The judiciary’s shadow over standard essential patents
Relevance: GS Paper II & III
Why in News?
India is facing a potential crisis due to technology companies using 'standard essential patents'(SEPs) against the telecom manufacturing sector. This could impact India's efforts to build a domestic cellular phone manufacturing industry. The judiciary has been primarily responsible for regulating SEPs but has often failed to address these issues effectively.
About Standard Essential Patents (SEPs):
- These are patents that cover technologies that are adopted by the industry as “standards”.
- For example, technologies such as CDMA, GSM, and LTE are all industry standards in the telecom sector.
- Such technological standards are especially important to ensure the interoperability of different brands of cellular phones manufactured by different companies.
- For example, once GSM was adopted as a standard, all manufacturers had to ensure that their handsets were compatible with GSM.
- Otherwise, there would be no demand for their phones.
- The process of setting standards in the technology sector is largely privatised and dominated by “standard setting organisations” (SSOs) run largely by private technology companies.
- Countries such as India, which has little innovation in the telecom sector, have very little influence over how standards are set or how SEPs are licensed.
Challenges surrounding Standard Essential Patents (SEPs):
- The companies that own the SEPs, gain enormously because every manufacturer of cellular phones has to licence the technological standards in question in order to survive in the market.
- The lack of alternatives also means that SEP owners can demand extortionary royalties or licensing terms from manufacturers that block competition.
- In economics, this is called the “patent holdup” problem. In theory, the SSOs are supposed to prevent such a scenario by requiring the owners of SEPs to licence their technologies at a fair, reasonable and non-discriminatory (FRAND) rate.
- In practice, this model of self-regulation by the technology industry has been marked with opacity and has failed rather spectacularly, as evidenced by the record fines that some of these SEP owners have had to pay worldwide for engaging in anti-competitive practices.
- The largest of these SEP owners, Qualcomm, has been fined $975 million by China (2015), $873 million by South Korea (2017), $774 million by Taiwan (2017), $1.2 billion (2018), and another $272 million (2019) by the European Commission.
- Not all these fines have been sustained on appeal, but they are useful indicators of how other countries have responded to the issue from a competition law perspective.
Case of Judicial lethargy and activism at Delhi High Court:
- In 2013, the Competition Commission of India (CCI), acting on a complaint by Micromax, began an investigation under the Competition Act into the issue of whether Ericsson abused its dominant position by demanding extortionate royalties for its SEPs. Ericsson challenged the power of the CCI to do so before the Delhi High Court on the grounds that the Patents Act vested the power to remedy an abuse of patents only with the Patent Office.
- The first round of litigation was resolved in favour of the CCI by a single judge on March 30, 2016.
- Ericsson then challenged this decision before the Delhi High Court's Division Bench, where it remained pending for an astounding seven years until a judgement was delivered against the CCI on July 13, 2023.
- The CCI has appealed against this decision to the Supreme Court of India, where the matter remains pending.
- As a result, India is the only major economy to not yet investigate the potentially abusive licensing practices of technology companies that own SEPs.
Issues with the stance:
- While the competition law issues remained mired in litigation, the Delhi High Court proceeded to hear lawsuits filed by Ericsson and other SEP owners against cellular phone manufacturers on whether the latter were infringing SEPs owned by the former and whether damages were payable.
- Ideally, the infringement lawsuits should have been stayed until the competition law issues were resolved.
- In most countries, the ordinary course of such litigation is for the courts to conduct a trial on the validity of the patents, whether there has been infringement, and, if so, the damages payable. These trials are complex and can take time.
- For example, one of the early lawsuits filed by Ericsson against Lava International took eight years to be decided in a remarkable 500-page judgement delivered recently by Justice Amit Bansal of the Delhi High Court.
- The problem, however, is the manner in which the Delhi High Court has granted “interim” remedies pending the conclusion of these long-winded trials.
- For the last decade, the Delhi High Court has short-circuited the entire process by granting a series of orders requiring manufacturers, many of them Indian companies, to “deposit” money with the court in order to continue manufacturing during the pendency of the trial.
- Such “deposit” orders, often amounting to crores of rupees before trial, are unprecedented in the history of commercial law for the simple reason that no provision in the law grants judges such powers.
- In addition to being unprecedented, these orders are also unfair to defendants because they deprive them of working capital (which is very expensive in India) for the entire duration of the trial (which can take up to eight years).
Consequences of judicial activism and delays in Delhi High Court:
- The Delhi High Court justified judicial activism by citing its inherent powers to do justice, a logic used in past activism measures like public interest litigation. This argument has been used to justify activism in the name of the oppressed and multinational corporations, highlighting the specious nature of the argument in the first place.
- This judicial activism and delays will negatively impact the government’s attempt to attract more investment in the manufacturing sector.
- The government has taken these measures, including paying manufacturers under the “production-linked incentives” scheme for manufacturing in India.
- It is worth questioning the rationale for putting money in the pockets of manufacturers while turning Nelson’s eye to the manner and amount of money that is being removed from the same pockets by the owners of SEPs.
- More pertinently, unlike manufacturers who are investing in India to create jobs, the owners of SEPs are only taking their money out of the country.
Way forward:
- It is time for the Indian government to intervene and implement measures to regulate SEPs before the judiciary further delays India’s manufacturing dreams. If it intervenes, India will not be an outlier.
- The European Parliament has already enacted one such set of measures to regulate SEPs.
Conclusion:
India arguably has a much stronger case to push for similar, if not stronger, regulatory measures since it has no say in how SEPs are selected by SSOs and is also compelled by international agreements to enforce the patents of foreign technology companies. The Indian government urgently needs to address SEP-related challenges and safeguard the country's manufacturing ambitions.
