Unlike the pharmaceuticals industry where firms tend to work in isolation, the electronics business is collaborative with each phone, for instance, having hundreds of parts, each of which is the result of years of expensive R&D adding up to hundreds of millions of dollars. And since research on new models takes several years, it helps to have standards set for all equipment manufacturers to follow. This is where Standards Development Organisations come in, to ensure compatibility and interoperability of devices made by different firms. Also, since the idea is to ensure that the industry develops using the research done by others, part of the job of these organisations is to come up with framework agreements for licensing of patents on what is called Fair Reasonable And Non-Discriminatory (FRAND) terms—the actual royalty rates, though, are left to each patent-holder. So, while a patent-holder can give better terms to a bigger player—volume discounts—the principle is that the patent cannot be withheld from a licensee; the patents themselves are in the form of ‘essential patents’ and those which are ‘non-essential’ or for which there are substitutes available.
It is in this context that Thursday’s interim injunction granted to Swedish telecom firm Ericsson by the Delhi High Court in its case against iBall needs to be seen. In this case, Ericsson argued that while iBall was importing phones/tablets from China which were using its patents, it was not paying it any royalty on this. Among the various arguments made by iBall, one was that it was merely importing the equipment, so if there was any infringement, this was being done by Chinese manufacturers—iBall was ‘an innocent infringer’. While a decision on whether a patent can be invoked at only the first stage of production involves the doctrine of ‘patent exhaustion’, the court has taken the view that iBall needed to have checked if the Chinese supplier held a valid patent. That done, the court took the view that iBall was not even willing to come to the table and negotiate with Ericsson on a FRAND basis, and has banned it from importing any devices that infringe upon Ericsson’s patents till the next hearing in the case. In a similar interim injunction against Micromax last year, the Delhi High Court had ordered the mobile phone/tablet manufacturers to pay Ericsson 0.8-1% royalties—in that case too, Micromax had been declared an ‘unwilling licensee’. In the iBall case, the court has said it takes 8-10 years before a patent is granted and ‘if 4-5 years are spent in negotiations, then just about 5 years are left for patent protection’.
There is also the issue of whether the royalty should be paid on the ‘smallest saleable unit’—the chipset, for instance—or whether it should be paid on the finished product, like the phone. The ‘smallest saleable unit’ sounds logical since that is where the patent is held, but in the case of a phone, for instance, if there is a larger screen and more memory, more value will be extracted—and the customer will pay more for it—from the same chipset. Hence it makes sense, even from the point of view of value delivered to customers, to levy the royalty on the full handset and not the chipset. Hopefully, by the time the two Ericsson cases are settled, there will be some clarity on this issue as well.