Standard Essential Patents (SEPs) and FRAND: A Delicate Balance in Innovation

28th September, 2024 - 11:42 am Categories: Patents 0 Comments

Introduction

Technologies like 5G, Wi-Fi and Bluetooth have become integral to daily life in today’s connected world and the standards that enable these technologies are vital. These standards ensure that devices and systems can communicate and work together seamlessly, regardless of the creator. However, the creation and implementation of these standards involve a complex interplay of intellectual property (IP), particularly in the area of Standard Essential Patents (SEPs) and the associated concept of FRAND (Fair, Reasonable, and Non-Discriminatory) licensing.

What Are Standard Essential Patents (SEPs)?

A Standard Essential Patent is a patent that protects an invention that must comply with a particular technical standard. These standards are often developed by standard development organizations (SDOs) and technology companies contribute towards the development of standards by bringing in technological innovations. For instance, consider the 5G mobile communication standard. To implement this standard, companies must use certain patented technologies that are necessary for 5G functionality. These patented technologies, which are necessary to adhere to the 5G standard, are SEPs.

 The Role of FRAND in SEP Licensing

FRAND refers to all the terms and conditions of the contract between the parties as well as their behaviour. FRAND is case specific and each licensing agreement or contract is in itself a unique case. SEP holders are required to commit to licensing their patents on FRAND terms.

Fair: The licensing terms should be equitable and not biased in favor of either party.

Reasonable: The licensing fees should reflect the value of the technology, considering the contribution it makes to the standard and the market.

Non-Discriminatory: The SEP holder should offer the same licensing terms to all licensees, preventing favoritism or exclusion.

FRAND commitments are designed to strike a balance between allowing patent holders to be fairly compensated for their innovations and ensuring that these innovations are accessible enough to foster widespread adoption and competition in the market.

Challenges

Although the concept of FRAND is straightforward in theory, its application in practice is often fraught with challenges. What is fair and reasonable can be subjective and would vary from context to context. This point of ambiguity has occasioned many disputes and litigations, particularly in industries where SEPs are common, like telecommunications and consumer electronics.

In making a determination over the reasonableness of a royalty rate, key issues of contention are bound to be evident. Most patent holders will argue for higher royalties, based on the amount put in research and development to make the patented technology. Implementers, on their side of defense, will argue for low rates of the same, citing reasons of cost reduction for consumers and enabling a broader scope of access to the market.

This, however, now opens another front for dispute: the potential for so-called “hold-up” or “hold-out.” Hold-up is when an SEP holder subsequently starts demanding commercially impracticable royalties, leveraging his essential patent against the parties. The opposite is hold-out, in which implementers may delay entering into a license in the hope of getting reduced rates or not paying at all.

FRAND in India

In the last two decades, standardization has contributed to increased efficiency and integration and has lowered cellular network costs as well as data charges by more than 90%, resulting in enormous customer benefits.

Telefonaktibolaget LM Ericsson (Ericsson), one of the largest telecommunications companies globally and a holder of numerous wireless patents, many of which are SEPs, filed a lawsuit against the Indian company Micromax. Ericsson accused Micromax of using its patented wireless technologies, including GSM, EDGE, and 3G, without paying the necessary royalties. After three years of unsuccessful negotiations, Ericsson sought compensation of one billion rupees and requested both an ex-parte and permanent injunction against Micromax. The Delhi High Court’s Single Judge issued an ex-parte interim injunction, which included provisions for customs officials to seize Micromax’s shipments. The court also required Micromax to deposit 1.25% to 2% of the sales price of the goods as a condition for their release.

In response, Micromax filed a complaint with the Competition Commission of India (CCI), accusing Ericsson of abusing its dominant position. Although Micromax later withdrew its complaint, the Delhi High Court clarified that the CCI could still pursue action against Ericsson for any potential abuse of its dominant market position. The CCI found that enforcing a confidentiality agreement and imposing discriminatory and excessive royalty rates constituted prima facie evidence of abuse of dominance under Section 4 of the Indian Competition Act. The CCI also objected to Ericsson’s restrictions that prevented licensees from resolving disputes within their own countries.

In 2016, the Department of Industrial Policy and Promotion (DIPP) took a significant step to raise awareness about SEPs and FRAND by releasing a discussion paper. The paper emphasized the need for clear FRAND and SEP regulations to promote technological innovation in India, aligning with the country’s legal framework. It recommended that royalty rates be based on the overall value of a component, rather than individual devices or inventions.

Conclusion

As technology continues to evolve and become more integral to every aspect of life, the importance of SEPs and FRAND will only grow. Policymakers, SDOs and industry stakeholders must continue to work together to refine and clarify the rules governing SEP licensing. This includes developing more transparent methodologies for determining FRAND terms and promoting dialogue between patent holders and implementers.

Ultimately, the goal is to maintain a system that encourages innovation while ensuring that the benefits of technological advancements are broadly shared. By finding a balance between the rights of SEP holders and the needs of implementers, we can continue to foster an environment where technology can thrive and bring about positive change on a global scale.

Author: Neha Vivek A, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

References

1. Telefonaktiebolaget Lm Ericsson. (Publ) vs Competition Commission of India and Another.
2. Licensing of SEPs and Emergence of FRAND: International and Indian Perspective, International Journal of Legal Science and Innovation, Vol. 2, Issue 3, 2020.