The Cost of Connectivity : SEP, FRAND and India’s Technological Future

Introduction : Technical standards provide common rules that allow networks and devices to interact. A patent essential for using such a standard, meaning it is not technically or commercially possible to comply with the standard without infringing upon the patent, is known as a Standard Essential Patent (SEP).

In the telecommunications industry, SSOs like ETSI, IEEE and ITU set the standards. SSOs require the participating companies to disclose all the likely patent rights which are going to be standard-essential to the standards being proposed and commit to license the standard-essential patent rights at Fair, Reasonable and Non-discriminatory terms.

The inherent tension of patent holders enjoying monopoly over technologies essential for market access by third parties yet legally entitled to block third party use is addressed by this FRAND obligation. It prevents patent holders from exacting excessive licensing fees or refusing to grant licenses, thus hindering competitors from the market, and also prevent consumers from over paying. The huge population base of 1.4 billion, the position of Indian firms in telecom device manufacturing sector and the Indian National Intellectual Property Rights Policy 2016 make it quite commercially relevant to examine SEP regulations.

Understanding Standard Essential Patents

Normal patents, however only give the owner of the patent the right to stop others making, using or selling the patent, an alternative can be “designed around”.  A SEP, however, cannot be designed around, unless the competitor declines to implement the standard. Once a standard that incorporates a patented technology has been accepted by an SSO, any and all implementers of the standard are a captive audience and thus “forced licensees” to the patent owner.

However, determining the essentiality of a patent is a fact-based and often disputed analysis. It may turn out that a “declared essential patent” (a patent owner’s declaration that it owns a SEP) is actually not technically essential once its essentiality has been challenged. It is estimated that a high percentage of self-declared SEPs fail to withstand independent essentiality assessments. This over-declaration leads to exaggerated demands of licensing terms and complications in negotiations. A handful of technology firms dominate SEP portfolios. During the 4G-LTE standard’s lifetime, for instance, Huawei, Qualcomm, Ericsson, Nokia, and Samsung collectively owned the overwhelming majority of declared SEPs. The transition to 5G has been accompanied by marked concentration, and forecasts of hundreds of thousands of SEP declarations, across new device domains ranging from self-driving cars to industrial IoT systems within standardised ecosystems.

FRAND Framework : Rights and Obligations

The FRAND licensing commitment is an undertaking of a contract entered into by an SSO member for being given a place in the standard. Three demands are made from the patentee upon acceptance of a FRAND commitment-

(1) royalty has to be fair (what is the genuine value of the patent to the standard?),

(2) the royalty has to be reasonable (at what price would a willing licensor agree to license to a willing licensee?), and 

(3) the royalty has to be non-discriminatory (what price is offered to other licensees in like positions?).

As courts and tribunals adjudicate, there are many procedural issues they need to tackle in FRAND determination-

(1) the unit on which the royalty base is measured-whole device or smallest salable patent-practising unit; 

(2) the issue of how to allocate value as between a SEP and hundreds or thousands of other patents that constitute a modern standard; and 

(3) whether value is defined by the ex-ante market position (the value of technology before it was ‘locked-in’ to a standard) or ex post position (the value of the holder with a standard being already deployed, and with this value intrinsically including the value of the standard). The courts in many jurisdictions give conflicting answers to all of these issues.

The FRAND commitment does not extinguish the right to an injunction from the SEP holder, but rather modulates and complicates the right to obtain one. If an implementer acts in good faith and tries to negotiate, the SEP holder has little basis to obtain an injunction, while on the contrary, if the implementer is not negotiating with good faith, he may not be protected from an injunction. This tension is the primary element in all global SEP disputes.

SEPS in the 5G and Future Technology Era

5G standards developed under 3GPP Release 15 (and successors) are a radically different generation to the generations preceding it-not a pure telecommunications standard, but a general-purpose infrastructure standard. Applications range from self-driving cars, smart manufacturing, remote surgery to Industrial IOT. Each of these industries is bound to generate its own generation of SEP disputes, as companies hitherto unrelated to the telecom sector are mandated to become implementers of the 5G standard.

This growth represents a particular problem for India. The “Make in India” drive pushes domestic manufacturing of electronics, semiconductors and telecom equipment. Indian companies making 5G compliant devices are required to procure licenses from holders who have developed their portfolios over decades of R&D expenditure in other jurisdictions. The information asymmetry between global SEP holders and Indian implementers, particularly small and medium enterprises, and the respective resource pools available to them, both in terms of cash flow as well as legal acumen, are stark.

Research for 6G is already well underway, with patents likely to be relevant to 6G already being filed in Europe, South Korea, Japan and China. India’s almost nonexistent presence in the development of 6G today implies a deficit in its licensing pool tomorrow. India needs a pro-active domestic policy relating to SEPs, on grounds of both industrial competitiveness and legal preparation.

Legal Framework in India

Patent rights in India are primarily governed by the Patents Act, 1970. Under this legislation patent holders have the right to prevent third parties from the manufacture, use, sale and import of their patented invention. Apart from this, compulsory licensing mechanism under the patent law of India also provides for the availability of patent products if a patented invention is not made available to the public, is sold at unreasonable price, is not being sufficiently worked in India. This is a subject widely debated and discussed in patent disputes, but its implication in licensing of Standard Essential Patents (SEP) are still ambiguous and under process of interpretation by Indian Judiciary.

Furthermore, anti-competitive practices and abuse of dominance is covered by the Competition Act, 2002 and licensing practices have been scrutinized in the light of competition law by the CCI. Such scrutiny becomes relevant where the licensing terms are discriminatory or unreasonable.

The structural ambiguity arises from the interplay of the two statutes. While patents are statutory entitlements, the exercise thereof is not ipso facto an abuse, even if done aggressively. If the SEP holder is in a position of dominance-a condition it is almost certain to be in if the standard cannot be practiced without the patented technology-then how it goes about its licensing can be anti-competitive behavior. Where the line is drawn between valid patent assertion and anti-competitive behavior is the critical debate for Indian IP law.

 Indian Judicial Approach to SEP Disputes

A. Ericsson v. Micromax

The first prominent dispute relating to SEPs came in India in 2013, when Swedish telecom company Ericsson sued Micromax, an Indian mobile manufacturer, for infringing 8 patents relating to 2G/3G/EDGE technologies. The Delhi High Court granted an interim injunction on the basis of Ericsson’s assertion that it had offered FRAND licenses which were not accepted by Micromax. It was a significant early indication that Indian courts would permit an interim injunction in a SEP dispute, closer to Germany’s policy than to that of the US. 

Micromax complained to the CCI that Ericsson had abused its dominant position through over-pricing and discriminatory licensing practices. The CCI concluded that it had jurisdiction to inquire into the complaint and that Ericsson’s conduct was prima facie an abuse of dominance. The CCI’s jurisdiction was challenged by Ericsson in the Delhi High Court, resulting in a clash of regulatory jurisdictions that was not fully resolved.

B. Ericsson v. Intex 

A similar case was filed against Indian device manufacturer Intex. Again, critics questioned the discretion exercised by the Delhi High Court in granting an interim injunction before considering the merits of the FRAND argument and believe this puts pressure on Indian companies, which have neither the cash nor the litigation expertise to fight protracted cases in the courts. 

The Delhi High Court did, however show an inclination to resolve the issues arising out of Royalty determination using a range of economic principles including; comparative license models- comparing the rates granted in licenses to others for comparable portfolios; and the top -down model-by calculating the aggregate royalty on all of the individual patent holder claims before apportioning it out between them. These have generally followed international norms, lacking the guiding hand of clear statutory or judicial principles.

C. The Jurisdictional Problem

The ongoing jurisdictional disputes regarding the role of the CCI compared to patent litigation demonstrate the problems. Through orders at various stages from the CCI, National Company Law Appellate Tribunal and the Delhi High Court, the signals provided as to the relationship between patent litigation and the investigation of SEP issues by the CCI remain contradictory. This ambiguity and lack of a clearly defined inter-play create significant transaction costs due to a perception of forum-hopping.

Global Practices : Comparative Experience

A. United States

The U.S. Jurisprudence surrounding SEPs has evolved. In re Innovatio employed a revised Georgia-Pacific calculation for patents incorporating FRAND commitments. In Microsoft v. Motorola, The Ninth Circuit found FRAND royalties justified on the basis of comparable licenses and ex ante approaches. Overall, the U.S. Approach prefers injunctions to be discouraged in SEP cases, if the implementer negotiates in good faith. According to the Federal Trade Commission, injunctions hinder competition.

B. European Union

In Huawei v. ZTE, The Court of Justice of the European Union put in place an EU framework in which an SEP holder may receive injunctions and not be liable for abuse of dominant position under EU competition law. An SEP holder is to warn an implementer of infringement, present a specific written FRAND offer, and provide sufficient time for the implementer to respond and negotiate in good faith. In turn, the implementer must also respond expeditiously and in good faith. The framework of negotiations has been recognized as a global standard, while the European Commission has proposed an EU SEP Regulation that, along with increased transparency, introduces mechanisms of essentiality assessment and conciliation.

C. China

The Chinese authorities have made it known that the Supreme People’s Court, among other Chinese courts, can decide global FRAND rates. The practice has led to many counter-suit filings in other jurisdictions and considerable dispute. The CNIPA has issued guidelines relating to the licensing of SEPs. The Chinese model combines judicial willingness to award global rates and administrative guidelines, to a certain extent, this serves the industrial interests of China, and can potentially be studied by India.

Indian SEPs : Structural Challenges 

Certain structural problems continue to plague a well-functioning Indian SEP system. 

Firstly, patent hold-up: the implementer has invested substantial amounts into standard-compliant technologies before an SEP holder comes forth with a claim, allowing the SEP holder to extract a higher royalty than the technology is worth. 

Secondly, patent hold-out, which occurs when the implementer purposefully delays or avoids accepting a FRAND license to effectively gain free use of a standard while litigation drags on. 

Thirdly, the absence of statutory FRAND guidelines creates an inconsistent and uncertain court-based system, since there is no objective standard for the calculation of royalties. 

Fourthly, courts and the CCI have concurrent jurisdiction which breeds forum shopping.

Fifthly, protracted legal proceedings in Indian courts can lead to a situation lasting a decade, where while litigating, the SEP holder continues to benefit from royalties, and the implementer suffers from a protracted process.

This regime negatively impacts Indian manufacturers. Startups and domestic smaller companies often lack sufficient legal and technical know-how and funds to conduct independent essentiality assessment and to fight prolonged litigation, placing them at a disadvantage vis-a-vis large multinational corporation.

Striking a Balance between Innovation and Competition

The underlying issue in regulating SEPs is balancing the rights of patent holders to enjoy reasonable returns on investment against the implementers’ right to acquire affordable technology. Excessive protection for patent holders hinders the ability of standardization to reduce costs and prices for end consumers. If the implementer does not obtain fair treatment, incentive to use standards can dwindle, as can incentive to participate in SSOs. A well-balanced SEP regime must recognize innovation while preventing exploitation through standard-lock-in. 

In India, striking this balance also means accounting for affordability and the use of technology as a development imperative. This includes access to services like banking, health, and governance through affordable smartphones. India’s innovators also stand to benefit from the development of a strong patent regime to safeguard their future SEPs. An efficient Indian SEP regime thus needs to address these factors, ensure IP protection for innovation, curb anti-competitive exercise of market power gained from standardization and build appropriate mechanisms for timely and fair dispute resolution. 

Suggestions and Reforms

1. Enact a statutory FRAND law; either by amending the Patents Act, 1970 or by enacting a separate IP Regulation. Similar EU SEP Regulations and Chinese CNIPA Guidelines can serve as useful models for the Indian approach. 
2. Establish an Intellectual Property and Technology Disputes Tribunal; to provide a specialized and accelerated mechanism for resolving disputes, with technical members to adjudicate complicated patent and FRAND issues. This will curb institutional friction created by the dual jurisdiction of courts and the CCI. 
3. Clarify jurisdiction on both patent infringement and competition law aspects of SEP disputes. An approach that requires parties to use the specialized tribunal for both would streamline litigation. Alternatively, it could specify procedures under which injunctive relief is granted only after a FRAND determination is secured. 
4. Create institutional capacity for essentiality assessment; by empowering the Controller General of Patents, Designs and Trade Marks to assess patent essentiality independently, thereby mitigating informational asymmetry between patent holders and implementers. 
5. Deepen international cooperation; through active participation in international standard setting bodies and contributing to the development of global norms and procedures for FRAND. Countries that actively participate in standard-setting will better shape the terms under which domestic industries license technologies.

Conclusion

Standard Essential Patents and the framework of FRAND licensing are critical but complex aspects of modern IP law. India faces a situation that calls for urgent action to address the existing ambiguity, fragmentation of institutions and the uneven burden of proof on domestic implementers. As 5G technology adoption accelerates and new technology-dependent industries gain prominence, this situation will likely worsen unless legislated action is taken.

The development of an effective SEP regime in India necessitates statutory clarity, institutional specialization and a proactive stance in international negotiations. This will not only lead to faster dispute resolution but will ultimately determine how Indian industry shapes its future in the global technology arena, with implications for both innovation and a more accessible technology ecosystem.

Author:- Swati Kumari, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or   IP & Legal Filing.

Endnotes

1. ETSI, ETSI Intellectual Property Rights Policy, Cl. 6.1, requiring holders of essential IPRs to provide irrevocable licences on fair, reasonable and non-discriminatory (FRAND) terms and conditions.
2. Telefonaktiebolaget LM Ericsson (PUBL) v. Competition Commission of India, 2016 SCC OnLine Del 1951, concerning allegations relating to Ericsson’s SEPs, royalty demands, FRAND obligations and competition-law issues before the Delhi High Court.
3. ETSI, Guide on Intellectual Property Rights (2021), explaining the concept of an “essential” IPR and noting that implementation of a standard may require use of the technology protected by the relevant essential IPR.
4. Huawei Technologies Co. Ltd. v. ZTE Corp., Case C-170/13, EU:C:2015:477, European Court of Justice, establishing the framework governing the exercise of injunctions by SEP holders subject to FRAND commitments and the conduct expected from SEP holders and implementers during licensing negotiations.
5. ETSI, IPR Policy and Standards-Making Process, explaining that technically essential IPRs incorporated into ETSI standards are subject to FRAND licensing principles, balancing the interests of IPR owners with access to standardised technologies.