The Ericsson-Micromax patent litigation: Where is India’s first FRAND litigation headed?

As our readers may be aware, Ericsson sued Micromax Informatics Ltd. and Mercury Electronics Ltd., a few months ago for allegedly infringing 8 of its telecom patents for a range of wireless technologies, including 3G, AMR and Edge. The Delhi High Court had granted an ex-parte interim injunction on the very first day even before Micromax could receive a legal notice that it had been sued. That order can be accessed over here.

Shouvik had blogged about it over here and I had written an op-ed for the Business Standard over here. My piece focussed mainly on two aspects of the case: the fact that the court had granted an ex-parte interim injunction without hearing Micromax’s defence and that the Court also issued order authorizing the seizure of documents from Micromax’s office regarding the sales and import of the mobile phones in question. (I’m not sure whether this aspect of the order was in fact executed.) I had argued that the Delhi High Court was wrong on both counts and I will not reproduce the reasoning once again in this article.

My apologies for the cheesy caption in the picture above.

Shortly thereafter, within 6 days, Micromaxfiled an appeal before a Division Bench of the Delhi High Court and the same was dismissed by the Bench the very same day with liberty to file a fresh appeal if the Single Judge did not hear Micromax’s defence within 30 days as required by the CPC. By the 19^th of March, 2013 Micromax and Ericsson approached the Single Judge informing him that they had entered into an interim arrangement pending final disposal of the lawsuit. The royalty rates for the technologies in question varied from 1.25% to 2% of the sale price. The matter was then referred for meditation and Justice A.P. Shah (Retd.) was appointed as a mediator for proceedings where both parties were to make an endeavour to arrive a consensus royalty figure. On the date of the last hearing the matter was adjourned on joint request by both parties and posted for directions on 24^thof May, 2013.

If history is any indication, there is no way in hell Ericsson-Micromax are ever going to reach an agreement on the royalty rates for all 8 patents. Going by the literature available on such disputes, even the interim royalty rates which hover between 1.25% to 2% are incredibly high in terms of overall costs for Micromax. The reason for this being the phenomenon of ‘royalty stacking’ in technologies like smart phones. It has been estimated that your average smart phone covers around 250,000 patents and if each patent was going to be licenced at 2% the net sale price, the product could very soon be unprofitable for Micromax. It is quite clear that if Ericsson succeeds in this litigation, Micromax will be sued by every other owner of an essential patent and we will have a classic case of ‘royalty stacking’. There is an excellent paper on this problem of royalty stacking by Carl Shapiro and Mark Lemley and can be accessed over here. It is a fantastic paper, published in 2006 and quite accurately predicted the wave of litigation that would hit the smart phone industry.

In the U.S. there has been considerable litigation on the ‘essential patent’, which are required to be licensed on FRAND terms – ‘Fair, reasonable and non-discriminatory’ terms (FRAND). ‘Essential patents’ are basically declared as standards for the entire industry by standard-setting organizations on the premise that they will be licensed on fair, reasonable and non-discriminatory terms to anybody ready to seek such a licence. Such an arrangement is a trade-off for the patentee because while it ensures that its patents are used by the entire industry, it will have to adhere to fair and reasonable terms and not be too gung-ho about its monopoly rights. Except, as we’ve discovered over the last few years, it is quite difficult for parties to agree on FRAND terms and the result is massive litigation, both from the perspective of patent law and competition law. You can read more about this litigation on the Patently O blog.

The first and only decision of a court actually fixing royalties for FRAND patents was delivered by a U.S. District Court, on April 29^th, 2013, in the context of the litigation between Motorola and Microsoft. Patently O has some interesting posts on this judgment. Sai Vinod will be writing on this judgment soon but let me just give you a brief summary of the conclusion. Motorola was demanding around 2.25% which translated to between $3 to $5.13 per unit. These rates were deemed to be too high by the judge because of the royalty stacking problem and the final rate for the different technologies was fixed considerably lower than Motorola’s initial offer. For the wireless networking patents involved, the FRAND rate was fixed between 0.8 cents to 19.5 cents. Similarly in the E.U. the competition regulator has recently on the 6^th of May, 2013, come to a preliminary finding that Motorola has abused competition laws by not agreeing to licence its ‘essential patents’ to Apple on reasonable and fair terms. The initial finding may lead to a massive fine against Motorola. The NYT story on this finding can be accessed over here.

At a time when the entire world is moving to sophisticated solutions for complex legal problems, we have the Delhi High Court granting an ex-parte interim injunction, which does not even refer to the patent numbers which the defendants are not supposed to be infringing. I’m serious! If you read the first day order passed by the Delhi High Court, you will notice that the order has not even mentioned the patent numbers which are the subject of the injunction order.

The Indian dispute also displays how Indian companies are remarkably lax with regard to their legal strategy. Micromax has been outmanoeuvred at every stage of this litigation by Ericsson. As if it was not bad enough being restrained without a hearing, Micromax also lost the appeal. In its appeal Micromax raised two main points: (i) That the Single Judge had not given reasons for the prima facie finding of patent infringement & (ii) That there is no presumption of validity of patent in India. Both points were good and the Division Bench has done a miserable job of evaluating them on merits but it is strange that Micromax did not make the most obvious argument and that is the lack of ‘urgency’, which is an essential pre-requisite for the grant of an ex-parte order. Why was this point not urged before the appellate court? As we have mentioned earlier on this blog, the Supreme Court has urged lower courts to be careful while granting ex-parte interim injunctions and to insist on a bond or surety from the plaintiff in cases where such ex-parte orders were being granted.

This leads us to the next question of why Micromax has not taken up this case in appeal before the Supreme Court of India. It would have been the perfect case to have the Supreme Court examine the issue of both ex-parte interim injunctions and the random ‘search & seizure’ Anton Piller orders granted by the Delhi High Court on a regular basis.

What can we expect from Micromax in the near future?  

Given that Micromax has not agitated its right to have its application for the vacation of the interim injunction decided within the statutory 30 days period, I can only presume that it is following one of the following strategies:

(i) It is actually hoping to strike an amicable deal with Ericsson on the royalties for the 8 standard-essential patents; or

(ii) It is more likely that Micromax is preparing to file 8 revocation petitions before the IPAB and/or the High Court seeking revocation of the patents in question. In all likelihood once these revocation petitions are filed, Micromax will call off the negotiations before the mediator and sue for the setting aside of the ex-parte interim injunction. Once the revocation petitions are filed, Micromax will have a much stronger bargaining position for vacation of the ex-parte interim injunction and for negotiating a more reasonable royalty rate with Ericsson. Given the fact that forums like IPAB have almost never upheld the validity of a patent, it is very likely that Ericsson could just lose all 8 patents. We have seen it happen before with other European companies. Enercon GmBH has had almost 14 patents revoked by the IPAB and another 9 are pending challenge.

It would be even more interesting, to see Micromax turn the tables on Ericsson by suing before the Competition Commission of India (CCI). It could be an action similar to one initiated in Europe against Motorola and it is possible that the CCI will reach the same conclusion as its European counterpart.

Indian companies like Micromax however lack a culture of strategic litigation and it is unlikely they will take the extra-effort to counter-attack Ericsson in a bid to pre-empt future action by other patentees.