Can Game Theory Resolve Smartphone Wars in India? (Part I)

Earlier this week, the European Commission (EC) in an ongoing antitrust investigation accepted binding commitments from Paramount Pictures Corporation (Paramount) to not enforce restrictive copyright licensing conditions against Sky TV. In this two-part series, I will analyze how similar agreements to not enforce IP are useful in preventing competition harm caused due to injunctions in SEP cases.

A short background on Paramount v. Sky (or Pay-TV case) is in order:

Paramount, a Hollywood film studio, entered into an agreement with Sky UK to license the right to broadcast Paramount’s content in UK & Ireland. Sky UK is a subsidiary of Sky Plc( a European satellite and internet TV broadcasting company) which offers subscription-based television content to consumers in Europe.  One of the conditions in the agreements related to geo-blocking whereby Sky was prohibited from letting consumers in other EU countries access the content either through satellite TV or internet.

In 2015, the EC initiated an anti-trust investigation against Paramount and five other Hollywood film studios on the ground that the geo-blocking condition is restrictive because it limits Sky’s ability to broadcast the content outside the UK, and consequently affects cross-border competition among TV broadcasters in Europe. The investigation was in line with Europe’s Single Digital Market strategy which envisions doing away with the 28 different EU-member state laws currently prevalent in Europe. One of the benefits of the Single Digital Market strategy (which is still in its blueprint form) is that it will harmonize copyright laws across the EU; this means that if I, as a German resident, can legally download a French movie (under German copyright laws), I need not worry whether I am infringing the copyright laws of France. In other words, the same copyright law would apply across all EU-member states.

Under the geo-blocking condition in Paramount’s licensing agreement, a user would not be able to subscribe to the content which Sky broadcasts in the UK if they are a resident of any EU state other than the UK and Ireland. The reason why Hollywood film studios or other video content-providers would introduce such licensing conditions is to charge different rates from users in different countries (This is probably why Netflix has geo-blocked its content in India).

While the investigation was on-going, Paramount agreed not to bring IP infringement claims against Sky UK in the event that Sky UK accepts unsolicited subscription requests from users outside of UK & Ireland. While the Pay-TV case is settled as far as Paramount is concerned, the investigation is on-going with respect to the five other Hollywood movie studios.

It bears noting that Paramount committed to not enforce its IP right because otherwise it risked an ‘abuse of dominant position’ finding by the EC. In this case, Paramount has voluntary undertaken not to file injunctions/restrain Sky if Sky breaches the licensing conditions; if Paramount were to file a case against Sky for breaching the restrictive licensing conditions, Paramount’s commitment to the EC would act as an estoppel against Paramount. The Pay-TV case is important in the context of FRAND licensing of SEPs because (as Chilling Competition notes) enforcing intellectual property claims in SEP licensing cases can amount to competition harm. The relevant case law on this point is Huawei v. ZTE wherein the main issue referred to the European Court of Justice was:

‘When is seeking of injunctions by SEP-holders when they have agreed to license their SEPs to third parties on FRAND terms amount to abuse of dominant position?’

The Court was of the opinion that while enforcement of IPR by itself is not an abuse of dominant position, an abuse will occur only when the following exceptional circumstances are met:

  • The patent in question is indispensable
  • The patent achieved an SEP status only when the SEP-holder agreed to license the patent on FRAND terms

The Court held that the undertaking by the SEP-holder creates legitimate expectations on the part of licensees (standard -implementers) that the SEP-holder would license the SEP on FRAND terms, and if the SEP-holder subsequently refuses to license their IP, this would amount to abuse of dominance.

While the ECJ was clear that FRAND licensing commitments do not bar SEP-holders from enforcing their IP claims (including by filing for injunctions), the SEP-holder must meet a greater burden to justify injunctions against the standard-implementers in infringement cases.  The specific requirements for grant of injunctions in SEP infringement cases identified by the ECJ were as follows:

  1. Prior notice must be given by the SEP-holder to the licensee identifying the SEP and the manner in which it is being infringed
  2. Where the alleged infringer agrees to obtain a license for the SEP, the SEP-holder must communicate to the willing licensee a “specific written offer” which states the amount of royalty payable by the licensee and the method of calculation of such royalty.
  3. The alleged infringer is then free to respond to that offer, in accordance with recognised commercial practices in the field and in good faith, a point which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics”.
  4. Where there is no agreement between the SEP-holder and the alleged infringer, “the parties may, by common agreement, request that the amount of the royalty be determined by an independent third party“.
  5. Finally, an alleged infringer cannot be criticised either for challenging, in parallel to the negotiations relating to the grant of licences, the validity of those patents and/or the essential nature of those patents to the standard in which they are included and/or their actual use, or for reserving the right to do so in the future”.
    In other words, in licensing the SEP to the alleged infringer, the licensing agreement shall not contain any clause to preclude the licensee from challenging the validity of the patent or its status as an SEP either at the time of licensing or in the future.

[For an analysis of the ECJ ruling in the Huawei case, please refer to Chilling Competition’s post]

In Part II, I analyse how injunctions in SEP cases amount to abuse of dominant position by the SEP-holder; the trend of Indian courts in granting injunctions in SEP cases; and alternate ways to fix the competition harm created by injunctions (for instance, by introducing final offer arbitration to determine FRAND royalties in SEP disputes).

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