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

In this two-part post, I argue that SEP-holders should voluntarily agree not to file for injunctive relief against standard-implementers, in cases where the SEP-holders have agreed to license their SEP on FRAND terms; this is because injunctions in SEP infringement cases can be anti-competitive.

Part I of the post shed some light on voluntary commitments by IPR-holders to not enforce their IP claims in the context of the recent Paramount v. Sky TV case. I then also discussed the ECJ ruling in Huawei v. ZTE wherein the main issue before the Court was to determine the circumstances in which injunctions in SEP cases are anti-competitive.

In the 2nd part, I will describe how Courts in India award injunctions in SEP cases and also suggest an alternative approach to resolve SEP disputes which can serve the interests of both the SEP-holders and the standard-implementers.

SEPs are a weapon of potential IP abuse leading to competition harm. Standards in telecommunications industries are set by standard-setting organizations (SSOs) which are voluntary coalitions of mobile phone companies and may include other interested stake-holders. The members of SSOs adopt certain technologies as standards which must then be incorporated into the products manufactured by all SSO members. Often, the technologies adopted as standards by SSOs are patented, and these patents are known as ‘standard essential patents’, since use of these patents is essential for conforming to a set standard. Mobile phone companies, other than the SEP-holder, need to obtain licences to use the technologies covered by SEPs. Since there is one ‘supplier’ of this particular technology (namely, the SEP-holder), it creates a natural monopoly of the SEP-holder in the market of SEPs. It is understood that patents are anyway monopoly rights since they give exclusive rights to the patent-holder to make commercial use of their invention; however, SEPs lead to a special problem of lock-in because when a particular standard is adopted, all other mobile phone-companies (i.e. standard-implementers), must necessarily obtain licences from the SEP-holder so that their products can conform to that standard (standard-implementers do not have the option to use alternate technology since they risk non-adherence to the adopted standard by doing so).

In order to prevent abuse of dominant position by the SEP-holder, the understanding between SSO members is that when a particular member’s technology is adopted as a standard, that member (SEP-holder) must license the SEP to other SSO members (i.e. standard-implementers) on fair, reasonable and non-discriminatory (FRAND) terms; FRAND, though not defined anywhere, is a commitment to license on good-faith terms. One way of determining FRAND terms is to understand the terms on which the SEP would have been licensed to standard-implementers before it attained the status of an SEP; this is also known as the ex-ante method of determining FRAND terms.

Disagreements over use of SEPs are common in cases where the SEP-holder and the standard-implementers do not come to terms over the amount of royalties which the SEP-implementers should pay for using the SEP. SEP-holders commonly file patent infringement suits against SEP-implementers for using the SEP without royalty payment and successfully obtain interim injunctions to prevent further use of the SEP by the SEP-implementers. The business of SEP-implementers comes to a veritable standstill since the injunction prevents SEP-implementers from selling their infringing devices in the market. The SEP-implementers are left with no choice but to negotiate with the SEP-holder and often end up paying royalties which are not FRAND. In this manner, injunctions can be used by SEP-holders to bait standard-implementers into accepting non-FRAND terms which harms competition in the market, because a single player (i.e. the SEP-holder) dictates the terms of the SEP licensing contract.

In India, SEP disputes in the past have been filed in the Delhi High Court which has readily granted ex-parte interim injunctions against standard-implementers. As of now, none of the SEP disputes in India have reached final decision and in all the cases, the standard-implementers have readily paid interim royalties and engaged into negotiations with the SEP-holders to agree on the royalty amount. A parallel trend in SEP cases is also witnessed in India wherein standard-implementers retaliate by filing complaints before the Competition Commission of India (CCI) to investigate SEP-holders; the complaints are filed on the ground that the licensing agreements are anti-competitive because the method used by SEP-holders to calculate the royalty amount (i.e. using the value of the downstream product as a base) is erroneous. The CCI in all cases found a prima facie abuse of dominant position by Ericsson and has ordered further investigation into the matter.

In SEP disputes, we witness two instances of abuse of dominant position by the SEP-holder:

  1. At the stage of licensing when the SEP-holder uses the SEP status of his IP to extract ex-post royalties (instead of ex-ante).
  2. At the stage of enforcement of his IPR by filing for injunctive relief to pressurize standard-implementers into paying the royalty at rates demanded by the SEP-holder

Royalties lie at the heart of any SEP dispute and the SEP policy in India must be devised to overcome the impasse over calculation of royalty rates. The final offer arbitration model proposed by Mark A. Lemley and Carl Shapiro  can be particularly helpful in this regard. I explain the model below (rather crudely):

Under this model, SSOs should provide that members agree not to file infringement claims in courts and instead participate in binding arbitration to settle royalty rates. Where the standard-implementer does not agree to enter into arbitration, SEP-holder would be free to pursue their claim in court.

Under this arbitration model, both the SEP-holder and SEP-implementer submit to the arbitrator the royalty amount which they consider to be FRAND. The arbitrator has to pick either of the two numbers; note that the arbitrator cannot pick a number in between the two. The number picked by the arbitrator is the final royalty amount for licensing the SEP. Note that in this case it would be in the interests of both the parties to submit a reasonable royalty amount because the arbitrator would pick the more reasonable of the two (a classic  ‘prisoner’s dilemma’).

Such a model would preclude the abuse of dominance by the SEP-holder through injunctions because the agreement to enter into arbitration would act as waiver of the right to bring infringement claims against standard-implementers.

[The MHRD IPR Chair at IIT Madras, in response to DIPP’s Discussion Paper on SEP and FRAND, has suggested that SSOs in India adopt such a model. Those interested in reading the Chair’s response can email me directly on devikaagarwal100@gmail.com]

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