Another investigation has been ordered by the CCI into Ericsson’s anti competitive licensing of its Standard Essential Patents (‘SEP’). The present investigation has been clubbed with the investigation ordered in Micromax vs. Ericsson FRAND royalty case (which we have blogged about here). For a detailed understanding of FRAND licenses and SEPs read Rajiv’s posts here, here and here.
The CCI in its order dated 16th Jan 2014, examined Ericsson’s conduct and concluded that it was prima facie an abuse of dominance. The Director General has been directed to institute an investigation into Ericsson’s practices, a report on which shall be submitted within 60 days.
The complaint and decision
Intex Technologies (India) Ltd., the ‘informant’, provides high end technology at affordable prices and its product portfolio includes more than 29 different products. Like Micromax, Lava and other players in the industry, it sources custom-made mobile devices from various countries and markets them under its brand name.
Ericsson on the other hand, is the largest holder of Standard Essential Patents (‘SEP’) for mobile communication covering 2G, 3G and 4G technologies.
As the CCI puts it, an SEP is “is one for which there are no non-infringing alternatives.” SEP holders are under an obligation “to license the SEPs to every party under Fair, Reasonable and Non-Discriminatory (FRAND) terms, in terms of the irrevocable commitment made to standard setting organization, such as the European Telecommunications Standard Institute (ETSI).” as per clause 6 of ETSI IPR policy.
Intex complained to the CCI saying that Ericsson was demanding exorbitant royalty rates and unfair terms of licensing its SEPs to Intex and was thereby abusing its dominance.
Dominance of Ericsson has to be assessed with regard to a ‘relevant market’. In the present case, the relevant market is the market of SEPs for 2G, 3G and 4G technologies in GSM standard compliant mobile communication devices in India. The CCI prima facie found that Ericsson is ‘dominant’ in this particular market as it “has 33,000 patents to its credit, with 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 the OP holds SEPs and there was no other alternate technology in the market in India, OP enjoyed complete dominance over its present and prospective licensees in the relevant product market. As such, OP prima facie can be said to be dominant in the relevant market.”
For establishing prima facie abuse of its dominance, the CCI considered the following facts:
- The royalty rates being charged by Ericsson were contrary to the FRAND terms as they had no linkage to the patented product. The CCI gives an example: “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.”
- Ericsson refused to share the terms of FRAND licenses given to licensees similarly placed to Intex possibly because Ericsson was imposing discriminatory and non uniform terms.
- Each user of Ericsson’s SEP was made to sign a Non Disclosure Agreement. This meant that users could were not able to find out terms of royalty given to other users. This reduced transparency and was contrary to the spirit of ‘applying FRAND terms fairly and uniformly to similarly placed players.’
- A jurisdiction clause was imposed which debarred Intex from having disputes adjudicated in Indian (where both parties carry on business) and vested jurisdiction in Sweden/Singapore. Such a clause also violates FRAND principles. FRAND licensing issues should be resolved locally as a foreign jurisdiction clause may lead to distortion of competition due to hold ups. This point has also been discussed by Florian Mueller here.
As we have pointed out earlier, the CCI has never adjudicated an SEP issue before. The CCI highlights the need for FRAND licensing – to prevent patent hold ups and royalty stacking. A patent hold may occur “When such standard technologies are protected by patent rights, there is a possibility for “hold-up” by the patent owner – a demand for higher royalties or more costly or burdensome licensing terms than could have been obtained before the standard was chosen. Hold-up can subvert the competitive process of choosing among technologies and undermine the integrity of standard-setting activities.” Similarly, royalty-stacking is “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.” Such practices stifle competition and affect the ultimate consumer.