1. The Delhi High Court in the recent judgement of Koninklijke Philips Electronics N.V. vs. Rajesh Bansal And Ors, has set a precedent by being the first post-trial judgement in a Standard Essential Patent (SEP) related suit given by an Indian Court. In light of the abovementioned one of its kind judgement, it becomes imperative to understand the basics behind one of the fastest growing patent-litigation in the world.
2.At the outset, it is important to understand what a Patent is. Article 27 of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement broadly defines patent by stating that,
“1.Subject to the provisions of paragraphs 2 and 3, patents shall be available for any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application. Subject to paragraph 4 of Article 65, paragraph 8 of Article 70 and paragraph 3 of this Article, patents shall be available and patent rights enjoyable without discrimination as to the place of invention, the field of technology and whether products are imported or locally produced.”
WHAT IS A STANDARD ESSENTIAL PATENT
3.Once a patent is registered, it could either be a Standard Essential Patent or non- Standard Essential Patent. A standard is a document that sets out requirements for a specific item, material, component, system or service, or describes in detail a particular method or procedure. One example of a widely-used standard is the A4 size for sheets of paper. Another example is how in a mobile phone, all the components need to work together so that it functions smoothly. To ensure that, the mobile phones must comply with some protocols or standards by which such phones communicate with each other, for example, smart-phones are now all designed to be compliant with 4G standards so as to be able to function in international markets without making variations according to each country.
4. These protocols or standards are set by certain Standard-Setting Organizations (SSOs) which include the European Telecommunications Standards Institute (ETSI) or the International Telecommunication Union (ITU). These organisations have developed rules, regulations and practices to ensure that the licensing of patents that are essential for their standards is done efficiently. Whether a standard in context of a patent is an essential standard or not depends on the facts and circumstances of each matter.
5. Article 15.6 of the Annexure 6 contained in the Rules of Procedure of the European Telecommunications Standards Institute (ETSI), defines ‘Essential’ as
“Essential as applied to IPR means that it is not possible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operate equipment or methods which comply with a Standard without infringing that IPR.”
6. Washington District Court in the U.S.A. Judgement, of Microsoft Corp. v. Motorola Mobility Inc, which consequently went to appeal, defined SEP as
“A given patent is “essential” to a standard if use of the standard requires infringement of the patent, even if acceptable alternatives of that patent could have been written into the standard.” A patent is also essential “if the patent only reads onto an optional portion of the standard.”
7. Thus, it is impossible to manufacture standard-compliant products like phones, computers, and tablets etc. without using technologies covered by one or more SEPs. For example the “slide to unlock” technology is covered by a non-SEP. Most smartphone manufacturers were able to develop different technologies for unlocking a smartphone screen which do not infringe the “slide to unlock” patent. This would not have been possible in the case of a SEP. Thus, what can be concluded is that a Standard Essential Patent or an SEP is a patent that a manufacturer needs to usein order to produce a standard-compliant product.
LICENSING OF A STANDARD ESSENTIAL PATENT:
8. A patent owner can licence his patent to a licensee through a license agreement, having regard to the consideration that the protection and enforcement of patent rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations. Thus, when a patent holder declares a patent essential to an ETSI standard, it must make a commitment to license that patent
on FRAND terms, which means- Fair, Reasonable and Non-Discriminatory terms.
9. The European Commissionhas stated that, “A smooth licensing environment is essential to the success of a standard. It helps to achieve broad and rapid diffusion of innovation and to give patent holders an adequate return on investment in research and development (R&D). It also gives all users of the standard fair access at a reasonable cost.
10. Therefore, in order to avoid the situation where the SEP holders would create a monopoly in the market and result in loss to the inventors who would be left without an option but to succumb to the terms provided by the SEP holders, standard-essential patents (SEPs) are licensed on Fair, Reasonable and Non-Discriminatory (FRAND) terms. These commitments are meant to protect technology implementers while ensuring that patent holders receive an appropriate reward for their investments in research and development.
11. The question arises as to what, precisely are FRAND licensing terms. Although FRAND licensing requirements have become prevalent in SSO rules, SSOs have generally avoided suggesting how FRAND terms should be determined. Thus, determining FRAND terms is challenging and complex. The task for licensors and licensees alike is made all the more difficult by the lack of guidance from SSOs, the courts, the legislature and governmental agencies about precisely what constitutes FRAND terms. However the following cases lay down some sort of parameter as to what constitutes FRAND terms and what are the limits to it.
JUDGEMENTS ON SEPs BASED ON FRAND TERMS
12. In the UK’s first-ever court decision on FRAND/SEP licensing, in the case of Unwired Planet Intl Ltd vs Huawei Technologies Co. Ltd, it was laid down that the SEP holder must not hold up (effectively refusing to license) and the licensee/implementer must not hold out (effectively refusing to take a licence). However, this does not mean that all offers made during negotiations have to be FRAND. A FRAND approach still allows for ‘non-FRAND’ opening offers that leave room for negotiation upwards or downwards towards an eventual FRAND licence. Offers which are above or below FRAND will only become problematic if they are extreme or take an inflexible approach which disrupts or prejudices the negotiation.
13. Two leading District Court cases (Microsoft v Motorola Inc(WD Wash April 25 2003) and In re Innovatio IP Ventures LLC Patent Litigation (ND Ill October 3 2013)) and three Court of Appeal cases (Microsoft v Motorola (Ninth Circuit, July 30 2015), Ericsson v D-Link Systems (Fed Cir December 4 2014)) and Commonwealth Scientific and Industrial Research Organization v Cisco Systems (Fed Cir December 3 2015) – have summarised the FRAND goals as follows:
a) Widespread adoption of the relevant standard;
b) An appropriate return to the patent holder to encourage participation in and contribution to standard-setting activities;
c) Avoidance of the excessive royalties that arise from adding together the royalty on all SEPs which a standard may include;
d) Recognition of the value to the standard of the patent at issue and appropriate apportionment of the value of the patented technology to the device accused of infringement; and
e) Avoidance of the attribution of value to a patent that arises from the inclusion of the patent in the standard.
14 . In another landmark case of the U.S. California District,TCL Communication Technology Holdings, Ltd. v. Telefonaktiebolaget LM Ericsson, Ericsson holds an extensive portfolio of telecommunications patents, including patents affecting 2G, 3G, and 4G cellular technologies that the European Telecommunications Standards Institute (“ETSI”) accepted into these standards. Acceptance into the standards required Ericsson to license the SEPs at FRAND rates. TCL Communication Technology Holdings, Ltd. manufactures and distributes cell phones worldwide and sought to license Ericsson’s SEPs, but the parties were unable to reach an agreement. The parties had been negotiating for several years and Ericsson sued TCL in several foreign countries for alleged infringement of the SEPs before TCL sought a declaratory judgment in the Central District of California: that Ericsson failed to offer FRAND terms and conditions; to establish the FRAND rates.
15. During the negotiations, Ericsson had made several offers to TCL and asserted during litigation that two options based on a April 23, 2014 offer and a February 11, 2015 offer (Options A and B) were FRAND. TCL suggested a top-down approach for determining a FRAND rate. Ericsson suggested determining FRAND rates ex ante by estimating the value of SEPs independent of any value arising from their inclusion into the standard.
16 . The district court concluded that neither Option A nor Option B were FRAND based on: A top-down analysis to determine a FRAND rate; global licenses that Ericsson granted to other companies.It determined that Telefonaktiebolaget LM Ericsson’s proposed royalty rates for a license to standard essential patents (SEPs) were not fair, reasonable, and non-discriminatory (FRAND) based on a top-down analysis and a comparison with other global licenses (C.D. Cal. Dec. 21. 2017).
17 . In a landmark decision of the Delhi High Court in the case of TelefonaktiebolagetLM Ericsson v Competition Commission of India, The Delhi High Court gave a judgement on similar lines in respect of FRAND terms on SEPs as its counterparts in U.S.A and UK. Micromax had claimed that exorbitant royalty rates and unfair licensing terms proposed by Ericsson amount to a patent holdup and the FRAND terms have been violated by Ericsson’s opaque licence negotiations and legal threats used to coerce licensees. The High Court in its 161 page judgement laid down the following important points:
“9. As per clause 6 of ETSI IPR policy, an IPR owner is required to give irrevocable written undertaking that it is prepared to grant irrevocable licences on FRAND terms to be applied fairly and uniformly to similarly placed players The patent owner has to grant irrevocable license to: manufacture, including the right to make or have made customized components and sub-systems to the licensee’s own design for use in manufacture; sell, lease, or otherwise dispose of equipment so manufactured; repair, use, or operate equipment; and use methods.
10. FRAND license are primarily intended to prevent Patent Hold-up and Royalty Stacking.
11. It is noted that Ericsson has declared to ETSI that it has patents over 2G, 3G and EDGE technology and these patents are SEPs. As per its undertakings, Ericsson is required to offer and conclude licenses with patent seekers on FRAND terms.
12. In view of the foregoing, the Commission is of the view that SEPs owned by Ericsson are in respect of the 2G, 3G and 4G patents used in smart phones, tablets etc., which fall under GSM technology therefore, prima facie, the relevant product market to be considered in the instant case appears to be the market of ―Standard Essential Patents for 2G, 3G and 4Gtechnologies in GSM standard compliant mobile communication devices
14. The allegations made in the information concerning royalty rates make it clear that the practices adopted by Ericsson appear to be discriminatory as well as contrary to FRAND terms. The royalty rate being charged by Ericsson has no linkage to the functionality of the patented product rather it has linkage to the final price of the manufactured product in which the patent is being used. Ericsson seems to be acting contrary to the FRAND terms by imposing royalties linked with the cost of manufacturing product. Charging of two different license fees per phone for use of the same technology, prima facie, appears to be discriminatory. Further, the terms of the NDA is contrary to the spirit of applying FRAND terms fairly and uniformly to similarly placed players.”
18. Thus, what is apparent from the above stated laws, judgements and theories is that FRAND terms are highly important when licensing Standard Essential Patents. Need of the hour is to ensure that the SEPs which are licensed are not going against the FRAND terms and commitments. The recent High Court Judgement in the Philips (Supra) case has maybe laid down a path for a journey towards more litigation in respect of SEPs, but only time will tell as to what direction it will take.
Maryam Naaz Quadri
Faculty of Law (2015-2018)
University Of Delhi
 CS (COMM) 24/2016
Section 83(c) of Patent Act, 1970
 [Writ Petition (Civil) No. 464/2014]