An issue being observed with increasing frequency, especially in high technology markets, is the manner in which patent holders can foreclose markets by using the exclusivity and market power vested by a patent. This can particularly be the case with patents that are accepted as essential to an industry standard; this issue has been the subject of an active debate, regulation and litigation. India is not immune to such abuse and some cases are already in litigation in courts and before the Competition Commission of India (CCI).
Technological development is increasingly driving growth across several sectors of the economy. High-tech industries account for an increasing share of the GDP across nations. Technology and innovation are recognised and incentivised by the state through award of patents and other forms of intellectual property (IP). These enable the innovator to reap the profits from its innovation by the exclusivity vested by the IP; these also encourage competition in the field of innovation.
Standards are evolved by industries with the view to enhance interoperability of technologies, achieve economies of scale and promote consumer experience. These are agreed to by standard-setting organisations (SSOs) set up in various industries.
Companies compete for their patents to be incorporated into a particular standard; the rewards and market power arising from becoming a standard-essential patent (SEP) are immense. Every producer i.e. implementer that wants to produce a standard-compliant product must procure a licence to use the SEP. For this, SSOs obtain from the SEP holder an assurance that it will offer to any implementer a licence to the SEP on reasonable and non-discriminatory royalty and other terms, referred to as FRAND (fair, reasonable and non-discriminatory) terms.
FRAND terms include commitment not to deny the technology to any implementer and to charge royalty that reflects only the inherent value of the technology and not the market power gained by virtue of it becoming an SEP. An SEP holder reneging or not complying with the assurance given to the SSO to honour FRAND commitment could seriously harm competition in the market. This harm can arise in ways such as: (1) hold up, when the SEP owner refuses to license the technology or threatens to use injunctive orders from a court; (2) the SEP owner seeking inordinately high royalty, often royalty based on the final product rather than on the component in which the technology is to be used; and (3) royalty stacking, when royalties have to be paid out to several SEP owners for technologies used in a single product.
SSOs have been struggling to find the right balance between just rewards to an SEP owner and the access to the technology on FRAND terms. The Telecommunications Standards Development Society of India (TSDSI)—a relatively new organisation—made an initial attempt at framing an interim policy for development of standards; the policy does not go far, and on the crucial issue of the commitments required of an SEP owner to not use the threat of injunction to hold up or extract excessive royalty, the society could not arrive at a consensus and ultimately dropped the contested provision.
The Institute of Electrical and Electronics Engineers (IEEE), one of the world’s leading SSOs, in a major effort to resolve similar issues, updated its patent policy in March this year. Thereafter, it requested the US Department of Justice (DoJ) to review the updated policy from the antitrust perspective. DoJ’s review concluded that the updated policy met all antitrust-related tests and was not likely to cause any harm to competition; that the update created “the potential to benefit competition and consumers by facilitating licensing negotiations, mitigating hold up and royalty stacking, and promoting competition among technologies for inclusion in standards.”
The IEEE update addressed four key areas of the patent policy.
(1) With regard to “reasonable” rate for royalty, the policy defines it as “appropriate compensation to the patent holder for the practice of an Essential Patent Claim excluding the value, if any, resulting from the inclusion of that Essential Patent Claim’s technology in the IEEE Standard.” The update recommends, but does not mandates, the three factors for consideration in determining a “reasonable” rate: (i) the value contributed “to the value of the relevant functionality of the smallest saleable Compliant Implementation that practices the Essential Patent Claim,” (ii) the value contributed “in light of the value contributed by all Essential Patent Claims for the same IEEE Standard practised in that (smallest saleable) Compliant Implementation,” and (iii) “Existing licences” that “were not obtained under the explicit or implicit threat of a Prohibitive Order” and “otherwise sufficiently comparable” circumstances and resulting licences.
(2) SEP owners cannot refuse to honour their commitment to IEEE to grant licences to an unrestricted number of applicants, and implementers cannot force a patent owner to grant a licence beyond the scope of that commitment.
(3) The circumstances in which the SEP owner shall not seek injunctions (from a court) or exclusion orders (from an international trade commission); it encourages parties to negotiate the licence terms; the SEP owner is not prohibited from seeking an injunction if an implementer declines to participate in or comply with the outcome of an adjudication (as specified in the policy).
(4) Discouraging tying of a licence to a non-essential patent with the licence for an SEP or requiring an implementer to grant to the SEP owner a licence to the implementer’s own patents (except essential patents on the same IEEE standard). Parties, however, are free to negotiate any kind of cross-licence or portfolio licence that they wish.
The update to IEEE’s patent policy brings much-needed clarity on issues surrounding the interface between SEPs and competition/antitrust laws. It also sets a healthy precedent for other SSOs (such as TSDSI), both in regard to similar clarity that can be introduced into their policies and in respect of the robust, consultative process observed by IEEE in updating its policy.
The author is former head of CCI and currently chairman of Vinod Dhall-TT&A competition law practice