Understanding FRAND & SEPs in Light of Micromax_Ericsson Patent War
Soon after Micromax refused to sign a FRAND license agreement and a 3-year negotiation with the company failed, Ericsson was quick to file a patent infringement lawsuit against Micromax. In March 2013, it slapped Micromax with an infringement suit worth Rs. 100 crore alleging that the domestic handset maker had infringed on 8 Standard Essential Patents (SEPs) used in its 2G, 3G and 4G devices. Note that Ericsson boasts largest number of mobile communication SEPs like 2G, 3G and 4G patents which are used for smart phones and tablets. As such, the Swedish giant enjoys complete dominance over licensees in the relevant product market. Currently, it has a huge patent portfolio of 33k patents, of which 400 are granted in India.
The negotiations between Ericsson & Micromax have been going on for long and at one point, latter had even agreed upon an interim arrangement. As such, on May 31, 2013, Micromax deposited Rs 29.45 crore as royalty payment in the court. However, even that did not settle the scores between the two companies.
Micromax recently filed a complaint against Ericsson with Competition Commission of India (CCI) and pointed out to the commission that –
• Ericsson is charging an exorbitant royalty as it is the sole licensor of the patented technology and an alternate technology is unavailable.
• Micromax also pointed out that Ericsson is asking for royalty payments based on the mobile phone’s sale price rather than the cost of product being licensed. As such, Ericsson is acting contrary to the FRAND (Fair, Reasonable and Non-Discriminatory) terms by charging patent royalties based on the cost of the user product (mobile phone, tablets and others) rather than the product being licensed (chipset), which is discriminatory. This has increased royalty of using the same chipset in a smartphone to 10 times than using it on an ordinary phone.
Post Micromax’s complaint and in an interesting twist, CCI has ordered an antitrust probe against Ericsson for allegedly charging a higher royalty for its GSM technology patents.
The Concept of FRAND & SEPs
FRAND (also known as F/RAND) is an acronym for “Fair, Reasonable and Non-Discriminatory” and is preferably called so in Europe. In United States, it is known as “reasonable and nondiscriminatory terms”(RAND). In licensing, patents are subject to FRAND/RAND commitments if the patent holder is part of a standards-development organization (SDO) that imposes this requirement on its participants. SDOs are voluntary membership organizations that set common standards for SEP holders who commit to license their patents on FRAND terms, and also prevent them from using their hold up power. This is a phenomenon in which a company that has a patent covering the implementation of a standard threatens to obtain an injunction against manufacturers of competing standards-compliant products thereby making the technology involved far less useful, or immensely costly. To overcome the issue of hold up, most SDOs today require that participants disclose their SEPs to them. This ensures that all designers/manufacturers have the right to implement the standard in their products and use the inventions from any declared essential IPRs.
A FRAND commitment usually applies to any patents that are “essential” to implementing a particular standard, also known as Standard Essential Patents (or SEP’s).
A technology is often more valuable after it has been widely adopted than when it is one alternative among many. Thus, a license price that captures that additional value is not reasonable because it does not reflect the intrinsic value of the licensed technology.
In this case, Ericsson is charging unreasonably as not only its patented technology is essential to products (Micromax handsets & tablets) implementing the standards (GSM technology) but also because currently there isn’t any alternative available for it. In the meanwhile, CCI has referred the case to the Director General for further investigation of any violation of the provisions of the Competition Act.