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How FRAND-ly are FRAND Commitments: A struggle between IP Laws and Competition

Law Policies.

Abstract
The threads of Competition Law and Intellectual Property laws are interwoven in an intricate web of legal rules,
which seek to balance the scope and achieve the objective of both the policies. We see that the spirit of IPR laws is
hurdled by Competition Law policies through the way of ‘Standard Essential Patent’ (SEP).

A SEP is a patent, which, through a licensing process, achieves the interoperability of our day to day technological
devices, such as, smart phones operating over 3G/4G networks, computers using Wi-Fi, or even the simple looking
ear phone playing music from MP3 devices. To achieve this interoperability there needs to be certain fixed
standards, so that all these different devices can work in synchronization with each other. That means the devices
typically need to comply with standards. These standards, in turn, may implicate hundreds or even thousands of
patents that cover parts of the technology that combine to make the devices work. The standard technology is
therefore controlled by a patent and is called a ‘Standard Essential Patent’. Once a technology is marked as the
standard, the market has to mandatorily follow the said standard and this in results, the owner of an SEP having a
superior bargaining position that can be used to extract exorbitant revenues which in turn disrupts the market
competition. To avoid any kind of disruptions in the market competition and to maintain the balance between the
IPR and Competition laws the SEP holders are permitted to license their patents only on ‘Fair, Reasonable and
Non-discriminatory’ terms, (FRAND). However, it is observed that there are no common standards with respect to
FRAND licensing terms and it varies from industry to industry and technology to technology.

Thus, the aim of this paper is to study existing regulatory authorities. Further, the paper will analyse the
complexities in existing FRAND terms and its effect on market competition.

In a liberal economy two segments always play a very dominant role, the first being consumer
protection and its welfare and the second being free trade, without any external interference. For the
trade to be free there are many factors, one of them being that market free from monopolies and no
abuse of dominance. Both, these things can be achieved when there is healthy competition in the
market on one hand and innovations on another. To protect market and consumer there is
Competition Laws and to encourage, support and protect innovation there is Intellectual Property
Laws (IPR). Competition law and Intellectual Property Rights (IPRs) policies are held together by
the economics of innovation and a complicated set of legal rules and policies that seek to balance
the scope and effect of each policy.1 They are bound together with thread of market economy and
innovation.

IPR grants protection to innovation it is a policy tool, to foster innovation, which in turn benefits
the consumers as they have better and new choices and at the same time, helps in economic

1
Alice Pham, “Competition Law and Intellectual Property Rights: Controlling Abuse or Abusing Control?” CUTS
International, Jaipur, India 2008.

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growth.2 IP rights, grant exclusive rights to the innovator, for a temporary period of time to
legitimately exclude, other parties from the benefits arising from new knowledge, and more
specifically from the commercial use of innovative products and processes based on that new
knowledge. In other words, innovators or IPRs holders are rewarded with a temporary monopoly,
by the law to recover the costs incurred in the research and innovation process and also to
encourage them for further research.3

On the other hand competition law, protects the market and is regarded as an essential
mechanism to curb market distortions,4 controlling anticompetitive practices, preventing
monopoly and abuse of dominance position,5 inducing optimum allocation of resources and
benefiting consumers with fair prices, wider choices and better qualities.6 Though under the
Competition Law of India under section 3 (5), IP Rights are exempted but it ensures that the
monopoly associated with IPRs, does not become detriment to competition policy.

The aim of the competition law is to control the exercise of the IPR within a reasonable limit, as
when IPR holder gets monopoly, the fear is increased that he might misuse his power, granted to
him by the exclusive rights on his innovation. The monopoly which comes with IPR, further
gives birth to the tussle, when its implementation gives rise to some competition concerns.

Though if we go further deeper in understanding both the laws, we come across one aspect, both
the laws, aims to protect consumer and help in economic growth, the only difference is that both
take different paths. One chose to restrict monopoly, whereas the other one promotes monopoly
through granting exclusive rights. Indeed, the relationship between IPRs and competition law has
been a complex and widely debated one. And, it won’t be wrong to suggest that IPR and
Competition are in an unhappy marriage. It is not just one of balances between conflicting or

2
William Fisher, “Theories of Intellectual Property”, Harvard Law Education, Available at
http//:www.law.harvard.edu/faculty/fisher/iptheory (accessed on 15th July 2018).
3
K. D Raju, “The Inevitable Connection between Intellectual Property and Competition Law: Emerging
Jurisprudence and Lessons for India”, Journal of Intellectual Property Rights, Vol. 18, 2013, pp. 111-122.
4
Preamble of Competition Act, 2002.
5
Section 4 of the Competition Act, 2002.
6
Richard Whish, Competition Law, London, Oxford University Press, 2012, pp. 25

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complementary systems/principles, but also one of different levels of market regulation as well.7 A
challenge for both policies is to find the proper balance of competition and innovation protection.

With the change in market tradition and economic liberalisation, the world is witnessing a drastic
change resulting of globalisation, as stated by Thomas Friedman, ‘the world is flat now’. To keep
the pace of globalisation going, new invention and advancement of technology becomes a
necessity. And with this comes new and complex legal and economic issues. The present paper
will discuss the interface between IPR policies and competition law with respect to Standard
Essential Patents (SEP) and Fair, Reasonable and Non Discriminatory (FRAND) terms. The
paper will try to analyse as how friendly are the FRAND terms and how SEP undermines the
competition law policies, the paper will also study the current Indian jurisprudence with respect
to SEP and FRAND.

The conflict between competition law policies and IPR policies in general is dealt on case to case
basis as for example; the patent law in general does not provide any precise criteria or terms and
conditions to be complied when licensing a technology. Now, when we talk about SEP the
situation becomes little complex and tricky, as once a standard is set, the market has to
compulsorily follow the said standard and the SEP holder has to grant the licence to any
implementer, who is willing to and is able to fulfil the FRAND terms.

The question now arises as to why we need standard in a technology? With, the advancement in
the technology, new inventions are a necessity and hence it becomes important, that there are
certain technical standards, to ensure that there is a consistency in the quality of the product and
is within the reach of the consumer. In this technology driven society, our life today is ruled by
technological devices, smart phones operating over 3G/4G networks, computers using Wi-Fi, or
even the simple looking ear phone playing music from MP3 devices.8 All these devices are
dependent on each other to function, as one cannot function without other, this mean
interoperability of one technology over the other. Now, to achieve this interoperability there
needs to be certain fixed standards, so that all these different devices can work in

7
Gustavo Ghidini, Intellectual Property and Competition Law: The Innovation Nexus, Massachusetts, Edward Elgar
Publishing Ltd, 2006.
8
Jeffrey I. D. Lewis, “What Is “FRAND” All About? The Licensing Of Patents Essential to an Accepted Standard”,
Cardozo Law, Benjamin N. Cardozo School of Law, Yeshiva University, 2014, Available at, www.cardozo.yu.edu
(accessed on 25th July 2018).

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synchronization with each other. This means the devices typically need to comply with
standards, i.e., protocols by which devices communicate with each other to achieve their
functionality. These standards, in turn, may implicate hundreds or even thousands of patents that
cover parts of the technology that combine to make the devices work.9

The standard technology or the part of that technology is controlled by the patent and is called a
‘Standard Essential Patent’ (SEP). Washington District Court in Microsoft Corp. v. Motorola
Mobility, Inc.10 defined SEP as “A given patent is essential, to a standard if use of the standard
requires infringement of the patent, even if acceptable alternatives of that patent could have been
written into the standard." A patent is also essential “if the patent only reads onto an optional
portion of the standard.” Thus, it is impossible to manufacture standard-compliant products
without using technologies covered by one or more SEPs.

As these standards are vital, to the technologically dominated world, at the same time they pose a
great difficulty in patent-licensing. Once a technology is marked as the standard, the market has
to mandatorily follow the said standard and this in results, the owner of an SEP having a superior
bargaining position, that can be used to extract exorbitant revenues based on the value of the
standard rather than the underlying SEP.11

The standards can be set because of the usage customs, a particular technology which is globally
accepted by the consumers and is in high demand, can be said a standard product, it is also
known as de-facto standard for example Adobe PDF has become a de-facto standard. Then is de-
jure standards, set by ‘Standard Setting Organisations,’ (SSO) entrusted with the responsibility of
monitoring the interactions, between competing industries, arriving at the appropriate technical
standards, ensuring transparency and inclusive decision making at every stage. 12 The Institute of
Electrical and Electronic Engineers (IEEE) and International Telecommunications Union (ITU)
are major Standard Setting Organisation in mobile and internet connectivity areas. In India
SSO’s such as Telecom Standards Development Society of India (TSDSI) and Telecom
Engineering Centre (TEC) plays an important role in the development of standards for telecom

9
Ibid.
10
Microsoft Corp. V. Motorola, Inc., Motorola Mobility, Inc., and gen. Instrument Corp. 104 U.S.P.Q.2d 2000
11
Roger G. Brooks and Damien Geradin, “Interpreting and Enforcing the Voluntary FRAND Commitment”, Social
Science Research Network, 2010 Available at https://papers.ssrn.com (accessed on 12th July 2018).
12
Raghavi Viswanath, “Demystifying the FRAND Regime: The Interplay of Competition and Intellectual Property”,
Journal of Intellectual Property Rights, Vol 21, 2016, pp. 89-95.

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equipment and services. There is also a private SSO known as the Development Organisation of
Standards for Telecommunications in India (DOSTI).

The work of the SSO’s are to select, from a wide variety of technology, which can give the same
results, generally the SSO’s follow three conditions for a patent or the technology to become a
SEP, i.e (i) it is a set of technical specifications, (ii) these technical specifications provide a
common design and (iii) the common design provided may be a product or a process13. These
industry standards ensure interoperability and compatibility of products from multiple vendors
who are often competitors of each other. This increase consumer choices with lower cost and
convenience. At the same time SEP act as a barrier to trade14 as once a technology is chosen and
selected as the ‘standard’, the bargaining power of the SEP-holder increases and the SEP holder
gets an absolute monopoly in the market, as there is no alternative for the same.15 Thus it can be
said that the consequences of SEP’s on the market competition cannot be ignored.

To avoid any kind of disruptions in the market competition and to maintain the balance betwee
the IPR and Competition laws the SEP holders are permitted to license their patents only on
‘Fair, Reasonable and Non-discriminatory’ terms, (FRAND) the responsibility of SSO’s is that
the licensing agreements are negotiated on FRAND terms.16 The FRAND requirement facilitates
widespread use of the standard and insures that each SEP owner benefits from use of the patent,
without gaining an unfair bargaining advantage.

FRAND licensing system is introduced, so that the SEP holder is bound by their commitments,
in providing the technology at fair and reasonable terms, without any discrimination and not to
create any obstruction, in the technological development.17 However, there are no common
standards with respect to FRAND licensing terms and it varies from industry to industry and
technology to technology. Hence, there is a considerable dispute, regarding the objectives behind
the FRAND commitments and their effect on the IPR regime as well as competition regime.

13
Domien Geradin & Miguel Rato, Can Standard-Setting lead to Exploitive Abuse? A Dissonant view on Patent
Hold-up, Royalty-stacking and the meaning of FRAND, 3 Eur Competition (2007)
14
Ibid.
15
Ibid.
16
Mark A. Lemley and Carl Shapiro, “A Simple Approach To Setting Reasonable Royalties for Standard Essential
Patents”, Berkeley Technology Law Journal, Vol.28, 2013, pp. 1135-1166.
17
Rashmi Singh and Pabitra Dutta, “Standard Essential Patents and FRAND litigation”, Law Mantra International
Monthly Journal, Vol 2, 2015, Available at, www.Journal.lawmantra.co.in (accessed on 22nd July 2018).

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The Standard Setting Organisations, which are entrusted with the task of examining and setting
the standard, have the duty to examine in detail, the standard and its implications on the market
and to call its members, to disclose every detail of the patent they own and they wanted to
establish as standard.18 As once the ‘industry’ standard is adopted the alternative to technology is
eliminated.

To maintain the balance, between the IPR and Competition law policies, the SSO’s demand their
members to grant SEP licenses on ‘Fair, Reasonable and Non-discriminatory terms’ (FRAND).
The Objective of FRAND terms is to ensure easy availability of the standard and that each SEP
owner benefits, from use of the patent without gaining an unfair bargaining advantage in the
market. As the term FRAND has not been defined by SSOs; it depends upon the nature of the
transactions between the SEP holder (“licensor”) and the SEP implementer (“licensee”).

However, the problem is to understand the exact meaning of FRAND, the vague nature of
FRAND terms and lack of set principles to determine them, the licensing negotiations between
the SEP holder and SEP implementer might not reach a consensus and such a situation has led to
a number of patent litigations across the world. The term, ‘Fair, Reasonable and Non-
discriminatory’ have no definite meaning and are not backed by any kind of statute, this makes it
difficult to implement in its true sense. The other problem is that FRAND commitments are
purely contractual and hence there is no regulation binding FRAND obligation, the role of SSO’s
is limited just in setting a standard and to stay out of the FRAND terms negotiations among the
parties, this results in the difficulty of reaching on the consensus.

The core area of litigation around SEP and FRAND is always centred on the issue of determining
the FRAND terms and royalty rates. The major cause of concern is that no fix standard has been
adopted by the court to determine the FRAND terms. The SSO’s have already made it clear that
their duty is just to set a standard and not beyond that and it’s the duty of the members to grant
license on FRAND terms.

18
International Telecommunication Union, “Understanding Patents, Competition and Standardisation in
Interconnected World”, 2014, Available at www.itu.int/en/ITU-T/ipr/Pages/Understanding-patents,-competition-
and-standardisation-in-an-interconnected-world (accessed on 26th July 2018).

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As the FRAND terms are not formally defined, this leads to some anti-competition issues. One
of the major problems, is of ‘Patent Hold-up’ Microsoft Corp. v. Motorola Mobility, Inc.19
explained that the “ability of a holder of a SEP to demand more than the value of its patented
technology and to attempt to capture the value of the standard itself is referred to as patent ‘hold-
up’." i.e. the owner of the SEP demands higher royalty, which he would not have demanded, if
the patent was not set as an standard, though this is against the FRAND commitments, but due to
the vague nature of FRAND, it gives enough room, to the owner of the SEP, to indulge in such
practices. The owner in such cases binds the licensee by a non-disclosure agreement, which
restrains the other licensees, to have the knowledge of the royalty rates imposed on such previous
agreements; this again is the misuse of the bargaining power i.e. equality of beneficiary and is
against the FRAND commitments.

The other issue in SEP and FRAND agreement is of Patent ambush i.e. when the Patent owner
does not disclose all about the patent and once the patent is promulgated as a standard, the SEP
holder files the case of patent infringement. The other issue which directly affects the consumer
is Royalty Stacking i.e. when the licensee has to pay royalty to different SEP holders on the
different component of same multi component product, the best example would be a
Smartphone. This results in higher royalty leading the royalties to exceed the total product price
and results in the distortion of competition.

The other important issue with respect to royalties is as to what should be the criteria for
determining the Royalty rates. It should be on the complete product as demanded by the SEP
holder or it should be for the component which is patented also known as the ‘smallest sealable
patent practicing component’ (SSPPC) as claimed by the licensee.20 The European
Commission’s in Rambus case has clearly stated, that the “royalty shall be determined on the
basis of the price of the individually sold chip and not of the end-product. If they are
incorporated into other products, the individual chip price remains determinative.”21

19
Supra Note, 10
20
Department of Industrial Policy and Promotion Ministry of Commerce & Industry, “Discussion Paper on Standard
Essential Patent and Their Availability on FRAND Terms”, 2016, Available at www.dipp.nic.in/discussion-paper-
standard-essential-patents-and-their-availability-frand (accessed on 26th July 2018).
21
Rambus, COMP/38.636, Eur. Comm’n, [2010] OJ C30/17

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The other complex issue which needs attention is the jurisdictional aspect in cases of FRAND
disputes, as the FRAND agreements are purely contractual in nature, but having infringement of
patent and abuse of dominance position as the core issue, which are the domain of IPR and
competition law respectively. Further, there is issue that whether the courts should grant
injunctions on the FRAND encumbered litigations as this can be used as a tool by the SEP holder
to earn supra royalties and create the problem of patent hold-up.22

To understand these issues we have to go lengths, as discussed above the SSO’s are responsible
for declaring a patent as standards, to declare a standard the important element is that patent
holder to voluntarily disclose his SEP, once declared it can only be licensed on FRAND terms,
but there are instances, that SEP holder with some ulterior motive and to gain higher profits have
not disclose their patents and as a result it has impacted the free market, this results, demand
royalty and infringement suits, the best example will Rambus Inc. Case23

The most litigated issue in SEP and FRAND disputes, is the basis of FRAND terms, as it’s
purely a contractual obligation and what can be fair for the SEP holder will be unfair for the SEP
implementer. Though certain common principles in past been emerged, but it lacks a uniform
implementation and regulation, and as the courts deal the disputes on case to case basis, this
leaves room for further disparities and no fix standard can be ascertained. It has been observed
that SEP holder use injunctive relief as a tool to maximise their royalty. The same was observed
in Samsung, Apple case

Though FRAND and SEP are relatively new to India, but being the second largest
telecommunication market, it is urgently required that India should evolve its IPR and
Competition Law policies, in sync with these issues. As already injunctions suit dealing with
FRAND terms and SEP are pending with Delhi High Court, where the court have already passed
injunction orders in favour of SEP holder, clearly favouring the patent holder, the court not only
granted injunctive relief it also ordered to pay heavy penalties. Now, if we understand the SEP
litigation in India and in other countries, we can observe the domestic manufactures are very

22
In most of the FRAND disputes the SEP holders file an injunction suit, demanding a stay order and damages for
the alleged patent infringement. It had been observed by anti-trust organisations, that SEP holders use injunction suit
as an to extort higher royalties from the manufactures and this results in Patent Hold-up
23
John E. Matheson, Patents and Standards FRAND Challenges for India’s ICT Sector, Spicyip, Discussion paper
series, Paper No. 201401 (accessed on 25th July 2018)

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small in terms of business and they cannot afford to go into a long drown patent battle, as this
becomes a very tricky situation for them either to opt for a long litigation or to reconcile and
except the demands of the SEP holder. Further, the court have failed to address the Competition
Commission concerns adequately. As the dynamics of Indian mobile market is different, where a
large multinational SEP holder is against the smaller SEP implementer. These can leave a
negative mark on the market.

India is still young in the telecom sector, and this will be a right time to take some steps in the
right direction and can learn from the other part of the world, as to how they are trying to deal
with this issue. There is need of Standard Setting Organisation in India, having international
presence and observing such issues and trying to draw a balanced SEP and FRAND policy by
taking into account the current ongoing litigation. The courts should refrain from granting ex-
parte injunctive relief to the SEP holders as the same can be used to coerce the SEP implementer.
The present IPR laws and Competition policies are insufficient to deal this issue and the same
needs to make to cater these issues.

Without regulatory framework for the working of the FRAND and SEP it’s difficult to achieve
the objectives of FRAND terms and SEP’s as both aims at fostering innovation and consumer
welfare. Thus there is a need to study, the issue of Standard Essential patents and the role of
FRAND commitments, in maintaining the balance between the competition laws and IPR laws.