Recently, Ericsson approached the Delhi High Court, claiming that Micromax was violating several of its patents pertaining to 2G and 3G standards and wireless technology standards like GSM and EDGE when it imported certain mobile handsets – these handsets included series like the Funbook Talk, Canvas 2 and Ninja. On failure to negotiate acceptable licensing terms and conditions with Micromax even after 3 years, Ericsson approached the Delhi High Court and instituted a patent-infringement case against Micromax, claiming damages to the tune of Rs. 100 crores.

The irony of it all is that Ericsson no longer sells mobile phones. It transferred its mobile handsets business to a joint venture which is now wholly owned by Sony, and now deals exclusively in network infrastructure. However, it owns approximately 30,000 patents and has been on a spree to enforce its patents across the globe – besides Micromax, it has instituted similar litigation against Samsung (see here), ZTE (see here) and Acer (see here).

Patent infringement cases are expensive and can take a long time to be decided by court, so parties usually tend to explore options to settle by entering into licensing arrangements. In this case, since parties had not been able to arrive at a permanent licensing arrangement on commercial terms, the court requested them to enter into a temporary arrangement for licensing on Fair, Reasonable And Non-Discriminatory terms (‘FRAND’ terms) until it issues a final decision.

Unfortunately, talks for an interim arrangement to pay royalty on the basis of every handset that was imported failed too – so Ericsson requested an injunction on imports of such handsets from the court. Given that its business model involves generating revenues from licensing its communications standards-related technology, it is possible that Ericsson may have demanded extremely high rates. The High Court’s order (available here) does not mention what rate of royalty was acceptable to Ericsson, so we do not have a mechanism to evaluate whether it was actually fair or reasonable.

The injunctive relief granted by the court, however, has serious consequences for Micromax – Micromax cannot import the concerned handsets which allegedly violate Ericsson’s patent rights. Further, as per the court’s order, Ericsson can object to imports of handset consignments by Micromax. To ensure this, the court ordered customs authorities to notify Ericsson each time that Micromax imports handset consignments.

Indian law on patent licensing is still developing, and it could have gone either way for Ericsson – in another scenario, Ericsson could have been required to issue a license on FRAND to Micromax, since, in certain circumstances, courts may require licensing to a competitor, provided the patent pertains to a “market standard”.

Why should an innovator be forced to license patented technology on FRAND terms?

Under normal circumstances, a patent holder is free to license his patents on any terms he wishes. Thus, he is free to negotiate exorbitant rates of royalty, or refuse to license the technology altogether.

However, if the patented technology becomes a market standard, a court may require the innovator to license it to other players on fair, reasonable and non-discriminatory terms, since this is essential to ensure a level playing field. Such patents are called ‘Standard Essential Patents’. When is a technology considered as a market standard?

Consider a fast forward option in a DVD player as standard – a consumer will not be likely to buy a DVD player without this function. Such market standards also become essential to ensure inter-operability of products which is important from the perspective of both the consumers and the producers. Imagine that this option was patented by a specific company. What would happen if this company refused to license the technology to other DVD player manufacturers thereafter?

Technology standards can be developed by a company individually, or jointly by a group of businesses (for example, consider the Microsoft – Toshiba alliance to develop the HD DVD standard, or the USB Implementers Forum comprising, amongst others, Microsoft, Apple and Intel). When multiple businesses develop a standard jointly, they usually form a Standards Setting Body (SSB) or Standards Setting Organization (SSO), which adopts the standard once the development work has been completed.

The standard may or may not use patented technology – but what if it does? This is where it gets interesting. American courts have started requiring patent holders to license their technology to other market players, if it has become a market standard. Such license must be given on fair and reasonable terms which must be non-discriminatory (these terms are called FRAND terms in legal jargon). For example, if Samsung owned a market standard of a technology, it will not be allowed to charge LG and Micromax exceptionally high, or radically different rates of royalty.

If a standards setting organization has already adopted a particular standard which comprises of technology that one or more members have patented, then there is clear evidence that the technology pertains to a market standard. Courts will more readily ask such patent holders to license their technologies to other players.

Indian courts tried to follow a similar line in the Ericsson – Micromax case, but failed when the companies failed to arrive at an agreement. Also, this is a new area in India, so there is lack of advanced jurisprudence on this issue.

Does the requirement of licensing on FRAND terms harm innovation?

Normally, if you own a patent, you can license it on terms that are convenient for you. You are free to charge exorbitant royalties, so long as the licensee agrees to pay them, of course. However, if you own a patent which has become a market standard, you may be required to issue a license to other suppliers on fair and reasonable terms.

Does this harm innovation? Probably not – the patent owner should be able to make up for the revenues due to the universal use and scale on which the technology will be adopted, since it has become a market standard.

Written by Abhyudaya Agarwal, Co-Founder, iPleaders and Roopali Adlakha, student from NUJS Kolkata.

iPleaders conducts a diploma course in Entrepreneurship Administration and Business Laws with the objective of simplifying business law for entrepreneurs, managers, decision-makers, working professionals and lawyers, offered in collaboration with NUJS, Kolkata, one of the best law universities in India. Enrollments for the third batch of the course are now open.