In two recent orders, the Indian Competition Commission has challenged Ericsson’s practice of licensing its standards-essential patents (SEPs), relating to cellular standards, for percentage-based royalties based on the selling price of the end-user licensed products. Ericsson had committed to the European Telecommunications Standards Institute (ETSI), the relevant standards-development organisation (SDO), that it would license its SEPs on “fair, reasonable and non-discriminatory” (“FRAND”) terms in accordance with ETSI’s intellectual property rights (IPR) policy.
The Commission contends that such percentage-based royalties are “prima facie discriminatory” in violation of the Competition Act, in the (novel) sense that different products selling for different prices pay different per-unit royalties (as opposed to the more common sense that different licensees who sell their products for the same price are treated in a discriminatory fashion because some firms must pay different royalties from their rivals).
As Ericsson’s practice of charging percentage-based royalties is followed by many firms and is common practice in this as in many industries, the Commission’s reasoning has implications far broader than the current disputes between Ericsson and two Indian cellphone manufacturers.
We analyse the broader implications of the Commission’s reasoning, concerned that if adopted and upheld, the Commission’s reasoning would disrupt common industry licensing practices in this and many other industries. India and Indian consumers and firms all benefit greatly from advanced telecommunications technology. The Commission has not contended that Ericsson’s royalties are excessive. If Ericsson were required to charge the same per-unit royalty across different products, as the Commission contends is required to eliminate the “discrimination”, in order to hold its licensing revenue constant, Ericsson would have to raise the royalty on low-priced products and lower it on high-priced products. The Commission has not addressed this issue, nor has it explained why such an outcome would be preferable from a competition policy perspective to the current percentage-based royalties system.
