Standards administered by the IEEE are collaborative consortia that set specifications of technologies pervasive in the digital world, including the popular wireless local area networks (W-LAN or Wi-Fi). The purpose is to create products with reduced cost structures capable of interworking with each other. Patent holders of Wi-Fi technology commit to license their standard essential patents (SEP) to potential manufacturers on terms that are fair, reasonable and non-discriminatory (Frand). The Frand commitments are important, as patents owners are granted statutory monopoly rights to exclude others to manufacture, import or sell products embedded with their patents.
The obligation to license under Frand terms serves two purposes. First, they provide innovators with reasonable rewards for undertaking heavy and risky research and development (R&D) investments. Second, they ensure access to critical interoperable technologies which can be incorporated in devices by manufacturers, culminating in consumers being able to easily use digital technologies (such as Wi-Fi and the mighty internet-enabling 3G/4G) in their devices with increased capability at an affordable price.
The manufacturers typically use Frand-encumbered SEPs through cross-licensing agreements - if they have their own patents - or through patent-licensing arrangements. Currently, Indian manufacturers do not hold patents that may be significant to the development of technical mobile standards. Their business model is based on selling a range of smartphones and other information technology products by simply assembling pre-manufactured modules that are imported into the country.
Some Indian companies fighting patent battles are advocating changes similar to the IEEE's amendments in India. If implemented, these can significantly reduce patent value and prevent Indian manufacturers (due to lack of incentives) to conduct meaningful R&D in India, thereby contributing only a fractional value in the manufacturing process of smartphones. This will be a huge dent in the long-term objective of Make in India whose purpose is to conserve the outflow of precious forex on account of exponential increases in the import of electronic goods, and to enhance the domestic capability of this sector. The current estimate is that if this situation continues, the outflow on account of import of electronic goods will surpass the oil import bill by 2020.
According to information furnished by the IEEE, changes in its patent policy have had unfavourable effects on innovating companies, and on the entire process of standardisation, particularly for the vital 802.11 communications standard. The members communicated that the revised policy "appears to be not enforceable or implementable" and that the SEP-holders have either stopped contributing SEPs, or withdrawn them altogether, thereby slowing down the process of technological growth.
Among the changes to the IEEE patent policy, the most worrying are: requiring patent holders to abide by predetermined royalty rates, not seek or threaten to seek injunctions at any stage of the licensing process, and calculating royalties on the basis of the price of the patented component that goes into the standard (called the smallest saleable patent-practising unit or SSPPU), instead of the end-product price, which may result in under-compensation to technology providers.
Commitments by SEP-holders to license on Frand terms are obligations under private contracts that are made on voluntary bases. Standard bodies tackle many challenges, including differences in the patents embedded in the standard as well as those among patent holders and seekers spread across geographies. Because of this, predetermination of royalty rates may dilute the dynamic nature of the entire process and pre-empt any gains arising from negotiations and bargaining between licensing parties. Further, an outright denial to seek injunctive relief, as a possible remedy in appropriate cases of patent infringement dispute, is a violation of the rights of SEP-holders. This is especially true when a potential licensee is unwilling to enter into a licensing agreement on Frand terms, by employing delay tactics and stalling the negotiation process in bad faith.
Mandating licensing at the SSPPU level has its own challenges. For instance, if the entire device is itself capable of performing the invention and no other smaller component can perform this action, then using the retail price of the end-user device is the appropriate royalty base. Further, there are numerous SEPs in a standard and they are usually licensed out in large portfolios to minimise transaction costs. The cumulative value that accrues from these portfolios to the end-device may get most appropriately revealed in downstream in the end-user price. Relying singularly on the SSPPU approach can make the task of royalty determination more arduous even for experts, who will find it difficult to apportion value between patented and unpatented features contained in a complex technology.
Outside India, questions were raised about the compatibility of the new IEEE patent policy with laws in European Parliament, and it was informed that technology developers in Europe and the nUS were opposed to this overhauling because it diminishes the value of essential technologies. It was also claimed that ever since the new policies were adopted, European innovators, small and medium enterprises and research organisations, in particular, "are finding licensing extremely difficult and the development of important standards for technology such as Wi-Fi, 5G, and the Internet of Things is already being negatively affected".
In the light of this development, and the spate of ongoing Frand-related disputes in India, it is imperative to delve deeper into some of these sweeping changes.
The writer is an assistant professor at Jindal Global Law School and an assistant director of the Centre for Intellectual Property and Technology