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India – Competition Law And FRAND Commitments.

27 January, 2014

 

 

The interface between intellectual property rights (‘IPR’) and competition law is increasingly attracting the attention of competition regulators across the globe. By its very nature IPRs are exclusionary. An IPR holder can exclude others from using or exploiting their proprietary product or technology. Grant of such exclusive rights is considered essential for fostering innovation. It is often argued that, but for IPR protection, enterprises would lose the incentive to innovate, a process which entails significant investments with no certainty of recoupment. Competition laws recognise this interplay between innovation and exclusive rights of exploitation on IPR protected products. Moreover, since innovation is important for increased competition, once an enterprise secures IPR protection over certain products/technology, competition laws do not generally cast a ‘duty to deal’. For example, once an enterprise secures a patent, competition authorities would not require the patent holder to license the patent to any other enterprise.


However, when it comes to essential patents1, the distant respect for IPR protected technology usually accorded by competition authorities, gives way to rather active intervention. Patents that are considered essential to implement a chosen industry standard cannot be exploited like any other patent, and certainly not to the exclusion of other market participants. Once a standard is selected, competitors and downstream market participants incur heavy investments to ensure that their production processes are in accordance with the selected standard. The adoption of a standard is likely to “lock in” industry stakeholders to the (patented) technology that is compatible with the standard. This provides the owner of a patent, which is essential for compliance with the standard (standard essential patent or SEP), with a great deal of market power.


Although standards are powerful market tools that enable products and services offered by different vendors to inter-operate, like most things, it can also be harmful if not applied carefully. In order to ensure that standard-setting remains beneficial, it is necessary to ensure that in cases where adopting a standard necessarily involves the incorporation of a patent into the industry standard, the relevant patent holder is not in a position to unjustly exploit its market power newly accrued to it (for example, by extracting exorbitant royalty rates) to the detriment of the entire industry.


One of the ways in which this may be achieved is by extracting FRAND commitments, where owners of essential patents commit to make their essential patent available to third parties on FRAND terms. While this appears to be a mutually beneficial solution, with the patent owner benefitting from its patent being widely used by the industry, and the remaining stakeholders being protected from paying exorbitant royalty rates, ultimately, the efficacy of FRAND is determined by its enforceability.


Competition Law: A Friend To FRAND?


Exploitative or exclusionary conduct by an entity in a dominant market position is prohibited under Section 4 of the Act2. A patent owner assumes significant market power when his patent becomes indispensable for complying with a particular standard adopted by a standard setting organization (‘SSO’). In the recent past, there have been several instances where essential patent holders have been alleged to demand unreasonable royalties for licensing their patents, despite their commitments to SSO’s to license patents on FRAND terms to third parties3. This is especially true for the technology market where companies often exercise their patent rights to block competitors from operating technologies essential to developing popular consumer electronics4.


One of the earliest cases where violation of FRAND commitments was sought to be addressed by the European Commission (‘EC’), was in an investigation against Qualcomm Inc. In 2005, six mobile phone companies alleged that Qualcomm’s licensing terms and conditions for its patents essential to the WCDMA standard did not comply with Qualcomm’s own FRAND commitment and, therefore, breached European Union’s competition rules. However, since EC was unable to conclude that Qualcomm’s licensing rates were “exploitative” (although arguably high), within the meaning of Article 102 of the Treaty for the Functioning of the European Union (‘TFEU’), it was constrained to close its investigation5.


Most recently6, EC found that Samsung had failed to provide its patents essential to the ETSI UMTS telecommunications standard to Apple on FRAND terms. Moreover, Samsung sought an injunction against Apple to prevent it from using its SEP’s, even though, according to EC, Apple was willing to enter into a licensing agreement on FRAND terms for Samsung’s SEPs. Accordingly, EC found Samsung to have abused its dominant position in breach of Article 102 of TFEU7. Reportedly, CCI has received its first major complaint in relation to breach of FRAND commitments8.


In a complaint filed by Micromax in November 2013, CCI has taken a prima facie view that when royalty rates are based on the cost of the final product rather than the patent itself9, the terms of license are not FRAND. Accordingly, CCI found Ericsson to have prima facie violated its FRAND commitments by licensing its essential patents for 3G and 4G technology on unfair terms, and directed DG to conduct a detailed investigation.


From the active role willingly played by competition agencies in relation to the alleged breach of FRAND commitments, it would appear that competition law may be well suited to enforce “FRAND” commitments. Remarkably, the introduction of FRAND (or RAND) appears to have brought closer the seemingly conflicting worlds of free competition and protection of proprietary innovation. However, given the problems associated with defining “fair and reasonable rates”, it will be challenging, at the very least, for CCI to determine whether a patent holder has in fact “exploited” its market power by demanding “unfair” prices in licensing arrangements.


Specifically, in the context of the FRAND complaint received by CCI, it will be interesting to see how CCI will strike a balance between protection of IPRs of the SEP holder and the avowed objective of promoting competition. Unlike in the United States of America, where FRAND breaches are litigated before courts that are well versed with both intellectual property laws and competition (anti-trust) law principles10, CCI is a specialist regulator tasked first and foremost with ensuring “freedom of trade carried on by other participants in markets”. Unlike Section 3 of the Act which provides a limited carve out for restrictions imposed by IPR holders to protect their rights, Section 4 of the Act, which contains disciplines on abuse of dominance does not contain a similar dispensation. This means that, in the context of a FRAND dispute, CCI can certainly look at the royalty rates being demanded for the SEPs.


Although there are no particular set of rules to determine FRAND terms, there exist some common principles that may be followed to calculate royalty rates. These include, the “ex-ante competitive rate” where FRAND royalty rates are based on the competitive rate for such technology, prior to its inclusion in a standard. FRAND rates may also be determined according to industry expectations. Royalties charged by licensors for the previous generation of the technology or royalties charged by the same licensor for patents that are essential to other comparable standards may form the basis for reaching a FRAND rate. Finally, a FRAND royalty rate may also be calculated on the basis of the contribution made by the essential patent holder to the standard in question.11


Given the multiplicity of FRAND litigation, both domestically and around the globe, it would be interesting to see how CCI will ascertain the ‘fairness’ of royalty rates, in its very first FRAND related investigation.

 

End Notes:

 

1 A patent is deemed essential if an independent evaluator concludes that the patent is essential to the practice of a technical standard.
2 It is to be noted that Section 3 of the Competition Act which prohibits (i) competitors from coordinating on interlia price and production activities, and (ii) entities in a vertical relationship from entering into exploitative or exclusionary arrangements (such as exclusive distribution/supply agreements, resale price maintenance, tie in arrangements) creates an exception for conduct that results in any of these prohibited activities, if such conduct is reasonably required to protect any rights arising out of intellectual property laws.
3 The commitments are intended to ensure that basic technical innovations are widely available to stimulate growth in the industry.
4 For example, see: Microsoft v. Motorola (W.D.Wash, Case No. C10-1823-JLR); Apple v. Motorola (N.D. Ill, Case No. 1:11-cv-08540, transferred in part from W.D. Wis., Case No. 10-CV-00662-BBC), Huawei v. InterDigital (Del. Ch., No. 6974)

5 Damien Geradin, ‘Ten Years of DG Competition Effort to Provide Guidance on the Application of Competition Rules to the Licensing of Standard-Essential Patents: Where Do We Stand?’; Paper prepared for the Research Roundtable on Innovation and Technology Standards, February 7-8, 2013, Searle Center on Law, Regulation, and Economic Growth, Northwestern University School of Law.
6 On 31st January 2012, EC announced that it had reopened its investigation against Samsung for failing to honour its FRAND commitments. On October 17, 2013, the EC has sought comments on the set of proposed commitments offered by Samsung to interalia, not seek “injunctive relief in the European Economic Area with regard to all its SEPs which read on technologies implemented in smartphones and tablets (Mobile SEPs) against any company which agrees to and complies with a particular licensing framework” [accessed on: http://europa.eu/rapid/press-release_MEMO-13-910_en.htm]
7 Similarly, EC also initiated an investigation and made a preliminary finding against Motorola for seeking and enforcing an injunction against Apple in Germany over patents essential to smartphones and tablets.
8 While there is no official confirmation, it appears that CCI has received several similar complaints pertaining to FRAND violations.
9 An allegation against Ericsson by Micromax.
10 While the United States Department of Justice Antitrust Division and the Federal Trade Commission share responsibility for investigating and litigating cases under the Sherman Act, 1890, decisions re anti trust violations are taken by federal courts that entertain disputes under all laws, specialist and general.
11 Phillipe Chappatte, “FRAND Commitments- The Case for Antitrust Intervention” European Competition Journal; August, 2009.

 

AZB

 

For further information, please contact:

 

Zia Mody, AZB & Partners
[email protected]

 

Abhijit Joshi, AZB & Partners 
[email protected]


Shuva Mandal, AZB & Partners 

[email protected]

 

Samir Gandhi, AZB & Partners
[email protected]


Percy Billimoria, AZB & Partners 

[email protected]

 

Aditya Bhat, AZB & Partners 
aditya.bha[email protected]

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