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Monday, December 30, 2013

Disputes on Royalty over Standard Essential Patents.

         Before the creation of a standard, all patents are implementation patents. However, when a standard is created and a patent holder declares its patents to be essential to the standard, the patent is a standard-essential patent (SEP) and is subject to the FRAND (Fair, Reasonable, Non discriminatory) commitment. A patent holder is obligated to make licenses available to its Essential Patent Claims defined as  “any Patent Claim the use of which was necessary to create a compliant implementation of either mandatory or optional portions of the normative clauses of the [Proposed] Standard when, at the time of the [Proposed]  Standard’s approval, there was no commercially and technically feasible non-infringing alternative.” The IEEE’s guidelines emphasize that the IEEE bears no responsibility for identifying essential patent claims for which a license may be required or for investigating the legal validity or scope of essential patent claims.
         CCI ( Competition Commission of India) recently addressed this issue in the dispute between Micromax Vs EricssonThe Informant (Micromax) has alleged that the OP (Ericsson) was demanding unfair, discriminatory and exorbitant royalty for its patents regarding GSM technology. The royalty demanded by Ericsson was excessive when compared to royalties charged by other patentees for patents similar or comparable to the patents held by Ericsson.  OP demanded royalty on sale price of product whereas Informant took the stand that royalty should be applicable on Chip (protected with the patents) and not on phone as smart phone manufacturer has to pay royalties on other components as well , leading to royalty stalking. Second, Ericsson was inclined to share data on Royalties imposed on other licensees to verify non-discriminatory aspect.
         CCI ruled:
         The allegations made in the information and not refuted by OP concerning royalty rates make it clear that the practices adopted by the OP were discriminatory as well as contrary to FRAND terms. The royalty rates being charged by the OP had no linkage to patented product, contrary to what is expected from a patent owner holding licences on FRAND terms. The OP seemed to be acting contrary to the FRAND terms by imposing royalties linked with cost of product of user for its patents. Refusal of OP to share commercial terms of FRAND licences with licensees similarly placed to the informant, fortified the accusations of the Informant, regarding discriminatory commercial terms imposed by the OP. 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. Charging of two different license fees per unit phone for use of the same technology primafacie is discriminatory and also reflects excessive pricing vis-a-vis high cost phones. 
         In view of above discussion, the Commission is of the opinion that it was a fit case for through investigation by the DG into the allegations made by the Informant, and violations, if any, of the provisions of the Competition Act. 

          This is the first and defining case in India. Request readers to share information on similar cases from other countries.


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