The number of cases filed before the Commission on patents in the telecommunications sector and SEPs are about half dozen pertaining to abuse of dominance.Footnote 1 Allegations in all the cases pertained to abuses of dominance under Section 4 of the Act on the premise that SEP owners are dominant in the relevant market. The prima facie Order in the case Micromax Informatics Limited v Telefonaktiebolaget LM Ericsson (Publ) identifies dominance as central to the allegation to be addressed: ‘From the perusal of the information and the documents filed by the Informant prima facie it is apparent that Ericsson is dominant in the relevant market of GSM and CDMA….’
Further, an explanatory phrase in the next paragraph: ‘The allegations made in the information and not refuted by OP concerning royalty rates sums up the initial responses of the Commission.’
Prima facie Orders are important although not in the same league as the Order after the investigation. A pre-investigation Order has less weightage. It indicates the mind of the Commission based on information available in public domain and what is filed by the parties. The investigations generally follow the line of thinking of the prima facie Order. It strengthens the initial presumption rather than pose counterfactuals or alternate lines of reasoning. There have been dissenting prima facie Orders too, but Members largely prefer to evaluate their decision on receiving the investigation Report of the DG. The Commission also has a policy: (i) to call for more information from the informant and the deponent and (ii) to provide for initial hearing of the arguments. The information filed can therefore be refuted at the early stages to which due weight is given by the Commission. In the SEP cases, decisions made based on similar information tend to carry weight in subsequent prima facie Order.Footnote 2
It needs however, to be emphasized that a prima facie Order does not necessarily suggest thinking of the Commission but merely voices concerns on the possibility of dominance and the scope for abuse. For instance, in Micromax Informatics Limited v Telefonaktiebolaget LM Ericsson (Publ) (Ericsson) the market so defined (GSM and CDMA) suggested dominance of the enterprise indicative of indulgence in anticompetitive activities that call for further investigation. At the outset let us examine as to whether SEPs are necessarily dominant in the relevant market as alleged in an assertion that devolves on a ‘per se’ understanding based on a static traditional approach of economics of competition law that patents provide a monopoly right. This approach raises several uncomfortable questions in the telecommunications sector, the sector itself is no longer confined to the lines and wires networks and related equipment has expanded to include internet services, digital transmission of voice and data, cloud computing, internet of things and requisite technology accessed by consumers.
Firstly, a monopoly right and the scope afforded for earning monopoly profit while an incentive for existing patent owners is also the incentive for aspiring innovators. It is also debatable whether monopoly profits are sufficiently conducive for further innovation and degenerate to the general advantage of patent as an entry barrier. The counter to this argument is that patents are awarded only to new innovations that are original and patentees have to prove that it is not mere imitation or improvisation at the most. The scope for innovation and the time cycle of innovation differs among industries. Studies and evidence have shown that in the telecommunications sector the speed of innovation has been remarkably fast.
Secondly, the telecommunications sector and its convergence with the internet and artificial intelligence has seen two developments: (i) a wide range of alternatives to the GSM/CDMA technologies and (ii) combining of different innovations enabling different functions in a mobile and of course, the emergence of apps.
Technological developments redefine markets spaces and dominance which have not been taken into account in the prima facie Orders. Orders uniformly state that as SEP owners in the telecommunications sector, the firm is but dominant. The same arguments have been applied in other cases also, for instance, Intel in the microprocessor segment.
The Order notes that in the market for GSM and CDMA technology in India, EricssonFootnote 3 is dominant. Globally the market share of Ericsson was estimated at 35%. In India as the Order points out the company holds 30,000 patents of which 400 patents have been granted in India.Footnote 4 The Order opines that since the firm holds an SEP, it is an indication that there is no alternate technology in the market. This is indicative of market power and dominance. The same argument continues in later Orders.Footnote 5 In the case of Intel and microprocessors (chips) the Commission found the firm in a dominant position in three of the four defined markets.Footnote 6
Market data shows that towards the end of 1990s, 85% of the GSM market consisted of five players—Ericsson, Nokia, Siemens, Motorola and Alcatel.Footnote 7 Major SEP owners with licensing programs includes Lucent, Ericsson, Nokia, Interdigital and Qualcomm.
The data on market share clearly points to two facts. Firstly, the telecommunications sector is highly innovative with ever expanding horizons of the internet from 2G to LTE to Cloud computing. As a lucrative market, entry of new firms with competing and often disruptive technology is the hall mark of technology based markets. Dominance at best is a temporary phenomena subject to the threatening presence of competitive constraints. As is argued later the presence of competitive constraints restricts the ability of a SEP owner to charge exorbitant royalty fees. The importance of looking at competitive constraints rather than dominance points to moving towards effects based analysis using rigorous economic analysis by the Commission. The argument that SEPs are dominant is powerful but not necessarily borne out by evidence.
Secondly, the need to appreciate the significance of SEP in promoting competition. Standardisation is a mechanism created by standard setting organisations (SSOs) and as the name indicates it enables the creation of a portfolio of patents that maintains standards and ensures compatibility. Several patents grouped together provide for the numerous activities that are looked for in smartphones with each generation providing for more functions. Standardization is the process where all patents are grouped together. Negotiations are simplified for a firm seeking a license. Multiple licenses are no longer required. A single license combines all patents in a set.
Thirdly, the argument that SEPs create entry barriers is not sustainable. The data shows that in the telecommunications sector, requirements of interoperability and of incorporating new features in the smartphone, the mechanism of standardization is appropriate. Standardization is a process whereby a group of patentees that combine as a package seek approval from SSOs. There are several SSOs who issue SEPs incorporating different technologies. A safe selection process of a SEP is to choose from a credible SSO such as the European Telecommunications Standard Institute (ETSI). As so much doubt has been raised on SEPs and standard setting process perhaps the Commission could consider hosting an open forum for discussion on SSOs and the process of selection before taking the final decision.Footnote 8
Fourthly, the hallmark of a SEP approved portfolio of patents is that FRAND condition is voluntary and ensures that for a licensee the technology is available to all firms who agree to pay. SEP and FRAND have resulted in the proliferation of smartphones both in terms of companies manufacturing them and in the new features that are advertised as each new model is introduced in the market. The booming market for smartphones which even a partial list shows more than two dozen manufacturersFootnote 9 is testimony to the fact that SEPs have facilitated the growth of smart phones and telecommunication systems.
Lastly, and of importance in an analysis of market power exerted by a dominant player is the choice available for selection of technology. Selecting a specific FRAND license being voluntary, there is no compulsion on phone manufacturers to select a particular SEP. It does however raise the question as to why the cases filed before the Commission have been on SEP and that of Ericsson. The counter arguments on this linear approach is the uncomfortable fact that all cases before the Commission are bunched in terms of time i.e. within a year suggesting a pattern of comradeship.
Discussions on SEPs and the process followed by SSOs are an important dimension of selecting a particular patent.Footnote 10 Credibility of an SSO is important as there are both public and private institutions including the emergent PAEs. In the present case ETSI is a well established SSO. The concern of the Commission is not on ETSI but on Clause 6 of ETSI which it is argued has been abused by Ericsson. Clause 6 as quoted by the Commission: ‘an IPR owner is required to give irrevocable written undertaking, that it is permitted to grant irrevocable license on FRAND terms, to be applied fairly and uniformly to similarly placed players.’Footnote 11
In adopting a legalistic approach the Commission placed emphasis on the last phrase of ‘fairly and uniformly’ as the phrase encapsulates abuse of dominant position stated as under Section 4(2). To quote: ‘… directly or indirectly, imposes unfair or discriminatory conditions in purchase or sale… …or in the price of purchase or sale of a good or service.’ Taking recourse to Clause 6 the Order suggests that owners of SEP are not in conformity with ‘fair, reasonable, and non-discriminatory’ in making royalty claims. Interpretation of the phrase is open to multiple interpretations.Footnote 12 Reference to Clause 6 and the allegations in the Orders necessitates an examination of ‘fair, reasonable, and non-discriminatory’ royalty payments.
Recent provocation by the Indian Cellular Association to mobile manufacturers to calibrate their allegations against SEP owners on royalty payments and the non-disclosure agreement cite violation of ‘fair and reasonable’ condition of FRAND. Claims of royalty claimed as excessive and inappropriate in terms of methodology suggests attempts to persuade the Government to declare SEPs as ‘non-essential’ placing it outside the framework of essential and standard, in a misplaced understanding of ‘essential’ in SEP. It is also a move that will hit the growth of smartphone manufacturers and the emergence of strong IPR standards within the country.Footnote 13
Does dominance lead to abuse seen in terms of royalty conditions? What is ‘fair and reasonable’ always provokes different responses. Interestingly arguments often made before the Commission not only in cases of SEP but across all cases of abuses relating to pricing clearly demonstrated an effort to define fair and reasonable from the perception of the informant and of uniformity irrespective of differences in the nature and characteristic of the product or on whether each price is a negotiated transacted amount. In this part the author will only emphasize upon few fallacies and misconceptions on pricing and royalty payments that have bothered her and calls for deeper analysis.Footnote 14
The commonplace interpretation of ‘fair and reasonable’ argued as uniform royalty for all licensees tends to ignore the critical point that a license is a negotiated document between two parties defined by what is offered and what is sought. A price so negotiated is fair and reasonable disputed on grounds that a SEP owner is dominant and the agreement is not fair as it is between two unequal parties. There are several loopholes in the argument of unequal bargaining strength with shades of populism. Firstly, firms manufacturing handsets are not exactly small. As per the information filed by one of the informants Micromax, by its own admission is the 12th largest handset manufacturer in the world.Footnote 15 Between a large domestic manufacturer and a large international SEP owner the situation is more akin to competing dominance than of unequal status at least in the Indian mobile and handset market. The issue devolves on who needs whom. Is it the patent owner or is it the patentee? Data on SEP technology for telecommunications showed several players vying for the market. The prevalence of competitive constraints balances the relationship in a negotiated settlement. Patent owners seek markets and generate funds by selling their patents. These funds cover investment in R&D vital to product development and innovation. To argue that a common (uniform) royalty rate be applicable to all seeking license is not a valid argument. Secondly, a competitive price is the rate at which a consumer satisfaction or marginal utility is met. It defines the value of a product (patent in this case) to the person seeking a license. Process of negotiation and the price settled reflects the value of the license in terms of the price fixed. There are different features that a phone incorporates and the choice of a specific patent is defined by the features that a phone manufacturer wishes to incorporate. Prevalence of competitive markets at the SEP technology and in the market for smartphones and other communication devices make for complexity of negotiations and royalty payments. To prove that royalty rates are reasonable and fair requires comparisons to be product specific, feature specific and time specific, provoking the question, how is the market to be defined—technology, implementer and consumer? And then to examine the strength of each market(s) in providing the requisite competitive constraint.
A negotiated settlement normally involves the rights of two parties but in the case of smartphones and telecommunication equipment the rights of consumer have to be considered by antitrust authorities. The rights of a patent owner to his IP and the incentive to keep innovating as against the right of the patentee or implementer whose right stated in the prima facie Order is assured under Clause 6 of the ETSI.Footnote 16 The Order points out that the patent owner has to grant irrevocable license to the following extent: ‘Manufacture, including the right to make or have made customized component and sub-systems to the licensee’s own design for use in manufacture, sell, lease, or otherwise dispose equipment so manufactured; repair, use or operate equipment’s; and use methods’.
Issuing of SEP licenses on FRAND terms enables the gains to be used by the implementer to benefit the consumer. Competition authorities concern should be with the consumers and not the implementers. Benefits of technology flows through the chain. How does one view the dynamic benefits of technology? How does one give a patent holder the right to his innovation? As stated in the Preamble of the Act, competition is to protect consumers. The argument put forth by Micromax and Intex in their filings with the Commission that consumers lose out on account of high royalty payments which result in higher costs is simplistic and tends to be an ‘accounts based approach’ towards pricing rather than an ‘economics based approach’ to pricing. The former is a methodology commonly used in cost based pricing schemes where all inputs plus a reasonable rate is added to arrive at a reasonable price. The arguments against royalty as a percentage of final selling price and for royalty pricing on the smallest saleable patent practicing component (SSPPC) proceeds on this logic and designated as ‘discriminatory’.Footnote 17 The argument that royalty rates affect the final price resulting in consumer harm is based on simplistic concept of pancaking of costs to arrive at the final costs. In a competitive market, prices of handsets and of smartphones are based on several factors—such as elasticity of demand; number of firms and availability of substitutes; business strategies that different firms adopt to increase sales etc. notwithstanding that royalty payments where SEP is concerned would impact in the same manner for all telecommunication equipment manufacturers.Footnote 18
It still leaves the question as to why the Order considered that charging of relevant fee on the total sale price was exorbitant and instead suggested royalty to be paid on the patented product or what is known as the SSPPC as the royalty base to determine a FRAND royalty. While arguments have been put forward for SSPPC it goes against the logic of standardization process. In fact, payment of royalty for each patent may result in a larger amount of royalty paid out and misses out on the importance of the basic intention of FRAND which is to determine a value of the entire portfolio.Footnote 19
Primarily and most importantly, there are several inputs and complementary products that are part of a mobile. In a standard they are all part of a package where the royalty payment is for the package. All of them have been harmonized to complement each other leading to what is commonly known as network effects. The standards setting process of SSO coordinate the process of a SEP. The value of a single license is enhanced by all the complementary features. They can only function if interoperable. Networks create value and fixing royalty as a percent of the final price is to price the patent at the value consumers’ perceive when they buy the product at a given price.Footnote 20
The recent Delhi HC judgement has brought to the forefront network economies and payment of royalty on the basis of total value associated with interoperability and complementarity of telecommunications systems rather than on the value of a single license. The court also noted that this was the method of fixing the base for royalty world over including US and China. The court also confirmed uniformity of approach after examining several licenses.Footnote 21 The importance of these developments to the benefit of consumers (primarily achieved through network effects of compatibility) was highlighted. The essence of FRAND royalty is of network economies.Footnote 22
The Commission in examining cases of ‘abuse of dominance’ prefers the ‘form-based approach’ rather than ‘effects-based approach’.Footnote 23 An ‘effects based approach’ would necessarily have to take into consideration the dynamics of market pricing as also the relevance of network economies. The concept of network economies did not find much favor during the prima facie Orders. In MCX-SX v NSE, network economies and the gains to consumers were overshadowed by concerns of predatory pricing and leveraging of a ‘dominant’ stock exchange. The prism of static analysis saw the Majority Order emphasizing in this case the importance of protecting competitors rather than competition.Footnote 24