Laissez-faire policy dictates that the parties are free to choose their business partners and there should be minimum government intervention. However, the issue of licensing of Standard Essential Patents and the terms of such licenses is increasing been recognised as an exception to the laissez-faire policy. Under the FRAND license scheme, a company can be compelled to license its patented technology to its competitors on Fair, Reasonable and Non-Discriminatory terms, popularly referred to as FRAND terms.
A Patent for an invention grants the proprietor the right to exclude others from using the invention within a particular jurisdiction for a limited period of time. An invention is patentable, if it is new, involves an inventive step, is industrially applicable and is not excluded subject matter.
Standards can be categorised on the basis of the standard setting process: de facto standard and de jure standards. Most voluntary standards are offered for use by people, regulators or industry. When a published standard achieves widespread acceptance and dominance it can become a broader de facto standard for an industry. A formal/de jure standard refers to a specification that has been adopted or approved by a standard setting organisation. When a standard is mandated by a legal requirement it becomes a de jure standard.
Article 15.6 of the Annex 6 of the European Telecommunications Standards Institute's Rules of Procedure, defines Essential as "as applied to IPR means that it is not possible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operate equipment or methods which comply with a Standard without infringing that IPR."
The said provision further clarifies that "in exceptional cases where a Standard can only be implemented by technical solutions, all of which are infringements of IPRs, all such IPRs shall be considered Essential."
Thus patents which are essential to a standard which has been adopted by a Standard Setting Organization are referred to as Standard Essential Patents. These Standard Essential Patents are indispensable for system interoperability for certain technologies. In such cases, L patent owners make contractual commitments to an industry standard setting organisation to license technology on FRAND terms, to promote interoperability, provide lower product costs and increased price competition.
For industries, like information communication technology, which are driven by innovation and not pricing, competition constitutes of fierce fights to be the next temporary monopolist.
Consequently, innovation is customarily protected by Intellectual Property so that from the very beginning firms in the competitive race will, based upon the success of their R&D, obtain limited monopoly rights over technical elements that may be critical to the development of future products in a number of markets. In this sense they have some monopoly power over the assets that they can use to develop new products, license to others, and which they can subsequently withhold in order to block others from pursuing certain avenues of product development. Consequently, Intellectual Property Rights play a major role in the business strategies of companies, such as personalised pricing, lock-in and the adoption of uniform compatibility standards to fuel the bandwagon effect.
Therefore, although companies give commitments to license their IP which has been included in a Standard, there is considerable ambiguity over what constitutes 'Fair, Reasonable and Non- Discriminatory' license terms. There is an inherent tussle regarding the royalty rates between the company who expended its resources in R&D to develop the Standard and the company that seeks to license it.
Companies are regularly seeking to enforce these FRAND commitments in various jurisdictions all over the world. For example, in India, Ericsson has filed a suit in the Delhi High Court against some mobile companies alleging infringement of its GSM patents which have been adopted as a part of the GSM Standard by the European Telecommunications Standards Institute. The mobile companies, in turn, have alleged that the move by Ericsson, to aggressively enforce its patent rights arising out of its GSM Standard Essential Patents to generate unreasonable license fees violate its contractual obligations to ETSI as well as the anti-trust laws of India. There are reports that they are likely to approach the Competition Commission of India to investigate the extent of illegality of Ericsson's actions.
Majority of the judicial forums have upheld the FRAND obligations but are grappling with laying down a test for evaluating whether the license terms fulfil the FRAND commitments. Judge James L. Robart's "Findings of Fact and Conclusions of Law" in the Microsoft Corp. V. Motorola Inc., (86 PTCJ 19, 5/3/13) offers some guidelines for formulating an effective test.
Although mandating companies to license their Standard Essential Patents to their competitors is a welcome step, in absence of a conclusive test for determining FRAND royalty rates, the last mile of the FRAND challenge remains unbundled.
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