[This post is co-authored with Swaraj Paul Barooah.]
This is Part II of the two part post on the recent Delhi High Court decision on the Ericsson-Lava SEP dispute. In Part I of the post we focussed on locating reasons for the FRAND determination by the Court. This part focuses on the Court’s findings on and calculation of damages payable to Ericsson, while critiquing the reasons (and the lack thereof) in the judgment. We shall also highlight the issues in the rationale behind adopting the global FRAND rate by the Court and how it fails to take into account consequential inconsistencies they may rise up in future.
Determination of Damages Using FRAND Rates
Once it was determined that Lava was an unwilling licensee (refer to Part I), the Court then moved to discussing how damages should be evaluated in SEP infringement cases. The Court first established a broad, overall principle of royalties determination and then discussed whether the “filters” proposed by Lava for calculating the damages will be applicable or not.
For the broad principle, the Court relied on the Division Bench order in Xiaomi Tech v. Ericsson, holding that royalties payable to the licensee will be the measure of damages for infringement. The logic behind this seems to be to compensate Ericsson for the royalties it would’ve received had Lava agreed to a FRAND based license agreement. Once this understanding was established the Court then discussed : –
- Whether damages can be granted only for the tested devices or all the devices
Lava argued that it should be held accountable for paying damages for only those devices (4 models) which were tested and found to be implementing the seven suit patents. The Court disagreed with this assertion and held that since the devices of Lava are compliant with the relevant AMR, EDGE, and 3G standards for which these suit patents are required, damages should be calculated for all of them. This seems pretty straightforward because if specific patents are used in a set of standards, then all devices incorporating that standard will use those patents, or they wouldn’t be compliant with the standard. There are two issues with the decision in this regard i.e. first, it does not specify the exact standards in the case. Second, it does not specify the number of total devices by Lava. Was it a conscious call, owing to the excessive confidentiality concerns? But the device models are in the market already, so was this an accidental omission on part of the Court?
- Whether damages can be granted only for the smallest saleable patent practising unit (SSPPU) or for the complete device
Lava argued that the damages should be granted only on the basis of the chipsets and not on the basis of the market value of the end products. For this, it relied on the US decision in Ericsson v. D Link Systems Inc and Ors. where the US Court held that royalties can be calculated on the basis of SSPPU. The Court however disagreed on this assertion, holding that unlike the product in the US case where there were multiple components, in the present case, in a device like a mobile phone, telecommunication network connectivity is not just a supplement function but rather is a core feature. The Court associated this practice of calculating royalties on the basis of the final product with the “economic reality” where value and functions of mobile phones are not limited to their individual components but are derived from integration of different technologies into one.
In doing so the Court may have overstepped in terms of estimating the contribution of Ericsson’s patent in Lava’s devices. The Court in rejecting Lava’s proposal ruled that “the patented technology is central to the primary function of mobile devices…” but the order does not clearly discuss what exactly is the contribution of the subject standard for smartphones overall. This is somewhat explained in Ericsson’s witness’ response to question no. 403 where they state how components like large screens are intertwined and integrated with 3G and 4G technology to communicate data packets and utilize the standardized technology to the most optimum level. However, in order to determine damages it must be kept in mind that mobile phones have other constantly evolving features like cameras, speakers, integrated circuits enabling the users to play games etc. Therefore, considering the dynamic nature of the field the decision seems mostly inward looking and arguably has overcompensated Ericsson.
Another question that rises up here is that as said above, devices like phones and tablets are comprised of other non chipset components like cameras and screens too. Let’s assume if tomorrow Lava is due to pay royalties for a patent on cameras then they’ll be required to pay up separately for camera (presumably on a non SSPPU basis, considering that cameras are not central to the primary function of mobile phones as per the Court’s assessment) in addition to paying royalties on the market price of the complete device (including camera). Therefore, won’t this result in situation where Lava is paying up royalties multiple times for using the same feature?
Also, the decision seems to keep Lava’s devices like mobile phones, dongles, and tablets, which use the subject standard, under the same bracket. But this raises a curious question i.e. is the patented technology central to the primary functions of all the devices? If so, then the decision should have expressly explained this understanding.
- Whether damages can be granted only for infringed patents or for the entire portfolio
On this issue, Lava seemed to have made the logical argument that since it was held to be infringing the essential suit patents, it should not be asked to pay damages by applying the royalty rate of thousands of patents across jurisdictions as the same would be disproportionate and excessive. Opposing this assertion, Ericsson argued that it is the industry practice to grant “global portfolio license” on FRAND rates and that it would be impractical for the SEP owner to grant individual licenses on a country by country basis. The Court agreed with Ericsson’s assertions and held that the key aspect for SEPs is to ensure a compatible environment for different interoperable devices and services. The Court reasoned that when an implementer is implementing a standard, it is automatically implementing all the patents essential to that standard and thus when a license is obtained, it is obtained for the entire portfolio. Consequently, damages will also be asserted on the basis of the entire portfolio and not just the suit patents.
On the basis of the above finding, the Court held that comparable licensing agreements provide the best mode of determining FRAND royalty rates. Thus, the Court held that the most appropriate FRAND rate to apply here would be the one offered by Ericsson to Lava in November, 2015, which was based on a Global Patent Licensing Agreement (GPLA) between Ericsson and a confidential third party, which were comparable to the rates negotiated by Ericsson with other similar entities in India. There Ericsson had offered two ranges of rates for 2G and 3G devices. The problem with picking up the global royalty rates in the present case can be seen from the explanation by Prof Siwal and Victor Vaibhav Tandon in their post here, stating that determination of the global rate should take into account the market presence of the implementer in different jurisdiction and the fact that the strength of a SEP holder’s portfolio may vary from jurisdiction to jurisdiction.
In the present case, importing the rates of a separate GPLA may somewhat discount the fact that Lava was only supplying its products to India and Nepal. It doesn’t make sense that the comparable rate selected for them is the rate which may be applicable on parties who may be exporting their products to other countries. How is the application of a global rate on an enterprise that is not exporting its products to these other countries regarded as fair. One could even argue that it is unFair, or unReasonable, or perhaps even Discriminatory. Separate from that is the question of how an Indian court can determine the appropriateness of “global rates”. Patents are territorial after all. And as seen in the current case, not all patents are applicable in all jurisdictions. How can the Court then state that the global rate is a FRAND one? Another issue with determining a global FRAND rate, as pointed out by Prof. Siwal and Victor Vaibhav Tandon in their above post, is -what about the situation when some other court holds a separate rate as the global FRAND rate? Will the rates previously determined by the Court be unFRANDed then? Importantly, in its analysis, the Court has focused only on the “Non Discrimination” aspect of FRAND. As seen in the analysis on page 450- 451 of the decision, the Court determined the offered rate to be FRAND because the same was similar to the 2015 comparable rate, without assessing if these rates were reasonable or fair in the first place.
Also, the Court had earlier said that Fairness should include “equitable aspects of licensing…respecting both patent holder’s contribution and licensee’s rights”. But it does not seem to have applied the same understanding in its assessment because it would be inequitable to apply the GPLA rates on Lava without taking into account its reach in the relevant market. Arguably, even non-discrimination may account for equity since while ensuring that a rate is consistent across different licensees, it should also be equitable.
Calculation of Damages
Moving on, surprisingly, the Court held that since Lava did not negotiate in good faith the higher rate for calculating damages, the highest rates from the offered range will be applicable on them. As one suit patent was held invalid thus impacting the overall valuation of the patent portfolio, the Court applied the principle of “preponderance of probabilities’ ‘ assuming that 1/8th patents in the patent portfolio are likely to be invalid. Consequently adjusting the strength of the portfolio. The Court then fixed 1.05% as the average rate for 2G and 3G devices and imposed damages worth INR 244,07,63,990/- (Two hundred forty-four crores seven lakhs sixty-three thousand nine hundred and ninety!) for the period from 1st November 2011 (the date on which Ericsson first approached Lava for negotiations) till 8th May 2020 (the date on which last of the above suit patents expired.) Of this amount, 50 crores already deposited by Lava against a 2016 interim injunction was directed to be adjusted. But the issue here is that the last patent is expiring almost 2 years after the date of expiration of the first patent’s term and by adopting this methodology the Court is exerting the rights under first patent beyond its permitted term.
This is perhaps the most contentious bit of the decision since the Court seemed to have blurred the lines between what may be relevant during negotiations and what may be relevant during the infringement analysis. While licensing the entire patent portfolio would have been the common practice during the FRAND negotiations, the rates were now being determined in an infringement suit for calculation of damages i.e. a statutory remedy. There may be some merits in arguing that calculation of damages on the basis of the entire portfolio makes sense in case the impugned products are exported to other countries, where some of the other patents are enforced. But in the present case, Lava was not exporting its mobile phones in countries other than India and Nepal. Now of course, had the parties entered into a licensing agreement Lava would have had to pay a specific rate for using Ericsson’s SEP, regardless of the actual usage, but when the Court is calculating the rate to determine the damages, convenience of the SEP owner to receive more royalties than the actual usage by the implementer should not be a factor here for the Court to account for.
In context of this order, a broad public policy issue that should be kept in mind here is that telecom is an innovation intensive sector and plays a crucial role in overall technological advancement of the nation. In light thereof, the problem of information asymmetry in SEPs (see the subhead titled “Information Imbalance” in this paper by Dr. Victor Vaibhav Tandon and Prof. Ashwini Siwal for the relevant background) puts the implementers from countries like India at a backfoot, where the control over evolving tech lies in the hands of the entities from developed nations. We have previously seen instances where Indian companies had to cough up big bucks in different SEP related suits and this decision perhaps tops that list now. What is problematic here is that the Court seems to have come to its conclusions with inadequate reasoning, opening doors to more litigation and confusion down the line. Considering that this decision will likely to be seen as precedent, it’s implications in future SEP disputes will be something to keep an eye out for.
[The authors would like to thank Dr. Victor Vaibhav Tandon for his inputs on the post. Please note that the inputs shared by Dr. Tandon were his alone. The views expressed in this post by the authors’ are theirs alone.]