Home / Quick Pickle / In Pursuit of Fairness: Delhi High Court’s Do’s and Don’ts for SEP Negotiations

In Pursuit of Fairness: Delhi High Court’s Do’s and Don’ts for SEP Negotiations

In Pursuit of Fairness: Delhi High Court’s Do’s and Don’ts for SEP Negotiations

Introduction:

SEP jurisprudence, evolving across multiple jurisdictions, consistently underscores the paramount importance of “Fairness” in all dealings ensuing in a FRAND negotiation. Indeed, the concept of ‘good-faith’ negotiations between SEP Holders and Implementers is acquiring increasing significance, as evidenced by the imposition of elevated royalty rates and even interim deposit orders, preceding a final adjudication on merits in the matter. Courts are increasingly cognizant of the strategic use of litigation as a bargaining tool and have therefore delineated the parameters within which parties are expected to operate prior to approaching the court, so as to demonstrate their bona fides.

Courts, in evaluating each case, are trying to strike a balance to prevent both ‘Patent Hold Up’ and ‘Patent Hold-Out’ scenarios. For SEP Holders, the consequences could entail a denial of injunctive relief, while on the other hand Implementers may face heightened royalties, litigation expenses, and punitive damages, in addition to being injuncted. This article provides an overview of the guidelines developed by Delhi High Court (DHC) in SEP cases, outlining behaviours deemed as “unwilling” and therefore undeserving. As SEP negotiations are extending beyond the telecom sector, awareness of these considerations is crucial to enable a party to avoid pitfalls, and a overshadowing of their arguments on merits.

However, before delving into the DHC’s perspectives on FRAND negotiations, it is imperative to first comprehend the foremost decision passed in the Huawei Technologies Co. Ltd. v. ZTE Corp. & Anr.[1], matter which has profoundly shaped DHC’s assessment of what constitutes as proper conduct in a FRAND negotiation.

  • Huawei vs ZTE (supra): The Court of Justice of European Union (CJU) while answering the reference question of ‘what constitutes the abuse of ‘dominant position’ by the SEP Holder under Article 102 of TFEU’, laid down the protocol that needs to be adhered to during a pre-suit FRAND negotiations. This decision has been consistently relied upon by DHC so as to ensure a balance of the equities, while safeguarding the implementer’s ability to challenge the claims made by an SEP holder: The following steps have been specified for a fair ‘FRAND’ discussion:
    • Alerting the implementer and specifying the mode of infringement: SEP holder before instituting a complaint is mandated to first alert the infringer of the claimed infringement, by designating the SEPs and specifying the manner in which it has been infringed. The reason for such compulsory notice is because Court observed that a standard ordinarily constituted numerous SEPs, which an implementer may not be aware of.
    • SEP holder to give written FRAND offer: Thereafter, it is for the proprietor of the SEP to present the alleged infringer with a specific, written offer for a license on FRAND terms. The Court observed, that in the absence of a public standard licensing agreement, and where licensing agreements have already concluded with other competitors are confidential, the proprietor of the SEP, is better placed to check whether it’s offer complies with the condition of non-discrimination.
    • Licensee to respond diligently in good faith: the Implementer is then required to respond diligently to the SEP holder’s offer and in good faith without employing any delaying tactics.
    • If SEP Holder’s Offer is not accepted, then promptly give a written Counter-Offer: Should the Implementer not accept the offer made to it, Licensee is expected to promptly give a written specific counter-offer that corresponds to FRAND terms. Where the infringer is using the teachings of the SEP, the implementer is also required to provide an appropriate security (BG or Deposit as per commercial practice in the field). It has been prescribed that the calculation of the security must include a) number of past acts of use of SEP and b) a rendering of the account in respect of those acts of use.
    • Agree to be bound by third-party FRAND determination: If no agreement is reached between parties, parties may then by common agreement request FRAND determination by independent third party by decision without delay.
    • Licensee is entitled to challenge Essentiality, Validity and Infringement: Since SSOs do not assess the validity or essential nature of the patents during the standardization process. Consequently, Court held that an alleged infringer is entitled to challenge the validity, essentiality, or their actual use of the asserted patents, either during the licensing negotiations or reserving the right to do so later.
  • Intex Technologies (India) Limited v Telefonatiebolaget L.M. Ericsson (Publ)[1]This is the very first decision of the DHC, which while relying on the decision of Huawei vs ZTE (supra), laid down certain specific considerations in the facts of the said case, which gave crucial insight into what could constitute as an “unwilling licensee”.
  • Factual Background: Ericsson had filed a Suit before DHC in 2014 against Intex for seeking permanent injunction restraining infringement of 8 Suit Patents claimed to be essential to 2G and 3G telecommunication standards, including relief of damages/rendition of account and delivery up. This was filed after engaging in almost 5 years of pre-suit negotiations, as Ericsson had first reached out to Intex for licensing its 2G and 3G SEP global portfolio in December 2008. The timeline discussed in the case, reveals that the signing of the NDA itself took around 4 years, thus indicating that substantive discussions on Ericsson’s portfolio had perhaps taken place only during which time Intex had also given a counter-offer.

    Intex had also instituted an “abuse of dominant position” case against Ericsson before the Competition Commission of India (CCI) [‘CCI Proceeding’], while filing Revocation Petitions against 5 Suit Patents before IPAB [‘Revocation Petitions’] in the month of Aug-Sept, 2013 i.e. during ongoing licensing talks. Once Ericsson was made aware of these actions, the negotiations came to an end in March 2014 and the above suit was filed.

    The Single Judge vide Order dated 13th March 2015 held that Ericsson’s Suit Patents were prima-face valid and essential, and that Intex has prima facie infringed Ericsson’s patents. Court further held that Ericsson demonstrated prima face compliance with its ‘FRAND’ commitment and Intex’s act of prolonging pre-suit negotiations and thereafter initiating proceedings against Ericsson before the CCI and IPAB in the midst of licensing negotiations, prima facie showed its unwillingness to execute a FRAND licence. It was also held that chipset basis for calculation of royalty could not be accepted and the practice of royalty calculation on the end-device price is non-discriminatory. Accordingly, the Single Judge disposed of Ericsson’s interim Injunction Application with the direction for Intex to pay a royalty on end-device net selling price at the same rate of royalty, as what was being paid by Micromax in another suit, which in turn was an amount arrived at pursuant to reviewing 26 agreements of Ericsson. Intex was directed to pay 50% royalty in form of Bank Guarantee (BG) and 50% as deposits.

    Intex then appealed against the Single Jugde’s order in its entirety, whereas Ericsson appealed to the limited extent of seeking modification, so has to receive a deposit for the entire amount and not just 50% as directed by the Single Judge. The Division Bench (DB) in appeal, upheld the decision of the Single Judge on merits, however it also allowed Ericsson’s appeal, by directing Intex to deposit the entire amount in favour of Ericsson rather than just 50% as BG.

    Observations of the DB Court on what would constitute as unfair behaviour in FRAND negotiations:

    • The DB relied on Huawei v ZTE recommended guidelines of conduct of willing Licensor and willing Licensee and held that the Standard Essential Patent regime envisages a candid and transparent negotiation between a willing licensor (Patentee) and willing licensee (implementer). Court was of the view that FRAND cannot be construed as a ‘one way street’ where obligations are cast on the Essential Patent holder alone and thus it was important to balance equities and ensures a level playing field. Accordingly, the Court held that “the conduct of the parties during negotiations is one of the key factors to be kept in mind while assessing whether a potential licensor and licensee were a willing licensor or a willing licensee.”
    • Who would be a Willing Licensor? Licensor will be considered willing licensor if it alerts the accused implementer of the SEPs and the mode of infringement, gives a FRAND offer and in certain situations provides necessary information (subject to NDA) for a licensee to be able to evaluate [‘non-discriminatory’ part of FRAND] an offer. If the licensor offers a supra-FRAND offer i.e. exorbitant royalty rates, then it will not be considered a willing licensor.
    • Who would be a Willing Licensee? After getting written offer from Licensor, a willing licensee would have to make a counter-offer on FRAND terms. Court held that an implementor has no right of silence or inaction on the ground that it has not been given access to SEP holder’s agreements. Court further held that in order to be able to make a counter-offer, implementer can take recourse to its own license agreements executed with other SEP licensors. Court further held that the counter-offer should be given along with an appropriate security in order evidence bona-fides. Court was of the view that if no ad-hoc royalty is paid during the interregnum, then such party benefit to the disadvantage of other willing licensees, and gets an unfair competitive edge in the market.

    Keeping the above principles in mind, the Court found Intex to be prima-facie an “intentional unwilling licensee” and infringing Ericsson’s patents due to the following facts:

    • During 5 years of pro-longed negotiation talk, Intex did not raise objection regarding essentiality.
    • During negotiation, Intex did not share any of its own claim charts with Ericsson either indicating use of alternate technology or disputing essentiality of Ericsson patents or countering Ericsson’s claim charts.
    • Intex’s pleadings before the CCI were seen as an admission of the Ericsson’s claims of possessing valid and essential SEPs.
    • Intex till the date of passing of the impugned order had not filed any counter claim or expert evidence along with claim charts to dispute Ericsson’s claim charts and/or to deny essentiality or the allegations of infringement.
  • Nokia Technologies Oy v. Guangdong Oppo Mobile Telecommunications Corp. Ltd. and Others[2]–  In this matter, the DB of the DHC for the very first time laid down the guidelines for grant of pro tem deposits in SEP matters. This case also shed light on the various factors of the Defendant’s conduct which was taken into consideration while prima facie holding infringement in favour of Nokia.
  • Factual Background:  Oppo had secured a licence for use of Nokia’s 2G, 3G and 4G Standard Essential Patents in 2018 for a period of three years (expiring on 30th June, 2021) [‘2018 Agreement’]. The said 2018 Agreement was a cross-licence agreement for patents belonging to both the parties. On expiry of the 2018 License Agreement, OPPO continued selling its 2G, 3G and 4G devices, as well as, started selling 5G devices, and even though OPPO was engaged in negotiations with Nokia for a renewal of their licensing arrangement, and had even given counter offers, the said negotiations had failed.

    In the suit instituted by Nokia, it insisted that in light of the fact that both parties were previously engaged in FRAND negotiation and OPPO being an ex-licesee, the Court should direct OPPO to make some interim pro-tem deposits, even before a prima facie determination of Nokia’s claims on merits. Nokia had contended that during the pre-suit negotiations OPPO had in fact agreed to make interim payments. While OPPO contended that during negotiation, OPPO had raised multiple concerns about the essentiality and validity of Nokia’s 2G-4G SEPs and thus there was no admission of Nokia’s claims. Further, OPPO assured that its bonafides were evident from the fact that it had already submitted a global Bank Guarantee in accordance with its counter offer, as per the guidelines of the Huawei vs ZTE decision. The Single Judge, however, denied Nokia’s request on the ground that since Nokia had preferred an application under Order 39 Rule 10 read with Section 151 of the CPC, and there was no “admission” of any of the claims asserted by Nokia, an order of pro tem deposits was not made out.

    Nokia then preferred an appeal against the decision of the Single Judge in which the DB set aside the decision of the Single Judge, by holding that in view of the fact that OPPO was an ex-licensee of Nokia for the asserted technologies, and since it showed willingness to renew the 2018 Agreement and to make interim payments as late as June 2021, coupled with the fact that it had approached a Court in China for determining a FRAND rate and also bearing in mind the financial condition of Oppo, an order of pro-tem deposit was made out. Accordingly, the Court directed OPPO to deposit 23% (India sales out of global sales) of the last paid amount under the 2018 Agreement in Court.

    DHC’s finding on unwillingness on the part of OPPO and the factors which contributed to a prima facie finding in favour of Nokia, and the basis for ordering pro-tem deposits against OPPO:

    • OPPO being an ex-licensee: Court observed that “Normally speaking, a pro-tern deposit should be directed only after a prima facie finding of essentiality and validity of the suit patents has been recorded, but in the present case where Oppo itself licensed the Standard Essential Patents of Nokia against royalty payments under the 2018 Agreement over a three year period and admitted its obligation in law to secure a new licence agreement commencing July, 2021 for Standard Essential Patents of Nokia, there arises a prima facie presumption that the challenge to essentiality and validity of Nokia’s patents is merely an afterthought”.
    • OPPO’s offer of making interim payments: Court held that Oppo offers of making interim payments were not part of its “without prejudice offer” to settle the disputes out of Court but rooted in the context of litigation and therefore it could be relied upon in the Court proceedings.
    • FRAND case pending before China Court: Court held that OPPO’s suit in Chongqing China, for determination of FRAND rates for Nokia’s portfolio was a prima facie admission that Nokia does own Standard Essential Patents and that Oppo must necessarily license it against FRAND royalty payment.
    • Objective material to determine the quantum of ‘pro-tem’: Court held that in the said proceedings there was objective material to determine the quantum of ‘pro-tem’ security, viz 2018 Agreement and Oppo’s willingness to renew the licence agreement and multiple counter-offers extended by it.
    • Finding of infringement and unwillingness on the part of OPPO by Foreign Courts: Court observed that out of the 13 proceedings filed globally inter se between the parties with regard to the same portfolio of Standard Essential Patents, 11 Courts [including those of Netherlands and United Kingdom in a (non-SEP case)] found infringement in favour of Nokia and 5 Courts [including German Courts] had found Oppo to be an unwilling licensee.
    • German Bank Guarantee held to be not sufficient: Court held that the bank guarantee already offered by Oppo in Germany was in compliance with the general directions contained in the judgment of the ECJ in the case of Huawei ZTE (supra) and not in accordance with any specific direction passed by any Court. According to the Court, the said BG did not provide any security until a license agreement was entered into between the parties. Thus, there was no security for the default in payments obligations under yet to be concluded agreement. The Court further observed that while the German Courts had not expressly assessed the sufficiency or adequacy of the bank guarantee, yet the insufficiency of the bank guarantee was evident from the fact that despite a bank guarantee having been furnished, the German Court has found Oppo to be an unwilling licensee and has consequently permanently restrained it from manufacturing and selling its devices in that country.
  • Telefonaktiebolaget LM Ericsson v. Lava International Ltd[3]. In this matter DHC, has rendered a final decision pursuant to trial and thus the case gives valuable insight into various factors and evidence which ultimately weighed in the Court’s mind while holding Lava as an “unwilling” licensee.
  • Factual Background: Ericsson had notified Lava on 1st November, 2011 to take a license for its SEPs for 2G and 3G global portfolio. After 2 years of exchange of email correspondences, parties signed the NDA in March, 2013. Post signing of NDA, during 2013-2014, on Ericsson sharing the term sheet for a normal bilateral patent license agreement, Lava sought technical information from Ericsson of its asserted SEPs as well as third-party license agreements. Ericsson provided technical information with regard to all the SEPs including the claim charts and the standards to which they correspond, and the clarifications as sought by Lava but refused to provide third-party license agreements on the ground of confidentiality. However, in 2014, Ericsson offered to Lava the rates that were offered by Ericsson to Micromax (similarly situated entity) in similar matter in terms of the order dated 19th March, 2013 passed by DHC to which Lava neither responded nor made any counter-offer. On insistence of Ericsson, Lava agreed to schedule a physical meeting in India on 6th February, 2015 and accordingly, Ericsson sent list of high-level representatives who would be flying to India. Just two days before the proposed meeting scheduled on 6th February, 2015 when the Ericsson’s representatives already reached India, Lava sent a communication dated 3rd February, 2015 to Ericsson, wherein it was disclosed that Lava had filed a suit against Ericsson in a Noida Court on 28th January, 2015.

    Noida Suit by Lava: After more than 3 years of the parties corresponding with each other, Lava preferred to file a Suit before District Court of Noida, U.P. (“Noida Suit”) in 2015 for seeking declaratory relief against  Ericsson, and for seeking protection against Ericsson’s groundless threats of litigation. Lava, as alternative plea, also sought a declaration of the Fair Reasonable and Non Discriminatory (FRAND) terms for Ericsson’s claimed SEPs.

    Proceeding before Delhi High Court (DHC): Soon thereafter, in 2015 Ericsson filed a Suit before DHC claiming infringement of 8 of its SEPs (6 2G and 2 3G), and thereby seeking permanent injunction and consequential reliefs, along with a declaration that the rates offered by Ericsson for its SEP portfolio were FRAND in nature. Lava accordingly filed a Counter Claim, seeking revocation of Ericsson’s 8 patents. In the meantime, vide order dated 31.07.2015, the Supreme Court, transferred the Noida Suit to DHC to be clubbed with the Ericsson’s suit.

    During the course of the proceedings, vide order dated 10.06.2016, DHC passed a conditional interim injunction against Lava, to deposit Rs. 50 Crores with the Court. This amount was thereafter reduced to Rs. 30 Crores in Appeal and the matter progressed to trial which commenced in February, 2016 and concluded in July 2016. The final hearing before the Hon’ble Judge who had rendered the ultimate decision had commenced on 8th February, 2023 and was concluded on 30th May, 2023.  On 28th March 2024, Delhi High Court (DHC) pronounced its final judgment in the cross-suits filed between Ericsson and Lava, ultimately deciding the matter in favour of Ericsson by granting it damages to the tune of INR 244 Crores (USD 29.9 Million) on the basis of offered FRAND rate (1.05% of the net selling price of the devices sold by Lava) along with legal costs.

    Court’s Findings on FRAND obligation and unwilling licensee:

    • Lava deliberately delayed execution of the NDA: From 1st November, 2011 when Ericsson first asserted infringement of its SEPs through notice to Lava, Lava deliberately delayed signing of NDA for 3 years by raising various objections to the NDA draft.
    • Lava never questioned the essentiality during pre-suit negotiations: Court found that Lava only repeatedly took time to revert  on technical queries  and in effect never questioned the essentiality of the suit patents during the period of negotiation. It further held  that Lava was engaged in discussions with Ericsson for a period of 3 years, which in itself shows that it believed that Ericsson’s patents were essential.
    • Lava unnecessarily insisted on third-party license agreements of Ericsson: Court held that Lava was “dishonest” in insisting that Ericsson provides its third-party license agreements. According to the Court such a request blatantly disregarded the confidentiality attached to these third-party agreements. According to the Court after the signing of the NDA between the parties, Ericsson was not obliged to provide confidential information pertaining to third parties, as the purpose of executing NDA was to share confidential information pertaining to signatories to the said NDA. Court further noted that even ETSI does not impose a duty on the IPR owners to disclose commercial licencing terms to prospective licensees.
    • Lava filed a Suit before the proposed physical meeting between the parties could take place: Court was of the view that when Ericsson’s high-level representatives had already arrived in India to negotiate the licensing terms on a mutually agreed date of 6th February, 2015 in a complete volte-face, Lava filed the Noida suit. It was only on 3rd February, 2015, that Lava had informed Ericsson of the Noida suit, by which time the various representatives from all over the world were already in India.
    • Lava failed to provide any rebuttal to Ericsson’s claim of essentiality and infringement- Court held that while Lava claimed that the Standards could be implemented through alternative methods which are different from the suit patents, it failed to demonstrate the same with any cogent evidence. Court also observed that Lava had not led any evidence or expert analysis to prove that the conclusions drawn in Ericsson’s test reports were incorrect and misleading.
    • No Counter-Offer was given by Lava: Even though Ericsson had shared copies of the interim orders passed by DHC in a suit filed by Ericsson against Micromax, which contained rates that were offered to similarly placed entities as Lava, Lava failed to give a definitive response to the said offer, nor did Lava give any counter-offer to Ericsson. In fact, even during the hearing, when Court enquired from Lava whether rates offered to Micromax is acceptable to Lava, Lava remained unresponsive.
    • Court ordered upper end of the FRAND rate for Ericsson’s entire portfolio: Since Lava did not engage in negotiations with Ericsson in good faith, Court ordered the upper end of the FRAND range for Ericsson’s entire portfolio and not just the asserted suit patents. Further the Court ordered Lava to render damages from the date they were first contacted by Ericsson i.e. 1st November 2011.

Conclusion:

While positioning itself as a key jurisdiction for SEP dispute resolution, the DHC’s influence rendered through the aforementioned decisions has clearly reverberated throughout the Indian telecom industry and its echo is bound to be felt in other domains as well. Therefore, a review of the various considerations articulated in the above decisions could be summarised into the following guidelines that may be borne in mind while engaging in FRAND negotiations with an SEP Holder

  • Firstly, as soon as SEP owner gives notice of infringement of its SEPs in writing, the Implementer must respond promptly in writing without any delay and seek necessary information and documents for assessing the alleged claim of infringement.
  • Secondly, signing of an NDA would not necessarily ensure access to SEP owner’s third-party license agreements which could be withheld till the matter progresses to litigation. However, the implementer can seek information that would explain the computational basis for the royalty rates sought by the SEP holder and an assurance that similar rates have been paid by other third parties.
  • Thirdly, any challenges as to validity and essentiality of the claimed SEP should be taken at the very first instance. A delay in this regard may be perceived as a defence in afterthought. In this regard, it may be fruitful to agree on the scope of patents that would be reviewed so as to speed up the assessment, as otherwise an insistence to review every patent claim, may also be perceived as a patent “hold up” strategy.
  • Fourthly, if Implementers are raising non-infringement claims on the basis of employing alternate technology, then they would be required to provide necessary evidence in this regard. Expert reports may be relied on to advance such technical pleas.
  • Fifthly, Implementer should respond with a counter-offer, based on it’s own assessment of the SEP holder’s portfolio, by taking guidance from either their own third party license agreements for the very same technology or publicly available information about SEP Holder’s portfolio, if any.
  • Sixthly, Implementer should be prepared to submit a security equivalent to the counter-offer made by it. A Bank Guarantee of a foreign bank may not be acceptable to either the SEP holder or the Indian Court and thus a Bank Guarantee of an Indian Scheduled Bank may be preferred. 
  • Seventhly, filing of a declaratory Suit with relief of FRAND determination or anti-trust suits against abuse of dominant position of SEP owner by an Implementer in any jurisdiction, may be perceived as an admission of ownership and essentiality of the SEP Holder’s claims by the Implementer. Therefore, care should be taken to synchronize strategies in all litigation across multiple jurisdictions.

An adherence to the above guidelines should ensure that an accused implementer is not perceived as being unwilling in nature, so as to avoid consequences of increased costs and royalties being levied upon it, and in some cases even injunctive reliefs being awarded against it.

Disclaimer

As per the rules of the Bar Council of India, law firms are not permitted to solicit work and advertise. Please agree to accept that you are seeking information of your own accord and volition and that no form of solicitation has taken place by the Firm or its members. The information provided under this website is solely available at your request for information purposes only. It should not be interpreted as soliciting or advertisement.