[Ed Note: This post is the first part of a two part series authored by Vaibhav Laddha, a student of NALSAR University of Law.]
Technology product markets today are inherently international. Products designed in Germany may be manufactured in Korea or China and sold in India. This cross-cutting global nature of technological products has created a need for standardisation to ensure technical interoperability. Some standards which ensure this are WiFi (wireless networking), MP3 (digital content encoding), 4G (wireless telecommunications), etc. These standards reduce communication costs and increase efficiency. For this reason, various standard setting organisations (SSOs) have been formed who primarily facilitate coordination between different stakeholders in a market by setting standards.
Standard Essential Patents, (SEPs), are patents that form a part of such a standard set by SSOs and are declared essential to fulfil that standard. The number of such SEPs has grown tremendously over the past few years, especially in the fields of telecoms, software and other technology-based industries, and has increasingly attracted the attention of anti-trust authorities worldwide. This is because of a multitude of factors like the essentiality and ubiquity of SEPs in technology fields and the fact that they restrict competition because ownership of an SEP automatically confers dominance.
The wireless telecommunications industry is a key industry which has witnessed tremendous growth over the past few years, with the number of mobile connections as high as 8.24 billion connections in 2017. In this field only, seven SSOs exist, each involving thousands of patents and hundreds of participants. Many of these patents have been declared essential in order to follow a certain standard. Unsurprisingly, this industry has seen over 50 lawsuits filed across ten countries involving major tech companies such as Google, Motorola, Apple and Samsung.
On 16 July 2015, the Court of Justice of the EU delivered a landmark ruling in the case of Huawei Technologies v ZTE Corp. The Court considered the circumstances under which a holder of a Standard Essential Patent (SEP) who has given a Fair, Reasonable and Non-Discriminatory (FRAND) commitment may seek an injunction against a party accused of infringing the same without abusing its violating anti-trust law.
This two part blog series shall deal with the concept of SEPs, FRAND commitments and the anti-trust elements involved, line of precedents before this ruling, what was held in Huawei v ZTE and how the Indian jurisprudence differs from it.
SEPs, FRAND Commitments, Injunctions and Anti – Trust
In recent years, the consumer communication devices industry has witnessed tremendous discussion and debate over the so-called ‘patent-wars’ where most of it revolved around mobile communication standards and patents essential for those. Of particular importance are standards set by SSOs like European Telecommunications Standard Institute (ETSI). Wireless communication standards such as CDMA and LTE involve significant amounts of patented technologies (the 4G-LTE standard comprises of 3000+ patents). Certain patents are deemed as ‘essential’ to a standard which means that a certain standard will not be achieved unless the use of that particular patent is made. During a standardisation process, firms declare their patents to be potentially essential to a particular standard, which is confirmed by Courts. Despite their names, SSOs do not actually set standards but they aid in standard development. However, SSOs request firms declaring their patents to be potentially essential to submit a commitment that they shall grant licenses to their patents to interested third parties on FRAND terms.
In a FRAND agreement, firms consent to contribute to the standard all of the patents that are ‘essential’ to this standard and to settle on royalties that are ‘fair, reasonable and non-discriminatory’. The ‘non-discriminatory’ part implies that every downstream firm must be dealt with similarly, the ‘fair and reasonable’ part implies that royalties ought not be ‘excessive’. Although the precise contents of a FRAND agreement depend on the wording of the commitment, these usually contain the promise to enter into good faith negotiations with the ultimate object of agreeing upon a licence built upon FRAND terms.
The invocation of anti-trust elements into the arena of intellectual property was first theorized by Mark Lemley and Carl Shapiro in their seminal work titled “Patent Hold-Up and Royalty Stacking.” They observed that the threat that a patent holder will obtain an injunction to force a downstream manufacturer to pull its product from the market is extremely powerful. This threat can greatly affect licensing negotiations even where the patent forms a small part of a large, complex and a popular product.
The Huawei case deals with these issues of SEPs given on FRAND terms, where an SEP holder may ‘holdout’ from granting a patent. The main issues were that the action brought by Huawei seeking an injunction against ZTE constitutes an abuse of its dominant position under Article 102 of the TFEU. We shall now deal with the case law preceding this decision and how Huawei differs from the same
In the 2009 Orange Book Standard case, the Oberlandesgericht of Karlsruhe (the German Federal Supreme Court) dealt with the question whether a patentee could get the relief of injunction against an infringer when the latter had tried to obtain a license but the patentee had refused. The Court concluded that a defendant can resist the claim for an injunction to prohibit use of a patent where the patentee is abusing its dominant market position. A patentee is said to be abusing its dominant position if it refuses to conclude a patent-licence agreement based on non-discriminatory and non-restrictive terms and the alleged infringer has made an unconditional offer to conclude a licence agreement.
The Oberlandesgericht, however, does not give much leeway to the licensee to question the validity or the essentiality of the royalty rate. In order to comply with the Orange Book Standard test, a licensee cannot impose a condition precedent. It can only (i) offer a royalty rate customary to that industry and (ii) propose that a royalty rate be determined according to patentee’s ‘reasonably exercised discretion’. It also held that an offer by the infringer to take a licence which did not include a provision for termination of the licence in the event of a challenge to the validity or the essentiality of the patent did not entitle the defendant to oppose an injunction.
Several German cases have followed the standard laid down in the Orange Book case, such as Philips v Sony Ericsson and Motorola v Apple. In the Motorola case, Motorola first obtained a judgment against Apple for infringing upon its GPRS SEPs in the Karlsruhe High Regional Court. An abuse of the dominant position of the patentee only if the licence-seeker has made the patentee an unconditional offer to conclude an agreement, which the patentee may not refuse without unreasonably obstructing the licence-seeker. Moreover, the licence-seeker must also acknowledge its liabilities for past damages in its licence-offer. Motorola obtained an injunction against Apple which was suspended when the case was heard on Appeal. It was found that Apple must withdraw its suit for nullification of Motorola’s patents when Motorola accepted Apple’s offer for licence. Furthermore, Apple was required by the Court to include a non-challenge termination provision to fulfil the Orange Book standard.
Upon complaint by Apple, the EU Commission analysed German case-law development in Google/Motorola Mobility and expressed dissatisfaction with the Orange Book standard. In the 2014 Samsung and Motorola cases, the EU Commission chose not to apply the Orange Book standard, indicating that it was too SEP-holder friendly as the requirements are too hard for a licence-seeker to fulfil. The Commission suggested a broader application of Article 102 of the Treaty on the Functioning of the European Union to injunctions sought to be brought by FRAND committed patent-holder. It held that an injunction sought against a “willing” licensee amounts to abuse of dominant position by a patent holder who has given a FRAND commitment. It differed from the Orange Book judgment and observed that Motorola’s restriction of Apple’s ability to challenge the validity of the patent under the threat of an injunction was “capable of having multiple anti-competitive effects,” and that “it is in the public interest to allow challenges to the validity of patents and to ensure that royalties are not unduly paid.” Now we shall look at Huawei and note the points of difference between Indian law and the ECJ case.
Huawei v. ZTE
The case was referred to the EU Commission by the Düsseldorf District Court which was hearing a patent dispute between Huawei and ZTE, two Chinese giants with huge patent portfolios. Huawei was the owner of a patent it had declared essential to practice LTE standard published by ETSI. Huawei, who had given its FRAND commitment to ETSI, had entered into negotiations with ZTE on the licensing terms and the royalty rates without any success. Huawei then sought an injunction against ZTE in Germany for infringing its patent without licence. ZTE claimed that Huawei’s action of seeking an injunction amounted to an abuse of its dominant market position under Article 102 of the TFEU. The Düsseldorf Court sought guidance from the ECJ as to what would apply, the Orange Book test or the conditions laid down by the EU Commission in the Samsung and Motorola decisions, while determining if Huawei’s behaviour constituted an abuse of its dominant position.
The ECJ holds that ‘in the particular circumstances of the case’ (where the LTE standard was essential in competing in the mobile telecommunication sector and where the SEP was given on FRAND terms), the patent-holder will not have abused its position as long as it takes certain steps and concomitantly, the license-seeker has failed to take certain other steps.
The ECJ provided a list of obligations an SEP holder must follow in order to avoid infringement of Article 102 of the TFEU. Firstly, the SEP holder cannot bring an action for infringement or for the recall of products without giving prior notice to the alleged infringer. The infringer must be alerted by specifying the way in which the SEP has been infringed. Secondly, the alleged infringer must express its willingness to conclude a licence-agreement on FRAND terms, after which the proprietor must provide a specific written offer based on FRAND terms. The alleged infringer must respond in good-faith to the same. The alleged infringer can only rely upon the defence of abuse of dominant position if it has promptly submitted a counter-offer based on FRAND terms.
If the counter-offer is rejected, the alleged infringer must provide adequate security, and where no agreement is reached, the parties may by common agreement request that an independent third-party determine the royalty rates. In addition, the ECJ overrules the Orange Book standard and holds that an alleged infringer can hold motions parallel to the licence negotiations, challenging the essentiality and validity of the patents in question.
Finally, the proprietor may use the threat of injunctions to force the license-seeker to take a license for its entire portfolio of SEPs, essentially perpetuating the abusive use of injunctions contrary to Art. 102 TFEU.