Walking Down an un-FRANDLY Road, India Searches for Answers

Abstract

Statistics say India is world’s second largest telecommunications market. As the market swells so do the number of innovations and owing to the nature of this industry, an innovation demands combination of various patents more often than not. However, the act of standardization of innovations along with up-front investments required to design, develop, and market products compliant with a standard create the possibility for what has been termed a ‘patent holdup’. Accordingly the patent-holder-essential to implementation of a standard set by any standard-setting organizations (SSOs) is able to demand and obtain higher royalties than he would have been able to demand ‘but for’ inclusion of the SSOs technologies in the set standards. The distinct features predicating a holdup, such as the sheer number of the relevant patents, their fragmented ownership, the condition of strong complementary links in network economies means that patent holdup may arise out of a wide variety of licensing arrangements including fair, reasonable and non-discriminatory (FRAND) commitments administered by SSOs. As a response to the potential holdup problem (i.e., to ensure that the standard can be used at a reasonable cost), SSOs typically require that participants agree to license their standard-essential patents (SEPs) on fair, reasonable and non-discriminatory (FRAND) terms.

Indian jurisprudence is at a very nascent stage on FRAND licensing practices for standard essential patents even as the SEP holders get increasingly involved in legal battles concerning the ambiguity on appropriately defining the fair, the reasonable and the nondiscriminatory in the FRAND terms and how to determine a suitable royalty rate for an SEP or a cluster of SEPs. Not only the judiciary but also the SSOs have largely left the concerns unanswered for several reasons including them not wanting to be responsible for policing patent licensing terms. However, it is certain that the answers have important policy ramifications. If FRAND is defined in a manner that allows SEP holders to charge royalties that exceed the level appropriate for the patented technology, widespread adoption of standard and associated economic benefits may be under threat. On the contrary, if it is defined in a way that does not fittingly compensate an SEP holder for the value of the invention, it may prove a deterrent for current or prospective patent holders to participate in SSOs and coupled with a decreased incentive to innovate, this may lead to reduction in welfare.

Although the FRAND licensing theory is understood in broad contours, uncertainty arises from implementation of FRAND terms in practice; heavy dependence on facts of particular industries, licenses, technologies and negotiations make prediction of royalty rates and schedule difficult, if not impossible. Further complications arise with the application of theoretical notions of fairness, reasonableness and non-discrimination in resolving concrete disputes. Identifying criteria that are simultaneously fair, reasonable and non -discriminatory can be an illusive task for any decision-maker, as is observed in any peculiar legal battle. The suitable definition of FRAND and approaches for determining a FRAND royalty are a subject of litigation between SEP holders and product manufacturers.

This paper takes on the FRAND issue in the Indian context in a threefold manner with a doctrinal approach. Firstly, the domestic development of Intellectual Property Law has been intricately linked to political ideologies that inspire the incumbent governments and it is sought to inspect the political motivations and economic impact to arrive at a harmonious understanding of the current framework of FRAND licensing. Secondly, in light of recent judicial pronouncements this paper also tries to examine the potential effects on holders of telecommunications SEP portfolios in the domestic arena. It is felt that the myriad issues related to FRAND are even more challenging with just a handful cases interpreting and applying FRAND in comparison to the overwhelming majority of licensing agreements determined through bilateral negotiations doing away with the need of a dispute resolution process. Lastly, though there is growing convergence between the Patents Law and the relatively young Competition Law, the Indian FRAND cases reflect palpable tension both within and between the institutions. Institutional designs pose a challenge with a major anomaly in their choices on issues such as injunctions, patent scope and the determination of fair and reasonable royalties across multiple jurisdictions. The paper suggests modifications to increase the suitability of the Indian economy while maintaining the balance between public policy and competitive markets. 

The SSO-SEP-FRAND framework requires patentees to cross over and, as licensees, enter into license agreements with other patentees that own equally essential patents. Unfortunately, in today’s aggressive economy the result is often to fight licensing wars in court – after all, the underlying force is a patent, protected by the law and created to grant a limited monopoly to the patentee.