The Indian jurisprudence on ‘pro-tem’ security deposits in FRAND trials has been twelve years in the making at the Delhi High Court. Full details of the contents of pro-tem orders have been frequently discussed on the blog, see here, here, here and here. In this post, I am concerned particularly with what justifications have been used by the court to develop its pro-tem jurisprudence – creative expansions of the SEP litigation strategy toolkit are welcome, but not at the cost of legal uncertainty in amount calculation and weak theoretical justifications; especially when the recent surge in the grant of pro-tem deposit orders has had an impact on non-SEP cases. With the demand for pro-tem relief pending in four new SEP cases (LG, Optis and InterDigital against Transsion respectively, and Optis v. Oppo) before the court, I question if pro-tem orders could indeed be the promoters of efficient litigation that the Delhi High Court claims them to be.
The FRAND Protocol
The Delhi High Court follows the FRAND protocol defined by the CJEU in Huawei. The protocol, briefly, stands thus: The SEP holder alerts the SEP implementer of infringement of relevant SEPs, the implementer expresses willingness to license said SEPs on FRAND terms, the SEP holder forwards a written offer with details of a FRAND royalty rate, the implementer accepts or makes a counter-offer. On rejection of the counter-offer, if the SEP implementer was using the SEPs prior to entering into a patent license agreement, then it must deposit a security amount accounting for past use of the SEPs through a bank guarantee or placing the amounts necessary on deposit. In case of breakdown of negotiations, the royalty rate shall be determined on common agreement of the parties, by an independent third-party.
The court has been using pro-tem orders to facilitate the deposit of this security amount. The orders are granted without exploration of merits, do not require a separate application to be filed and the deposit amount is held by the Registrar General of the court until further interim or final determination. What cannot be clearly deduced from these precedents, however, is how the amount to be deposited would be calculated, what counts as an ‘exceptional situation’ to warrant such a deposit, and how effective these deposits can be in maintaining innovation incentives.
The Fulfilment Effect is probably not fulfilled
The Delhi High Court, constructed its pro-tem remedy, at least initially, as an alternative to the ex parte ad-interim order in Xiaomi v. Ericsson which the court had found onerous for having ‘throttled the business’ of the implementer by significantly curtailing Xiaomi’s business activities. A more lenient pro-tem order would permit resumption of Xiaomi’s business at the cost of a security deposit and for the SEP holder, Ericsson, this would remedy the ‘adverse effect’ of losing out on ‘finances which would otherwise flow to (their) coffers.’ Thus the first justification for a pro-tem deposit was the ‘fulfilment effect’.
The understanding that the implementer may be required by the court to fulfil the licensing conditions as it would have done in capacity of an actual and willing licensee comes from the German Orange Book Standard decision. Although the Delhi HC has not explicitly discussed the fulfilment effect, its repeatedly used reasoning that justifies the use of security deposit to maintain a ‘status quo’ by ‘balancing the equities’ between the SEP holder and implementer matches this doctrinal understanding. The problem is that the court views the, perhaps emotional, sufficiency of holding a deposit amount with itself as enough to motivate continued innovation. But this emotional relief does not translate to actual fiscal relief. The fulfilment effect can only be realised when there is transfer of money directly to the SEP holder. Also, contrary to the Court’s opinion, this transfer will generally only account for recovery of past use, it will most likely not be too crucial in sustaining future innovation.
Weak Theoretical Justifications
In a relatively recent exercise the court has found justifications for pro-tem deposit as a procedural remedy in domestic laws – Section 151 of the Code of Civil Procedure, 1908 (the CPC, 1908) and Rule 5(v) of the Delhi High Court Rule Governing Patent Suits, 2022 (the Rules, 2022).
The Intex court was the first to cite poor judge-population ratio and lengthy trials as justifications for the grant of a speedier interim remedy – two justifications that have since been quoted in every pro-tem order. This court is also to be credited for the statement that Rule 5(v) ‘specifically empower(s) this Court to pass deposit orders even on the first date of hearing’. In subsequent suits when SEP-holders did in fact raise claims in the initial days of their hearings, the court had to clarify that the decision could not be taken without consideration of defenses raised.
Until now, in no case has the court discussed what an ‘exceptional situation’ required by Rule 5(v) is likely to be. It may be inferred (by a generous benefit of the doubt) that the court presumes that prevention of the SEP implementer from ‘gaining unfair competitive edge’ in the market through a hold-out could be one such situation. The justification to prevent hold-out works if facts show an unwillingness to pay; it doesn’t work so well when the issue is only about amount or mode of payment. The court has issued pro-tem orders in both such situations without distinction.
Unexplained Deposit Amount Calculations
The Huawei protocol requires that calculation of the amount of security deposit is to be based on ‘the number of the past acts of use of the SEP, and the alleged infringer must be able to render an account in respect of those acts of use’. Yet, there is a persistent lack of transparency in court’s reasoning for its pro-tem amount calculations. For Xiaomi, Prof. Shamnad Basheer had asked why the court had decide on a rate of Rs. 100 per device. In Philips, a royalty of Rs. 71 crores based on details of past use, conforming to the Huawei protocol, was demanded. The court did not quite explain why a lack of sales data for two years and expiry of two out of five suit patents amounted specifically to a 1/4th reduction in the claimed amount and how does this reduction balance the equities. In Atlas, the pro-tem deposit was calculated to be 1/5th of the amount of the counter-offer – why 1/5th the order does not explain. In a subsequent hearing, the number of devices sold was brought on record and the deposit amount was further reduced to Rs. 50 lakhs.
In InterDigital the single bench court ordered deposit of security for past sales, but also included an additional payment to be made the next year in case the trial took longer to conclude and more costs for delay. This reaches far beyond the remedial effect of fulfilling costs of past use. Some course-correction by the division bench clarified that security deposits were not be used ‘as a punitive measure’.
Lack of clarity on how the court makes its calculations can lead to perverse results. Earlier this year, the execution of money decrees related to the Philips DVD case was stayed due to miscalculated presumption of damages. One of the main justifications from the court for grant of pro-tem relief is to provide a fast remedy. This goal will be defeated if pro-tem determination itself becomes a ground for multiple hearings and appeals. The court is no stranger to awarding unexplained damages in patent enforcement cases (see Praharsh’s post here). Now that the justifications developed in SEP cases have made their way to non-SEP cases, the stakes for transparency and clarity are even higher.
Varying Conditions for Grant of Deposit
Interestingly, in Atlas the court stated that on failure to deposit pro-tem security, the defendant would be ‘restrained from selling, manufacturing, exporting, and importing any Wi-Fi 6 compliant products in India, without obtaining a licence from the Plaintiff.’ In a way, this makes the pro-tem relief come full circle, leading to the same sweeping effect that the Xiaomi ex-parte order had sought to prevent!
Further, the court in the Nokia DB order and the Atlas order has been of the view that non-grant of pro-tem relief would cause ‘irreparable harm’ to the SEP holder in whose favour the ‘balance of convenience’ lies. In the previous precedents, the court has said that pro-tem orders shall be made only on a prima facie view of infringement (this also satisfies one condition of Rule 5(v)); additionally, it was decided that prima facie essentiality and validity of the claimed SEPs will be taken in account. Extending this analysis further to irreparable harm and balance of convenience significantly blurs the boundaries between a pro-tem deposit order and an interim injunction.
Since merits of the claims are not being considered for deposition of pro-tem security, why should the court make a full determination of the three conditions of prima facie infringement, irreparable harm and balance of convenience at this stage? More importantly, if there is enough material on record to make these determinations, then why use extra hearings to give pro-tem orders instead of directly issuing temporary interim injunctions? Dolby provides a better solution that prima facie findings of infringement, essentiality and validity should be fact-specific and not an ‘in-depth examination’ required for interim injunctions.
Is this ‘for the ends of justice’?
In a globally competitive jurisdictional competition where the pace of dispatch of court orders quickly becomes the stuff of headlines (see here (paywalled)), pro-tem security deposit that could be granted at least within the initial days of a hearing, might position the Delhi High Court as a favourable choice of forum for SEP holders. The court is yet to reject a demand for pro-tem deposit and it is likely that the trend will continue in the four upcoming SEP cases. However, it will be more beneficial for Indian SEP jurisprudence if in these new orders the terms as well as timelines of the grant of pro-tem orders are well-defined, and their utility is not reduced to merely assuaging the Court’s guilt of delayed proceedings.
