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Are the SEP Holders prima facie dominant, leading to a per se assumption of abuse under the competition law

A 'Standard' can be understood to be uniform or common technical design specifications which allow a certain level of compatibility across products or process. A common set of standards allow an easy interaction among the products. In various industries such as communication, technology, certain standards with regard to the design and the specifications are set by a Standard Setting Organisation (hereinafter referred as 'SSO') in order to have compatibility with other products and networks (here).

An example of such compatibility would be the charger of a mobile phone compatible across different sets or a Wi-Fi and 4G cell phone standards. More often than not, the standards set by the SSO rely on the patent protected technologies (here). In the case of Microsoft Corp. vs. Motorola Mobility Inc. (here) the United States court explained Standard Essential Patent (hereinafter referred as 'SEP') as, a patent which is essential to the standard and the use of the standard would amount to the infringement of the patent. In other words, a SEP is the patented product or technology which is required to comply with the standards set by the SSO.

The industries or the implementers of the standard would have to either infringe or license the patented technologies in order to comply with the standards set by the SSO (here). Generally, it is understood that, the SEP holder gains a significant bargaining power once the patented product has been set as a 'standard' in an industry. It creates a beneficial network effect in the market and with the growth of the network, the market power of the SEP holder grows (here). In order to ensure that there isn't any abuse of the dominant position gained by the SEP holder, the SSOs have certain rules in place.

The SEP holders are required to license the SEPs to the industries or the implementers of the standards based on fair, reasonable and non-discriminatory (FRAND) conditions (here). The conditions primarily refer to the royalty paid by the Implementers to the SEP holders. The royalty is supposed to be comparable to the royalty paid by the other implementers of the standard (here).

Does SEPs necessarily grant monopoly or dominant position to the holder?
In the case of SEP, for instance specifically in the telecommunications sector, the sector is known for innovation and the entry of new firms with disruptive technologies. The sector sees a presence of threatening competitive constraints which makes it difficult for one player to remain dominant throughout. In an industry, when there is a presence of competitive constraints it restricts the SEP holders to charge an unreasonable or exorbitant amount of royalty fees.

In analyzing the dominance of a SEP holder in an industry from the standpoint of competitive constraints rather than market power, it paves the way for effect based analysis in the antitrust laws (here). Moreover, SEP plays an important role in promoting competition in an industry. SSO enables to fix a uniform standard facilitating easier negotiations for an implementer to enter into a license agreement to use the patented product. The understanding that SEPs act as an entry barriers stands on shallow grounds. The patent holders form a package in order to seek approval from various SSOs.

The SEP holders choose among the SSOs on the basis of credibility. The selection of SEPs goes through a process of seeking approval of the SSOs by way of a package among the patent holders. It is warranted that, SSOs conduct a forum, discussing the selection criteria of the SEPs in order to promoter transparency and clarity in the process. The SEP holders are required to follow the fair, reasonable and non-discriminatory (FRAND) conditions while entering into a license agreement with the implementers. Such conditions have helped in the growth of the telecommunication sector.

The growing market in the telecommunication sector is a living example of the benefits and the success of the FRAND conditions. In the antitrust laws, when a dominant player exerts its market power, it is imperative to consider the choice available for the selection of the product. Specifically, in the telecommunication market, the FRAND license is voluntary and it is not an obligation on the part of the implementers to select a specific SEP over other SEPs (here).

Does dominance lead to abuse in terms of royalty payments?
The SEP holders are required to comply with the fair, reasonable and non-discriminatory (FRAND) conditions while entering into a license agreement with the implementers. What amounts to 'fair and reasonable' is often a grey area. 'Fair and reasonable', as part of the FRAND conditions is generally understood to be a uniform royalty for all the implementers of the specific SEP.

It has to be noted that, the licensing agreement between the SEP holders and the implementers are between two unequal parties. Any price which is negotiated as part of the licensing agreement between the unequal parties is bound to be far from 'fair and reasonable'. The SEP holder is at a dominant position with higher bargaining power which makes the licensing agreement anything but, fair. However, along with the understanding that the SEP holder can be considered to be at a dominant position as a patent holder, it has to be considered that the implementers are more often than not, large manufacturing companies which are not exactly small.

In a situation where the licensing agreement is between an international SEP holder and a large domestic telecommunication company, it gives rise to a competing dominance. In such a licensing agreement, rather than an outright presumption of dominant position and thereby abuse of dominance, the questions which need to be asked are whether the SEP holder needs the implementer more than the implementer needs the SEP holder or vice versa (here).

Rather than the presence of unequal bargaining power, the situation hints towards a presence of competing dominance which eventually helps to strike a balance in the bargaining power between both the parties of the licensing agreement of a SEP. The SEP holders are interested in licensing their patents which will eventually generate funds to cover their research and development cost facilitating innovation. In light of the competing dominance, ruling out the notion that SEP holders are prima facie dominant thereby akin to cause abuse of dominance, uniform royalty rates applicable to all the implementers does not sound to be a valid argument.

Additionally, the royalty payment to the SEP holders reflects the value of the patent to the implementer. Each and every implementer has different products with varied specifications which influences the choice of SEP. The value of the SEP is product specific, determined on the basis of the features of the product which the implementers incorporate.

The value of the royalty is also determined by the consumer satisfaction and the marginal utility of the implementer's product which is bound to vary from product to product given the fact that, each and every product is different. Considering the nuanced factors which affect the value of a SEP to the implementer, it is imperative to acknowledge the complexities in the licensing agreements and the royalty payments.

All the cases pertaining to SEPs have been considered under the frame work of Section 4, Abuse of Dominance under the Competition Act, 2002 in terms of its anti competitive effects (here). The presumption is that, SEP holders are dominant and therefore, immune to competitive constraints.

In the case of Micromax (here), the argument has been that, higher royalty payments results in higher costs to the consumers. In this argument, it is implied that the royalty rates affect the final price of the product thereby, costing the consumers more. However, it has been ignored that, in a telecommunication market for instance, the final price of the product is not simply based on the royalty payments of the SEPs but, there are several factors to the pricing of a product.

The implementers decide on the final price of the product based on the factors of elasticity of demand, the number of firms in the market, available substitutability among others. Moreover, a change in the royalty payment or a higher royalty payment in the market will have similar impact on all the implementers in the telecommunication market (here).

The factors of abuse of dominance are provided under Section 19(4) of the Competition Act. The approach under the antitrust law is out of place with regard to the SEP specifically, for instance, in the telecommunication sector given the fact that, the implementers or the manufacturers enjoy a limited and temporary position of dominance in the market.

The market changes rapidly and the dominant positions of the players keep of changing over the time. Additionally, there are number of SEPs and SSOs enabling a range of choice on the part of the implementers. As it has been highlighted, competitive constraints are a more plausible way to look at the market which infers that, an effect based approach under the antitrust law should be a way forward. Such an approach would enable in indentifying the competitive constraints by way of investigations in order to determine the abuse of dominance.

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