[By Rishita Chatterjee]
The author is a student of Jindal Global Law School, O.P Jindal Global University.
Part I: Introduction to India’s Contentious Affair with Standard Essential Patents
India’s digital economy is growing at an unseen scale, confirming that rapid technological innovation can have an impactful, lasting leapfrog effect, inducing economic growth even as physical infrastructure continues to lag. As the digital economy goes through this seismic shift, a pertinent question surfaces whether India is equipped for this growth. An important part in India’s digital economy toolbox is Industrial Internet of Things (‘IoT’) – a market that is to surge over 28 Billion USD by 2033 and consequently the connected vehicles market poised to become a USD 27 Billion industry by 2033. This transformation is enabled by a common language of standardized technologies like but not limited to 5G, LTE and Wi-Fi. The critical function of interoperability is safeguarded by a rather intricate framework of Standard Essential Patents (SEPs); however, the enforcement of these patents has proven to be a conundrum for both antitrust and patent regimes. Although not defined under the Patent Act, courts in India ensured robust discourse around it to ensure proper adjudication. In simple terms, a SEP is defined as a patent whose claim encompasses technology that is deemed “indispensable for the implementation of a technical standard”. This invites a very foundational legal tension. On one hand, the patent regime confers upon the patentee a statutory monopoly, including an “exclusionary right” to prevent third parties from utilising the patent. Conversely, the principles of antitrust law are designed to structure the exercise of market power derived from this status, ensuring that essential technology functions within a competitive market framework.
It is also crucial to recognise that Indian law and policy on SEPs has been forged almost exclusively in the crucible of telecommunication disputes, a market dominated by a handful of mobile phone giants as licensors and handset manufacturers as the primary licensees. This results in a legal framework tailored to the said industry, however implementing this in the industrial landscape of IoTs and the automative sector places the licensing model in a classic “square peg in a round hole” conundrum. This paper delves further into this problem, attempting to underscore policy implication, value propositions and the future of India’s regulatory role in the digital economy.
Part II: Does India have a ‘Legacy Framework’ for SEPs ?
The first leg of SEP litigation in India was dominated by a protracted legal battle between the Swedish telecom giant Ericsson and Indian handset maker Micromax and Intex. In response to SEP proprietors seeking compensation for investments primarily on R&D, Indian courts developed a distinctive equitable remedy of pro tem deposits, which orders a temporary and provisional financial arrangement pending the financial resolution of a dispute. The mechanism secures the patentee’s interest during litigation via a court mandated payment structure. The Delhi High Court pioneered these conditional injunctions, making relief contingent upon securing fair, reasonable and non-discriminatory (‘FRAND’) licensing fee. A reading of the initial Ericsson v Micromax decision shows that the judiciary favors to recognize the complementary, rather than the contradictory nature of the Patents Act, 1970 and the Competition Act, 2002, enabling the Competition Commission of India (‘CCI’) to launch investigations into alleged abuse of dominance by SEP holders. The case further highlights the remedies that are put forth by the respective statutes, while the Patent Act provides for in personam remedies (like compulsory licensing for specific party), the Competition Act provides for in rem remedies (such as market wide cease and desist orders, notably structural remedies).
A. Trouble in Paradise?
The balance in jurisprudence has been thrown into disarray. The landmark judgment by a Division Bench of the Delhi High Court pertaining to Ericsson and Nokia cases held that the Patents Act of 1970 constitutes a separate and distinct self-content law that effectively trumps the jurisdiction of the Competition Act of 2002 in SEP licensing transactions and the enforcement of patent rights. The judgment, appealable before the Supreme Court of India, has created unprecedented uncertainty. If upheld, it would considerably reduce the adjudicatory function of the CCI, thus challenging the ability of the antitrust regulator to police potentially anti-competitive licensing conduct by dominant SEP owners.
Looking back at the telecommunications conflict, arises a prevalent licensing pattern: the licensing of the end-product, that is, the mobile phone. This approach directly gave rise to the central, and contentious, disagreement regarding the proper royalty base. Two competing principles largely characterize this conflict. The Smallest Saleable Patent Practicing Unit (SSPPU) principle argues that a FRAND royalty must be determined based on the value of the smallest unit that utilizes the patented technology, e.g., the cellular chipset. Supporters of this approach, as established in seminal U.S. case law such as LaserDynamics v. Quanta Computer, argue that this approach avoids the patent owner from appropriating value associated with discrete innovations, branding, and features integrated in the final product. In contrast, the Entire Market Value Rule (EMVR), an approach frequently adopted by SEP owners, argues that the royalty should be derived from the entire retail value of the final device. Supporters of this approach found their position grounded in the argument that the standardized connectivity is the key feature driving the overall market value of the product and consumer demand.
Adopting the EMVR route, could potentially inflate end device costs, slowing mass adoption of crucial technologies like 5G. The SSPU principle aligns for India’s national objective of prioritizing widespread digital penetration, encouraging lower licensing costs, fostering affordability and accelerating the very technological integration essential for building infrastructure.
B. Bespoke or All-Purpose Competition: The Value Chain Conundrum
This legacy design, tailored to smartphone industry, is poorly suited for India’s digital future. A radical redesign of markets is the very first real issue. Telecom wars were a rather concentrated industry of a few dozen industry behemoths around the world. The IoT ecosystem continues to grow, beyond what the infrastructure can handle, and key applications are emerging industrial automation, smart city infrastructure and agriculture. Here the market structure is diverse made of thousands of possible Indian SMEs and large players like Rajasthan smart meter makers to Punjab agri-sensor makers. The inherent market imbalance indicates that most players do not have many assets or experience in sophisticated patent litigation. A second, and more involved, challenge arises from the problem of value attribution, a challenge that has been heavily discussed across both the paradigms of IoT and FRAND licensing. Perhaps a 5G patent portfolio makes a significant contribution to the core function and value of a USD 1000 smartphone. Yet, one must consider its relative value in a USD 20,000 connected car, where its value is one of many features, or in a USD 50 smart electricity meter, where its único function is the transfer of a small data packet daily.
The most critical and contentious issue for emerging connected industries is determining the appropriate point of licensing within a complex supply chain structure. And the classic chicken or egg here being – should the SEP license be negotiated “upstream” by the Tier 2 or Tier 3 component supplier who makes the connectivity module such as the telematic control unit or “downstream” by the Originial Equipment Manufacturer (‘OEM’) such as the vehicle company. The automative and IoT companies have varying perspectives, rooted in core supply chain practice. They primary contention is that they are buying functional component that should carry licenses for their intended use under the principle of patent exhaustion. Mandating every OEM to independently negotiate with dozens of SEP holders is ineffective, creates legal overhead and requires deviation from core competencies, thus, advocating for an upstream licensing system allowing them to purchase compliant, pre- licensed modules, fit for their core business. The automobile industry, currently flooded with connected vehicles face the “patent thicket” barrier, where numerous overlapping patents lead to “royalty stacking” making cumulative licensing fees prohibitively expensive. This very uncertainty deters innovation. New entrants, including Indian automobile manufacturers due to the asymmetry in negotiations face stifled growth, a roadblock in India’s aspiration to become a manufacturing hub.
Part III: Are We There Yet? The Future of Connected Automobiles
In conclusion, as we stand on the precipice of a new dynamic, complex and connected dawn of a new industrial age, led by interoperability. India stands at the crossroads. The economic and legal frameworks that regulate SEPs, primarily drawn from previous rather convoluted “smartphone” litigation, have not only proved to be inefficient, but a severe roadblock to the country innovation frontiers. The path forward cannot be developed from reactive, ad hoc legal measures leading to extended uncertainty. Instead, there is an imperative for the deliberate creation of a modern policy structure. That structure needs to be built on essential pillars of proactive leadership by a central organization, i.e., the Department for Promotion of Industry and Internal Trade (DPIIT), judicial embracement of a flexible “proportionality principle” in royalty determination to provide equity, and a systematic commitment to openness. Here, adjudicating authorities determine an aggregate royalty for all SEPs in a “standard”, and then apportion it based on the patent holder’s portfolio strength. This practice upholds the principle that royalties should reflets the patent’s actual contribution to the final product’s value. This commitment can be fostered through market-driven solutions such as patent pools, guided by proven models such as Sisvel’s Cellular IoT pool, and by close observation of international regulatory developments exemplified by the European Union’s proposed SEP Regulation.
Briefly, the choice is obvious. India can remain mired in a legal framework that inadvertently slows down its most promising industries, or it can choose a straightforward, pragmatic, and business-friendly way. By choosing the latter, India will not only safeguard its industrial policy but also establish an environment conducive for the next generation of indigenous innovation to take full hold, hence securing its status as a leader in the emerging world digital economy.