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Commercialization of Standard Essential Patents on FRAND basis through the process of Court

TELEFONAKTIEBOLAGET LM ERICSSON (Ericsson)

VS
 
LAVA INTERNATIONAL LIMITED (Lava)

-By Sushant Arora, Partner, Mumbai Office

Ericsson sued Lava in Delhi High Court over its Eight (8) Standard Essential Patents (SEP) relating to AMR, GSM and EDGE technologies. The matter was first heard in court in March 2015. Both companies tried to negotiate a FRAND Licensing agreement but failed. Subsequently, the Delhi High Court decided in favour of Ericsson and granted it an Injunction order restraining Lava from importing, exporting, manufacturing, and selling any mobile phones that use Ericsson’s patents and technology. 

Lava is a manufacturer of mobile devices such as smartphones, feature phones and tablet PCs, is headquartered in NOIDA, India. It has testing facilities in China, and “is the only Indian mobile handset brand in the country to have invested in research and development”.

In the process, the Court also held that when a patent is “Essential” for a particular “Standard”, then by implication, all manufacturers that claim to be compliant to the said technology are supposed to use the said technology, as those are claimed to be the standards.  This is so because it is impossible to claim compatibility with a technology and without that, it would amount to infringement of the said Standard Patent. In view of the above, the Plaintiff averred that there is no other option left with the Defendant but to obtain a license from the Plaintiff to use the said SEP and in absence thereof, it would be deemed to be considered as infringement.

Case Details
 
Ericsson (Plaintiff) had filed the present Suit for permanent injunction against the Defendant (Lava) seeking, inter alia, to restrain violation and infringement of its rights in its patents being:

  • IN 203034 titled as "Linear Predictive Analysis by synthesis encoding method and encoder";
  • IN 203036 titled as "Apparatus of producing from an original speech signal a plurality of parameters";
  • IN 234157 titled as "A method of encoding/decoding multi-codebook fixed bitrate CELP signal block";
  • CS(OS) No.764/2015 Page 2 of 67IN 203686 titled as "Method and system for alternating transmission of codec mode information";
  • IN 213723 titled as "Method and apparatus for generating comfort noise in a speech decoder";
  • IN 229632 titled as "Multi service handling by a Single Mobile Station";
  • IN 240471 titled as "A mobile radio for use in a mobile radio communication system";
  • IN 241747 titled as "A transcieving omit unit for block automatic retransmission request".

 

It was alleged by Ericsson that the above listed 8 Suit Patents related to three technologies in the field of telecommunications pertaining inter alia to 2G, EDGE and 3G devices (mobile handsets, tablets, dongles etc.), details of which are as under:

  • Adaptive Multi-Rate (AMR) speech codec - a feature that conserves use of bandwidth and enhances speech quality; (AMR)
  • Features in 3G phones - Multi service handling by a Single Mobile Station & A mobile radio for use in a mobile radio communication system; (3G)
  • Enhanced Data Rates for GSM Evolution (EDGE) - A transceiving unit for block automatic retransmission request; (EDGE)

 

Ericsson alleged that the above Suit Patents have corresponding registered patents in several countries of the world and that the relevant Technologies are essential for mobile devices (handsets, tablets, dongles etc.) to interoperate with network equipment, as per the standards prescribed by international standardization bodies that have CS(OS) No.764/2015 Page 3 of 67 been adopted and implemented in India by the Department of Telecommunications (DoT) qua AMR, 3G and EDGE enabled devices. It also submitted documents filed with ETSI (European Telecommunications Standards Institute) in this regard claiming that these 8 patents are in fact SEPs – Standard Essential Patents.

Ericsson also claimed ownership of above 8 SEPs vis-à-vis the GSM, GPRS, WCDMA Technology which cover Technical Specifications (TS teaches what is to be done and how it is to be performed) for a technology that forms a part of a standard. Thus, an Essential Patent can be said to be a patent that corresponds to an industry standard.

It was alleged that when a patent is essential for a particular standard, by implication for the technology concerned, all manufacturers of devices or equipment which are 2G, EDGE or 3G compliant are supposed to use the said technology belonging to Plaintiff's Suit Patents as those are claimed to be standards.  This is so because it is impossible to claim compatibility with a technology and without that, it would amount to infringe the Plaintiff’s patents. In view of the above, the Plaintiff averred that there is no other option but to obtain a license and in absence thereof, it would be deemed to be considered as infringement.

Based on the above averments, the Plaintiff contended the Defendant (Lava) was guilty of infringement, as the Defendant's phones are compliant with specified ETSI Standards and that the said eight Suit Patents correspond to various Standard Essential Patents (SEPs). The Defendant has no right to infringe the patents of the Plaintiff.

To support its allegation, the Plaintiff also produced & filed in the court the Defendant's devices and alleged that the same use AMR technology in 3G and 2G and possess CS(OS) No.764/2015 Page 5 of 67EDGE capabilities and thus, these devices are infringing its SEPs.

The Plaintiff also stated that it is obligated to offer a license of the said 8 SEPs to the Defendant on FRAND terms and has accordingly sought to negotiate with the defendant but the defendant has refused to take license on FRAND Terms. Therefore, the Suit has been filed and the plaintiff is entitled for injunction in view of infringement.

N.B. -  FRAND - Fair and reasonable and non-discriminatory. FRAND is also known as Reasonable and Non-discriminatory terms (RAND). The two terms are interchangeable, while FRAND is a term mostly preferred in European countries, the term RAND is preferred in the United States of America.

Fair primarily relates to the licensing terms being ‘Fair’ i.e. which are not anti-competitive and that would not be considered unlawful if imposed by a dominant firm in their relative market.

Reasonable refers mainly to the licensing rates. According to some people, a reasonable licensing rate is a rate charged on licenses which would not result in an unreasonable aggregate rate if all licenses were charged at a similar rate.

Non-discriminatory relates to both the terms and the rates included in the licensing agreements.

As the name suggests, this license requires an allegiance in order to maintain fairness in the competitive market with respect to existing competitors and to ensure potential new entrants are free to enter the market on the same basis.  FRAND requires that holders of Essential Patent do not discriminate, and do not restrict competition downstream. Licensors must avoid discriminating:

  • against and between other technology providers (e.g., by requesting unremunerated grant-backs, discriminating against IP-rich licensees and diminishing innovation incentives and technology competition);
  • against and between rival firms in downstream markets (e.g., by refusing to provide reciprocal licenses to rival manufacturers of standardized components or products);
  • against and between licensees in downstream markets (e.g., by offering royalty rebates and incentives, particularly when such discrimination is linked to exclusive or preferential supplies - resulting in “primary line” anti-trust injury).

 

The Plaintiff stated its Licensing offer to Lava (Defendant) was based upon FRAND rates offered by the Plaintiff to similarly placed third parties who had duly accepted the rates. The said rates were also same to the rates being deposited with the Court by Micromax, which was yet another similarly placed player in India.  However, the Defendant (Lava) did not agree to consider the non-binding term sheet and stated that "plaintiff was putting the cart before the horse". But the defendant further stated that it needed clarifications on various technical aspects which establish the essentiality of plaintiff's SEPs and also the necessity of a patent license agreement.

The Defendant (Lava) in turn, challenged the validity as well as essentiality of the 8 Suit Patents by filing its written statement and also filed a counter-claim alleging that the said 8 Suit Patents are not SEPs.  

The Court divided the issues into the following heads:

  • Whether 8 Suit Patents were actually owned by Ericsson? & Whether the suit patents were indeed SEP’s?
  • Whether Lava was willing to become Ericsson’s licensee on FRAND terms?
  • Whether the suit patents were prima facie valid patents under section 3 of Patent Act or whether Lava had been able to raise a credible challenge to the validity of the suit patents at the interim stage?
  • Whether prima facie case of infringement is made out by Ericsson against Lava?

With regards to these issues, the Court ruled that Ericsson was undisputedly the owner of the Suit Patents and had taken adequate steps to establish “Essentiality” of the 8 Suit Patents before ETSI.

The Court also observed that Ericsson had shared non-binding term sheets for License of the said SEPs, on FRAND terms and made Lava aware of how its mobiles were infringing Ericsson’s patents. However, Lava allegedly delayed the execution of a FRAND license agreement citing varying reasons including raising objections regarding Ericsson’s relationship with Qualcomm, which was rejected by the Court.

[Incidentally, Qualcomm, a chipset manufacturer was already a licensee of Ericsson and was utilizing Ericsson’s patented technology. Lava contended that since it was using Qualcomm’s chipsets, it was not infringing Ericsson’s patents; thus, implying that it did not need a license or any further license from Ericsson.] 

The Court was also observed that despite being involved in negotiations, Lava had filed a suit for declaration against Ericsson; while it per se, failed to challenge Ericsson’s patents. Instead, Lava had allegedly admitted to the validity of Ericsson’s patents and had, in fact, recognized them to be standard and essential. It showed that the sole intention of Defendant was to avoid execution of a FRAND License Agreement when the final stage arrived, all of which is clearly indicative of a lack of good faith on defendant’s part. Thus, owing to the unwarranted conduct of Lava during negotiations between the parties, the Court accepted Ericsson’s plea of Lava being an unwilling Licensee.

It was accordingly submitted by the Plaintiff that if the Defendant or any other company is allowed to use the patented technology and portfolio of the said SEPs for less royalty or without royalty, the entire arrangement of the Plaintiff with other companies would collapse. It submitted that the Licensee Companies like Micromax, Gionee, Xiaomi, iBall, etc., were similarly placed and after examining the validity of Standard Essential Patents, these Companies had entered into the said License Agreement with the Plaintiff.
CS(OS) No.764/2015 Page 38 of 67
It further held that the Defendant (Lava) was getting an unfair advantage in the market, firstly, by conducting its business without royalty payment and secondly by delaying the FRAND determination before this Court. In view of the lack of “bonafides” displayed in its conduct during the negotiation between the parties, it was observed by the Court that prima facie the Defendant is an unwilling Licensee.

The Court also held that the technology covered under Ericsson’s Essential Standard Patents did not fall under the auspices of Section 3 of the Patents Act, 1970 inasmuch as the same either related to telecommunication devices/ apparatus such as handsets, dongles, tablets etc. or various components that constitute an actual physical part/element of such devices such as encoders/transceiver etc. and that these technologies had resulted in the improvement of the existing state of the art technologies.  It also held that the Suit Patents were granted in favour of Plaintiff by the Patent Office, only after all the essential requirements for grant of a patent being novelty, inventive step and industrial applicability have been fulfilled along with ensuring that the subject matter of a patent does not prima facie fall under the head of excludable subject matter as detailed in Section 3 of the Act.  

The Court further held that the term 'algorithm' is being misunderstood and misinterpreted by the defendant inasmuch as the bar of Section 3(k) of the Patent Act applies to algorithms which are theoretical in nature and/or abstract formulae. This bar of Section 3(k) does not apply when in a patent involving modern day technology, for algorithms are employed in order to perform certain calculations or selections which are thereafter utilized by various hardware components or elements to produce / improve a technology and create a practical effect or result in a physical realization.

Prima facie, it appears that these inventions of the Plaintiff have resulted in an improvement (technical advancement) in telecommunication technologies and have had a huge effect upon the manner in which CS(OS) No.764/2015 Page 51 of 67 these technologies function thereby resulting in practical implementation and actual physical representation.

Lava in its Counter-Claim, had failed to establish as to how the patented technologies were merely software(s), and the Court held that Lava had failed to raise a credible challenge to the validity of Ericsson’s Patents and the pleadings made in the Counter-Claim could not be gone into at the interim stage to refuse an injunction.

The Hon’ble Court also held that the active life of a patent (post grant) is in the range of about 5 years or so.  It held that “Trade mark rights are perpetual and patent rights are limited. It takes several years, almost 8-10 years, before a patent is even granted. Patents can be asserted only once they are granted. So by the time they are granted, only 50-60% of the life of the patent is left. Thereafter if 4-5 years are spent in negotiations, then just about 5 years of patent protection remains.”
CS(OS) No.764/2015 Page 62 of 67
In the circumstances, immediate enforcement of Patent rights are to be protected in the case of Standard Patents that are registered globally and have been licensed by global players in over 100 agreements. The Defendant who had notice of the said Standard Essential Patents should not get the benefit of the loss of time. Moreover, the fact that the Defendant is aware of the Plaintiff's patents but has not challenged their validity and hence admits the same, should be a factor in favour of grant of injunction.

The Court held that “I am clear in my mind that once patent prima facie held to be infringed and no credible defence is established, injunction must follow even in cases of Standard Essential Patents, if any party is reluctant or unwilling and deliberately and intentionally avoiding to enter into license agreement on flimsy grounds, the injunction order is to be passed. It appears from the conduct of the Defendant that their approach is very negative and prima facie the Defendant is adopting hide and seek policy”.

The Court thus held that the Defendant is liable to be injuncted from manufacturing, importing, selling, offering for sale its devices including phones, tablets, dongles, etc. which infringe the Plaintiff's patented technology. The Court accordingly issued an injunction against Lava mobiles along with directions to the Custom Authorities in India to not release the impugned mobile phones if received from overseas countries under technology of Suit Patents of the Plaintiff.

It further clarified that the said interim order would become operative w.e.f. 21st June, 2016. From that date onwards, the Defendant shall not import mobiles under the patents and technology, which are subject of the suit patents, and shall not sell the same in the market, directly or indirectly through agent, shopkeepers, dealers, distributors or any other person on its behalf. The Defendant shall also not export the impugned goods.  All Custom Authorities in India are directed not to release the impugned mobile phones if received from overseas countries under technology of suit patents of the plaintiff to the defendant or any person on its behalf w.e.f. 21st June, 2016.

In the process, the Delhi High Court once again established that it has always been pro-active in protecting the Rights of the Patent Holders.  It has also been established that in case of Standard Essential Patents, a Patent Holder is entitled to license his patent rights on FRAND basis.