Regulation of standardised patent royalties: Why it may stifle innovation

In the 1940s, the New York City government, facing an influx of people to build ships for World War II, decided to regulate apartment rents, setting the maximum price landowners could charge from tenants. Seventy years later, New York City continues to face a shortage of housing; flats are often not renovated since landlords cannot charge more for a better-quality apartment, and a black market has emerged where the actual rent charged can easily be five times what is put on the lease. Some landlords even accept non-registered payments upfront to allow a person to move into a rent-controlled apartment.  

Determining the proper price of patented technology is a complicated task for those not having access to market information such as governments, in particular, for complex and dynamic markets like telecom where information is difficult to collect and constantly outdated. The current discussions underway in India are about possible regulation of royalties for standardised patented technology despite a large number of cases where price control policies have led to economic catastrophe. Regulation on patent licences has the potential to set the wrong price and eventually distort the market for technologies, thus harming consumers and innovators.  

Businesses, on the other hand, are in a much better position to gather updated and accurate information on the technical merit of technology, as well as its commercial value, and make use of it for this challenging assessment. 

Markets set prices for technologies in response to consumer demand. Consumers ‘regulate’ the supply of technologies by indicating their willingness to pay a specific price for those technologies. If this price is sufficient for innovators to cover their costs and risks in developing technology and earn a return on investment (ROI), they will be encouraged to develop the next cutting-edge technology.  If the price for patented technology is regulated -- leading to a price below the market price -- consumers may indeed pay less for it, but this benefit is short-lived. By depriving innovators of the possibility of an adequate ROI, governments will reduce medium- to long-term incentives to innovate and commercialise their innovations. 

Furthermore, patentees that license their technologies out have, in general, strong incentives to be reasonable in their pricing. Take cellular standards for example. Standards such as 4G and 5G are developed within standard-developing organisations (SDOs) made up of the industry. Companies involved in the process are typically interested in a long-term sustainable system due to the large and continued investments they make in standardisation. For a standard to be commercially successful, technology contributors submit formal commitments to SDOs to grant access to their patents essential to the standard (also known as standard-essential patents or SEPs) on fair, reasonable and non-discriminatory (FRAND) terms and conditions. These commitments are enforceable in courts worldwide and technology users, including Indian manufacturers in IT industries, can rely on them to ensure royalty payments are reasonable and that they are not discriminated against.  
 

The success of cellular standardisation based on FRAND terms and without government regulation is indisputable. Consumers can nowadays buy smartphones for as low as Rs 5000 compared to the 1980s when phones sold for $4,000. Innovation during this time has been a huge trigger in making phones affordable. For instance, 4G standard transfers data 12,000 times faster than the 2G standard. The success of FRAND has also allowed India to become the second-largest telecom network with estimates for its digital economy to reach $1trillion by 2025. 

Regulated prices to benefit implementers of standards in the short term would risk discouraging investment in innovation, destroying a proven well-functioning market. As the US Department of Justice said: “Underinvestment by the innovator should be of greater concern than underinvestment by the implementer.” 

Moreover, price regulation for standardised patented technologies would (1) diminish incentives for local businesses to invest in innovation, (2) reduce consumer choice and the availability of innovative products, and (3) stifle competition in markets for technologies. 

Instead, the most viable and sustainable way to reduce deficits in the payment of royalties is to encourage (1) investment in R&D, (2) participation in SDOs, and (3) education on the value of IP. Building an efficient and reliable patent system would also attract foreign investment besides allowing local innovators to become big players and increase their patent portfolios, making India a successful global player. 

Tsilikas is attorney at law, IP and anti-trust consultant, while Copra is general manager at Ericsson. The views expressed are personal