of standard in this context is a “technical standard” or more specifically an “industry standard”. They are standards in technology requirements which need to be met to provide so that a product or process, functions in a specific manner.

As per the ISO/IEC Guide 2:2004 (which can be found here) “standard” is defined as “a document, established by consensus and approved by a recognized body, that provides, for common and repeated use, aimed at the achievement of the optimum degree of order in a given context.

Taking into consideration the electronics industry, we can say that in order to manufacture, an ‘industry standard compliant’ mobile phone, tab, etc the manufacturer will have to use certain technologies that are covered by a SEP. In case of the telecom industry: there are two technologies that are SEPs- Code Division Multiple Access (CDMA) and Global System for Mobile Communication (GSM).

How is it determined that a patent is essential to a particular standard?

In simple words, it can be said that a patent can be termed as “essential” to a particular standard when it is not possible to manufacture a product compliant to industry standards set by SSOs without infringement of that patent.

In the case Microsoft Corp. V. Motorola, Inc., Motorola Mobility, Inc., And Gen. Instrument Corp. the Washington District Court held, “A given patent is essential to a standard if use of the standard requires infringement of the patent, even if acceptable alternatives of that patent could have been written into the standard.”

How does a particular patent acquire SEP status?

If for making a product compliant with certain industry standards – a manufacturer needs to use patented technology and it is impossible to manufacture that without infringing the said patented technology, then that patented technology is a Standard essential patent.

Like in the case of smartphones etc, it is not possible to create a standard compliant product without using technologies like CDMA OR GSM.

According to European Telecommunications Standards Institute (ETSI) and its IPR policy (available here) the condition for essentiality is:

“ESSENTIAL” as applied to IPR means that it is not possible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operate EQUIPMENT or METHODS which comply with a STANDARD without infringing that IPR. For the avoidance of doubt in exceptional cases where a STANDARD can only be implemented by technical solutions, all of which are infringements of IPRs, all such IPRs shall be considered ESSENTIAL”

Therefore, Patents that are essential for compliance with industry standards and have been adopted by a Standard Setting Organisation (SSO) are SEPs.

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FRAND and SEP

As discussed any patented technology which has to be mandatorily adopted in order to produce a standard compliant product is a Standard Essential Patent (SEP). And although these standards are important for many industries in the modern world they may pose patent licensing issues.

In case there exists a ‘standard’  in the industry then the owner of a SEP will have a superior bargaining power that can be misused by him during licensing in order to earn disproportionate revenues by the virtue of t technology is an industry standard.

In the same manner, any standard setting organization (SSO) may avoid adopting a standard if the owner of the SEP is reluctant in licensing the patent in advance as the level of adoption by the SSO is a determining factor of the SEPs value.

These situations are called patent licensing “holdups”. And probably the only solution to this is the creation of F/RAND – Fair, Reasonable, And Non-Discriminatory terms. These terms are made as requirement by SSOs in order to ensure Fair, Reasonable, And Non-Discriminatory licensing of patents by SSO members to other members and sometimes non-members as well. The FRAND terms ensure a balance between use of the standard by all the manufacturers in the industry and the fair benefits reaped by the SEP owner.

FRAND IN INDIA

The position of the F/RAND litigation in India is relatively new as compared to the European Union and United States. The Supreme Court in India has not yet delivered a final decision in this matter. At present the Competition Commission of India (which has just begun deciding cases on topics like calculating a FRAND loyalty) and the Courts are overrunning each other.

Whereas the Indian antitrust Authority- CCI seems to be favoring smallest salable patent-practicing component as the base for calculating FRAND royalty, on the contrary, Delhi High Court has used the downstream product as the royalty base. This is seen as a non-productive trend in the FRAND jurisprudence in India if the judiciary and the competition authority continue to take opposing stands towards SEP holders and SEP implementers.

Can an injunction by a SEP holder against a third party amount to an anti-competitive practice?

There is no statute or regulation imposing a FRAND obligation and it created wholly by SSOs in response to some of the members suing other members who use their SEPs.

A FRAND commitment may arise due to contravention of any of the SSO’s by-laws which the members have agreed to or agreements between members in relation to the adoption of standards.  Hence an F/RAND commitment is made by an owner of a SEP to the SSO itself or to another SSO member and not to any third person or the public.

This question of law is still developing and usually courts have allowed SSO members to enforce FRAND commitments on the theory that they are third-party beneficiaries of FRAND agreements between the SEP owner and SSO.  If there is a third party at all it has to be a beneficiary of the contract. it is usually a beneficiary The case of non-members using the standards being third parties or not is not clear in law on this date.

FRAND OR (F)RAND OR F/RAND

FRAND is the acronym for fair, reasonable and non-discriminatory. It generally arises in antitrust cases where an owner of intellectual property rights (IPR) refuses to grant a license or refuses to grant a license on FRAND terms.

Comparison of compulsory licensing vs. FRAND licensing

FRAND and Compulsory Licensing are two different forms of licensing. On one hand, FRAND licensing is widely used in software, mobile phone, and communications sector whereas on the other hand Compulsory licenses have been used by Governments, of different countries, where the need of the use of the invention (mostly pharmaceuticals) by the general public is of prime importance.

A FRAND license lays emphasis on proving the license holder with decent and reasonable terms. Which results in a SEP holder not extracting unreasonable royalties. Whereas Compulsory license lays emphasis on the benefit of the general public through wider access to patented inventions. Both ultimately create value for the patented product which is different from the value of the product in the market. The entity which ultimately consumes the product pays lesser for it due to both these licensing mechanisms.

A compulsory license is a result of a supervisory mechanism of the government. It stems from the government sovereign right to determine that public welfare trumps a patentee’s rights of commercial exploitation of his patent. On the contrary FRAND licenses are a result of free market forces working within industries and SSOs in order to determine whether a patent can be “standard essential” and be licensed as per FRAND terms.

If seen from the perspective of a consumer, then the biggest difference lies in negotiation. In case of FRAND licensing there lies this uncertainty about royalty which is result of the negotiation alone. But in the case of compulsory licensing the royalty rates are pre set by the government and there is constancy regarding the same. One of the biggest criticisms of FRAND licensing in the recent times has been that instead of promoting innovations.

What are the factors involved in differentiating a FRAND litigation from a regular patent infringement case?

A FRAND litigation happens when there is a FRAND agreement between the parties. And a FRAND agreement arises as a contractual obligation. Ans in a FRAND litigation case goes in the direction of an exact form of relief to be recovered which was a part of the contract.

For example in the Microsoft vs Motorola case, the parties had argued the different perspectives which have to be considered in arriving at a “reasonable”  royalty rate. The judgment can be found here.

Whereas there is Patent infringement when a party makes, uses or sells a patented item without the permission of the Patent holder. The Patent holder may take the infringing party to court stop its activities and receive compensation for the illegal and unauthorized use of the patent.

Hence a patent infringement case arises when the exclusive right of the patent holder is taken away by a third party. On the other hand, an F/RAND litigation arises on a breach of contract.