Breaking News!! DHC fixes interim royalty rates, last date of trial in Ericsson/Micromax FRAND case

tug of warA Single Judge of the Delhi High Court passed a judgment on the interim applications pending in the patent infringement suit filed by Ericsson (Telefonaktienolaget LM Ericsson) against Micromax and Mercury Electronics on the 12th of November, 2014. The judgment covers two main points: first, it sets the royalty rate to be paid during the pendency of the case [brings it down from 1.25-2% to 0.8-1.3%], and, secondly, it fixes 31st December as the final date for the trial of the suit.

An earlier ex parte interim injunction of the Single Judge (later upheld by a Division Bench) required that customs officials intimate Ericsson of any consignment imported by Micromax which would then be subject to the Intellectual Property Rights (Imported Goods) Enforcement Rules, 2007. The two parties then approached the court with a modified interim arrangement for the payment of interim royalties from Micromax to Ericsson. These were set at an unusually high rate of between 1.25% to 2% of the sale price [The rate set by the Washington District Court in the Microsoft v. Motorola matter ranged from 0.555 cents to 3.417 cents per chip which would be 4 cents/unit or 0.02% of the avg 200$ product]. For more details on the history of the litigation see Prashant’s post and for more information on FRAND licensing and fixing of royalty rates see Sai Vinod’s post.

In it’s decision last week, the High Court fixed the new interim royalty rates based on 26 license agreements between Ericsson and other operators produced before court. The new rates are as follows:

Till  12.11.2015 From 13.11.2015 to 12.11.2016 From 13.11.2016 to 12.11.2020
For phones/ devices capable of GSM 0.8% 0.8% 0.8%
For phones/ devices capable of GPRS + GSM 0.8% 0.8% 1%
For phones/devices capable of EDGE + GPRS + GSM 1% 1.1% 1.3%
WCDMA/ HSPA phones/devices, calling tablets 1% 1.1% 1.3%

As is evident from the table, the rates are set based on the combination of technologies present in a product and are set for inflation. More importantly, they are set as percentages of the net selling price of products. While the tiered rates for devices containing single and multiple technologies helps guard against royalty stacking, this becomes a serious concern when considering other kinds of patents contained in these products. The rates are far reduced from those in the earlier interim arrangement of 19th March, 2013, but it can be argued that they continue to remain on the higher side as a function of being charged as a percentage of the selling price. The court also specified that these are not global FRAND rates since Micromax has only negligible operations overseas and records Micromax’s agreement to re-enter into negotiations in the event that it expands internationally.

The new rates are to cover even those payments made earlier by Micromax under the 19th March arrangement. The court directed both parties to present a fresh computation of amounts based on these new rates. Micromax is then required to make quarterly payments to Ericsson based on the same, in return for which, Ericcson is required to furnish surety bonds in favour of Micromax for the amounts received.

Micromax is further required to continue to give intimation to the plaintiff of the arrival of the consignments at customs and seek NOC from Ericsson. However, post inspection, Ericsson must “forthwith inform the Customs that it has no objection to the release of the consignment so that the consignment could immediately be handed over to the Defendants.”

The court makes it explicit that the defendant shall not rely upon the above rates before the competition authorities or any other forums as it is not final in nature.

Finally, we must not take the court’s fixing of rates till 2020 as an indication of how long it thinks this litigation is going to take, since it also fixed an upper cap for the trial in the present case. It has set 31st December, 2014 as the last date of trial, after which, final arguments in the case are to commence.

While the reduced rates are an important victory for Micromax, the judgment is unclear about what criteria it relies on to fix these rates. The other licenses it considered remain confidential and hence does not give us a clear picture of whether the court purely relied on the going rate in the market or on other additional factors. This detailed comparison of the 15 Georgia-Pacific factors with Justice Robart’s modifications in Microsoft v. Motorala gives us an indication of how much further our courts can go in terms of bringing clarity in the law.

See also: Rajiv’s triparite series that literally covers everything FRAND for more on these issues.
Part 1 | Part 2 | Part 3 

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