FRAND in India

Abstract

Investigations and litigation involving standard-essential patents (SEPs) have been brought around the world. In the last several years, India has drawn attention to itself by raising several novel and controversial concerns regarding SEPs. For example, in 2013 and 2014, the Competition Commission of India (CCI) issued investigation orders against Ericsson, alleging that the company violated its commitments to license on fair, reasonable, and nondiscriminatory (FRAND) terms by imposing discriminatory and “excessive” royalty rates and using Non-Disclosure Agreements (NDAs). In its investigation order, the CCI stated that “forcing” a party to execute [an] NDA” and “imposing excessive and unfair royalty rates” constitutes “prima facie” abuse of dominance and violation of section 4 of the Indian Competition Act, as does “[i]mposing a jurisdiction clause debarring [licensees] from getting disputes adjudicated in the country where both parties were in business.” Most recently, India’s Department of Industrial Policy and Promotion issued a Discussion Paper on SEPs, which among other things, emphasizes concerns about holdup by patent holders, while omitting any concerns about holdup and holdout by implementers. This chapter analyzes that Discussion Paper, providing guidance based on the approach taken by the United States and Europe, and offers several policy recommendations, including on the availability of injunctive relief; the issuance of a one-size-fits all template for standard-development organizations (SDOs); the imposition of royalty caps or competition sanctions for “excessive pricing,” the use of NDAs and the “ND” prong of FRAND; balancing desires for transparency with needs for confidentiality in licensing; and the use of international arbitration on a portfolio basis as likely the most efficient and realistic means of resolving FRAND disputes.

1 Introduction

Since becoming fully operational in October of 2009, the CCI has brought two public investigations involving SEPs, both against Ericsson and both based upon allegations that the company violated its FRAND commitments by imposing discriminatory and “excessive” royalty rates and using NDAs.¹ According to the CCI, “forcing a party to execute [an] NDA” and “imposing excessive and unfair royalty rates” is “prima facie” abuse of dominance in violation of Section 4 of the Competition Act, as does “[i]mposing a jurisdiction clause debarring [complainants] from getting disputes adjudicated in the country where both parties were in business.”² In both matters, the CCI stated that “prima facie the relevant product market”³ is “the provision of SEP(s) for 2G, 3G and 4G technologies in GSM standard compliant mobile communication devices,” in India, in which “prima facie it is apparent that Ericsson was dominant”.⁴

The investigations allege that Ericsson “seem[s] to be acting contrary to the FRAND terms by imposing royalties linked with cost of product of user for its patents.”⁵ Thus, “[f]or the use of [a] GSM chip in a phone costing Rs. 100, [the] royalty would be Rs. 1.25 but if this GSM chip is used in a phone of Rs. 1000, [the] royalty would be Rs. 12.5.”⁶ According to the CCI, “[c]harging of two different license fees per unit phone for use of the same technology prima facie is discriminatory and also reflects excessive pricing vis-a-vis high cost phones.”⁷ Furthermore, contends the CCI, “[t]ransparency is the hallmark of fairness,” alleging that, Ericsson’s use of NDAs “is contrary to the spirit of applying FRAND terms fairly and uniformly to similarly placed players.”⁸

In the second investigation the CCI further alleged that, although Ericsson publicly claims that it offers a broadly uniform rate to all similarly placed potential licensees, its refusal to share commercial terms and royalty payments based upon the NDAs is “strongly suggestive of the fact that different royalty rates/commercial terms were being offered to the potential licensees belonging to the same category.”⁹

The CCI has also expressed concern about hold-up and royalty stacking, stating that “FRAND licenses are primarily intended to prevent Patent Hold-up and Royalty Stacking… [F]rom the perspective of the firm making the product, all the different claims for royalties must be added or ‘stacked’ together to determine the total burden of royalty to be borne by the manufacturer.”¹⁰

In March 2016, the DIPP issued a Discussion Paper on SEPs that, among other things, emphasizes concerns about hold-up by patent holders, while omitting any concerns about hold-up and hold-out by implementers. The chapter also contains a troubling summary of U.S. and EU law, erroneously suggesting that United States and European Union apply a per se rule or presumption against injunctive relief on a FRAND-assured SEP. The chapter poses a number of questions, including: (1) whether Indian patent and antitrust laws are adequate to address issues relating to FRAND-assured SEPs; (2) “what should be the IPR policy of Indian” SDOs and whether government guidelines for SDOs are necessary; (3) whether royalty payments for SEPs should be capped and limited to the “smallest salable patent practicing component”; (4) whether the use of NDAs constitutes an abuse of dominance and is contrary to a commitment to license on FRAND terms; (5) how to create transparency in cross-licensing and patent pooling; and (6) what are appropriate ways and remedies for settling SEP-related disputes and whether an independent expert body should be created to determine FRAND terms.

The remainder of this chapter discusses these issues, providing guidance for policy makers and regulators in India.

2 Hold-Up and Hold-Out

Overall, one of the central problems with CCI’s prima facie orders and the DIPP Discussion Paper, are their focus upon concerns about hold-up by patent holders while seemingly ignoring concerns about hold-up and hold-out by implementers. Although there is serious and important scholarly work exploring the theoretical conditions under which hold-up by patent holders might occur, this literature merely demonstrates the possibility that an injunction (or the threat of an injunction) against infringement of a patent can in certain circumstances be profitable for the licensor and potentially harmful to consumers. This same theoretical literature has also recognized, with respect both to intellectual and to tangible property, the threat of both hold-up and hold-out by implementers. Hold-up requires lock-in, and standard-implementing companies with asset-specific investments can be locked in to the technologies defining the standard. On the other hand, innovators that are contributing to an SDO can also be locked-in, and hence susceptible to hold-up, if their technologies have a market only within the standard. Thus, incentives to engage in hold-up run in both directions.¹¹

There is also the possibility of hold-out by an implementer. While hold-up by implementers refers to the situation in which a licensee uses its leverage to obtain rates and terms below FRAND (fair, reasonable, and nondiscriminatory) levels, hold-out refers to a licensee either refusing to take a FRAND license or delaying its doing so.

It is important to distinguish the various hypotheses in the theoretical literature on patent hold-up from the empirical evidence that would substantiate the theories underlying those hypotheses. Theories of anticompetitive harm predict systematic opportunism by patent holders and price increases across output markets that depend upon patented technology as an input. The anticompetitive theories in that literature also predict, in addition to higher prices, reduced output and less innovation.

The evidence required to justify a competition law sanction for seeking or enforcing injunctive relief requires that there be a probability, not a mere possibility, of higher prices, reduced output, and lower rates of innovation. In contrast to the predictions of the theories that such injunctions will have anticompetitive effects, we note that, products that intensively use SEPs have seen robust innovation as well as falling prices and increased output when compared to industries that do not rely upon SEPs.¹²

For example, evidence from the smartphone market, which is both standard and patent intensive, is to the contrary: Output has grown exponentially, while market concentration has fallen, and wireless service prices have dropped relative to the overall consumer price index (henceforth “CPI”).¹³ More generally, prices in SEP-reliant industries in the US have declined faster than prices in non-SEP intensive industries.¹⁴ A recent study by the Boston Consulting Group found that globally the cost per megabyte of data declined 99% from 2005 to 2013 (reflecting both innovations making data transmission cheaper and the healthy state of competition); the cost per megabyte fell 95% in the transition from 2G to 3G, and 67% in the transition from 3G to 4G; and the global average selling price for smartphones decreased 23% from 2007 through 2014, while prices for the lowest-end phones fell 63% over the same period.¹⁵ All of this indicates a thriving mobile market as opposed to a market in need of fixing and suggests caution prior to disrupting the carefully balanced FRAND ecosystem.

As evidence of hold-up, some point to a small number of court cases in which the court-determined FRAND royalty was lower than the patent holder’s demand. Among the numerous flaws with this argument—even holding aside the reasonable debate over whether the courts correctly determined reasonable royalty damages in those cases—is that the outcome of a handful of litigated cases says nothing about whether hold-up is a widespread problem for competition and consumers.¹⁶ Economists have long understood the shortcomings of making inferences about a population from a sample of litigated cases.¹⁷

Economic analysis provides the basis upon which to understand the apparent disconnect between hold-up theory and the available evidence. As economic theory would predict, patent holders and those seeking to license and implement patented technologies write their contracts so as to minimize the probability of hold-up. Indeed, the original economic literature upon which the patent hold-up theories are based was focused upon the various ways that market actors use reputation, contracts, and other institutions to mitigate the inefficiencies associated with opportunism in transactions involving tangible property.¹⁸

Several market mechanisms are available to transactors to mitigate the incidence and likelihood of patent hold-up. Reputational and business costs may deter repeat players from engaging in hold-up and “patent holders that have broad cross-licensing agreements with the SEP-owner may be protected from hold-up.”¹⁹ Also, patent holders often enjoy a first-mover advantage if their technology is adopted as the standard. “As a result, patent holders who manufacture products using the standardized technology ‘may find it more profitable to offer attractive licensing terms in order to promote the adoption of the product using the standard, increasing demand for its product rather than extracting high royalties’” per unit.²⁰ This result is not surprising given the incentives of patent holders and implementers to reach efficient solutions that minimize the risk of opportunism.

Some have asserted that the theoretical predictions of hold-up models cannot be tested and thus it is only prudent to assume a systemic hold-up problem. This is incorrect. Were ex post opportunism in licensing SEPs a systemic problem—that is, were market failures preventing firms from efficiently contracting to minimize their risk, one would expect to observe one-sided SDO contracts that do not reflect the risk of opportunism and protect primarily SEP holders rather than potential licensees. However, the empirical evidence shows that SDO contract terms vary both across organizations and over time in response to changes in the perceived risk of patent hold-up and other factors.²¹

Recognizing the theoretical nature of hold-up concerns, the United States Court of Appeals for the Federal Circuit (which has nationwide jurisdiction over patent disputes) has held that a claim of hold-up must be substantiated with “actual evidence,” and that the burden is on the accused infringer to show the patent holder used injunctive relief to gain undue leverage and demand supra-FRAND royalties.²²

3 U.S. and EU Law on Injunctive Relief for FRAND-Assured SEPs

Contrary to the suggestion in the DIPP Discussion paper, in the United States, there is no per se rule or presumption against injunctive relief on a FRAND-assured SEP. Instead, as the U.S. Court of Appeals for the Federal Circuit explained in Apple v. Motorola, there is “no reason to create… a separate rule or analytical framework for addressing injunctions for FRAND-committed patents. The framework laid out by the Supreme Court in eBay [v. MerchExchange], as interpreted by subsequent decisions of this court, provides ample strength and flexibility for addressing the unique aspects of FRAND-committed patents and industry standards in general.”²³ Under eBay, for an injunction to issue, a court must find that the patent holder established: “(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by [an] injunction.”²⁴ This critical gatekeeping by courts minimizes the risk of harm to competition and consumers. As such, the mere seeking of injunctive relief alone does not monopolize the market because courts independently assess whether an injunction is warranted, taking into consideration whether the public interest would be disserved by an injunction.

In addition, no U.S. court has held that seeking or enforcing injunctive relief on a FRAND-assured SEP constitutes an antitrust violation. Instead, every U.S. court that has addressed the injunction issue has done so under contract, not antitrust, principles.²⁵

With respect to the European Union, in Huawei v. ZTE (July 2015), the European Court of Justice adopted a safe harbor from antitrust liability.²⁶ Specifically, an SEP holder that (1) prior to initiating an infringement action, alerts the alleged infringer of the claimed infringement and specifies the way in which the patent has been infringed; and (2) after the alleged infringer has expressed its willingness to conclude a license agreement on FRAND terms, presents to the alleged infringer a specific, written offer for a license, specifying the royalty and calculation methodology, should be free of liability. The Court quite properly put the burden on the alleged infringer to “diligently respond” to the SEP holder’s offer, “in accordance with recognised commercial practices in the field and in good faith,” by promptly providing a specific written counter-offer that corresponds to FRAND terms, and by providing appropriate security (e.g., a bond or funds in escrow) from the time at which the counter-offer is rejected and prior to using the teachings of the SEP.²⁷

In its decision, the Court recognized that SEP holders have “the right to bring an action for a prohibitory injunction or for the recall of products,” and made clear that the SEP holder’s right can be limited only in particular and exceptional circumstances.²⁸ The decision recognizes concerns about reverse hold-up, stating that the Court will not tolerate infringers’ “delaying tactics.”²⁹ The Court reiterates, in multiple places throughout the decision that its competition analysis relates to a dispute involving two competitors, which suggests the Court’s analysis and holding are limited to matters involving competitors. Lastly, the Court analyzed the seeking of injunctive relief as possibly exclusionary as opposed to exploitative conduct, such as charging excessive or unfairly high royalties.

Imposing an antitrust law sanction for seeking or enforcing injunctive relief would likely reduce incentives to innovate and deter SEP holders from participating in standard setting, thereby depriving consumers of the substantial procompetitive benefits of standardized technologies.³⁰ Should India decide to adopt such a sanction, however, at the very least it should adopt a safe harbor approach such as that crafted by the European Court of Justice in Huawei v. ZTE.

4 The Case Against Special Legislation or Amendments to Regulate FRAND Licensing

Existing intellectual property and antitrust laws are adequate to address the issues relating to FRAND licensing. Indeed, one of the main benefits of relying upon existing antitrust law in particular is that it proceeds primarily by applying, on a case-by-case basis, a uniform methodology grounded in economic analysis and sensitive to the facts of the particular case. This approach has proven over time more likely to maximize consumer welfare than ex ante regulation. Contract law also provides a means to resolve disputes arising from FRAND licensing given that a FRAND commitment is a contractual commitment and contract remedies are sufficient optimally to deter hold-up.³¹ Specifically, in analyzing the contractual nature of the FRAND commitment, U.S. courts have held that: (1) a commitment to an SDO to license on FRAND terms constitutes a binding contract between the SEP holder, the SDO, and its members³²; (2) potential users of the standard are third-party beneficiaries of the agreements with standing to sue³³; and (3) FRAND licensing “includes an obligation to negotiate in good faith,” where obligation is “a two-way street.”³⁴

Identification of a market imperfection is a necessary, but not a sufficient condition to justify regulation on economic grounds.³⁵ Even if one were to believe SEP-reliant markets were performing poorly, the burden would still be on regulators to demonstrate that an antitrust remedy or regulation would improve efficiency—not merely that the market is underperforming relative to an unrealistic benchmark such as “perfect competition.”³⁶

Moreover, as discussed in Sect. 2, above, there is no credible causal evidence to support the existence of a market imperfection in markets that make intensive use of SEPs. As explained there, evidence from the smartphone market certainly does not suggest that market imperfections are hampering market performance. Output has grown exponentially, while market concentration has fallen, and wireless service prices have dropped relative to the overall CPI.³⁷ In other words, the empirical evidence does not suggest that FRAND licensing is somehow broken and in need of fixing. Instead, the thriving nature of the wireless market suggests caution prior to disrupting the carefully balanced FRAND ecosystem. The evidence makes clear the burden is appropriately allocated to the proponents of additional intervention to solve SEP-related opportunism to demonstrate that the particular intervention would improve welfare.

5 The Dangers of Adopting a One-Size-Fits-All Template for SDOs

In our experience, the issues and choices regarding specific SDO Intellectual Property Rights (henceforth “IPRs”) policies are best left to individual SDOs and their members to decide. SDOs “vary widely in size, formality, organization and scope,”³⁸ and therefore individual SDOs may need to adopt different approaches to meet the specific needs of their members. In addition, issuance of guidelines by a government agency may unduly influence private SDOs and their members to adopt policies that might not otherwise gain consensus support within a particular SDO and that may not best meet the needs of that SDO, its members, and the public. This could occur because the SDO believes failing to adopt the specified policy is not permitted or because failing to adopt the policy could subject the SDO and its members to other legal liabilities. Accordingly, the U.S. antitrust agencies have taken the position that they do not advocate “that SSOs [or SDOs] adopt any specific disclosure or licensing policy, and the Agencies do not suggest that any specific disclosure or licensing policy is required.”³⁹

6 Problems with Regulating Royalty Rates or Prohibiting “Excessive Pricing”

In the United States, firms are free unilaterally to set or privately to negotiate their prices; it follows that a firm that has or acquires monopoly power lawfully is free to charge profit-maximizing prices, which induce the risk-taking and entrepreneurial behavior by firms that lead to innovation and economic growth.⁴⁰ Requiring by law that prices be “fair” or “reasonable,” or prohibiting a firm from charging “unfairly high” prices risks punishing vigorous competition. In general, competition policy should not prohibit a monopolist from charging whatever price for its products and its IPRs it believes will maximize its profits. It is axiomatic in economics and in antitrust law that the “charging of monopoly prices… is… what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth.”⁴¹ That is especially so in the case of IPRs; the very purpose for which nations create and protect IPRs is to induce investment in risky and costly research and development. To achieve a balance between innovation and the protection of competition, monopoly prices should be unlawful only if they are the result of conduct that is unlawful on other grounds.

Moreover, economics teaches that absent market information it can be especially difficult to identify a “fair” price. Indeed, it is particularly difficult to assess the “fairness” of prices associated with licensing IPRs both because the fixed costs of innovation require prices above marginal cost in order to secure an adequate return to investments in innovation, and because IPRs themselves are highly differentiated products making price comparisons difficult, if not impossible. The risk of placing too strict limitations on IPR prices is that the return to innovative behavior is reduced, and consumers suffer in the form of less innovation. With such limits in place, IPR holders will face significant uncertainty in determining whether their licensing practices violate competition laws.⁴²

In addition, in order to determine whether a particular price is excessive, the competition agency would need to calculate a reasonable royalty range as a baseline against which to compare the allegedly excessive price. For the reasons stated above, the antitrust laws in the U.S. generally avoid the administrative determination of prices. In our experience, competition agencies will not possess the information necessary to determine market prices generally, and royalty rates for inventions in particular. This is a task that is best left to the market or, as a last resort, to the courts in those limited cases when the parties cannot reach agreement.⁴³

Should an agency insist upon applying an excessive pricing prohibition to IPRs, it could use the hypothetical negotiation framework developed under U.S. patent law to determine the minimum reasonable royalty. This, however, is a complex methodology intended for use by the courts upon development of a full record, which usually includes detailed expert reports and opportunities for witnesses to testify and be subjected to cross-examination. In addition, it is essential to keep in mind that a reasonable royalty calculation using the hypothetical negotiation framework sets a minimum royalty; the patentee should have the opportunity to prove its lost-profits as part of its damages. In an excessive pricing case, these lost profits equal the profits denied by the “unfairly high” pricing provision.⁴⁴ As such, when used in an “unfairly high” pricing investigation, a reasonable royalty calculation should likewise be treated as a minimum starting point to avoid imposing a royalty that undercompensates the patentee—a result that would significantly reduce the patentee’s incentives to innovate.

In an action for damages resulting from patent infringement, the goal of a reasonable royalty calculation is to determine the market price the infringer would have paid if it had licensed rather than infringed the patent. Accordingly, that amount should depend upon what a willing licensee and a willing licensor would have agreed to in a hypothetical negotiation. The seminal case in the United States, Georgia-Pacific Corp. v. United States Plywood Corp., describes the proper measure of damages as “[t]he amount that a licensor (such as the patentee) and the licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been… trying in good faith to reach an agreement.”⁴⁵ The central tenet of this framework is the willing licensor/willing licensee model, under which the amount awarded would have been acceptable to both parties.

U.S. district courts have recently adopted modified versions of the Georgia Pacific framework in determining prospective royalties in cases involving FRAND-assured SEPs. The U.S. Court of Appeals for the Federal Circuit in Ericsson, Inc. v. D-Link Systems, Inc. held that “[t]here is no Georgia-Pacific-like list of factors that district courts can parrot for every case involving [F]RAND-encumbered patents.”⁴⁶ Instead, courts must instruct the jury only on factors that are relevant to the record developed at trial, and must instruct the jury on the actual FRAND commitment at issue. Because each technology and market is different, the evidence considered and the weight placed upon each factor will vary based upon the circumstances.

In constructing the hypothetical negotiation, U.S. courts consider evidence of market factors that the negotiating parties would have considered in determining the royalty rate. Often comparable licenses are the best available evidence of the market value of the patent. Accordingly, the Federal Circuit recently held in Ericsson v. D-Link that evidence about comparable licenses based upon the end product should properly be considered by the jury in determining patent damages. The court reasoned that “[m]aking real world, relevant licenses inadmissible… would often make it impossible for a patentee to resort to license-based evidence.”⁴⁷ Indeed, as a practical matter, most licenses in many high-tech markets, including smartphones, are negotiated on a patent portfolio basis using the end-user device as the royalty base. A number of considerations may dictate private parties’ selection of a royalty base in a freely negotiated license agreement. Industry practice and the convenience of the parties is one such consideration; other commercial dealings between the parties is another.

The Federal Circuit also explained that, while prior licenses “are almost never perfectly analogous to the [licenses at issue in a later] infringement action,” which “generally goes to the weight of the evidence, not its admissibility.”⁴⁸ For example, allegedly comparable licenses may cover more patents than are at issue in the current action, or include cross-licensing terms, or cover foreign intellectual property rights, or be calculated as some percentage of the value of a multi-component product. “Testimony relying on [comparable] licenses must account for such distinguishing facts when invoking them to value the patented invention.”⁴⁹ When considering comparable licenses, it is also important to consider factors such as the circumstances, timing, and relative bargaining position of the parties to those licenses. For example, a license entered when the commercial viability of the technology is still uncertain will, in general, provide for a lower royalty than a license entered into when the commercial viability of the technology has been established or has increased.

With respect to the appropriate royalty base, as the U.S. Court of Appeals for the Federal Circuit recently explained in Ericsson v. D-Link, the “smallest salable patent practicing unit” (henceforth “SSPPU”) approach was created as an evidentiary rule “to help our jury system reliably implement the substantive statutory requirement of apportionment of royalty damages to the invention’s value.”⁵⁰ The SSPPU approach does not impose limitations upon private arms-length negotiations in the market place. The court went on to explain that:

Logically, an economist could do this [apportionment] in various ways—by careful selection of the royalty base to reflect the value added by the patented feature, where that differentiation is possible; by adjustment of the royalty rate so as to discount the value of a product’s non-patented features; or by a combination thereof. The essential requirement is that the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product.⁵¹

Importantly, for some technology, using the smallest component or device as the royalty base may under- or over-value the technology. For example, some technology may technically be implemented by a single component part, yet its value to the device and to consumers may exceed the value of the component itself, so that using an appropriately apportioned end-user product price as the royalty base may provide a more accurate means to value the technology at issue.

Moreover, the value of a portfolio of SEPs to a particular licensee also may vary depending upon the final product in which the licensee incorporates the technology. For example, a given portfolio of SEPs may deliver very different value to a mobile infrastructure manufacturer as compared to a handset maker or a network operator.

There are a number of considerations that may dictate the parties’ selection of a royalty base in a freely negotiated license agreement. Industry practice and the convenience of the parties are two such considerations; other commercial dealings between the parties may also affect their negotiation. In order to reduce administrative costs, a royalty base is often selected to allow for easy monitoring or verification of the number of units sold; end product prices are often chosen for these reasons. Indeed, as a practical matter, we have found that most licenses in many high-tech markets, including smartphones, are negotiated on a patent portfolio basis using the end-user device as the royalty base.⁵²

We also note that the Antitrust Division of the U.S. Department of Justice (henceforth “DOJ”) issued a Business Review Letter on February 2, 2015, in response to a request by the Institute of Electrical and Electronics Engineers (henceforth “IEEE”) that addressed the recommended use of the SSPPU approach.⁵³ Most important for the question at hand, in its letter, the DOJ correctly recognized that its

task in the business review process is to advise the requesting party of the Department’s present antitrust enforcement intentions regarding the proposed conduct. It is not the Department’s role to assess whether IEEE’s policy choices are right for IEEE as a standards-setting organization (SSO). SSOs develop and adjust patent policies to best meet their particular needs. It is unlikely that there is a one-size-fits-all-approach for all SSOs, and, indeed, variation among SSOs’ patent policies could be beneficial to the overall standards-setting process. Other SSOs, therefore, may decide to implement patent policies that differ from [the IEEE’s policy].⁵⁴

In other words, the DOJ did not endorse the SSPPU approach as a requirement for all SDOs, and certainly did not suggest that a patent holder’s failure to base a royalty on the SSPPU would constitute an antitrust violation; it concluded only that the IEEE’s adoption of its preferred approach did not violate U.S. antitrust laws. The DOJ further noted that the IEEE’s Policy itself merely recommends the use of the SSPPU approach, but “does not mandate” its use by IEEE members as the only correct royalty base.⁵⁵

Lastly, with respect to concerns about so-called “royalty stacking,” the aggregate royalty should be considered, if at all, only when there is evidence that it would have a severely adverse effect upon the product market, or at a minimum substantially restrict output. Some claim that devices such as mobile phones, which implement thousands of patents, are subject to royalty stacking. The evidence, however, is not consistent with these theoretical claims. For example, a recent empirical study shows that, contrary to the predictions of the royalty stacking theory, between 1994 and 2013, the non-quality adjusted average selling price of a mobile device fell 8.1% per year on average; the number of devices sold each year rose 62 times or 20.1% per year on average; the number of device manufactures grew from one in 1994 to 43 in 2003; and since 2001, concentration fell consistently and the average gross margin of SEP holders remained constant.⁵⁶

As the U.S. Court of Appeals for the Federal Circuit explained in Ericsson v. D-Link, the burden is on the implementer (or, in an excessive pricing enforcement action, the agency) to provide evidence establishing the actual cumulative royalty, and that royalty must be assessed to determine whether it is excessive.⁵⁷ The court of appeals rejected the approach taken by some U.S. first instance courts of considering the aggregate royalties that would apply if one assumed that all SEP holders charged the same or similar rates. The problem with that approach is that not all patents are created equal and FRAND rates should reflect the value of the particular SEPs at issue. In addition, many licensees do not pay cash royalties for every SEP. Instead, there may be cross-licenses or other business relationships that allow for royalty-free exploitation of some SEPs.

There are several other important principles to keep in mind. First, it is important to distinguish between, on the one hand, an aggregate royalty that reflects the cumulative value of the various SEPs included in a given standard and, on the other hand, an aggregate royalty burden that includes at least some supra-FRAND rates, i.e., individual hold-up rates. The former is simply the cost of making products that benefit from valuable IP, analogous to any other cost of doing business. For example, automakers face an aggregate input cost covering all of the many components needed to produce a car. There is nothing inherently anticompetitive in needing multiple inputs to produce a particular good, nor in each of those input suppliers charging the market price for its contribution.⁵⁸

Second, proper apportionment can eliminate the risks of both hold-up and royalty stacking. As long as the inputs for multi-component products are priced according to the value of each patent’s contribution to the end product, no SEP holder can be faulted for either hold-up or stacking. Proper apportionment is a reasonable means to accomplish this goal.⁵⁹

Third, it is critical to distinguish between the number of SEPs and the number of SEP holders. Given the prevalence of portfolio licensing, it is the number of SEP holders and not the number of SEPs that is relevant. Even if licenses for 1,000 SEPs were required to implement a given standard, if all of those SEPs were held by a single entity that licensed on a portfolio basis, there would be no stack at all.⁶⁰

Fourth, for a variety of reasons, not all SEP holders seek license payments. As the Federal Circuit pointed out in Ericsson v. D-Link, “[t]he mere fact that thousands of patents are declared to be essential to a standard does not mean that a standard-compliant company will necessarily have to pay a royalty to each SEP holder.”⁶¹

Fifth, one of the assumptions underlying the ‘Cournot complements problem’ (the theory upon which the concern with royalty stacking is based) is that each input supplier will price its inputs without regard to the prices charged for other needed inputs.⁶² But there is no reason to assume that will necessarily be the case in a standard-setting context. For example, SEP holders will be cooperating with one another (and with all other member of their standard setting organization) in the development of the standard, and are therefore likely to know what patents are expected to be asserted and by whom. As a result, there is no reason to presume that SEP holders will set rates without regard to the full complement of known SEPs.⁶³

7 Non-disclosure Agreements and Transparency

To our knowledge, no U.S. court has held that including an NDA in a patent license is an antitrust violation. This is not surprising given the obvious economic benefits of an NDA to the parties entering into a patent license. Because patent licenses often include the confidential business information of both the licensor and the licensee, and procompetitive licensing depends critically upon the ability of the parties to negotiate without fear that sensitive information will be revealed to non-parties, NDAs are an essential safeguard. Accordingly, in Ericsson v. Intex, the Delhi High Court concluded that including an NDA is legitimate and a “sine qua non in every licensing deal, particularly in patent licensing negotiations.”⁶⁴

Given that the purpose of antitrust law is to protect the competitive process and not individual competitors, it is difficult to see how including NDAs in a license could amount to an abuse of dominance. To the extent the antitrust theory of harm relating to NDAs is that their inclusion in licenses undermines the “non-discriminatory” commitment in the FRAND license, an antitrust remedy is inappropriate and unnecessary. The FRAND commitment is a contract and failure to perform that contract warrants contract remedies. There is no reason to impose an antitrust sanction for the inclusion of one contract term in order to facilitate performance with another. That would be tantamount to imposing an antitrust duty to risk disclosing to rivals one’s confidential and sensitive business information.

For the same reasons, we disagree that cross-licensing and patent pooling require transparency for royalty rates to be fair and reasonable. For the vast majority of cases, the parties rely upon the contracting process to obtain information needed to enter into a license agreement. In the event of a dispute over royalties, the parties can use discovery to obtain under a protective order, which balances the interests of transparency and confidentiality, any additional information they may need regarding cross-licenses or patent pooling.

Moreover, the “nondiscriminatory” element of a FRAND commitment does not require licensing terms, including price, to be the same for each licensee. Instead, depending upon the specific SDO’s IPR Policy at issue, the “nondiscriminatory” element is typically about access to essential patents, not the specific terms of a license.⁶⁵ Or, as one judge has explained, “[t]he FRAND nondiscrimination requirement prohibits ‘unfair discrimination,’ but it does not require uniform treatment across licensees, nor does it require the same terms for every manufacturer or competitor.”⁶⁶

Whether discriminatory licensing—including FRAND licensing—is anticompetitive should be determined by an effects-based analysis that recognizes: (1) discriminatory licensing can serve legitimate, procompetitive ends and enhance consumer welfare⁶⁷; and (2) price discrimination helps a firm with fixed costs to recover its outlays and is sometimes essential if the firm is to recover those outlays.⁶⁸ Indeed, an important aspect to consider in evaluating licensing discrimination as compared to price discrimination for physical goods is the nature of IP development. The innovation process typically involves large upfront investments in research and development yet very low marginal costs for implementation. Economists have observed that price discrimination can be an important mechanism for recovering fixed costs under these circumstances.⁶⁹

8 Settlement and Remedies for Disputes Involving FRAND-Assured SEPs

Particularly in cases when a patent owner has a large worldwide portfolio of SEPs, international arbitration on a portfolio basis is likely the most efficient and realistic means of resolving FRAND disputes. Otherwise, the patent owner would be required to file lawsuits around the world to adjudicate royalties on a patent-by-patent basis.

The availability of injunctive relief is an essential remedy. First, FRAND-assured SEP holders need the credible threat of an injunction if they are to recoup the value added by their patents and maintain their incentives to innovate. Second, when an injunction is unavailable, an unscrupulous or judgment-proof infringer can force the SEP holder to accept a below-FRAND rate.⁷⁰ Specifically, if the worst penalty an SEP infringer faces is not an injunction but merely paying, after an adjudication, the FRAND royalty it should have agreed to pay when first asked, then reverse hold-up and hold-out give implementers a profitable way to defer payment—or if they are judgment proof, to avoid payment altogether—and puts SEP holders at a disadvantage that reduces the rewards to, and therefore can only discourage, both innovation and participation in standard setting. Without injunctive relief, hold-outs may actually reduce the gains from innovation and standardization.

9 Conclusion

Indian policy makers and regulators seem prepared to make a number of radical changes to FRAND licensing in response to perceived problems. The empirical evidence, however, does not suggest that FRAND licensing practices are anticompetitive or otherwise in need of regulatory intervention. Instead, the thriving nature of the wireless market suggests caution prior to disrupting the carefully balanced FRAND ecosystem. The evidence makes clear the burden is appropriately allocated to the proponents of additional intervention to demonstrate that any particular intervention would improve welfare.