A recent CCI order passed in a dispute between major telecommunication industry players, Ericsson and Micromax with regard to the allegedly abusive conduct of Ericsson against Micromax with respect to patent licensing brings to the fore certain important issues pertaining to competition law in the telecommunication and technology industry.
Ericsson as the holder of Standard Essential Patents (SEPs) for mobile communications related 2G, 3G, 4G and EDGE technologies, was required to license out the use of certain technologies to other manufacturers on fair, reasonable and non-discriminatory (FRAND) terms. Micromax alleged that Ericsson had violated its FRAND obligations by charging an unreasonably high royalty rate by basing them on the price of the final product (the mobile phone) instead of on the much lower value of the patented chipset used in the phone.
Innovation in technology today is based on a principle of standard-setting. The standard allows interoperability of products manufactured by different firms in addition to facilitating information sharing amongst users, thus enhancing product utility of products. The importance of this phenomenon to competition begins with the fact that firms compete to have their technologies included within the ambit of the standard when it is being developed. The patent that covers the chosen technology becomes essential (a SEP) because it must be used to comply with the agreed standard.
Once a standard is adopted and alternative technologies are eliminated from consideration, the values of SEPs related to that standard surge.This is because standard implementers must license SEPs and are at the SEP holders’ mercy. To prevent extraction of monopoly royalties and rents, standard-setting organisations (SSOs) typically require SEP holders to license their technologies on FRAND terms .
FRAND terms essentially seek to enforce a commitment not to deny a license for the patented technology to any producer and to charge royalties at rates that reflect only the inherent value of the technology and not the market power gained by virtue of the fact that the technology’s patents have become SEPs. In this case, Micromax alleged that the latter part of the FRAND term’s objectives was not fulfilled as an inflated royalty rate based on market power derived from the price of Micromax phones was charged by Ericsson when the SEP held by it was purely for the chipsets used in the handsets. This clearly amounts to an “abuse of dominance” . With regard to SEP licenses in general, such abuse could be carried out as in the Ericsson – Micromax dispute by charging excessive royalty based on final price of handsets thus discriminating between equally placed consumers (for example, since all Micromax handsets use the same chipset technology, a consumer who purchases a smartphone pays much more in royalty on the same technology than a consumer who purchases an ordinary phone since typically smartphones are priced higher than other phones. This is clearly discriminatory pricing which is forbidden by the Competition Act, 2002.
Other anti-competitive actions on the part of SEP holders include refusal by a SEP holder to deal with certain standard implementers such as manufacturers of the patented components or use of the SEP to force the licensing of another patent by tying the two together.
Ericsson v. Micromax case is the first example of the negligence of the IP challenges in telecom sector. Such IP infringements are being feared to start telecom wars in India . The dispute in itself has been of considerable significance because it marked the arrival of patent wars on the Indian shores, with similar feuds between tech giants including Samsung, Apple, Google and Microsoft already going in courtrooms around the world. Such restrictive behaviour by a SEP holder must be prevented as it not only has an obvious impact not the consumers on a day-to-day basis, but also affects technological innovation on a macroscopic level.
This post was authored by Pratik Ranjan Das, a second year student at the West Bengal National University of Juridical Sciences and member, Society for International Trade and Competition Law.
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