Crisis
There is a possible crisis brewing in India over the manner in which certain technology companies are wielding ‘standard essential patents’ (SEP) against the telecom manufacturing sector in India.
This is a complex policy issue which has direct ramifications for India’s effort to build a domestic manufacturing industry for cellular phones.
So far, the issues of regulating SEPs have been left to the judiciary, which, as an institution, has mostly missed the ball.
SEP
These are patents that cover technologies which are adopted by the industry as “standards”.
For example, technologies such as CDMA, GSM, LTE are all industry standards in the telecom sector.
Such technological standards are especially important to ensure 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 the handsets that they manufactured were compatible with GSM. Otherwise there would be no demand for their phones.
Opaque model
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 with little innovation in the telecom sector, have very little influence over how standards are set or how SEPs are licensed.
Theoretically, the companies which 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 owners of SEPs 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 cough up across the world 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) and $1.2 billion (2018) and another $272 million (2019) by the Europe Commission.
Not all these fines have been sustained on appeal but are a useful indicator of how other countries have responded to the issue from a competition law perspective.
Judicial lethargy and activism
The Indian response to the issue has been characterised by both judicial lethargy and judicial activism at the 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 Division Bench of the Delhi High Court, where it remained pending for an astounding seven years until a judgment 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.
While the competition law issues remained mired in litigation, the Delhi High Court proceeded to hear lawsuits filed by Ericsson and other SEPs owners against manufacturers of cellular phones on the question of 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.
The ordinary course of such litigation in most countries 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
The problem, however, is the manner in which 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 running into crores of rupees, before trial, are unprecedented in the history of commercial law for the simple reason that there is no provision in the law granting 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).
Yet, such judicial activism has been justified by the Delhi High Court by invoking its “inherent powers to do justice”.
Such similar logic has been used in the past by the judiciary to justify activist measures such as “public interest litigation”.
That the same argument has been used to justify activism in the name of the oppressed and also in the name of multinational corporations demonstrates how specious an argument it was in the first place.
Impacts
This judicial activism combined with judicial delays will have a negative impact on the government’s attempt to attract more investment in the manufacturing sector.
These measures, by government, have included payouts to manufacturers under the “production linked incentives” scheme for manufacturing in India.
It is worth questioning the rationale of putting money in the pockets of manufacturers, while turning a Nelson’s eye to the manner and the 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.
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