In a major setback to the telecommunications technology major Ericsson, the Competition Commission of India(CCI) has ordered an investigation into anti competitive licensing of its Standard Essential Patents(SEPs). Ericsson is unarguably the largest holder of SEPs in mobile communications in 2g, 3g, 4g and EDGE technologies. Ericsson is embroiled in several SEP based litigations worldwide.
In its Press Release dated 28th November, Ericsson has stated that the complaint filed by Micromax is a general defense to the ongoing patent infringement proceedings initiated by Ericsson against Micromax.
For a quick insight into the Smartphone SEP wars, read Rajiv Kr Choudhry’s post here.
Read the Order here.
A quick background to the dispute
In March 2013, Ericsson sued Micromax for patent infringement of its SEPs in the Delhi HC. Ericsson claimed damages worth 100 cr. In fact Ericsson is presently suing Samsung in the US and Acer in Germany as well over SEP infringement.
In the case before the Delhi HC, Justice Manmohan issued an interim order to Micromax to deposit a certain amount of money, apparently in a bid to protect Ericsson’s monetary interests while the negotiations were continuing. The deposit consisted of category-specific royalties and Shouvik had blogged about the dispute here. Until June 2013, Micromax had deposited 29.5 crores with Ericsson as per the Interim Order rates.
Prashant had previously discussed Micromax’s possible litigation strategies, and noted that Micromax had the option of suing Ericsson before the CCI. Well, Micromax went ahead and did exactly that.
Micromax filed a complaint with the CCI under S 19(1)(a) of the Competition Act, 2002, alleging the Ericsson demanded unfair, discriminatory and exorbitant royalty for its patents regarding GSM technology. The CCI in its Order dated 12th November 2013 examined Ericsson’s conduct and concluded that it was prima facie was anti-competitive in nature. It has directed the Director General to institute a proper investigation into Ericsson’s practices, a report on which shall be submitted within 60 days.
Micromax was represented by Saikrishna & Associates, and Ericsson by Singh & Singh Law Firm LLP.
Parties’ Contentions and CCI’s reasoning
As stated, Ericsson had earlier accused Micromax of infringing its patents. Later it demanded that Micromax should secure the licences of these patents on Fair, Reasonable and Non-Discriminatory Terms (FRAND Terms). When Micromax initiated a request to enter into a licensing agreement based on FRAND terms, Ericsson sent an agreement imposing royalty rates as under:
a) GSM – 1.25% of sale price of product of the Informant,
b) GPRS – 1.75% of sale price of product of the Informant,
c) EDGE – 2% of sale price of product of the Informant,
d) WCDMA/HSPA: Phones, Tablets – 2% of sale price of product of the Informant,
e) Dongles – USD 2.50 per dongle.
Micromax argued that royalty rates imposed by Ericsson were not product based i.e. royalty was not being charged on the basis of cost of product licensed but was being charged on the basis of value of the phone in which product of Ericsson was being used and Micromax had to pay a percentage of cost of the phone as royalty. Ericsson had arbitrarily imposed royalty on basis of sale price of the phone, while the royalty should be charged on basis of value of technology/chipset used in the phone. Further, Ericsson made licensees enter into non-disclosure agreements regarding royalty rates prescribed by it. This constituted a discriminatory practice. Ericsson on its part did not dispute any of the contentions regarding royalty rates.
The CCI noted that Ericsson was the largest holder of SEPs in the GSM market with 33,000 patents to its credit, and 400 of these patents granted in India, and the largest holder of SEPs for mobile communications like 2G, 3G and 4G patents used for smart phones, tablets etc. Further, since there is no other alternate technology in the market, Ericsson enjoyed complete dominance over its present and prospective licensees in the relevant product market.
The CCI completely agreed with Micromax’s arguments. It held that charging of two different license fees per unit phone for use of the same technology prima facie is discriminatory and also reflects excessive pricing vis-a-vis high cost phones and that confidentiality of royalty rates was discriminatory indeed. It observed:
“For the use of GSM chip in a phone costing Rs. 100, royalty would be Rs. 1.25 but if this GSM chip is used in a phone of Rs. 1000, royalty would be Rs. 12.5. Thus increase in the royalty for patent holder is without any contribution to the product of the licensee. Higher cost of a smartphone is due to various other softwares/technical facilities and applications provided by the manufacturer/licensee for which he had to pay royalties/charges to other patent holders/patent developers.”
The above mentioned observations made the case fit for a full fledged investigation by the CCI. Readers should note that the CCI is extremely selective when it comes to ordering investigations into matters. 90% of the complaints filed before it are dismissed.
This Order is a first in many respects. The CCI has never adjudicated on a SEP issue before. Nor has any Competition regulatory body in the world discussed royalty rates. In fact Regulatory bodies over the world have shirked from determining royalty rates. The most significant ruling discussing royalty rates so far has been Judge Holderman’s judgment in the Microsoft-Motorola dispute involving WiFi Technologies.
The CCI Order touches the issue of determining royalty by the Appropriate Royalty Base method. This method prescribes for calculating royalty not on the entire product, but on the smallest salable patent-practicing unit. The method evolved from the valid concern that where small elements of multi-component products are accused of infringement, calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product. The Federal Circuit Court in LaserDynamics v. Quanta had articulated these concepts while calculating damages in a SEP infringement matter. The fact that CCI has made preliminary observations on royalty rates makes me optimistic about the final order, wherein it may make a foray into the difficult task of determination of FRAND royalties.
The Order also discussed the conception of Standard Setting Organisations(SSOs) and noted that Ericsson was the member of one such organisation namely European Telecommunications Standards Institute (ETSI). 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. Ericsson’s evidently unfair game play rules have been taken to task by this Order.
The Order also highlighted serious concerns of Patent Holdup alongwith Royalty Stacking and the importance of Interoperability surrounding FRAND obligations. Patent Holdup occurs when owners of standard technologies demand higher royalties or more costly or burdensome licensing terms than could have been obtained before the standard was chosen. Royalty Stacking occurs when a single product uses many patents, of same or different licensors. As such, from the perspective of the firm making the product, all the different claims for royalties must be added or “stacked” together to determine the total burden of royalty to be borne by the manufacturer.
The CCI also held that it had complete jurisdiction to investigate into the matter with respect to anti-competitive practices, irrespective of contemporaneous proceedings of IPR infringement in the Delhi HC. Section 62 of the Act makes it clear that provisions of Competition Act are in addition to and not in derogation of other existing laws. Section 3(5) of the Act protects IPR rights of a person, subject to reasonable conditions.
The CCI, however, in the last paragraph of the Order clarified that: “Nothing stated in this order shall tantamount to a final expression of opinion on merit of the case and the DG[Director General] shall conduct the investigation without being swayed in any manner whatsoever by the observations made herein.” Thus, the Report of the DG will indicate which way India’s first FRAND litigation will ultimately sway.