DIPP’s Discussion Paper on Standard Essential Patents

Discussion Paper on Standard Essential Patents and their Availability on FRAND Terms (Department of Industrial Policy and Promotion, Ministry of Commerce and Industry), 1 March 2016

The Department of Industrial Policy and Promotion (Government of India Ministry of Commerce and Industry) had invited comments from the public on the recently published ‘Discussion Paper on Standard Essential Patents and their Availability on FRAND Terms’ with the objective of developing a suitable policy framework to define the obligations of Essential Patent holders and their licensees.

LEGAL CONTEXT

India presently lacks a policy on Standard Essential Patents (SEPs) and the licensing of SEP technology on Fair, Reasonable and Non-Discriminatory (FRAND) terms. Neither the Patents Act 1970 nor the Competition Act 2002 contains any provision on SEP and FRAND licensing. On 1 March 2016 the Indian Patent Office released the draft of ‘Discussion Paper on Standard Essential Patents and their Availability on FRAND Terms’ (the DIPP Paper) by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry. The paper invited comments from the public to develop a suitable policy framework to define the obligations of SEP holders and their licensees.

FACTS

Sections IV to VII of the DIPP Paper give a broad overview of standards and SEPs and related concepts such as patent hold-up, FRAND, role of the competition law regime in SEPs, standards setting organisations (SSOs) such as the European Telecommunications Standards Institute (ETSI) and the Institute of Electrical and Electronics Engineers Standards Association (IEEE-SA), cross-licensing and patent pooling.

  Section IX of the discussion paper notes important SEP litigation worldwide and the judicial trend in granting injunctions in such cases in the US, Germany, the Netherlands, France, UK, Japan and China.

  Section X of the paper focuses on Indian SSOs in the telecommunication sector and the judicial approach towards SEPs and its availability on FRAND terms in India.

  Section XI is the heart of the discussion paper- it formulates the issues for resolution in the field of SEPs and invites comments from the public on the same.

Section XI: Issues for Resolution

a) Whether the existing provisions in the various IPR related legislations, especially the Patents Act, 1970 and Anti-Trust legislations [sic], are adequate to address the issues related to SEPs and their availability on FRAND terms? If not, then can these issues be addressed through appropriate amendments to such IPR related legislations? If so, what changes should be affected?

b) What should be the IPR policy of Indian Standard Setting Organizations in developing Standards for Telecommunication sector and other sectors in India where Standard Essential Patents are used?

c) Whether there is a need for prescribing guidelines on working and operation of Standard Setting Organizations by Government of India? If so, what all areas of working of SSOs should they cover?

d) Whether there is a need for prescribing guidelines on setting or fixing the royalties in respect of Standard Essential Patents and defining FRAND terms by Government of India? If not, which would be appropriate authority to issue the guidelines and what could be the possible FRAND terms?

e) On what basis should the royalty rates in SEPs be decided? Should it be based on Smallest Saleable Patent Practicing Component (SSPPC), or on the net price of the Downstream Product, or some other criterion?

f) Whether total payment of royalty in case of various SEPs used in one product should be capped? If so, then should this limit be fixed by Government of India or some other statutory body or left to be decided among the parties?

g) Whether the practice of Non-Disclosure Agreements (NDA) leads to misuse of dominant position and is against the FRAND terms?

h) What should be the appropriate mode and remedy for settlement of disputes in matters related to SEPs, especially while deciding FRAND terms? Whether Injunctions are a suitable remedy in cases pertaining to SEPs and their availability on FRAND terms?

i) What steps can be taken to make the practice of Cross-Licensing transparent so that royalty rates are fair & reasonable?

j) What steps can be taken to make the practice of Patent Pooling transparent so that royalty rates are fair & reasonable?

k) How should it be determined whether a patent declared as SEP is actually an Essential Patent, particularly when bouquets of patents are used in one device?

l) Whether there is a need of setting up of an independent expert body to determine FRAND terms for SEPs and devising methodology for such purpose?

m) If certain Standards can be met without infringing any particular SEP, for instance by use of some alternative technology or because the patent is no longer in force, what should be the process to declassify such a SEP?

ANALYSIS

In the absence of any provision related to SEPs in the Indian patent law, the role of defining a policy on SEPs is increasingly falling to the Indian courts. To this end, the DIPP Paper addresses the need to make relevant amendments to the Patents Act.

  The discussion paper lacks any draft provisions or a proposed model and merely identifies the contentious issues in SEP litigation.

  While the discussion paper is fairly open-ended, some of the questions posed by the DIPP are worrisome to the extent that the Indian government is considering the possibility of actually determining the terms and conditions of FRAND licensing agreements; this may threaten the contractual independence of the parties concerned. This is evident from some of the issues that have been formulated in the DIPP Paper. In particular:

  1. the need for prescribing guidelines on the working and operation of SSOs by the Government of India;
  2. the need for prescribing guidelines on setting or fixing the royalties in respect of SEPs and defining FRAND terms by the Indian government;
  3. the need for capping the total payment of royalty in case of various SEPs used in one product by the Government;
  4. the need of setting up of an independent expert body to determine FRAND terms for SEPs and devising methodology for such purpose;

PRACTICAL SIGNIFICANCE

SEP litigation in India is on the rise. In 2013 Ericsson filed a number of patent infringement suits against Indian companies including Micromax Informatics & Intex Technologies over the infringement of Ericsson’s SEPs.

  In response to Ericsson’s suits, the Indian companies approached the Competition Commission of India (CCI), alleging abuse of dominant position by Ericsson over the latter’s FRAND licensing terms. In all the complaints filed before the CCI against Ericsson, the CCI found that prima facie Ericsson had abused its dominant position and accordingly ordered investigation into the matter by the Director General (DG). However, the Delhi High Court ordered the CCI not to pass any final order in the matter in pursuance of the writ petitions filed by Ericsson.

  On 30 March 2016 the Delhi High Court vacated its orders passed against the CCI and dismissed Ericsson’s writ petitions.

  The CCI and the Indian courts have differed on the method to calculate FRAND royalty rates, with the former favouring the Smallest Saleable Patent Practicing Component (SSPPC) and the latter accepting Ericsson’s use of the net price of the Downstream Product. Invariably, the difference in the approach taken by the Courts and the competition authorities over FRAND royalties has led to differing outcomes in SEP disputes.  A prospective policy on SEPs adopted by the Indian government (without undue government interference) would aid in clarifying the law related to SEPs in India.

[The Discussion Paper is available here.]

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Is India Really Apathetic to the Grant of Compulsory Licences?

On 1st April 2016 the National Human Right Commission (NHRC) called on the Indian government to submit reports on the allegations that the Indian government had given private assurances to the US that India would adopt a stringent approach when granting compulsory licences over patented drugs.

While the Ministry of Commerce & Industry in a press report in March had denied such allegations, shortly after the NHRC Press Release Lee Pharma and BDR Pharma (the only two companies to file for compulsory licences after Natco) announced that they would not be pursuing appeals against the rejection of their compulsory licence applications by the Indian Patent Office. The Indian generic drug companies cite the government’s proclivity against the granting of compulsory licences as the reason behind their decision.

While the Indian government’s alleged promise to the US has definitely stirred up a hornet’s nest among public health activists in the country, it is worth exploring whether the Indian government is as apathetic to the granting of compulsory licences as it appears to be.

Ever since its inception in the Patents Act in 1970 the compulsory licensing provision has remained an under-utilized provision. In the first four decades since the introduction of the Patents Act 1970, no compulsory licence application was filed in India and it was only in 2011 that Natco successfully filed a compulsory licence application over Bayer’s anti-cancer drug, Nexavar.

Intellectual Property has always formed a top priority in the trade and policy discussions between India and the US, with the latter pushing for stronger IP protection in India. The Nexavar licence, which was the world’s first market-initiated compulsory licence, was met with severe backlash by the United States which argued that compulsory licences can only be issued in times of public health emergencies and are restricted to certain diseases only. In 2012, the US Commerce Secretary, John Bryson, in a visit to India raised concerns over the Nexavar licence calling it a “dilution of the international patent regime”.

The Nexavar licence had led to apprehensions worldwide that India would be quick to grant compulsory licences, however, the history of compulsory licensing has been fairly insipid in India, with only two applications under section 84 (market-initiated compulsory licences) filed after Nexavar. The first application pertained to Bristol-Myers Squibb’s cancer drug, Dastanib, which was filed by Indian generic drug manufacturer, BDR Pharma. BDR’s application was rejected at the threshold because BDR had not made a sincere effort to procure a voluntary licence from Bristol-Myers prior to making an application under section 84 (a relevant factor for granting compulsory licence applications).

The second application was initiated by Lee Pharma Ltd. for compulsory licence over AstraZeneca’s patented diabetes drug, Saxagliptin. The Saxagliptin application was rejected on the basis that the applicant had failed to provide evidence regarding any of the grounds under section 84: non-availability, non-affordability, non-working of the patented drug in India.

The number of compulsory licence applications filed in India after Nexavar has not been encouraging and it forces one to reconsider whether India has in fact been playing to the gallery as far as the US is concerned. In both the Dastanib and the Saxagliptin case, the Indian Patent Office rejected the applications due to procedural shortcomings on the part of the applicants.

In the absence of an order reflecting the ideology of the Indian Patent Office when granting (or rejecting) compulsory licence applications, it is too early in the day to conclude that such a secret arrangement between India and the United States has in fact been made.

[This blog (originally titled, ‘The Dismal History of Compulsory Licences in India’) was first published here on the Kluwer Patent Blog.]

A Case for International Investment Courts

One of the criticisms of the international investment arbitration system is that it is far from being the neutral adjudicatory forum that it was envisaged to be. Critics find that the arbitral awards in investor-state disputes are often skewed in favour of the investors, with the effect that host nations are often directed by the arbitration panels to pay millions in damages to the investors. Typically, investor-state disputes under the Investor State Dispute Settlement (ISDS) clauses in free trade agreements are brought for adjudication before private arbitrators instead of being adjudicated before the national courts like other disputes. This has led to a system of “privatization of justice” wherein sovereign states are made amenable to private arbitrators, with no provision of appeal against the arbitrators’ decisions.

While the investment arbitration system evolved to protect the rights of investors by adjudicating investor-state disputes in a seemingly neutral manner, it is witnessed that the ISDS mechanism is adversely impacting the sovereignty of host nations. This is because investors can initiate arbitration to challenge the domestic laws of host states where the investors feel that their investment is not adequately protected. In most cases, the arbitrators render an award favouring the investors, and host nations are called upon to pay millions in damages to the investors; as most nations cannot afford the exorbitant amount of damages payable by them to the investors, they are often compelled to amend their regulatory laws to suit the investors. ISDS proceedings entail legal expenses in millions of dollars and the financial liability may itself suffice to bring the host nation to the negotiating table.

Critics fear that the ISDS mechanism has evolved as a tool for investors to badger host nations into amending their laws to favour the investors. Foreign investors have been known to use the ISDS mechanism to change the host State’s IP laws.

Investment treaties generally define ‘investment’ to include ‘intellectual property’. If investors feel that their IP is not adequately protected in a host nation, they often initiate arbitration proceedings claiming ‘expropriation’ of their IP.

In 2010, Philip Morris sued Uruguay for $25m dollars over its anti-tobacco laws which require that 80% of the cigarette packaging should bear warning signs about the hazards of cigarette smoking. Philip Morris brought the arbitration case under the Switzerland-Uruguay BIT (Philip Morris being headquartered in Switzerland) and claimed that Uruguay expropriated its IP because the company has effectively no space to advertise its trademark on the cigarette packaging. The case is awaiting a ruling on merits by the arbitral tribunal.

Potential investor-state disputes can also deter countries from enacting public-health legislation. When the Canadian Parliament wanted to introduce plain packaging rules in 1994, tobacco company, R.J. Reynolds, wrote to the Canadian government threatening to bring an investor claim for illegal appropriation of its trademark. Canada eventually succumbed and the plain packaging law never saw the light of the day.

The independence of arbitrators has become a contentious issue in investment arbitrations- since arbitration under the ISDS clause can be initiated only by the investor, arbitrators have an incentive to rule in favour of the investors who later hire those arbitrators as lawyers in other investment arbitrations involving the investors.

A likely model for ISDS can be the replacement of the investment arbitration system with an Investment Court System (ICS), as is currently being proposed by the European Union in the Transatlantic Trade and Investment Partnership (TTIP) Agreement with the United States. The ICS seeks to ensure the impartiality of adjudicators by establishing a permanent tribunal comprising Tribunal members who “shall refrain from acting as counsel or as party-appointed expert or witness in any pending or new investment dispute“. Additionally, the ICS would also include an Appeal Tribunal. If the ICS is adopted into the TTIP, other developed and developing nations are expected to follow suit to preclude the “privatization of justice” under the current investment arbitration regime and to protect their domestic laws.

(Written by Devika Agarwal)

Do FTAs threaten the existence of the WTO?

One of the modern day debates in international trade law revolves around whether regional trade agreements (RTAs) like the TPP threaten the existence of the WTO, or to put it in economist, Jagdish Bhagwati’s words, whether RTAs are “building blocks or stumbling blocks“ towards multilateralism.

The WTO was established to facilitate international trade between member states by means of multilateral agreements. The popularity of Regional Trade Agreements (RTAs) rose in the mid-1990s which marked a shift towards regionalism.

While both multilateral trade agreements and regional trade agreements such as the TPP are geared towards removing trade barriers between nations, economists are divided on whether the RTAs are instead creating anti-liberalization forces through discrimination.

One of the principles underlying the WTO is non-discrimination or the ‘most favoured nation‘ (MFN) principle wherein a country is not permitted to discriminate between its trading partners. RTAs form an exception to the MFN clause to the extent that countries which enter into RTAs are permitted to impose preferential tariffs and other favourable conditions when trading with each other than is applicable to the countries which are not parties to the RTAs.

In my opinion, however, the increasing regionalism does not undermine the WTO, rather it seeks to complement it. Regionalism evolved as a means to facilitate trade because it was easier for countries to negotiate agreements at a regional level as compared to a multilateral forum. Given the lengthy negotiation process of multilateral agreements, RTAs emerged as a viable alternative to multilateralism.

Scholars like Richard Baldwin do not believe that RTAs threaten the existence of the WTO. According to Baldwin, few RTAs can have an anti-liberalization effect because trade is already quite free in major trading nations”. It has also been observed that the effect of RTAs violating the MFN clause is insignificant compared with the development of multilateral trade law based on non-discrimination. While Bhagwati views RTAs as promoting discrimination economist, Larry Summers, perceives regionalism as encouraging liberalization. Summers is of the opinion that RTAs have majorly had a benign impact on the multilateral trade system.

Under Fred Bergsten’s “competitive liberalization“ theory, the establishment of RTAs by states especially with an economic superpower like the US provides incentives to other states to enter into similar RTAs including with the US either by entering into fresh RTAs or joining the membership of existing RTAs in order to defend their markets in the major economies from trade discrimination. Summers‘ arguments confirm the view that efforts at regional integration infact contribute to multilateralism and do not undermine WTO.

(written by Devika Agarwal)