How and why of Standard Essential Patents (SEPs) licencing in India:
Standard Essential Patent (SEP) regime envisages a candid and transparent negotiation between a willing licensor (Patentee) and willing licensee (implementer). The regime incorporates mutual reciprocal obligations on both the Essential Patent holder and the implementer. It is not a ‘one way street’ where obligations are cast on the Essential Patent holder alone, rather it is important that both the parties should agree, to avoid any conflicts and legal proceedings in future about royalty payments etc. However, the determination of royalty is a contentious issue. Often the negotiations fail and parties land in Court(s) for determining royalty. Whether the royalty calculation should be based on chipsets or the end-device price, is a contentious issue. SEP holders argue that Chipsets constitute a small portion in the mobile phones. The hardware and other software technologies form a major part of the smartphone so royalty calculation should be based on end-device price. In many cases the implementor would challenge the validity of the Patent in question as part of the royalty negotiation process. The complaints are also filed before the Competition Commission of India (CCI) to probe the conduct of the SEP holder and its dominant position while negotiating terms and grant of license.
The courts are mindful of the need to balance the rights of SEP holders by providing them adequate monetary compensation with those of implementors to use the SEPs. The Courts in SEP cases do make a conscious attempt not to pass interim injunction against an implementer until a final decision has been taken on all relevant issues. At the same time provide appropriate monetary security and protection to SEP holder in the form of pro-tem deposit.
Our post summarises three recent decisions on the subject addressing the contentious issues in SEP litigation. All the cases had come up in Appeal before the Division Bench (two judge bench). Therefore, binding on the Single judges in the IP Division. The decisions also provide clarity on the SEP landscape.
Oppo against Nokia
In this case, an appeal was filed by the appellant-plaintiff (‘Nokia’) challenging the order (dated 17th November 2022) passed by the Single Judge of the Delhi High Court dismissing Nokia’s application for the interim payments by Oppo. Nokia, in its appeal, sought directions asking:
- Oppo to deposit interim security of an amount based on either the latest counteroffer made by it for a global licence of Nokia’s portfolio of Standard Essential Patents; or
- an amount equivalent to the royalty paid under the Agreement executed between the parties proportionate to the ratio of the number of devices sold by Oppo in India vis-à-vis the number of devices sold globally.
The court held that the payment of pro-tem security is the implementer’s obligation even in the negotiation phase. To balance the equities, the Indian court has the power to pass a pro-tem order, if the facts so warrant. The Court outlined the situations for payment of pro-tem order to be passed by the Court:
- If the negotiations between the parties fail, it does not mean that an implementer can continue to derive benefits by using the technology of the Standard Essential Patent proprietor in the interregnum without making any payments for such use.
- The Court also noted that nearly two years have elapsed since the institution of the suit, and not a ‘single farthing’ has been paid by Oppo. Consequently, to balance the equities between the parties, this Court has the power to pass a pro-tem order being a temporary arrangement without a detailed exploration of merits if the facts so warrant.
- The Court also relied on Ericsson Vs. Intex, CS(OS) 1045/2014 where the Delhi High Court Rules governing patent suits, 2022 has recognized the concept of pro- tem security and has held that the Courts have the power to pass deposit orders even on the first date of hearing if the facts so warrant.
- The Court opined that a pro-tem security order cannot be linked to an injunction order because, unlike an injunction order, it does not stop or prevent the manufacturing and sale of infringing devices. The intent of a pro-tem security order is to either ensure maintenance of status quo or to retain the Courts’ power and ability to pass appropriate relief at the time of the decision of the injunction application. In the facts of the present case, the pro-tem security order does not confer any advantage upon Nokia as it only balances the asymmetric advantage that an implementer has over a Standard Essential Patent holder.
- The Court further directed Oppo to deposit the money in Court, which will be reimbursed to Oppo should it succeed at the interim or final stage.
- The Court allowed Nokia’s appeal to set aside the challenged order. The Court also directed the respondent to deposit the ‘last paid amount’ attributable to India i.e., Twenty Three percent (23%) of the last paid amount under the 2018 Agreement within four weeks.
The order establishes that SEP holders can ask the Court for the direction of a “Pro-tem security deposit” during the initial stages even when the matter is not dealt with in detail by the Court. On the point of prima facie infringement by Oppo, the Court importantly mentioned that an injunction can be secured, even if the infringement of one patent is established either prima facie or at the final stage. Thus, to restrain the sale of an infringing device, a Standard Essential Patent holder does not have to base its case on each of the thousands of patents that it owns and are used in the product; it can do so by showing that one or a handful of representative patents are infringed. This is a welcoming move for SEP holders.
Oppo has since filed an Appeal against the order in Supreme court, establishing their case. However, the Supreme Court refused to disturb the findings of the High Court and simply extended time for Oppo to comply with the High Court order on pro-tem deposit by 25th August.
INTEX to pay Royalty for use of Ericsson’s Standard Essential Patents:
In this case, Ericsson (SEP holder) had brought a suit against Intex seeking royalties on FRAND terms for use of its patents as prolong negotiations had failed. The Court after hearing both parties held that:
- Ericsson’s eight suit patents were prima facie valid, essential and that Intex has prima facie infringed Ericsson’s patents.
- Ericsson demonstrated prima facie compliance with its Fair, Reasonable and Non-Discriminatory (in short ‘FRAND’) commitment and Intex’s act of prolonging pre-suit negotiations and thereafter initiating proceedings against Ericsson before the Competition Commission of India (in short ‘CCI’) and Intellectual Property Appellate Board (in short ‘IPAB‘) during licensing negotiations prima facie showed its unwillingness to execute a FRAND licence.
- chipset basis for calculation of Royalty cannot be accepted and the practice of royalty calculation on the end-device price is non-discriminatory.
Finally, the Court directed Intex to pay 50% royalty at the interim stage and balance50% by way of a bank guarantee.
Cross Appeals were filed by both Ericsson and Intex against the Single Judge decision to the Division Bench of the Delhi High Court.
- Ericsson in its Appeal had prayed that Intex be directed to pay the entire royalty amount and not split as a bank guarantee and royalties.
- Intex on the other hand argued that:
- Single Judge could not have passed a direction to pay as well as deposit royalty at the interim stage since Standard Essential Patent owners’ only entitlement, even according to law laid down by foreign Courts, is royalties at the end of the trial.
- In Standard Essential Patent matters no injunction can be granted, even if an implementer is an unwilling licensee.
The four-factor test to be satisfied is not made out in this case (i) the asserted suit patents are in fact Standard Essential Patents, (ii) the technology used by the implementer infringes the Standard Essential Patents, (iii) the royalty rate at which patentee is willing to license its Standard Essential Patents are FRAND, and (iv) implementer is unwilling to take the licence at the FRAND rate.
Finally, the Court found that Ericsson had shown in its cross-appeal that “the terms suggested by Ericsson are prima facie FRAND terms” and that “to ensure parity with other implementers, Intex must pay in full for the past use of the Standard Essential Patents.” The Court based its decision in part on the fact that the “telecom industry has overwhelmingly accepted Ericsson’s Standard Essential Patents” and “more than one hundred licences have been executed by Ericsson for the same technology globally, and similar implementers are paying royalty in accordance with the terms suggested by Ericsson.” The Court did not discuss those licencing terms beyond noting at the outset of its decision that the lower Court rejected Intex’s argument that the royalty base should be the chipset, not the end product, where the lower court “held that the chipset basis for calculation of royalty cannot be accepted and the practise of royalty calculations on the end-device is non-discriminatory.” The Court ultimately ordered that “Intex to pay the entire royalty amount to Ericsson within four weeks.”
Role of Competition Commission of India (CCI) in SEP cases
When a patent is issued in India, and the patentee asserts such rights, can the Competition Commission of India (CCI) inquire into the actions of such patentee in exercise of its powers under the Competition Act, 2002 (“Competition Act”)”
This was dealt by the Division Bench of Delhi High Court in an Appeal by Ericsson on a complaint made by Micromax and Intex that Ericsson was imposing conditions for licensing certain standard essential patents (“SEP”) in the field of telecommunications that are not fair, reasonable, or non-discriminatory. A similar question was raised by Monsanto as the Court had observed there was no bar in law to proceedings initiated by CCI for violation of Section 3 and 4 of Competition Act (Section 3 essentially bar agreements the effect of which will have adverse effect on competition and Section 4 bars any enterprise from abusing its dominant position).
The Division Bench (two judge bench) in their analysis, discussed that “the Competition Act is a general legislation pertaining to anti-competitive agreements and abuse of dominant position”. The Court also opined that for deciding an application for compulsory licensing, the Controller is empowered by the Patents Act to consider the reasonability of conditions imposed in a license agreement. Chapter XVI of the Patents Act (relating to Working of Patents, Compulsory Licences and Revocation) is a complete code, on all issues pertaining to unreasonable conditions in agreements of licensing of patents, abuse of status as a patentee, inquiry in respect thereof and relief to be granted. Therefore, the court concluded that Patents Act should be invoked while dealing with anti-competitive agreements and abuse of dominant position by a patentee while exercising his rights under the Patents Act.
To sum up
The courts by the above decisions have tried to simplify the a) royalty calculation b) made it clear that pending challenge to the Patent pro-tem deposit can be ordered by the court c) the Patents Act is relevant statute to decide on issues pertaining to unreasonable conditions in agreements of licensing of patents, abuse of status as a patentee, inquiry in respect thereof and relief to be granted.
Overall, the jurisprudence, including the enforcement of SEPs with these series of judgements would be simplified and in line with the stand taken by the courts in other countries. It was also much needed as the Court noted in Ericsson v Intex case the fact that the judge-population ratio is extremely poor in India, expeditious disposal of patent suits cannot be expected at the cost of other suits. Therefore, a pro-tem deposit or an interim calculation of royalty is essential to incentivise companies to innovate.