By: Diya Parekh and Diya Parvati
Introduction
Patent Laws and Competition Laws, can be considered two sides of the same coin where one aims to promote innovation by providing exclusivity in rights the other protects market efficiency by preventing abuse of dominant market behaviour. If one is empowering the other is limiting thus the tension between the two laws is inherent. At present the debate between the two laws has resurfaced around the anticompetitive tendencies of Standard Essential Patents (‘SEPs’).
SEPs are those patents that are integral for the interoperability of ‘common technology standards’. Standardization of technology is a voluntary process where in a number of market players reach a consensus on setting some technology to be a standard under the support of a Standard Setting Organization. Once a patent is declared as a SEP, it faces no competition from other patents until that patent becomes obsolete in view of other new technologies/inventions. It is this feature of an SEP that also separates it from a regular patent, and thereby gives rise to competition concerns. The exclusivity and dominant power that is given to an SEP holder creates scope for abuse there by falling within the domain of antitrust practices.
The present essay critically examines the recent judgement passed by the Delhi High Court where it adjudicates upon this conflicting jurisdiction of patents law and competition law where by it provides exclusive jurisdiction to patent laws on maters pertaining to SEPs. The ruling fails to take into consideration the gravity of an abuse of dominant position on part of a patent holder, and the implications it may have on the healthy competitive environment of a relevant market.
The essay debunks the judgement, by analysing various judgements and laws by placing its foundation on a law and economic model of SEPs. The essay aims to establish the jurisdiction of competition laws in matters pertaining to SEPs and recommends a complementary coherence between the two laws.
The Recent Delhi High Court Judgement, a blind eye to the CCI.
The forlonged tussle between Micromax and Ericsson as enumerated in the case of Telefonaktiebolaget LM Ericsson v. Competition Commission of India, 2014[1] has contributed significantly to the evolution of Indian jurisprudence concerning the jurisdictional overlap between Patents Act[2] and Competition Law[3]. The issue emerges around the possible anti – competitive effects which may arise by the existence of monopolistic power in the hands of SEP holders and the abuse of such a dominant position.
Ericsson was a parent company based in Sweden and one of the world’s largest telecommunication companies whose patent portfolio had about 400 SEPs for mobile communication. Micromax on the other hand was a mobile handset manufacturer based in India. The conflict between the two arose when Micromax alleged that Ericsson was demanding unfair, discriminatory and exorbitant royalty for its patents concerning GSM technology, which Micromax was accused of infringing upon. The conflict resulted in two parallel legal proceedings, Ericsson initiated a civil lawsuit with the Delhi High Court, while Micromax lodged a complaint with the Competition Commission of India.
The Patents Act, within its legislation provides for a remedy of permanent licensing of patented technology against abuse of dominant position and anti-competitive conduct of patent holders under Chapter XVI[4] of the Patents Act. While the Competition Act, deals particularly with the determination and safeguarding of the markets of the country against anti-competitive practices there by ensuring freedom of trade and market accessibility[5].
This contextual foundation set the stage for the recent ruling by the Delhi High Court which shed light on the implications of the issuance of a patent in India, while examining anti-competitive exercise of power by the patent holders. It was to be decided if such matters fall within the framework of the Competition Act, 2002 or the Patents Act. The Delhi High Court ruling, tipped the scales of the present debate towards the jurisdictional exclusivity of the Patents Act. The High Court quashed the on-going proceedings with the Competition Commission of India for want of power and further held the Patents Act to be a special law in matters concerning patents and hence must take precedence over the Competition Act which is a general law.
By way of the present essay the authors try to debunk this stance of the Delhi High Court by critically challenging the exclusive jurisdiction that is provided to the Patents Act. The authors reflect upon the contours of the present ‘SEP hold up’ dynamic and the implications of the same to come to the conclusion that the intervention of Competition Law is not only inevitable but also absolutely necessary.
Unregulated SEP rights, a law and economic perspective.
The preamble of the Competition Act enumerates the clear intention of the drafters of the Act. It provides for the economic development of the country by preventing practices that have an adverse effect on competition, thereby promoting and sustaining competition in markets by protecting the interests of all participants of the market including consumer welfare while ensuring freedom of trade. By allowing SEP holders to abuse its dominant position with respect to a particular technology not only contradicts the goals that the Competition Act strives to eliminate but also stands in contradiction to various provisions of the act.
To better analyse the contention of the authors, the following economic model has been graphically depicted here with.
The above model, provides for an ideal relevant market[6] of the ‘GSM’ technology, which is a standard technology, whose SEP was held by Ericsson. This made Ericsson a dominant enterprise in the said relevant market. The premise of this market is on the non-substitutability of the SEP, thereby the ability of a company or enterprise to engage in products that require the GSM technology, is solely dependent upon its accessibility or non-accessibility to the SEP held by Ericsson. The abuse of this market power of SEP holders is seen in the exorbitant, discriminatory and unfair royalties imposed on licensing the patents to other market players at prices that are unaffordable and unfair thereby making the SEP inaccessible to some.
The curve denoted ‘D’ is a Demand Curve depicting the demand for the GSM technology, across multiple market players. The ‘Y’ axis depicts the changing price of the SEP based on the royalties imposed by the SEP holders. The ‘X’ axis showcases the heterogeneity of multiple market players in the present market, where ‘B’ stands for bigger enterprises that have a higher ability to use the patent at varying price levels, ‘M’ stands for middle enterprises that have a lower ability to take benefit of the patent at varying price level than the bigger companies but a higher ability than the smaller enterprises. Finally, ‘S’ stands for small enterprises that cannot afford to benefit from the patents at varying price levels. P1 denotes the price of SEP set by the SEP holder, without abuse of market dominance in a fair, non-discriminatory and affordable manner. The shaded red part depicts the consumer welfare in this particular model.
The above model, provides for a non-ideal relevant market of the ‘GSM’ technology. In comparison to Diagram 1, Diagram 2 focuses on a shift of price of SEP from P1 to P2, which falls within the ambit of predatory pricing[7]. P2 denotes the price set by the SEP holder in a manner that is in abuse of its dominant position, leading to an unfair, discriminatory and exorbitant imposition of royalties. The most important implication of this shift in price of SEP is the inaccessibility of markets to the medium and small enterprises. By shifting the price from P1 to P2 there is a shift in accessibility of SEP by use from ‘Q’ to ‘P thus, the players that exist between ‘P’ and ‘Q’ were first able to get access to the SEP but are now excluded from the relevant market for ‘GSM’ technology, thereby making the market inaccessible and in contravention to freedom of trade. This provides for three other implications,
- As depicted in the red shaded region, there is a substantial reduction in consumer welfare as compared to Diagram 1, thereby causing a substantial loss/injury to the consumers.
- As depicted in the blue shaded region, there is a monopolistic profit that is created exclusively for the SEP holder at the cost of consumer welfare. This proves excessive pricing which provides the SEP holder with excessive profit margin[8]
- As depicted in the green shaded region, there is a ‘dead weight loss’ that is created, which depicts that part of the market which has a relevant demand but is static and cannot be engaged with.
In summary, by way of the above economic models the authors try to substantiate the influence of anti-competitive behaviour of SEP holders on the accessibility of a relevant market. Such a restriction on the freedom of trade of the players of the market, create an anti-competitive environment which falls within the contours of regulation by competition laws. Further as enumerated under Section 18[9] of the Competition Act, the act fastens a statutory duty on the Competition Commission of India to eliminate practices having adverse effect on competition, and to be instrumental in promoting and sustaining competition by protecting the interest of the consumers and to ensure freedom of trade, both of which are being clearly compromised upon as evident in the above explained economic model.
Predominance of jurisdiction of CCI in matters of abuse of dominant position and the Essential Facilities Doctrine.
It is well established as under the Competition Act, 2002 that if the behaviour of an enterprise proves to be anticompetitive or establishes the abuse of market dominance, the same would attract penal action under the said act. The Supreme Court in the case of Uber India Systems Pvt. Ltd v. Competition Commission of India, 2017[10] held that an enterprise is said to hold a dominant position when it holds a position of strength in a relevant market, which enables them to operate independently of the prevailing competitive forces or impact its competitors or the relevant market.
In the ongoing case under debate, Ericsson’s position qualifies as dominant due to its substantial influence in the relevant market, granting it the power to impact the market. Consequently, the misuse of this dominant position would trigger the application of Section 4 of the Competition Act[11]. Section 4(ii)(a)[12] provides that imposition of unfair condition on the purchase/sale of goods or services and unfair pricing[13] (including predatory pricing/ excessive pricing) amounts to abuse of dominance. Unfair conditions are those that give rise to unfair trade practice which causes loss or injury to the consumer[14].
In the present context, Ericsson’s engagement in Non-Disclosure Agreements (NDAs), imposition of injunctions, and discriminatory practices while setting royalty rates creates an environment of unfair trade practices that results in harm or injury to consumers regarding Standard Essential Patents (SEPs). Additionally, the Section also prohibits actions that hinder market access[15].
The “Essential Facilities Doctrine” (EFD) (or to third party access) is a framework in competition policy where a dominant firm cannot refuse to grant access to an essential facility (that is difficult to replicate), which it controls, to the other firm. The doctrine was first recognised by the CCI in the Arshiya Rail Infrastructure Ltd. v. Ministry of Railway, 2013[16] case.
Further in the case of Surinder Singh Barmi v. Board for Control of Cricket in India, 2013[17], the CCI provided an interpretation of the essential facilities doctrine in India. The CCI found that BCCI had abused its role as the regulator of cricket in India to limit economic competition in sporting events. The CCI suggested that a restriction to necessary infrastructure (which might be considered as an essential facility) by a dominant enterprise, to the detriment of competitors could amount to refusal to deal and hence be considered anti-competitive making it fall within the ambit of competition law.
Similarly, Ericsson being the holder of an SEP, which can be considered an essential facility, demands the application of EFD. In the relevant market of the “GSM” technology, it acts in a manner which limits economic competition and restricts access to smaller market players, while impacting consumer welfare acted in an anti-competitive manner. Hence, one cannot totally exclude the jurisdiction of the CCI in such matters, making the intervention of the CCI warranted and necessary.
Contention against Exclusive Jurisdiction of the Patents Act – Bharti Airtel Case.
The landmark Supreme Court judgment in the case of Bharti Airtel[18] dealt with the conflict of jurisdiction between TRAI and CCI. A two-step approach was established to tackle the conflict. It was categorically held that since the matter was pertaining to the Telecom sector regulated by TRAI, the jurisdiction at primary instance should be given to TRAI to arrive at a prima facie conclusion whether there has been an anti-competitive practice or not. The CCI can then be activated to investigate upon the practice as per the Competition Act. The judgment putting an end to many scholarly debates flows from a premise that sectoral regulation facilitates competition in the structured market and CCI’s jurisdiction shall be invoked only when there is a market failure.
Whether Patent Controller falls within the definition of “sectoral regulator”?
The Bharti Airtel case opens a way to determine the unending conflict of jurisdiction between the patent controller and the CCI by narrowing down to a single question of whether the patent controller can be considered as a sectoral regulator. Governing a particular subject matter should be differentiated from regulating it. The settled position of law is that it is only when an authority is conferred with the role of a regulator can it determine on anti-competitive practices over the CCI. The Bombay HC has opined that the Patents Act does not confer regulatory powers to the Patent controller as compared to that of TRAI.[19] An authority cannot confer upon its jurisdiction which it does not possess otherwise.[20]
TRAI confers the power to make regulations that mold the market structure.[21] On the other hand, such a power is not vested on the Patent Controller. According to the Patents Act, the powers of the patent controller are more in the nature of adjudication and rectification of correct clerical errors than regulation. The compulsory license granted upon an instance of abuse of the patent right is merely a remedy upon an existing abuse of dominance and cannot be considered as an efficient regulator of such abuse. All other checks provided by the Patents Act are to protect the licensee from being forced into a licensing agreement and restricted only to deal with the patented item. Even these checks cannot regulate the unfair royaltee demanded by the patent holders and prevent licensees being discriminated amongst each other. Hence, Patent controller’s control cannot be equated to that of TRAI’s as the latter is more pervasive in nature. TRAI’s regulatory mandate is the differentiating factor over Patent Controller to have jurisdiction prior to CCI.
In the Bharti Airtel case, “Domain expertise” is an attribute associated with a sectoral regulator. Since patent is a concept that spreads across various domains/industries, a specific angle of “domain expertise” cannot be traced to a patent controller unlike TRAI. A bare perusal of the Patents Act points out that there is no sector- specific expertise or minimum qualification prescribed for a Patent Controller. Given the heterogeneity of patents, the Patent’s Act itself empowers the court to appoint a scientific advisor of sector specific clarifications.[22] Hence, it points to the fact that the statute in itself does presume the Patent Controller to have domain experience and be a sectoral regulator.
Therefore, in light of the Bharti Airtel case, a patent controller can be distinguished from TRAI as not being a sectoral regulator. There is no requirement of vesting even prior jurisdiction to the Patent Controller, let alone ousting the CCI’s jurisdiction. Both Patent Controller and CCI shall have parallel jurisdiction and shall be approached by the parties considering the remedy they seek.
Further, it is also noteworthy that despite the Supreme Court not completely ousting CCI’s jurisdiction, in January 2021 CCI highlighted the dearth of efficient regulatory design and improved lines of communication between different regulators in dealing with competition related concerns in the Telecom industry.[23] Hence, its high time that the glaring relevance of CCI even in the presence of a sectoral regulator is given due recognition and deserved significance.
The CCI’s Regulations as the Lex Specialis
The principle of a special law having applicability over a general law is a much appreciated legal position across the world. However, determining which law shall be considered as special will be crucial to make a fair judgment on the same.
The above discussed Delhi HC judgment has observed the Patents Act to be lex specialis (specific law) as it particularly deals with matters relating to grant of patents. However, the judgment overlooks the heterogeneity in the kind of end products patents are used for and the corresponding wide range of markets it is involved in. Hence, the specific kind of market the overarching patent right has an impact on and the rules regulating such market, that is the CCI’s regulations should be considered as lex specialis.
The wide range of domains in which patents are applicable also make it hard for the Patents Act to have pre-set regulations while negotiating a patent licensing agreement as one size would not fit all. In such an event, it is only the relevant market that can mold the regulatory standards, which falls under the sole jurisdiction of the CCI.
The CCI’s role in shaping FRAND obligations in India.
FRAND which stands for Fair, Reasonable and Non-Discriminatory can be broadly understood as open technical standards developed hand in hand through industry-lead standardization processes that are consent-based. Patent holders voluntarily agree to license their patent according to FRAND obligations upon standardizing their patent. It creates a balance of interest between the patent holders and the licensees having a final impact on the consumers. Essentially, it forms a commitment the patent holder makes to the Standard Setting Organization. The exact scope of the FRAND obligation may be traced back to the SSO’s bylaws but it may vary according to different jurisdictions.
Judicial decisions across the world have widely considered FRAND obligation to be enforceable in courts and have taken active roles to sketch out the same. The US Court of Appeals[24], the UK Supreme Court [25] and the Federal Court of Germany[26] have in various cases observed that a reasonable royalty rate can be determined by analyzing comparable licenses. Further, it recognized that when the end product is sold worldwide and the patent holder attains a dominant position in the global market, FRAND obligation’s scope cannot be limited to a particular jurisdiction.
The CCI versus the Patent Controller.
In India, there exists no regulations or guidelines on SEPs apart from certain judicial decisions, including the above-mentioned Delhi High Court judgment that recognise the importance of FRAND obligations but relies on the Patents Act to check the SEP’s abuse of dominant position. It flows from a premise that the Patents Act already accounts for FRAND obligation between the patentee and licensee. It does not give due credit to the role of CCI as a market regulator to decide on the compliance of FRAND or issue market specific regulations for its compliance.
The remedy of compulsory license in the Patents Act is the most cited reason for ascertaining that the Patents Act already accounts for the chance of anti-competitiveness while granting a patent. It is argued that it was the legislative intent to vest jurisdiction on the Patent Controller based on the fact that the amendment including compulsory license was introduced in 2005, after the enactment of the Competition Act. However, the existence of an unregulated opportunity to impose unfair royalty and adopt non-discriminatory practices is left unnoticed.
Firstly, granting of Compulsory license under Section 84 of the Patents Act is merely a remedy that comes into play only when it is proven that reasonable requirements of the public are not met. Even though engaging in actions creating prejudice to a particular trade or industry is considered as one of the reasons to seek compulsory license, it is only an ex-post check on such practices. In short, there exists only a partial cure to the situation while there is no prevention. In addition to this remedy, it is pertinent to have ex-ante regulations or pre-set guidelines in the form of well formulated FRAND to actually act as a check against anti-competitive tendencies.
A law and economics perspective offers a clear answer to why there should be an additional set of market regulation as a condition precedent in the case of SEPs as elaborated further. While considering a bargain between the patent holder and licensee, the cost of exchange in a bargain can be understood as the transaction cost. Though generally transaction cost is attributed to exchanges outside the domain of law, some transaction costs are endogenous to the legal system as legal rules can reduce hindrance to private bargaining.[27]
The much-discussed Normative Coase theorem propounds that law can lubricate the bargaining process by lowering transaction costs.[28] One recognised way of doing this is by defining and ascertaining rights of the parties in a bargain. Having pre-set anti-competitive regulations in the form of well-defined FRAND will help both parties accurately define their rights and hence reducing the transaction cost.[29]
Hence, the transaction cost involved in granting an ex-post remedy is way higher than having ex-ante regulations. Taking it further, the societal cost of not having pre-set regulations is also very high. A lot of aggrieved parties may not even seek the remedy due to the high cost of availing it.
Further, a compulsory license may be sought only after three years from the date of grant of patent. As mentioned above, an SEP being used as a standard in the relevant market would by default give a dominant position to the patent holder from the moment it is standardized. Given the dynamic and elastic nature of technology, small market players who are aggrieved by the abuse of dominance of such patent holders will be erased or swept out of the market in three years.
Therefore, the glaring need for pre-regulations ensuring FRAND obligations of an SEP holder shall not be undermined. A blind eye cannot be turned against the real adverse effect non-compliance of FRAND obligations have on the relevant market. In the given context, the CCI, having the core objective of regulating anti-competitive practice in a relevant market, is the most apt authority to formulate what constitutes FRAND obligations in India as it is the most aware of all shades of the market.
Conclusion
A major part of the contemporary legal discourse on Competition Act in India is about the jurisdictional conflicts of the same with multiple other statutory authorities. The continuous exploration of what constitutes FRAND obligations in licensing an SEP and the authority which will formulate guidelines on the same is yet another point of intersection between the Patents Act and the Competition Act.
The recent Delhi High Court judgment in the case of Telefonaktiebolaget LM Ericsson v. Competition Commission of India, 2014 put a stop cap to the unending conflict by reserving jurisdiction in matters regarding grant of SEPs to the Patent Controller. However, the authors opine in disagreement that the said judgement undermines the glaring impact a grant of SEP has on the market of its end products due to the abuse of dominance or potential abuse of dominance by the patent holder.
On critical scrutiny of the patent controller’s authority, it is observed that the same cannot be brought under the ambit of sectoral regulator for having prior jurisdiction over the CCI. In light of the wide range of markets in which the Patents Act shall have an effect on, the authors opine that the guidelines set by the market regulator on a specific market, such as that of the GSM technology shall have the status of les specialis. Further, the need to mandate FRAND obligations on licensing every SEP is pertinent as the remedy for compulsory license and other existing checks in the Patents Act fails to be efficient.
Despite the unending debate about the jurisdiction of the Patent Controller over the CCI and vice versa, many scholars and jurists have also opined that the two bodies of law are complementing to each other and not exclusive to each other. The authors concur to this view and further points out that the end goal of both the statutes is consumer welfare, only the means of achieving it is different. Hence, conferring jurisdiction to either doesn’t essentially oust the other. The golden approach here is to interpret both statutes harmoniously. However, technical dynamics of a market falls under the expertise of the CCI and the recent Delhi Hight Court judgement fails to give due credits for the same.
[1]Telefonaktiebolaget LM Ericsson v. Competition Commission of India [2023] SCC OnLine Del 4078
[2] Patents Act 1970
[3] Competition Act 2002
[4] Competition Act 2002, Chapter XVI
[5] Competition Act 2002, Preamble
[6] Competition Act 2002, s 2(ii)(r)
[7] Competition Act 2002, s 4 explanation (b)
[8] Shamsher Kataria v. Honda Siel Cars India Ltd. [2014] SCC OnLine CCI 95, United Brands Co. & United Brands Continental BV v. Commission [1978] ECR 207
[9] Competition Act 2002, s 18
[10] Uber India Systems Pvt. Ltd v. Competition Commission of India [2019] Civil Appeal No. 7012
[11] Competition Act 2002, s 4
[12] Competition Act 2002, s 4 (ii)(a)
[13] Shamsher Kataria v. Honda Siel Cars India Ltd. [2014] SCC OnLine CCI 95
[14] HMM Ltd v. Director General, MRTP Commission [1998] 6 SCC 485
[15] Competition Act 2002, s 4 (ii)(c)
[16] Arshiya Rail Infrastructure Ltd. v. Ministry of Railway [2013] 112 CLA 297
[17] Surinder Singh Barmi v. Board for Control of Cricket in India (BCCI) [2013] CCI 25
[18] Competition Commission of India v. Bharti Airtel Limited and Ors, Civil Appeal No. 11852 of 2018
[19] Vodafone India Ltd v. The Competition Commission of India, [2017] 144 SCL 580
[20] Arun Kumar Vs. Union of India, [2007] 1 SCC 732
[21] Monsanto holding Pvt. Ltd & Ors. v. Competition Commission of India, [2020] 272 DLT 61, [55]
[22] Patents Rules, 2003, Rule 103
[23] Competition Commission of India, ‘Market Study on the Telecom Sector in India’ (Competition Commission of India, 2021) <https://www.cci.gov.in/sites/default/files/whats_newdocument/Market-Study-on-the-Telecom-Sector-In-India.pdf> accessed 18 August 2023
[24] Ericsson v. D-Link, [2014] 773 F. 3d 1201 [ Fed. Cir.]
[25] Unwired Planet v. Huawei, [2020] UKSC 37
[26] Sisvel v. Haier, [2020] KZR 36/17
[27] Robert Cooter & Thomas Ulen, Law and economics (4th edn, Pearson Education) 91
[28] Ibid, 96
[29] Elizabathe Hoffman and Mathew Spitzer, ‘The Coase Theorem: Some Experimental Test’ [1982] J. Law & Econ., 73
( Diya Parekh and Diya Parvati are law undergraduates at Gujrat National Law University, Gandhinagar. The authors may be contacted via email at diya.parikh2003@gmail.com and diya21bbl010@gnlu.ac.in)
Cite as: Diya Parekh & Diya Parvati,’ Exploring Anti – Competitiveness in Standard Essential Patents; A Law and Economics Perspective’ 28 August, 2024 <https://rmlnlulawreview.com/2024/08/29/exploring-anti-competitiveness-in-standard-essential-patents-a-law-and-economics-perspective/> date of access.
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