Article by Ashish Bharadwaj on "Technology: Time to implement what we have learnt" - ET Telecom

February 02, 2017 | Prof. Ashish Bharadwaj

We are living in turbulent times, characterized by rapid technological change that bring untoward legal scuffles between those that are an integral part of an ongoing vortex of breakthroughs and disruptions.

 
 
The spunk of standard setting
Among many factors, technical standards played a critical role in defining our new technology-led economies, the future of which is predicated on thriving competition, nurturing innovation and building respect for intellectual property rights. Contemporary standards are becoming ubiquitous in today’s markets. Standards, such as WiFi capability or 3G/4G communication, foster interoperability, avoid inefficient rivalry between competing systems, and facilitate competition in product markets. The conventional narrative is that firms, that commit their patents to a standard, abuse their market dominance by demanding excessive royalties from technology implementers and by seeking injunction order against infringers of their standard-essential patents. Competition agencies around the world generally prevent collaborations among competitors, but they are not hostile of voluntary standard setting by competitors in technologies that rely on principles of interoperability and compatibility. Standards certainly involve a risk of anti-competitive abuse since the adoption of a standard eliminates competition between competing technologies, which could lead to consumer harm. To mitigate this risk, patent holders, especially in high technology industries, typically provide an assurance that they will license patents that they have committed to a standard on fair, reasonable and non-discriminatory (FRAND) terms to anyone who wishes to use them.

The quintessential European decision: Huawei versus ZTE

In 2015, Court of Justice of the European Union (CJEU) – the highest court in the European Union in matters of European Union Law – held that a SEP holder’s refusal to license on FRAND terms may be an abuse of dominance in violation of Article 102 TFEU (i.e., an abuse of dominant position under EU competition law). One of the key questions regarding the circumstances under which seeking a claim for injunction would amount to an abuse of dominance was answered by CJEU in Huawei vs. ZTE after years of prolonged ambiguity and diverging opinions of the German Federal Court of Justice. CJEU’s decision laid down terms under which holder of a FRAND-compliant SEP can seek injunctive relief and further removes some vagueness in understanding of what constitutes an ‘unwilling licensee’. It is now up to the national courts of individual member states of EU to apply CJEU’s general framework and implement their guidelines to resolve questions that have been left unanswered by the CJEU.
 
The opinion of the CJEU was that action of a holder of FRAND-committed SEP of brining an action for infringement seeking an injunction or product recall would not amount to an abuse of dominant position, if (1) (a) prior to brining the action, the SEP holder alerts the alleged infringer of the infringement by designating the patent in question and providing details of the infringement; (b) the SEP holder presents a specific written offer to licence – after the infringer expresses a willingness to execute a licensing agreement on FRAND terms – with clear specifications of how royalty was calculated. (2) the alleged infringer continues to infringe on the said patent and does not diligently reciprocate to the licence offer proposed by the SEP holder, as per established commercial practices and in good faith, or adopts delaying tactics. CJEU also imposed requirements on the SEP implementer. The alleged infringer who chooses to not accept the initial offer can invoke Article 102 TFEU defence only if it submits to the SEP holder, promptly and in writing, a counteroffer on FRAND terms. The decision essentially enhanced the restrictions already placed on the alleged infringer’s behaviour in FRAND negotiations by applying EC’s safe harbour provision, striking a bargain between the Orange Book decision of the Federal Court of Justice and the earlier (Samsung and Motorola) decisions of the European Commission.
 
Recent developments in Deutschland: Down but not out

Germany has always been a preferred litigation forum in Europe, especially in SEP matters, making it the centre of gravity for smartphone litigation. Since German courts have historically been rather lenient in granting injunctions in patent infringement, the burden of proof lies mainly on the defendants when they invoke a competition law defence. Three major and recent decisions of German Courts developed case law on injunctive relief to the patent holder in cases dealing with infringement of SEPs, applying the rules established by CJEU in its Huawei vs. ZTE decision. The Regional Courts of Dusseldorf and Mannheim in Germany addressed some of these questions in Sisvel vs. Haier (November 2015), SLC vs. Deutsche Telekom (January 2016) and NTT DoCoMo vs. HTC GmbH (June 2016). In all three decisions, the SEP holder was granted injunctive relief against the infringing implementer, and the courts held that the SEP holder’s conduct did not amount to an abuse of dominant position. However, in Sisvel vs. Haier, an interim order was issued suspending the injunction order. It was found that the decision of the lower court was based on evident flaws in the application of the Huawei vs. ZTE requirements. The lower court wrongly assumed that the initial offer from the SEP holder was FRAND compliant. Although these decisions are currently under appeal, they throw light on application of the Huawei vs. ZTE decision in admissibility of FRAND defence in SEP infringement casesCompetition law of the European Union has taken a prominent role in the ICT sector that has always been more patent and SEP-intensive. Even though the litigants in these cases are global, but non-European companies, the fact that Europe was chosen as the forum for patent litigation highlights the importance of EU cases and decisions in matters of SEPs.
 
FRAND or foe: What is in it for India?

India needs a functional market for technologies that balances the interests of innovators, who rely on incentives to further develop technologies that enhance industrial capabilities, and the interests of implementers, who rely on these technologies to make standard-compliant devices. This balance will be disturbed if the incentives for innovators are constrained in ways that are commercially unviable, or when access to technologies is hindered by strategic and opportunistic behaviour of the patent owner. Either way, an environment is created where innovation is ultimately at a suboptimal level. The lesson for an Indian implementer can be that if it chooses to reject a ‘reasonable’ and ‘fair’ license offer from a SEP holder (which it very well can for an unrealistic proposal), it may leave the SEP holder with no choice other than suing for infringement if the implement continues with its business. Injunctive relief as a statutory remedy may be justified in cases where breach of promise to charge FRAND royalties as a defence cannot be proved by the licensee. FRAND terms, in essence, are a range of royalty rates calculated on the basis of reciprocity and a royalty base, keeping in mind the duration, scope and geographic markets that can encompassed as part of the agreement. In SEP matters in India, the implementers were found to be ‘unwilling licensees’ by the high court that found their actions as tactics for delaying negotiations, and in the process, continue commercial success of their infringing products.
 
Oversight of the process of standardization by a competition agency is indeed crucial. There is a lot we can learn from the emerging European jurisprudence. Seeking injunctions against licensees that are ready and willing to enter into a license agreement and are blocked by the SEP holder is indeed anticompetitive, and warrants scrutiny (and sanctions) by competition authority. More generally, market power acquired by SEP holders through anticompetitive market behaviour during the standard setting process necessitates scrutiny by competition agency. The enquiry, however, should focus on alleged holdup and harm to competition, rather than a perception of harm to consumers and competitors. Taking injunction off the table for SEP holders, or equating it with abusive behaviour, will certainly force them to forego significant and valuable licensing revenues as well as making them bear full cost of litigation and uncertainty. What we must understand is that our legal and regulatory systems should not undercompensate innovators and SEP holders by overlooking infringement; or overcompensate patent holders by overlooking abusive behaviour Implementers of technologies have a massive role to play to ensure India’s steady growth in mobile communication sector, but they cannot hide behind a cloak of a willing licensee to delay the negotiation process of technologies that have a very short lifeline. The responsibility is on creators to make their technologies accessible, and also on implementers that help integrate the market by making valuable products reach the end consumer.