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ERICSSON'S LITIGATION STRATEGY: A MEANS TO AN END?

First posted on spicyip.com on 15.08.2015
Some time back Ericsson announced a settlement of its pending disputes with True Position and Samsung. In the announcements, in True Position, Ericsson claimed that it "[T]akes pride in its technical leadership in wireless standard setting activities and looks forward to continuing to take a leading role in future 3GPP standard setting, including for LTE-Advanced and future generations of wireless technology." In the Samsung matter, Ericsson claimed that it is, "[C]ommitted to licensing its standard-essential patents on fair, reasonable and non-discriminatory (FRAND) terms for the benefit of the industry. It believes that licensing according to FRAND principles strikes the appropriate balance between incentivizing companies to innovate and contribute technology to open standards and maintaining the overall royalty rates at a reasonable level to allow new entrants access to the market."

In my previous post, I had highlighted the pitfalls in portfolio licensing - and recommended a constituent - individual analysis of the portfolio.elements.  This post continues in the same direction and highlights further why it is necessary to do individual patent analysis.


Ericsson is currently being investigated by the Competition Commission of India in three parallel cases over multiple issues, one of which is that it uses the selling price of devices as the royalty base even if the relevant wireless industry standards are implemented in chipsets that sell at a fraction of the price of a smartphone or tablet. The other is use of a portfolio license that bundles SEPs with non-SEPs, even though there may or may not be a charge for non-SEPs. There could be a wide spectrum of reasons for it - and some of it may pertain to litigation strategy in different geographies.

Thankfully, one of Ericsson's director of core patent units, Gabriele Mohsler explains in one of his presentations at C5 Business - Hi Tech Patent Litigation and IP Strategies, the reasons that why Ericsson chooses to litigate not just SEPs but other patents as well, is to compel parties to come to negotiations.  It is perhaps not surprising that Ericsson's aim is not to get litigation to an end, but to get negotiations going.

It should not be to anyone's surprise that Ericsson uses its implementation patents to file patent infringement litigation which, in turn, is intended to pressure Ericsson’s opponents into acquiescing to Ericsson’s bargaining position regarding the terms of a license.  Whether or not the litigation is frivolous is anyone's guess!  Also, once implementation patents are injected into a litigation involving standard essential patents, it is but natural that there is a licensing terms are concluded for both.

It is anyone's guess whether or not this qualifies as a sharp litigation practice. I leave it to our readers to decide. 

Download the complete presentation from here:
mosler presentation.pdf 451 KB

ECJ ON SEP LICENSING – HUAWEI V. ZTE

SEP holders with huge portfolios many patents (SEPs) may find it exceedingly difficult (at least in Europe) to take legal action against parties for patent infringement after the European Court of Justice put the onus on them to offer fair licensing deals.  Given the multitude of wayward decisions in Indian courts on SEPs and FRAND, I am not sure whether there would be any impact of the decision.  However, it is my sincere hope that it does.

Readers would remember my last post where I tried to show the extra territorial reach of SEPs when used in portfolio licensing and tried to make a case against it.  The ECJ decisio

n does discuss this issue briefly - albeit in a different context.  Because this is breaking news, I am not making a detailed analysis of the judgment - that will come later - key are parts e extracted below.  My few comments:

SEP owners must provide specific details to prospective licensees on each SEP:

The ECJ's decision supports a prospective licensee’s right to know the specific infringement allegations of the SEP owner, i.e. a blanket portfolio demand can't be raised.  The demand must be quantifiable.  And an injunction is expressly ruled out if a SEP owner has not previously provided specific infringement information about the SEP, and also a FRAND license proposal for that SEP.  - it is a patent by patent discussion.

The judgment requires that the SEP owner give specific infringement information (by way of proper claim chart).  In this case as well, the court notes that neither invalidity or infringement has been established for the SEP in question, and it is open for a licensee to challenge such SEP on these grounds.

Accordingly, the proprietor of an SEP which considers that that SEP is the subject of an infringement cannot, without infringing Article 102 TFEU, bring an action for a prohibitory injunction or for the recall of products against the alleged infringer without notice or prior consultation with the alleged infringer, even if the SEP has already been used by the alleged infringer.

Prior to such proceedings, it is thus for the proprietor of the SEP in question, first, to alert the alleged infringer of the infringement complained about by designating that SEP and specifying the way in which it has been infringed.

Facts and issues present to the full court

Huawei Technologies, a multinational company active in the telecommunications sector, is the proprietor of, inter alia, the European patent registered under the reference EP 2 090 050 B 1, bearing the title ‘Method and apparatus of establishing a synchronisation signal in a communication system’, granted by the Federal Republic of Germany, a Contracting State of the EPC (‘patent EP 2 090 050 B 1’).  That patent was notified to ETSI on 4 March 2009 by Huawei Technologies as a patent essential to the ‘Long Term Evolution’ standard. At the same time, Huawei Technologies undertook to grant licences to third parties on FRAND terms.  The referring court states, in the order for reference, that that patent is essential to that standard, which means that anyone using the ‘Long Term Evolution’ standard inevitably uses the teaching of that patent.  Between November 2010 and the end of March 2011, Huawei Technologies and ZTE Corp., a company belonging to a multinational group active in the telecommunications sector and which markets, in Germany, products equipped with software linked to that standard, engaged in discussions concerning, inter alia, the infringement of patent EP 2 090 050 B 1 and the possibility of concluding a licence on FRAND terms in relation to those products.  Huawei Technologies indicated the amount which it considered to be a reasonable royalty. For its part, ZTE Corp. sought a cross-licensing agreement. However, no offer relating to a licensing agreement was finalised.  None the less, ZTE markets products that operate on the basis of the ‘Long Term Evolution’ standard, thus using patent EP 2 090 050 B 1, without paying a royalty to Huawei Technologies or exhaustively rendering an account to Huawei Technologies in respect of past acts of use.  On 28 April 2011, on the basis of Article 64 of the EPC and Paragraph 139 et seq. of the German Law on Patents, as amended most recently by Paragraph 13 of the Law of 24 November 2011, Huawei Technologies brought an action for infringement against ZTE before the referring court, seeking an injunction prohibiting the infringement, the rendering of accounts, the recall of products and an award of damages.

.....Thus, the referring court considers that the positions of the proprietor of an SEP and of the infringer ought not to make it possible for them to obtain excessively high royalties (a ‘hold-up’ situation) or excessively low royalties (a ‘reverse hold-up’ situation), respectively. For that reason, but also on the grounds of equality of treatment between the beneficiaries of licences for, and the infringers in relation to, a given product, the proprietor of the SEP ought to be able to bring an action for a prohibitory injunction. Indeed, the exercise of a statutory right cannot, in itself, constitute an abuse of a dominant position, for characterisation as such requires other criteria to be satisfied. For that reason, it is not satisfactory to adopt, as a criterion of such an abuse, the notion of the infringer’s ‘willingness to negotiate’, since this may give rise to numerous interpretations and provide the infringer with too wide a freedom of action. In any event, if such a notion is to be held to be relevant, certain qualitative and time requirements must be imposed in order to ensure that the applicant for the licence is acting in good faith. Accordingly, a properly formulated, acceptable, ‘unconditional’ request for a licence, containing all the provisions normally found in a licensing agreement, ought to be required to be submitted before the patent concerned is used. As regards, in particular, requests for a licence from operators which have already placed products using an SEP on the market, those operators must immediately comply with the obligations to render an account of use of that SEP and to pay the corresponding royalty. In addition, the referring court considers that an infringer ought, initially, to be able to provide security instead of paying the royalty directly to the proprietor of the SEP in question. The possibility of the applicant for a licence leaving the determination of a fair royalty amount to the proprietor must also be envisaged..............

In those circumstances, the Landgericht Düsseldorf decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:

{1)      Does the proprietor of [an SEP] which informs a standardisation body that it is willing to grant any third party a licence on [FRAND] terms abuse its dominant market position if it brings an action for an injunction against a patent infringer even though the infringer has declared that it is willing to negotiate concerning such a licence?  or 

Is an abuse of the dominant market position to be presumed only where the infringer has submitted to the proprietor of the [SEP] an acceptable, unconditional offer to conclude a licensing agreement which the patentee cannot refuse without unfairly impeding the infringer or breaching the prohibition of discrimination, and the infringer fulfils its contractual obligations for acts of use already performed in anticipation of the licence to be granted?

(2)      If abuse of a dominant market position is already to be presumed as a consequence of the infringer’s willingness to negotiate:

Does Article 102 TFEU lay down particular qualitative and/or time requirements in relation to the willingness to negotiate? In particular, can willingness to negotiate be presumed where the patent infringer has merely stated (orally) in a general way that it is prepared to enter into negotiations, or must the infringer already have entered into negotiations by, for example, submitting specific conditions upon which it is prepared to conclude a licensing agreement?

(3)      If the submission of an acceptable, unconditional offer to conclude a licensing agreement is a prerequisite for abuse of a dominant market position:

Does Article 102 TFEU lay down particular qualitative and/or time requirements in relation to that offer? Must the offer contain all the provisions which are normally included in licensing agreements in the field of technology in question? In particular, may the offer be made subject to the condition that the [SEP] is actually used and/or is shown to be valid?

(4)      If the fulfilment of the infringer’s obligations arising from the licence that is to be granted is a prerequisite for the abuse of a dominant market position:

Does Article 102 TFEU lay down particular requirements with regard to those acts of fulfilment? Is the infringer particularly required to render an account for past acts of use and/or to pay royalties? May an obligation to pay royalties be discharged, if necessary, by depositing a security?

(5)      Do the conditions under which the abuse of a dominant position by the proprietor of a[n SEP] is to be presumed apply also to an action on the ground of other claims (for rendering of accounts, recall of products, damages) arising from a patent infringement?’

......

  It is characterised, first, as the referring court has observed, by the fact that the patent at issue is essential to a standard established by a standardisation body, rendering its use indispensable to all competitors which envisage manufacturing products that comply with the standard to which it is linked.   That feature distinguishes SEPs from patents that are not essential to a standard and which normally allow third parties to manufacture competing products without recourse to the patent concerned and without compromising the essential functions of the product in question.

Secondly, the case in the main proceedings may be distinguished by the fact, as is apparent from paragraphs 15 to 17 and 22 of the present judgment, that the patent at issue obtained SEP status only in return for the proprietor’s irrevocable undertaking, given to the standardisation body in question, that it is prepared to grant licences on FRAND terms.

Although the proprietor of the essential patent at issue has the right to bring an action for a prohibitory injunction or for the recall of products, the fact that that patent has obtained SEP status means that its proprietor can prevent products manufactured by competitors from appearing or remaining on the market and, thereby, reserve to itself the manufacture of the products in question.

In those circumstances, and having regard to the fact that an undertaking to grant licences on FRAND terms creates legitimate expectations on the part of third parties that the proprietor of the SEP will in fact grant licences on such terms, a refusal by the proprietor of the SEP to grant a licence on those terms may, in principle, constitute an abuse within the meaning of Article 102 TFEU.

It follows that, having regard to the legitimate expectations created, the abusive nature of such a refusal may, in principle, be raised in defence to actions for a prohibitory injunction or for the recall of products. However, under Article 102 TFEU, the proprietor of the patent is obliged only to grant a licence on FRAND terms. In the case in the main proceedings, the parties are not in agreement as to what is required by FRAND terms in the circumstances of that case.

In such a situation, in order to prevent an action for a prohibitory injunction or for the recall of products from being regarded as abusive, the proprietor of an SEP must comply with conditions which seek to ensure a fair balance between the interests concerned.

In this connection, due account must be taken of the specific legal and factual circumstances in the case (see, to that effect, judgment in Post Danmark, C‑209/10, EU:C:2012:172, paragraph 26 and the case-law cited).

Thus, the need to enforce intellectual-property rights, covered by, inter alia, Directive 2004/48, which — in accordance with Article 17(2) of the Charter — provides for a range of legal remedies aimed at ensuring a high level of protection for intellectual-property rights in the internal market, and the right to effective judicial protection guaranteed by Article 47 of the Charter, comprising various elements, including the right of access to a tribunal, must be taken into consideration (see, to that effect, judgment in Otis and Others, C‑199/11, EU:C:2012:684, paragraph 48).

HOLDING / RULING

Article 102 TFEU must be interpreted as meaning that the proprietor of a patent essential to a standard established by a standardisation body, which has given an irrevocable undertaking to that body to grant a licence to third parties on fair, reasonable and non-discriminatory (‘FRAND’) terms, does not abuse its dominant position, within the meaning of that article, by bringing an action for infringement seeking an injunction prohibiting the infringement of its patent or seeking the recall of products for the manufacture of which that patent has been used, as long as:

–        prior to bringing that action, the proprietor has, first, alerted the alleged infringer of the infringement complained about by designating that patent and specifying the way in which it has been infringed, and, secondly, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, presented to that infringer a specific, written offer for a licence on such terms, specifying, in particular, the royalty and the way in which it is to be calculated, and

–        where the alleged infringer continues to use the patent in question, the alleged infringer has not diligently responded to that offer, in accordance with recognised commercial practices in the field and in good faith, this being a matter which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.

2.      Article 102 TFEU must be interpreted as not prohibiting, in circumstances such as those in the main proceedings, an undertaking in a dominant position and holding a patent essential to a standard established by a standardisation body, which has given an undertaking to the standardisation body to grant licences for that patent on FRAND terms, from bringing an action for infringement against the alleged infringer of its patent and seeking the rendering of accounts in relation to past acts of use of that patent or an award of damages in respect of those acts of use.

THE EXTRA-TERRITORIAL REACH OF (SE)PATENTS? THE CASE AGAINST SEP PORTFOLIO LICENSING

One of the first things that law students are taught is that among the various rights granted by a sovereign, patents too are territorial in nature.  Simply put, patents granted by India are valid in India, and not valid in United States (US) or Pakistan, etc. and vice versa.
Existing scholarship including case law in the US, focuses on the outbound impact of intellectual property rights (IPR), with patent laws being the focus of attention.  See, for example, US 35 USC § 271, and the related case law.  These studies have focused on  expansion and reach of high technology in foreign shores, and consequent violation of US IPR laws where the solution is to apply national IP laws on a case-by-case basis to conduct occurring abroad.

However, the focus in this article is to see whether patents that exist only in the United States, or in a few other countries but not in India, can have an extraterritorial reach, i.e. patents in one country / jurisdiction, can have a reach across national boundaries.  I show in this post that such a situation does exist, and Indian courts, perhaps are unwittingly giving explicit recognition to the foreign patents that are not registered in India.

Portfolio licensing -historical background

This situation exists mostly in high - technology domain where there is portfolio licensing and a portfolio rate is agreed upon.  It is used in semiconductor, telecommunications, high-tech advanced medical equipment, crude refinery equipment, etc.  However, wherever products are part of the licensing deal, patents value is subsumed within the price of the product.  This happens in all situations other than in telecommunication, and also partly in the telecommunications domain.  The ‘part situation’ exists in telecommunications industry at the base-station end where base-station and operations / maintenance services are procured by service providers.

In India, this situation can be seen in the relationship between Airtel, Reliance, etc. where both use services (operations, maintenance, billing) from Ericsson AB to give services to their customers. These services also include technical services that include standard essential patents (SEPs).

In the past it was comparatively easy as the players who owned SEPs had manufactured and sold mobile handsets.  So it was easy for Nokia, Ericsson, Alcatel Lucent, Motorola, Qualcomm, ZTE,  Huawei,  Nortel, etc. to conduct business.  The situation changed when entities gave up the mobile sales business altogether but went into a pure patent licensing model.  The licensing rates for the portfolios continued to be at the same rates at which these few entities had cross-licenses. So whatever was the arrangement that was settled between Party A and Party B who had patents and had mobile businesses, the similar arrangement rate was demanded from parties who did not have patents.

The initial contour of the problem starts to emerge - where parties who do not have patents get access to technology for the payment of a royalty fee, where the putative licensee had no say in determining royalty.

What is the Patent Portfolio

The patent portfolio is a strange phenomenon.  It continues to evolve based on addition of new patents, and expiration of old ones.  However, the royalty once fixed has historically remained static with provisions for re-negotiation once the end of licensing period is approaching. This issue was workable earlier as both parties had SEPs and could appropriately count and value them.  With the pure patent licensing (SEP) model, the situation is somewhat different as one party holds all the cards, and with it the entire negotiating power is skewed in the SEP licensor’s favour.  Till recently there was no court or competition law authority that made it mandatory for the licensor to disclose the entire patent portfolio listing.  However, the situation is now different where the Chinese Antitrust authority (NDRC) in the Qualcomm decision held that Qualcomm must disclose and provide a complete list of all patents in the portfolio.  The decision is although applicable in China, I see no reason why the logic can’t be used elsewhere.

Another aspect of the NDRC decision is that the portfolio rate is tied to the portfolio, and the decision holds that if new patents are added to the portfolio, it must be shown that they are of at least equal value to those expiring from the portfolio for the rate to be the same.

Patents in Patent Portfolio

When coming to the portfolio itself, the license is for patent families that pertain to the standard.  For example, see the patents families annexed to this Global patent license agreement (GPLA) between Ericsson and Wavecom.  There are other GPLAs as well: between InterDigital and LG (here); Intel and and NVIDIA (here); InterDigital and LG (here)  and Intel and AMD (here).

The Ericsson vs. Wavecom agreement is unique because it contains an exemplary list of Ericsson’s licensed patents. As it states, it is not a complete list but only an example list.  On further scrutiny, I note that most families do not list an Indian member or in some cases, even China is missed out.  It is these patent families, that do not have a member in one country, but are part of the portfolio that pose the question of extraterritorial reach of SEPs.

For almost all cases that I have seen at the patent office website, I note that not all patents that are filed / granted in the US, or Europe, not all of them are filed in India.  In fact, for some companies, the ratio is as low as 10% of the ones filed in the US/Europe.  The issue that emerges is that the portfolio licensing rate does not change in the same proportion.  What I am saying here is that if the portfolio size is say 50 % in India as compared to US, then why is it that the portfolio rate does not change from 4 % to 2%.  This is a clear example of extra-territorial reach.  Even if the patent is not filed in India, the licensor demands royalty for entire portfolio on the simple reason that “all SEPs are implemented in the device conforming to the standard” whether or not the SEPs are actually essential or not.

This is only part of the problem as the next question is that all patents (even in the same family) are not of the same scope.  In the diagram below, Country A issues a patent which is standard essential, and it is designated  as Essential A.  Similarly, Country B issues a patent from the same family as that of Essential A, and it is standard essential, and the patent is designated  as Essential B.

The scope of both is different because of the variation in the patent laws of countries A and B.  For example, some unique aspects are found in Indian patent law (section 3(d), 3(k), (3(m), etc.) that are not found in US patent law, and vice versa.

When the scope of both patents from the same family is different, how is it that they are able to command the same premium  when it comes to licensing, i.e. are treated the same when it comes to the portfolio value.  It could also happen that the Country A patent is standard essential but the Country B one is not.  It is these concerns that wash out the so called efficiencies in portfolio licensing.  These efficiencies include allowing firms operating within a patent thicket to use each other's patented technology without the risk of litigation, including the risk of facing an injunction that shuts down production. Elimination of risk, or "patent peace," in this situation cannot give firms the design freedom

This situation in the telecommunications industry also does not encourage long-term investments in both manufacturing capacity and R&D because the parties to the portfolio cross license fear "unforeseen, and unforeseeable, infringement actions."  These also do not reduce transaction costs to licensees as the licensee has got no technical prowess but only that of marketing - the licensee cannot start to value or determine whether a patent is standard essential or not.  For more details on these efficiencies, see this article from the DOJ.

In my personal opinion, the cases where Ericsson has filed lawsuits at the Delhi High Court against Micromax, Intex, Gionee, Xiaomi, Lava, etc. all have at least some element of extraterritorial overreach. It would be better for the general public as well as companies like Micromax, Intex, Lava, Xiaomi, etc. if the High Court considers these issues as well as these are not just competition law concerns, but issues that have to be addressed by the High Court.

CHINA RULES ON ADJUSTED ROYALTY BASE FOR SEP LICENSING

First posted on spicyip.com on 29.03.2015

Earlier this month the Chinese Anti-trust authority (NDRC) gave its decision in the Qualcomm matter involving Chinese Anti-Monopoly Law (AML).  This decision is a landmark decision where Qualcomm was found to have engaged in anti-competitive conduct relating to the licensing of standard essential patents (“SEPs”) for wireless communication technology and baseband chip sales.  The original decision is available here.  While a summary of the decision (based on Google translate) is also provided in this post, I have put in my comments in italics and I compare the approach taken by Indian courts / competition commission and the Chinese NDRC.  Image from here. Long post follows.

Highlights

The most important aspect of the decision is that the royalty base for (Qualcomm’s) SEPs is reduced to 65% of the device wholesale price, which mitigates the royalties at least to some extent (non-SEPs are not a part).  And the NDRC Decision does not require that royalties be based on the “smallest saleable component” (the chip), as some US Courts decided and the IEEE recommended.  The decision also does not Qualcomm to lower its portfolio royalty percentages, except if and to the extent patents expire without being replaced by new patents of equal value.

Compare this in the Indian context where the play is on percentages.  No Indian decision (all are interim) even discuss the issue of an appropriate royalty base.  Consider the following – if royalty % is imposed on the net selling price of a device, there is no relationship between the (SEP) patented technology and taxes, freight, shipping, packing, local levies & duties, accessories, dealer discounts, advertising etc.  All these must be discounted before applying the %.

It is interesting to note that just before the NDRC came out with the decision, the IEEE (a standard setting organization) issued a set of guidelines that encouraged imposing royalties for SEPs on the smallest saleable patent practicing unit or the SSPPU or simply put the chipset.  More interestingly, the Chinese authorities allowed the practice to charge on wholesale value of end product!!  (See our post on this here). This decision provides another different method on determining the royalty payable for use of SEPs.

ANALYSIS OF THE NDRC DECISION

1. Factors considered in determining Qualcomm’s dominance

In the decision, the NDRC defined four relevant markets: (i) the license market of SEPs for wireless communication technology, which is a collection of each independent license market constituted by each SEP held by Qualcomm, (ii) CDMA baseband chip market, (iii) WCDMA baseband chip market, and (iv) LTE baseband chip market. The NDRC found that Qualcomm had dominance in each of the above markets.

In determining Qualcomm’s dominant position in each of the relevant markets, the NDRC kept its focus on factors like market share, Qualcomm’s control over the relevant market, downstream customers’ reliance on Qualcomm’s technology/products and market entry barriers.

With respect to the license market for SEPs, the NDRC found that Qualcomm had 100% market share in the market, as it is the only holder of the SEPs.  This approach is the same as what is adopted in the Huawei v. InterDigital case which was decided by Guangdong High People’s Court in October 2013.  We had discussed the Huawei v. InterDigital on this blog here, and also the same as that taken by the Competition Commission of India in the information filed by both Micromax (discussed here) and Intex (here) where ownership of an SEP was taken to be a position of dominance, as no alternative source of the SEP was available. 

With respect to the baseband chip markets, the NDRC found that Qualcomm ranked 1st in the baseband chip markets during the period from 2007 to 2013. Qualcomm had 93.1% in CDMA baseband chip market, 53.9% in WCDMA baseband chip market, 96% in LTE baseband chip market. Based on the above data, the NDRC reasoned that Qualcomm had some control over the relevant markets considering its ability to maintain its leading position for such a long period of time. The NDRC determined that Qualcomm had dominant position in the WCDMA baseband chip market with 53.9% market share (a tab above 50%) and that there were other important market players, like MediaTek, Intel and Broadcom, holding market shares of 15.5%, 11.8% and 9.3% respectively. The NDRC reasoned that even though there were other players in the market, choices for downstream mobile device manufacturers were limited and Qualcomm’s chipsets had advantages over other products in respect of technology, functionality and brand.

  1. Licensing practices that violate the AML
Qualcomm was found to run afoul of Article 17(1) and 17(5) of the AML by engaging in three types of conducts, i.e. charging unfairly high royalties, tying SEPs with non-SEPs and imposing unfair conditions on the sale of baseband chips.  Each of these is dealt in greater detail below:

A. Unfairly High Royalties: The NDRC determined that Qualcomm charged unfairly high royalties based on the following three factors:  (i)  Qualcomm refused to disclose its patent list and included expired patents in its patent portfolio licensed to Chinese licensees; (Note that in the Indian context, the decisions issued so far do not indicate that Ericsson has disclosed any complete list of SEPs / patents to any of the parties. All lists have been ‘exemplary lists).  (ii) Qualcomm requested that Chinese licensees grant back their patents free of charge, and refused to deduct the value of such patents from royalty fees or to pay for such patents in other ways; and (iii) Qualcomm charged relatively high royalty fees and unreasonably used the net sale price of the whole mobile devices which incorporated its technology as the base for its royalty fees.  (This is the case here in India as well – It makes no sense to give royalties to a patentee for non-technical components which clearly have no impact or relationship with the patents.  Taxes, duties, levies, packaging, accessories, charger, ear phones, advertisement, dealer discounts, etc. have no relationship to the patent.)

Note that the factors listed above have been modified to suit the SEP fact scenario.  The factors listed in Article 11 of the NDRC’s Anti-Price Monopoly Provisions, provide that in determining unfairly high price, the factors that should be considered are: (i) whether the sales price of a product is noticeably higher than the price of other undertaking; (ii) when costs are stable, whether the sales price was raised beyond a normal range; and (iii) whether the level of price increase is noticeable higher than the increase in cost.  The considerations also differ from the ones taken into by the Huawei vs. InterDigital case, in which case the court emphasized on the relatively low royalties that InterDigital charged other mobile device manufactures, like Apple and Samsung.  Here, unlike the Huawei v. InterDigital case, the NDRC did not set a specific royalty rate for Qualcomm’s SEP licensing.  Qualcomm was allowed to propose new rates and make the rates as part of it’s commitments.

B. Calculation basis of royalties:  The decision may also be a significant relief to the SEP owners. This is because the decision maintains and allows charging a % on the selling price.  It has been a practice of the recent past that SEP royalties were on the net selling price or end product price.  The decision however, forbids setting a high royalty rate while using the net wholesale price of device as calculation basis at the same time. Following such order, Qualcomm has committed to charge royalty at wholesale price offset by a percentage (35%). The factors included: (i) Including expired patents in licensing package: The NDRC considered the Qualcomm’s failure or refusal to provide patent list and inclusion of expired patents in the package as unreasonable. Qualcomm argued that new patens continue to be added to the portfolio and therefore expired patents would not drag down the value of the license. However, the decision puts the onus on the patentee to prove the value of newly added patents in order to justify no change in the level of royalties. Otherwise adding new patents to the license package will not serve as a justification for including expired parents in the package while maintaining the royalties on the same level.

(ii) Patent grant-backs:  Like the US Anti-trust laws, the decision look at grant-back requirements under the rule of reason and determine that grant backs are not per se illegal.  Qualcomm’s grant back clause was questioned as it requires licensees to license their non-SEPs back and to waive their right to enforce patents free of charge.   The NDRC noted that Qualcomm could not deny the value of patents held by the licensees, and that such practice (if allowed) would impose restriction on competition through suppressing licensees’ innovation impetus and granting Qualcomm free-riding competitive advantages.tute

C. Tying:  Qualcomm’s practice of tying its SEPs with non-SEPs was found to be illegal. The concern here being forcing the licensees to license non-SEPs from Qualcomm will deprive any substitute technologies of the opportunity to compete with Qualcomm’s non-SEPs, and thus would eliminate or restrict the competition in the relevant markets.

D. Imposition of Unfair Conditions:  The NDRC found that Qualcomm abused its dominant position in the baseband chip markets by threatening to refuse selling baseband chips to Chinese enterprises if they did not sign patent license agreements containing unreasonable terms, and prohibiting the licensees from challenging such license agreements. Compare the situation with the Indian patent act that provides (section 140) that a such a clause (restriction to challenge patents/agreement) is void.

 

LIMITING ROYALTIES FOR SEPS TO ‘CLAIMED’ INVENTION

First posted on spicyip.com on 18.01.2015
In a decision issued by the US Federal Circuit that will have major repercussion on the evaluation models for standard essential patents (SEPs), the  court gave substantial guidelines for determining an appropriate royalty base on which a royalty figure may be applied. In VirnetX, Inc. v. Cisco Systems, Inc. (No. 2013-1489), the appeals court held that the district court had wrongly instructed the jury that in determining the royalty base for calculating damages, it should not use the value of the entire accused product unless “the product in question constitutes the smallest saleable unit containing the patented feature.”

This logic can be applied to the SEP / FRAND context in India by limiting royalty for a SEP to the claimed (and fully supported by the detailed description) invention.

The US Court clarified that the requirement that the patentee identify damages associated with the smallest salable unit is merely one step towards meeting the apportionment requirement, and where the smallest salable unit is a multi-component product with several non-infringing features unrelated to the patented feature, the patentee must do more to estimate what portion of the value of that product is attributable to the patented technology. This is extremely common to today’s smartphones and other high-tech. devices.

While the appeals court acknowledged this “may involve some degree of approximation and uncertainty,” a patentee must “apportion the royalty down to a reasonable estimate of the value of its claimed technology, or else establish that its patented technology drove demand for the entire product.”

The logic here fairly simple and it can be applied to the SEP /FRAND context in India by limiting royalty for a SEP to the claimed (and fully supported by the detailed description) invention.  Section 10, sub section 4 of the Indian Patents Act provides:

Section 10: Contents of complete specification

(4)Every complete specification shall—

(a) fully and particularly describe the invention and its operation or use and the method by which it is to be performed;

(b) disclose the best method of performing the invention which is known to the applicant and for which he is entitled to claim protection; and

(c) end with a claim or claims defining the scope of the invention for which protection is claimed;

Compare the language used in the Indian act with that of the US Act (MPEP Section 112):

…..(B) the claims must particularly point out and distinctly define the metes and bounds of the subject matter to be protected by the patent grant.

During prosecution, applicant has an opportunity and a duty to amend ambiguous claims to clearly and precisely define the metes and bounds of the claimed invention. The claim places the public on notice of the scope of the patentee’s right to exclude. See, e.g., Johnson & Johnston Assoc. Inc. v. R.E. Serv. Co., 285 F.3d 1046, 1052, (Fed. Cir. 2002) (en banc). Halliburton Energy Servs., Inc. v. M-I LLC, 514 F.3d 1244, 1255, 85 USPQ2d 1654, 1663 (Fed. Cir. 2008).

The above diagram (from a US patent) describes a real estate measuring tape using which ‘metes and bounds of measured property can be easily seen.  Accordingly, if a standard essential claim uses a term encoder (that is part of a baseband processing chip), then FRAND value of the patent is limited to that of encoder or a percentage basis of baseband processing chip.  If another SEP uses a system claim (user +network) type terminology, then the FRAND value of the patent from a user device provider must exclude the value of the network and is again limited to the baseband processing chipset.

If a patent claims a user device (a user equipment is the term used to describe a mobile phone) but in the description it is clear that the claims are performed at a single unit like a chipset, then again FRAND royalty could be limited to the percentage of chipset value only.