I. SETTING THE TONE

The Standard Essential Patent (“SEP”) refers to a patent that encompasses an invention integral to adhering to a specific standard. It is difficult to manufacture standard-compliant products without using technologies covered by one or more SEPs. Once a patent becomes integrated into a standard and gains widespread acceptance, it confers exclusive market control upon the SEP holder. In order to encourage the utilization of the standard and mitigate any potential competition issues, standard-setting organizations (“SSOs”) worldwide mandate that SEP holders provide licenses under Fair, Reasonable, and Non-Discriminatory (“FRAND”) conditions. FRAND aims to ensure that patents are accessible to participants at a price comparable to their value in a more competitive market before they were deemed essential. However, such commitment does not prevent SEP holders from potentially engaging in abusive practices, highlighting the need for the intersection of competition Act and Intellectual Property Rights (“IPR”). This gives rise to the jurisdictional clash between the Competition Commission of India (“CCI”) and the Controller General of Patent (“Controller”) which has left both the authorities locking horns.

Initially, the conflict arose when Micromax and Intex filed an information with the CCI against Ericsson, accusing it of abusing its dominant position and breaching FRAND terms. In response, the CCI issued directives for probing Ericsson’s purported anticompetitive behavior. However, Ericsson contested the CCI’s jurisdiction before the Delhi High Court (“Delhi HC”), arguing that “any issue regarding a claim for royalty would fall within the scope of Patents Act, 1970 (“the Patents Act”) and cannot be a subject matter of examination under the Competition Act, 2002 (“the Competition Act”).” The single judge bench of Delhi HC rejected Ericsson’s claim stating that “even if the relief sought by the implementers is available under the Patents Act, this would not exclude the subject matter of the complaint from the CCI’s jurisdiction (¶202).”The Delhi HC’s reasoning primarily hinges upon the fact that the relief available to Ericsson in court would involve compensation in the form of damages or an injunction order, while the CCI’s authority is confined to determining the damages in the event of Ericsson’s involvement in abusive behaviours under Section 4 of the Competition Act.The Delhi HC instructed the CCI to proceed with its inquiry into the purported anti-competitive behaviour of Ericsson.

Interestingly, the two-judge bench of the Delhi HC on July 13, 2023, in Telefonaktiebolaget(PUBL) v. CCI (“PUBL”) reversed the earlier position and quashed the ongoing proceedings with the CCI 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. In a myopic view taken by the Delhi HC, the judgement has created a vacuum by precluding competition Act remedies to be utilized in cases where patents are abused in the market.

In this piece, the authors adopt a perspective that integrates legal and economic principles, contending that existing antitrust legislation plays a crucial role in both averting and addressing anti-competitive breaches of FRAND obligations. They also stress the significance of encouraging SSOs to implement robust FRAND regulations.

II. SEP DILEMMA: LAW AND ECONOMIC PERSPECTIVES ON ANTITRUST CONCERNS

‘Competition law enforcement is increasingly nuanced and rooted in rigorously developed economic methodology’ - Einer Elhauge

A. Unregulated SEP: Welfare Reducing Deadweight Loss

The following graph has been used by the authors to further explain the economic analysis:

In a perfectly competitive market, SEP holders charge royalties (R1) in line with FRAND terms which means that the Marginal Benefit (“MB”) (i.e. royalties that the SEP holders will get) charged is equal to the Marginal Cost (“MC”). The consumer surplus in this case would be represented by the addition of red, blue and green portions in the graph. Consumer surplus represents the variance between the value consumers place on a product and the actual price they pay to acquire it.In the context of the present analysis, standard implementers even with low purchasing powerhold a stand in the market because they can actually pay for it.

Now in the context of excessive royalties (“R2”) where MC for the SEP holder remains unchanged, the number ofstandards implement who could avail the SEP decreases from S1 to S2, leading to the creation of substantial dead-weight loss (represented by red-shaded portion in the graph). Deadweight loss is the reduction in economic efficiency resulting from a market equilibrium where the MC is not equivalent to the MB. In this case, since the dead-weight loss is so substantial leading to severe economic negative, the consumer surplus reduces and is now represented by only the green shaded area as with charging with higher royalties, the standard implementers with the low purchasing power would be ousted from the relevant market. Here, the royalty charged is so high that there is a willingness to pay but they cannot actually pay for it. Since implementers with higher purchasing powers are the only players gaining from the reduced consumer surplus, this leads to static inefficiency in the market.

Furthermore, by ousting the implementers with lower purchasing power, inefficiency is created in the market leading to reduced consumer welfare as the benefit which could have been attained leading to efficient outcome has remained unattained.

The objective of competition Act is to regulate the market in a manner that converts inefficient outcomes into efficient outcomes. However, when holders of SEPs within a relevant market engage in practices that stifle economic competition and hinder smaller standard implementers’ market access, it inevitably undermines consumer welfare. As a result, such actions are unequivocally categorized as anti-competitive.

Under competition law, comprehensive provisions empower regulatory bodies to investigate and address actions that may reduce consumer welfare within the market. Consequently, the jurisdictional authority vested in the CCI cannot be disregarded in such cases, necessitating the proactive intervention of the CCI to safeguard market integrity and promote fair competition to reach efficient outcomes.

B. Additional Set of Market Regulations

From a law and economics perspective, the necessity of implementing additional market regulations, particularly concerning SEPs becomes increasingly apparent. Transaction costs, which encompass the economic expenses associated with market interactions, play a pivotal role in the bargaining dynamics between patent holders and licensees. 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 hindrances to private bargaining.

The Normative Coase theorem, a foundational concept in this field, suggests that legal frameworks can facilitate bargaining by reducing transaction costs, primarily through the clear delineation of rights between parties. In this context, the establishment of well-defined FRAND regulations serves as a mechanism to minimize transaction costs by providing clarity on the rights and obligations of both patent holders and licensees. Ex-ante regulations, such as pre-set anti-competitive measures, are particularly crucial in mitigating transaction costs compared to ex-post remedies, available under Patent Act. The absence of pre-set regulations not only escalates transaction costs but also results in significant societal costs, as parties may refrain from seeking remedies due to prohibitive costs.

Competition authorities play a vital role in enforcing regulations to prevent the abuse of market power associated with SEPs and ensure compliance with FRAND commitments, thereby safeguarding innovation and consumer interests. For example, Carl Shapiro and Mark A. Lemley’s article explores the complementary role of antitrust laws in reinforcing contract law and other private agreements to prevent patent holdups. By harmonizing antitrust and contract law mechanisms, regulatory frameworks can effectively address patent-related challenges, alleviate transaction costs, foster innovation, and protect consumer welfare. Absence of regulation by the competition authority, SEP holders could take advantage to exploit their substantial market power by charging royalties far above the value of patent technology. Antitrust law is needed to constrain anticompetitive conduct by SEP holders.

III. PATENT ACT: A COMPLETE CODE IN ITSELF?

A. Compulsory licenses: a half-baked remedy?

Recourse under Section 84 of the Patents Act(Compulsory Licenses (“CL”) is solely accessible following the demonstration that the public’s reasonable needs have not been satisfied.The Patent Act does not bestow any investigative power on the Controller in this regard. Even though engaging in actions creating prejudice to a particular trade or industry is considered one of the reasons to seek a CL, it is only an ex-post check on such practices. CL may be sought only after three years from the date of grant of the patent, unlike the CCI which can address antitrust violations at any point. Similarly, any applicant must have previously applied for a patent at reasonable terms, to be eligible for the CL. The CCI has no such locus requirements, and can even take up cases suo-moto under Section 19.

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. In short, there exists only a partial cure to the situation while there is no prevention.Hence, pre-regulations ensuring compliance with FRAND obligations for SEP holders are imperative. Ignoring the adverse effects of non-compliance would be short-sighted and in such a scenario the CCI is best positioned to delineate FRAND obligations in India. In any case, the CCI is the specialized regulatory body in “conducting competition analysis” (Justice Sikri in CCI v. Bharti Airtel, ¶90).

B. Competition Act is far more efficacious in dealing with anti-competitive agreements While both the Competition Act and Patent Act have provisions against anti-competitive agreements, the Competition Act is broader, encompassing more agreements including exclusive distribution and tying, not covered by the Patents Act (depicted in the table below). This grants the Competition Act a wider reach in addressing such practices.

s. 140 of the Patents Act and s. 3(4) of the Competition Act: A Comparison in dealing with vertical agreements

IV. CONCLUSION

The intricate interplay between FRAND commitments, antitrust regulations, and patent laws in India underscores the need for a harmonized approach to address issues surrounding SEP licensing. The recent jurisdictional clash between the CCI and the Controller General of Patent, highlight the complexity of navigating this landscape. While the Patent Act provides remedies such as compulsory licenses, it falls short in addressing the immediate concerns related to anti-competitive behaviour by SEP holders. Conversely, the Competition Act offers a broader framework to tackle such practices, ensuring a level playing field and fostering innovation.

Furthermore, drawing from the precedent set forth in the case of Arshiya Rail Infrastructure Ltd. v. Ministry of Railway, an SEP could be classified as an essential facility under the Essential Facilities Doctrine. This doctrine, also known as third-party access, is a vital framework within competition policy that prevents dominant entities from denying access to essential facilities, which are difficult for others to replicate.Limitingaccess to essential standards by dominant entities, to the detriment of their competitors, may constitute a refusal to deal, potentially violating competition law. The recognition of SEPs as essential facilities underscores the importance of proactive regulatory intervention to prevent abuse of market power and ensure fair competition.

Moving forward, collaboration among regulatory bodies, SSOs, and industry stakeholders is crucial to balance innovation promotion and competition safeguarding in the SEP ecosystem. Only through such joint efforts can India establish a robust framework that upholds FRAND principles, protects consumer interests, and fosters technological advancement.

Harshal Chhabra and Shaswat Kashyap are 3rd year and 4th year students, respectively at Gujarat National Law University, Gandhinagar.