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WorkingPaperSeriesNo.14

Onthe“Non-Discrimination”AspectofF/RANDLicensing:

AResponsetotheIndianCompetitionCommission’sRecentOrders

EdwardF.Sherry,DavidJ.Teece,andPeterGrindley1

1 WethankKeithMallinsonforbringingtheIndianOrderstoourattention.

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I. Background

TwoIndianfirms,MicromaxInformaticsLtd(“Micromax”)andIntexTechnologies(India)Ltd.(“Intex”),filedcomplaintswiththeCompetitionCommissionofIndia(“Commission”),againstTelefonsktiebolagetLMEricsson(“Ericsson”),aSwedishcompany.2ThecomplaintsallegedthatEricssonhadviolatedSection4ofIndia’sCompetitionActby(allegedly)failingtocomplywithitscommitmentstolicenseitsstandards-essentialpatents(“SEPs”)relatingtothe2G,3GandEDGEGSMcellulartelecommunicationsstandardsadoptedbyETSI,aEuropean-basedstandards-settingorganization(“SSO”),on“reasonableandnon-discriminatory”(“RAND”)terms.TheCommissionhasissuedtwoOrders,oneinNovember2013,3theotherinJanuary2014,4directingtheDirectorGeneraltoconductinvestigationsofEricsson’slicensingpractices.

LicensingofSEPsonRANDtermshasbecomeatopicofconsiderableinterestanddiscussioninrecentyears.BecauseEricsson’schallengedlicensingpracticesarenotsignificantlydifferentfromthoseofmanyotherholdersofSEPs,andpresumablytheCommissionwouldreachsimilarconclusionsinsimilarcases,theOrdersareofmoregeneralinterest.

FouraspectsofEricsson’slicensingpracticeswereidentifiedbytheCommissionasbeingofparticularconcern:

(a) thefactthatEricssonwouldnotprovidetheprospectivelicenseeswithinformationaboutitsinfringementcontentionsunlesstheprospectivelicenseeenteredintoaNon-DisclosureAgreement(“NDA”),or

(b) thefactthatEricsson,citingconfidentialityprovisionsinNDAspreviouslyenteredintowithotherlicensees,wouldnotprovideprospectivelicenseeswithinformationaboutthetermsofferedtooragreedwithotherpotentialoractuallicensees;5

2AfterunsuccessfuleffortstolicenseitspatentstoMicromax,EricssonhadsuedMicromaxforpatentinfringementinIndiabeforeMicromaxfileditscomplaintwiththeCommission.Seehttp://www.reuters.com/article/2013/11/28/us-ericsson-india-idUSBRE9AR0FU20131128.3Caseno.50/2013,availableathttp://infojustice.org/wp-content/uploads/2013/12/CCI-Case-no-50-2013.pdf(hereafter“MicromaxOrder”).4CaseNo.76/2013,availableathttp://www.cci.gov.in/May2011/OrderOfCommission/261/762013.pdf(hereafter“IntexOrder”).5IntexOrder,Para.7;MicromaxOrder,Para.7(Ericssonallegedly“failedtoprovideagreementsofsimilarlyplacedpartiestoInformant[Micromax]”despitebeing“directedtoshowagreementsofsimilarlyplacedpartiestoInformant’srepresentatives”).(WeunderstandthatEricssondisputesthisallegation.)

TheCommissionarguedthat“RefusalofOP[Ericsson]tosharecommercialtermsofFRANDlicenceswithlicenseessimilarlyplacedtotheInformant,fortifiedtheaccusationsoftheInformant,regardingdiscriminatorycommercialtermsimposedbytheOP.”(MicromaxOrder,Para.17;emphasisadded)ButtheCommission’sargumentthatEricsson’sproposedlicensingtermswere“primafaciediscriminatory”wasbasedonthefactthatEricssonproposedtochargepercentage-basedroyalties,whichwouldleadtheper-phoneroyaltytobehigherforhigh-pricedphonesthanforlow-pricedphones.ThatwasapparentonthefaceofEricsson’slicensingproposal,andhasnothingtodowithwhetherEricsson(allegedly)“refused…tosharecommercialtermsofFRANDlicenseswith[Ericsson’s]licenseessimilarlyplacedtotheInformant…”Asnotedbelow,thetwosensesof“discrimination”–discriminationacrossproductsvs.discriminationacrosslicensees–arefundamentallydifferent.

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(c) thefactthatEricssonspecifiedthattheNDA“providesforjurisdictioninSingapore”ratherthanIndia6andthat“thejurisdictionandgoverninglawforthe[proposedpatentlicense]wouldonlybeSweden.”7TheCommissionconcludedthat“ImposingajurisdictionclausedebarringInformantfromgettingdisputesadjudicatedinthecountry[India]wherebothpartieswereinbusinessandvestingjurisdictioninaforeignlandprimafaciewasalsoanabuseofdominance”;8and

(d) thefactthatEricssonaskedforpercentage-basedrunningroyalties(of1.25%)basedonthesellingpriceoftheend-productsoldbythelicensee(e.g.,thevariousGSM-compliantcellphones).9TheCommissionsaidthat“FortheuseofGSMchipinaphonecostingRs.[rupees]100,royaltywouldbeRs.1.25butifthisGSMchipisusedinaphoneofRS.1000,royaltywouldbeRs.12.5.”10TheCommissionconcludedthat“Thusincreaseintheroyaltyforpatentholderiswithoutanycontributiontotheproductofthelicensee.Highercostofasmartphoneisduetovariousothersoftwares/technicalfacilitiesandapplicationsprovidedbythemanufacturer/licenseeforwhichhehadtopayroyalties/chargestootherpatentholders/patentdevelopers.Chargingoftwodifferentlicensefeesperunitphoneforuseofthesametechnologyprimafacieisdiscriminatoryandalsoreflectsexcessivepricingvis-à-vishighcostphones.”11“[I]mposingexcessiveandunfairroyaltyratesprimafaciewasabuseofdominanceandviolationofsection4oftheAct.”12

TheCommissionwentontosaythat“Nothingstatedinthisordershalltantamount[sic]toafinalexpressionofopiniononmeritofthecaseandtheDGshallconducttheinvestigationwithoutbeingswayedinanymannerwhatsoeverbytheobservationsmadeherein.”13

6IntexOrder,Para.9.7IntexOrder,Para.6.8IntexOrder,Para.17(italicsinoriginal).9IntexOrder,Para.17.IntheMicromaxcase,EricssonwasseekingroyaltiesonGSMdevicesof1.25%ofthesalepriceoftheproductssoldbyMicromax,of1.75%forGPRSdevices,of2%forEDGEandWCDMA/HSPAproducts,andofUS$2.50perdongle.(MicromaxOrder,Para.4.)WeassumethatthesearethesameasthetermsofferedtoIntex,astheCommissionusedthesamecalculationsintheMicromaxOrderthatitputforwardintheIntexOrder.(CompareIntexOrder,Para.17,withMicromaxOrder,Para.17.)Alternatively,IntexmaynothavemadesomeoftheproductsthatMicromaxdid,andthustheissueoftheroyaltyrateforsuchproductsmaynothavearisenforIntexasitdidforMicromax.10IntexOrder,Para.17;MicromaxOrder,Para.17.TheCommission’scalculationsappeartobemerelyillustrative.Intexsaidthatitsells“approximately35models”ofcellphones“inthepriceofRs.950-Rs.3000andsmartphonesinpricerangeofRs.4000–Rs.25000.”IntexOrder,Para.3.Itdoesnotsellaproductfor“Rs.100”asthefirstoftheCommission’stwoillustrativeexamplescontemplates.(WearenotfamiliarwithcomparablepricingdataforMicromax,butwouldexpectthatmarketcompetitionwouldcausethetwofirmstochargecomparablepricesforcomparableproducts.)11IntexOrder,Para.17;MicromaxOrder,Para.17(italicsinoriginal).12IntexOrder,Para.17(italicsinoriginal).WedisagreewiththeCommission’ssuggestionthatEricsson“imposed”theratesthatitsought,asevidencedbythefactthatMicromaxdidnottakealicense,andEricssonwasforcedtosueMicromaxforpatentinfringementinordertotrytobecompensated.13IntexOrder,Para.21;MicromaxOrder,Para.21.

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TheCommission’sopinionsontheNDA,Ericsson’s(alleged)“refusal”toprovidedetailsofitsotherlicensesbecausethoselicensesweresubjecttonon-disclosureagreements,14andtheprovisionthattheNDAwouldbesubjecttoSingaporeanlawandthelicensewouldbesubjecttoSwedishlawandjurisdictionandthus(ostensibly)would“cripple[]theInformant[Intex]toaddressorseekredressofitsgrievancesinalocalcourtoflaw”15and“primafaciewasalsoanabuseofdominance”16raiseissuesthatarebeyondthescopeofthisarticle,otherthantonotetwothings:first,licensingtermsaretypicallytreatedasconfidentialbusinessinformationandtheuseofNDAsgoverningaccesstoanduseofconfidentialinformationarecommoninmanycommercialcontexts,17andsecond,havingchoice-of-lawprovisionsincontractsbetweenfirmsdomiciledindifferentcountriesisacommonpractice,andinourviewthereisnothingunreasonableor“abusive”aboutEricsson(whichtheCommissionacknowledgesisbasedinSweden18)proposingachoice-of-lawprovisionspecifyingSwedishjurisdictionandSwedishlawforitslicense,orforEricssontoproposethattheNDAbegovernedbySingaporeianlaw(aneutralforum).19

Instead,ourattentionislargelyfocusedontheCommission’sconclusionthat“chargingoftwodifferentlicensefeesperunitphoneforuseofthesametechnologyprimafacieisdiscriminatory.”20Sincethe“twodifferentlicensefeesperunitphone”arisefromapplyingthesamepercentage-basedroyaltyratetophonessellingfordifferentprices,theCommission’sconclusionisapparentlybasedonthepropositionthatchargingpercentage-basedroyaltiesonthesellingpriceoflicensedproductsisitself“primafaciediscriminatory,”giventherealitythatdifferentproductssellfordifferentprices.Ineffect,iftheCommission’sinterpretationwereaccepted,itwouldbetantamounttothepropositionthat

14WenotethattheETSIGuideonIPRsprovides(inrelevantpart)that“ItisrecognizedthatNonDisclosureAgreements(NDAs)maybeusedtoprotectthecommercialinterestsofbothpotentiallicensorandpotentiallicenseeduringanEssentialIPRlicensingnegotiation,andthisgeneralpracticeisnotchallenged.”ETSIGuideonIPRs,September2013,Section4.4,availableathttp://www.etsi.org/images/files/IPR/etsi-guide-on-ipr.pdf.15IntexOrder,Para.9.16IntexOrder,Para.17.17TheCommission’sassertionthat“transparencyishallmarkoffairness”(IntexOrder,Para.17)ignorestheconfidentialnatureoflicensingtermsandtheroleofNDAsinprotectingconfidentialinformation,asrecognizedbySection4.4oftheETSIGuidetoIPRs.WedoubtthattheCommissionisseriouslysuggestingthat,onceEricssonhadagreedwithitslicensees(initsNDAs)nottodisclosethetermsoftheirconfidentiallicensesunlesscompelledbycourtorder(orsomesimilarofficialcompulsion)todisclosethem,itshouldneverthelesshavevoluntarilydisclosedthosetermstootherpotentiallicenseesmerelybecauseof“transparency/fairness”concerns,inbreachofitscontractualcommitmentstokeepthelicensetermsconfidentialabsentofficialcompulsion.18ThefactthatEricssonhasawholly-ownedIndiansubsidiary(IntexOrder,Para.4)whichdoesbusinessinIndiadoesnotchangethefactthatEricsson’slicensingoperationsarenotbasedinIndia.19Ericssonhadawholly-ownedIndiansubsidiary(IntexOrder,Para.4),butitisnotclearwhethertheIndiansubsidiaryownedEricsson’sIndianpatents,orwhetherthepatentlicensewouldhavetobebetweenEricssonitselfandtheprospectiveIndianlicensee.Inanycase,alicenselimitedtoEricsson’sIndianpatentswouldnotgivethelicenseethefreedomtoexportproductstoothercountriesinwhichEricssonhadpatents.Inordertoensurethelicensee“freedomtooperate,”itiscommonpracticeforpatentlicensestoincludethelicensor’srelevantworldwidepatentportfolio.TheCommissiondoesnotaddressthisissue.Nordoweagreethat,byproposingachoice-of-lawprovisionoranNDAspecifyingsomeparticularjurisdiction,Ericssonwouldbe“imposing”suchacondition.Choice-of-lawprovisionsinlicenses(andothercontracts)canbe(andoftenare)negotiated,anditisnotuncommonforsuchprovisionstospecifyoneparty’shomecountryorsomeneutralforum(suchasSingapore).20IntexOrder,Para.17;MicromaxOrder,Para.17(italicsinoriginal).

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percentage-basedroyaltiesare“primafaciediscriminatory”andthusnotRAND(andalsoanabuseofadominantposition).Sincelicensescallingforpercentage-basedrunningroyaltiescalculatedonthesellingpricesofthelicensedproductsthelicenseesellsarecommoninthisandmanyindustries,theCommission’sargument,ifaccepted,wouldamounttothepropositionthat,byadoptingRANDpolicies,SSOslikeETSIintendedtoprohibittheuseofsuchacommonlicensingpractice(namely,onespecifyingpercentage-basedrunningroyalties)inconnectionwithlicensingstandards-essentialpatentssubjecttoRANDcommitments.

I. “Discrimination”AmongLicensees

TheCommissiondoesnotappeartobesayingthatEricssonis“discriminating”among/acrossdifferentlicenseesinthesenseofchargingtwodifferentlicenseestwodifferentroyaltyratelevelsand/orstructures:e.g.,bychargingIntexa1.25%royaltybutchargingoneofIntex’scompetitorsa0.5%royalty.21TheEricssonlicensingproposalis“non-discriminatory”among/acrosslicenseesinthesensethatdifferentlicenseesthatsellproductsforthesamepricespaythesameper-unitroyalties.Itcanbeseenas“discriminatory”onlyintheCommission’ssensethatdifferentlicenseeswhosellproductsfordifferentpricespaydifferentper-unitroyalties.

Itisworthnotingthatthepatentholderdoesnotcontroltheproductsthatthelicenseesellsorthepricesthatthelicenseechargesforthoseproducts.Thatisachoicethelicenseemakes.

Itisalsoworthnotingthatanygivenlicenseemaysellavarietyofproductssellingforarangeofprices.Itissimplynotthecasethatapercentage-basedrunningroyalty“discriminates“among/acrosslicensees,inthesensethatsomefirmspayhigherper-unitroyaltiesthandootherfirmssellingforthesameprice.Ifdifferentlicensees’licensescallforthemtopaythesamepercentage-basedroyaltyrates,afirmsellingahigh-pricedproductpaysthesameper-unitroyaltyasanotherfirmsellingforthesameprice.

Commentatorshavesuggestedthatthe“non-discrimination”aspectofRANDwasintendedtopreventdiscriminationamong/acrosslicenseesonthebasisof(a)thelocationordomicileofthelicensee,orthecountryoforiginofthelicensedgoods(asdifferentialtreatmentonsuchgroundsmight

21TheratesthatEricssonwasseekingfromMicromaxforGSMarethesameastheonesitwasseekingfromIntex.Id.SomeoftheCommission’sconcernsaboutEricsson’s(claimed)“refusal”toprovidethetermsofitsotherlicensesseemtobebasedonaconcernthat,withoutunfetteredaccesstothetermschargedto(orsoughtfrom)others,potentiallicenseeswouldnotknowwhethertheywerebeing“discriminated”against,notintheCommission’ssensethatpercentage-basedroyaltiesare“primafaciediscriminatory,”butinthesenseofinter-licenseediscrimination(chargingsomelicenseesdifferentratesthanthosechargedtoothers).Toaddressthisissue,someSSOs(but,interestinglyandimportantly,notETSI)haveRANDpoliciesthatrequirethatRANDratesbe“demonstrablyfree”ofany“unfairdiscrimination.”ThoseSSOsdonotexplainwhattheymeanby“demonstrablyfree”orwhatinformationwouldhavetobedisclosedtoprovidesucha“demonstration”(andinwhatcontexts;e.g.,isitsufficienttodiscloseroyaltyratesinotherlicensesonlysubjecttoanNDA?).Wenotethattheadditionoftheterm“unfair”addsanotherdimensiontotheissue.Isit“unfairdiscrimination”tochargethesamepercentage-basedroyaltyratetodifferentlicensees,eventhoughthatinherentlyimpliesthatwhenlicenseessellhigher-pricedproductstheywillpaymoreonaperunitbasisthanwhenlicenseesselllower-pricedproducts?

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raiseconcernsaboutprotectionism22),(b)whetherornotthelicenseewasamemberoftheSSO(e.g.,arenon-membersbeingchargedhigherroyaltiesthanmembers?),(c)thesizeorscopeofthelicensee(e.g.,dobigfirmsgetbettertermsthansmallfirms?),or(d)whetherornotthelicenseecompetedwiththepatentholder(e.g.,dorivalspayhigherratesthannon-rivals?).ThehistoryoftheETSIIPRpolicyrevealsthatETSIwasconcernedwith(a)and(b)abovewhenadoptingitsIPRPolicy.23Whenalllicenseespaythesamepercentage-basedroyaltyrates,noneoftheseconcernsisimplicated.

Itisoftenthecasethatdifferentfirmsofferdifferent“mixes”ofproducts,withsomefirmsconcentratingonhigh-endproductsthatsellforhighpricesandotherfirmsconcentratingonlow-endproductsthatsellforlowprices.Buttosaythatthisimpliesthatlicensesspecifyingpercentage-basedroyalties“discriminate”among/acrossfirmsstrikesusaseconomicallymeaningless.

II. TwoAlternativeBasesforArgument:RANDCommitments(Contractual)andCompetitionPolicy

TherearetwopossiblebasesfortheCommission’sarguments.Thefirstbasisiscontractual:EricssonmadeRANDcommitmentstoETSIpursuanttoETSI’sIPRPolicy,andthird-partybeneficiariesofthoseagreements(firmsthatwanttomakestandards-compliantproductsthatincorporateEricsson’spatentedtechnology,suchasthetwoIndianfirmsthatfiledcomplaints)maywanttoenforcethosecommitments.Thatisacontractualargument,andpresumablyisgovernedbythecontractualprovisions,inparticular(a)thetermsofETSI’sIPRpolicy(discussedinthenextsection)and(b)thetermsofEricsson’sRANDcommitments.ETSI’sIPRpolicyisnotappreciablydifferentfromtheIPpoliciesofotherSSOs,andonecouldillustratetheissuesinvolvedwithexamplesfromthehistoryofotherSSO’sIPpolicies.24ButEricsson’sRANDsubmissionsweremadepursuanttotheETSIIPRpolicy.

Fromaneconomicandpublicpolicyperspective,aRANDcommitmenthasfourkeyfeatures:

(a) Thepatentholdermustmakelicensesavailable.Itcannotrefusetolicenseandkeepitspatentedtechnologyforitsownexclusiveuse,asitwouldotherwisebeabletodo.

(b) Thepatentholdermustmakean“unlimited”numberoflicensesavailable.Itcannot“pickandchoose”amonginterestedparties,licensingsome(e.g.,itsallies)andrefusingtolicenseothers(e.g.,itsrivals).Itcannotauctionoffalimitednumberoflicensestothe“highestbidders.”

(c) Thepatentholdermustmakelicensesavailableon“reasonabletermsandconditions,”includingnotonlyfinancial(royalty)termsbutotherterms.

(d) Thepatentholdermustmakelicensesavailableona“non-discriminatory”basis.

22TherewereconcernsexpressedthatETSI,aEuropean-basedSSOwithvotingrulesthatwereweightedinfavoroffirmswithaEuropeanpresence,mightdiscriminateagainstnon-Europeanfirmsinviolationofinternationalobligations.23SeeBrooksandGeradin,“InterpretingandEnforcingtheVoluntaryRANDCommitment,”pp.31-32,availableathttp://www.cravath.com/files/Uploads/Documents/Publications/Interpreting%20and%20Enforcing%20Vol%20Frand%20Commitment_Brooks%207.20.10.pdf.24SeeContreras,“ABriefHistoryofFRAND”(February3,2014),availableatSSRN:http://ssrn.com/abstract=2374983,andmaterialcitedtherein.

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Thoughmanyrecentarticleshavefocusedon(c)and(d)above,(a)and(b)above–ensuringthatinterestedpartieswillbeabletoobtainlicensestothetechnologynecessarytomakestandards-compliantproducts,therebyenhancingcompetitioninthemarketsforstandards-compliantproducts–arearguablymoreimportant/fundamental.TheearlyhistoryofRANDmakesitclearthatpartieswereconcernedaboutensuringthatpotentialimplementershadaccesstothenecessarytechnology.25

Thesecondbasisisrootedincompetitionpolicyprovisions,especiallyrestrictionsagainstan“abuseofadominantposition”insomerelevantmarket.InitsOrders,theCommissionreferredtoSection4oftheIndianCompetitionAct,whichprovidesthat“noenterpriseorgroupshallabuseitsdominantposition”andfurtherprovides(inrelevantpart)that“itshallbeanabuseofadominantpositionifanenterpriseorgroup…imposesunfairordiscriminatory…priceinpurchaseorsale…ofgoodsorservices.”26TheCommissionhasconcludedthatEricssonhasadominantpositionin“therelevantmarketofGSMandCDMAtechnologiesasitheldalargenumberofGSMandCDMApatents”27andtheIndianDepartmentofTelecommunication“hasdirectedthatAllGSM/CDMAnetworkequipmentimportedintoIndiashouldalsomeetthestandardsofinternationaltelecommunicationstechnology…”28Wenotethat(contrarytotheCommission’sstatementthat“therewasnoalternatetechnologyinthemarketinIndia”29)numerousotherfirmsalsoownsubstantialnumberofpatentsrelatingtotheGSMandCDMAstandards,sothattheytoopresumablyhaveasimilarsortof“dominantposition”intherelevanttechnologymarketsthatEricssonhas.30Assuch,eachistosomeextentconstrainedinitslicensingbehaviorbythelicensingbehaviorofothers.

TheCommission’sargumentattimesveersfromacontract-basedapproachtoacompetition-policybasedapproach.Notethatthetwoapproachesareconceptuallydifferentandinvolvedifferentsortsofconsiderations.Somebehaviormayviolateacontractualcommitmentbutnotfallafoulofcompetitionpolicy,orviceversa.Inparticular,apatentholderthathascontractuallycommittedtolicensingitspatentsonnon-discriminatorybasismaybreachthatcontractualcommitmentevenifits

25Id.26Seehttp://www.cci.gov.in/images/media/competition_act/act2002.pdf?phpMyAdmin=QuqXb-8V2yTtoq617iR6-k2VA8d.InitsOrders,theCommissiondoesnotcitetoanyIndiancaselawinterpretingtheterm“discriminatory”asusedintheAct,whetherasthattermisusedinlicensingcontextsormoregenerally.27IntexOrder,Para.16;MicromaxOrder,Para.16.28IntexOrder,Para.14.29IntexOrder,Para.16.Technically,theSEPsofEricssonandthoseofotherholdersofSEPsrelatingtothesametelecommunicationsstandardsarecomplements,notsubstitutes,andinthatsensetheCommission’sstatementthattheSEPsheldbyothersarenot“alternatetechnolog[ies]”forEricsson’spatentsiscorrect.Buttheyare“alternatetechnologies”relatingtoGSMproducts.30TheCommissionmayberelyingonthepropositionthatEricssonhasthe“largest”numberofSEPsrelatingtocellularcommunicationsstandards(MicromaxOrder,Para.16;IntexOrder,Para.16).ButanyfirmwithevenasingleSEPcontrolsanintangibleassetthatimplementersneedtobeabletouseinordertomakeandsellstandards-compliantproducts,sointhatsensetherecanbehundredsoffirms,eachwitha“dominantposition”relativetosome(narrowly-defined)technologymarketconsistingofitsownpatentedtechnologyandthealternativesthatcouldhavebeenchosenforincorporationintothestandardinstead(butwhichwerenot).TheCommissionseemstobeleaningtowardthisinterpretationwhenitsaysthatEricsson“holdsSEPsandthereisnoalternativetechnologyavailableinthemarket”capableofbeingusedasasubstituteforEricsson’spatentedtechnologytomakeandsellstandards-compliantproducts.Id.

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conductisnotanticompetitivefromacompetitionpolicyperspective.Oritmayviolatethecompetitionlawsdespitenothavingmade(orbreached)anycontractualcommitment.

Itisworthnotingthateconomistsareawarethatpricediscriminationcanimprovebotheconomicefficiencyandsocialwelfare.31Anyargumentbasedsolelyoncompetitionpolicyconcernsneedstoaddressthatinsight.32Otherthantheirargumentabout“excessive”royalties(discussedbelow),theCommissionhasnotsuggestedthatEricsson’sproposedroyaltiesareeconomicallyinefficient,onlythattheyare“primafaciediscriminatory.”

III. NoGuidance/SupportForCommission’sPositionFromETSIIPRPolicy

Lookingfirstatthecontract-basedapproach,wefindnosupportfortheCommission’spositionineithertheETSIpolicyorEricsson’sRANDsubmissions.TheETSIIntellectualPropertyRights(“IPR”)policy,availableontheETSIwebsite,33doesnotprovideanyclarificationofwhatETSImeansbytheterm“non-discriminatory”(nor“reasonable”)inconnectionwithitsRANDlicensingpolicy.WhenitwascontemplatingitsIPRpolicy(whichunderwentconsiderablerevisionbeforefinallybeingadopted34),ETSIappointedaSpecialCommitteeonIPR,whichissueda“CommonObjective”documentwhichprovided(interalia)that“LicensingtermsandconditionsshouldallownormalbusinesspracticesforETSImembers.ETSIshouldnotinterfereinlicensingnegotiations.”35Sincepercentage-basedrunningroyaltiesareaclearexampleof“normalbusinesspractices,”wethinkitisunlikelythatETSIintendeditsRANDpolicytoprohibitsuchlicensesasbeing“primafaciediscriminatory”andinconsistentwithRAND,astheCommissionnowcontends.

31SeeHalVarian,“PriceDiscrimination,”Ch.10inSchmalenseeandWillig(eds.),HandbookofIndustrialOrganization,Vol.1,pp.597-654(1989).32TheCommissionhasnotcitedanyIndiancaselaworregulationsinterpreting“pricediscrimination,”whethergenerallyorinthelicensingcontext.33TheETSIIPRpolicy,setforthinAnnex6totheETSIRulesofProcedure,isavailableathttp://www.etsi.org/images/etsi_ipr-policy.pdf.ETSIalsoprovidesa”GuideonIPRs,”availableathttp://www.etsi.org/images/files/IPR/etsi-guide-on-ipr.pdf,andalistof“ETSIIPRFAQs”[FrequentlyAskedQuestions],availableathttp://www.etsi.org/services/ipr-database/14-about/569-etsi-ipr-policy-faqs.ETSIpolicymakesitclearthatlicensingnegotiationsaretobeconductedoutsideETSIbetweenthepartiesinvolved.TheCommission’sOrdersdidnotreferto(orcite)anyofthesedocuments,oranysimilardocumentsfromanySSO.34ThehistoryofETSI’sIPRpolicy(andhowitevolvedsignificantlyovertime)providesusefulevidenceastowhatETSIdidanddidnotintenditsIPRPolicytomean.SeethediscussionofthathistoryinBrooksandGeradin,“InterpretingandEnforcingtheVoluntaryRANDCommitment,”pp.31-32,availableathttp://www.cravath.com/files/Uploads/Documents/Publications/Interpreting%20and%20Enforcing%20Vol%20Frand%20Commitment_Brooks%207.20.10.pdf.SeealsoContreras,“ABriefHistoryofFRAND”(February3,2014).AvailableatSSRN:http://ssrn.com/abstract=2374983andmaterialcitedtherein.

35ETSI/GA20(94)2(SCFinalReport),ANNEXXII,discussedid.atpp.31-32.

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ManycommentatorshavedecriedthelackofclarityinwhatismeantbyRANDandhavecalled(sofarlargelyunsuccessfully)forfurtherclarification,36andnumerousproposalshavebeenmade(andrejected)to“clarify”whatismeantbyRAND.37TheCommissionhasnotcitedtotheETSIIPRpolicy,norindeedanyprovisionintheIPpoliciesorrulesofanystandards-settingorganization,thatprovidesanyspecificityorclarificationofwhatETSIorotherSSOsmeanbytheterm“non-discriminatory,”orofwhatfirmsthathavemadeRANDcommitmentshaveunderstoodorintendedthosecommitmentstomeaninthisregard.NordoesthelanguageofEricsson’scommitmentstolicenseitsSEPsonRANDtermsprovideanyclarificationofwhat“non-discriminatory”means.

TheCommission’sopinionsthuscannotbederivedfromthelanguageoftheETSIIPRpolicyorthetermsofEricsson’sRANDcommitments.Instead,theyseemtobebasedontheCommission’sownviewofwhat“non-discriminatory”means,withoutanycitationtoanyauthority(otherthantheCompetitionAct)oranyscholarlyanalysisoftheissue.

Wedonotmeantosuggest,andshouldnotbeunderstoodassuggesting,thattheCommission’sopinionorreasoningisclearlyinconsistentwitheithertheETSIIPRPolicyorthetermsofEricsson’sRANDcommitments.ThelackofclarificationastowhatETSImeantbyRANDmeansthatmultipleroyaltystructurescanbeconsistentwiththeRANDpolicy.Itiscertainlypossible(evenlikely)thatfixedper-unitroyaltiesareconsistentwithRAND,thoughourdiscussionoftherelationshipbetweenRANDroyaltiesandthe“value”thatthelicenseegetsfrombeingabletousethepatentedtechnology(setforthindetailbelow)castssomedoubtonthisproposition.ButmerelackofinconsistencyisnotanaffirmativejustificationfortheCommission’sopinions.Thefactthatmanyfirms(suchasEricsson)thathavemadeRANDcommitmentshavechosentolicensetheirpatentsonapercentagebasissuggeststhatthosefirmsdonotfeelthatsuchalicensingpolicyisinconsistentwiththeircommitments.

IV. NoSupportInTheAcademicLiterature

36See,e.g.,Lemley,“IntellectualPropertyRightsandStandardsSettingOrganizations,”Calif.L.Rev.,Vol.90,pp.1889-1980,at1904(2002)(“While‘reasonableandnon-discriminatory’licensingthusappearstobethemajorityruleamongSSOswithapatentpolicy,relativelyfewSSOsprovidemuchexplanationofwhatthosetermsmeanorhowlicensingdisputeswouldberesolved.”)Forarecentsurveyreachingmuchthesameconclusion,seeRudiBekkersandAndrewUpdegrove,“AStudyofIPRPoliciesandPracticesofaRepresentativeGroupofStandardSettingOrganizationsWorldwide,”PresentedtoNationalAcademiesofScienceSymposiumonManagementofIPinStandards-SettingProcesses,Session4(Oct.3,2012),availableathttp://sites.nationalacademies.org/xpedio/groups/pgasite/documents/webpage/pga_072197.pdf.37Oftheproposals,theonemostsimilartothepositiontakenbytheCommissionwasaNovember2011proposalbyAppletoETSIthatRANDroyaltiesbecalculatedona“CommonRoyaltyBase,”whichAppledefinedas“nohigherthantheindustry-averagesellingpriceofabasiccommunicationsdevicecapableofbothvoiceanddatacommunications.”Basingroyaltiesonan“industry-averagesellingprice”ratherthanontheactualsellingpricesofaparticularlicensee’sproductswouldmeanthattheroyaltywouldbethesameacrossdifferently-pricedlicensedproducts,astheCommissionproposes.TheAppleproposalisavailableathttp://www.scribd.com/doc/80899178/11-11-11-apple-letter-to-etsi-on-frand.Asofnow,ETSIhasnotadoptedApple’sproposal,andseveralmajorETSImembershaveopposedApple’sproposal.SinceApple’siPhonessellforsignificantmultiplesofthe“industry-averagesellingpriceofabasiccommunicationsdevice,”thebenefitstoAppleifitsproposalweretobeadopted,intheformofasmallerroyaltybaseandthuspresumablyintheformoflowertotalroyaltiesApplewouldowetoothers,areclear.

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Therearea(relativelysmall)numberofacademicarticlesdiscussingthe“non-discriminatory”aspectofRAND,38comparedtoamuchlargernumberofarticlesdiscussingthe“reasonable”aspectofRAND.Someofthearticlesfocusontheissuewhetherthepatentholder“charges”itselfaroyaltycomparabletotheroyaltieschargedtothird-partylicensees,39arguingthatthepurposeofthe“non-discriminatory”aspectofRANDistocompelthepatentholderto“chargeitself”thesameroyaltyitchargestothird-partylicensees,thoughwebelieve(a)thatisanon-issuewhich(b)findsnosupportintheIPRpoliciesofanySSO.Onerespectedauthorrecentlysuggested“ashiftofemphasisfromthe‘fairandreasonable’prongofFRAND,whichisofteninherentlyambiguous,tothe‘non-discrimination’prong…”40arguingthatthelatter“ifclearlydefinedcanprovidemeaningfulprotectionagainstexpostholdupifbilateralnegotiationsbetweenrightsholdersandindustrymembersoccurbeforefirmsandconsumersmakeinvestmentsthatarespecifictoastandard.”41Toourknowledge,basedonourreviewofhundredsofarticlesonRANDlicensing,noscholarhassupportedtheCommission’sinterpretationofwhatthe“non-discrimination”aspectofRANDmeans.42CertainlyinitsOrderstheCommissionhasnotcitedtoanyauthororarticlethathasproposedanythingsimilartotheCommission’sinterpretationofthe“non-discrimination”aspectofRAND.

Thatsaid,itisworthnotingthateconomiststhathavestudiedpricediscriminationhavehistoricallydifferentiatedbetweenthreetypesofpricediscrimination.In“first-degree”pricediscrimination,thesellerknowsthevaluethateachpotentialcustomerplacesontheproduct,andchargeseachbuyeranindividuatedpriceequaltothatbuyer’smaximumwillingnesstopay.In“second-degree”pricediscrimination,sellerspaydifferentper-unitpricesdependingonthequantitiestheypurchase.Theclassicexampleinvolvesvolumediscounts.In“thirddegree”pricediscrimination,sellerscanobservecertaincharacteristicsofthebuyersandchargedifferentpricesdependingonthebuyers’characteristics.43Commonexamplesincludediscountsforyouthsandseniorcitizens,time-of-daydiscountsorpricingbasedonconditionsofpurchase(suchasairlinepricing).

Anargumentcanbemadethatpercentage-basedroyaltiesareanexampleof“thirddegree”pricediscrimination,44withtheobservable“buyer”characteristicbeingthepricethatthelicensee/buyer

38See.,e.g.,Layne-Farrar,“NondiscriminatoryPricing:IsStandardSettingDifferent?,”J.CompetitionL.andEcon.,(2010),availableathttp://scholar.google.com/scholar_url?hl=en&q=http://www.researchgate.net/publication/247572944_NONDISCRIMINATORY_PRICING_IS_STANDARD_SETTING_DIFFERENT/file/60b7d521ba78c74e1b.pdf&sa=X&scisig=AAGBfm0-YPb3QMMp-rK1C-0JKLT6CNbMpQ&oi=scholarr,andarticlescitedtherein.39SeeBaumolandSwanson,“ReasonableandNondiscriminatory(RAND)Royalties,StandardsSelection,andControlofMarketPower,”73AntitrustL.J.pp1-58at26-27(2005).40Gilbert,“DealorNoDeal?LicensingNegotiationsinStandardsSettingOrganizations,”AntitrustLawJournal,Vol.77No.3(2011),pp.855-888at859.41Id.(emphasisadded).42Inhis “FOSSPatents”blog,FlorianMullerfavorablycitedwhathesawastheCommission’sfocusonthechipsetpriceastheappropriateroyaltybaseforRANDroyaltiesforcellularcommunicationsstandards,thoughtheCommission’sfocuswasinfactnotonthechipsetbutonthe“perunitphone”issue.Seehttp://www.fosspatents.com/search?q=india43SeeHalVarian,“PriceDiscrimination,”Ch.10inSchmalenseeandWillig(eds.),HandbookofIndustrialOrganization,Vol.1,pp.597-654(1989).44WethankEdEganforthispoint.

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chargesforthelicensedproductsitsells.45Eachlicenseewhochargesthesamepricepaysthesamepercentage-basedper-unitroyalties,sothe“discrimination”isnotsomuchacrosslicenseesasacrossproducts.WhetherETSIintendedtheRANDpolicytoprohibitsuchdifferentialroyaltiesbasedondifferentialpricing,orwhetherfirms(suchasEricsson)thatmadeRANDcommitmentstoETSIunderstoodthosecommitmentstopreventthemfromchargingpercentage-basedroyalties,isofcourseadifferentmatter.

V. AnalogyTo“MostFavoredNation”Provisions

Somecommentatorshaveanalogizedthepurposeofthe“non-discrimination”aspectofRANDlicensingtotherationalesunderlying“mostfavorednations”(“MFN”)clausesinlicenses(andothercommercialcontracts).46Inbothcases,thepresenceoftheprovisionprovidesanassurancetothecustomerthattheroyalty(price)itpayswillbenohigherthantheroyalty(price)paidbyanothersimilarlysituatedlicenseesellingalicensedproductforthesameprice–i.e.,thatonelicenseewillnotbetreatedmorefavorablythananothercomparably-situatedlicensee.

Usingthisanalogy,thelimitationsoftheCommission’sreasoningbecomeapparent.Licensescallingforalllicenseestopaythesamepercentage-basedroyaltiesbasedonthesellingpricesoftheproductsthelicenseessellwouldnotfallafoulofanMFNprovision;theyare“non-discriminatory”among/acrossdifferentlicensees.Ifthereisany“discrimination,”itisnotacrosslicenseesbutacrossproducts,withper-unitroyaltiesforhigher-pricedproductsbeinghigherthanroyaltiesforlower-pricedproducts,butwitheachlicenseesellingproductsforthesamepricepayingthesameper-unitroyalty.TheCommissionhasgivennoexplanationwhyanySSOwouldwanttoadoptaRANDpolicydirected,notto“discrimination”among/acrosslicensees,butto(claimed)“discrimination”acrossstandards-compliantproductssellingfordifferentprices.

Ineffect,theCommission’sargument(ifadopted)wouldmandateaparticularroyaltystructure,withdifferentlicensedproductssellingfordifferentpriceshavingthesameper-unitroyaltiesiftheyusethepatentedtechnologyinthesamefashion.Thathasnothingtodowith“discrimination”among/acrosslicensees.TheCommissionhasprovidednocitationstoanySSO’sIPRpolicy,oranyscholarlycommentary,suggestingthatthepurposeorintentofthe”non-discriminatory”aspectofaRANDcommitmentistoprecludelicensescallingforpercentage-basedroyalties(basedonthesellingpriceoftheend-userproduct)forSEPs.

VI. IsAPercentage-BasedRoyaltyA“Price”?

TheCommissionmaybeappealing,nottotheETSIIPRpolicyortoEricsson’sRANDcommitmentpursuanttothatpolicy,buttoSection4oftheIndianCompetitionAct,whichprovides(inrelevantpart)that“itshallbeanabuseofadominantpositionifanenterpriseorgroup…imposesunfairor

45Thereisanargumentthatthisisnotsomucha“buyer”characteristic,asagivenbuyer/licenseecansellbothhigh-pricedandlow-priceditems,asacharacteristicofthepricingdecisionmadebythebuyer/licenseeforparticularproductsthatitsells.46SeeGilbert,“DealorNoDeal?LicensingNegotiationsinStandardsSettingOrganizations,”AntitrustLawJournal,Vol.77No.3(2011),pp.855-888at880.

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discriminatory…priceinpurchaseorsale…ofgoodsorservices.”47Whatisatissuehereisnotatangible“good”butanintangible“service”--alicensethatauthorizesthelicenseetouseEricsson’spatentedtechnology.The“price”beingchargedistheroyaltyforthatuse.Whatdoes“price”meaninthecontextofroyalties?

“Prices”cantakemanyforms.Tangiblegoodsaretypicallypricedonan“each”basis:$X/unit.Butroyaltiescanbeexpressedeitherasapercentageofsalesoronaper-unit-royaltybasis(orinotherforms,suchaslump-sumlicenses).Buttherighttousepatentedtechnologydoesnotcomein“units.”

Bywayofanalogy,“services”includeslabor.Laborcanbeprovidedinexchangeforcompensationthatcantakemanyforms.Oneformisaper-unit-of-outputbasis,wherethelaborer’soutputismeasuredinsomefashion(e.g.,bythenumberofgarmentssewed,orbasketsoffruitpicked)andthelaborerispaidonaper-unit-of-output“piecework”basis.Otherexamplesincludecommissionedsales,wheretheemployeeispaidacommission(typicallyapercentage,possiblywithsomesortofslidingscale)onconsummatedsales.Butmanytypesoflabordonotlendthemselvestomeasuringaworker’soutputinsuchafashion,andamorecommonpaymentmethodisonaper-unit-of-inputbasis,e.g.,anhourlywageforhoursworked.Thethreepayment-for-serviceapproacheshavedifferentimplications,butallofthemarereasonableintheappropriatecircumstances.

Itseemstousindisputablethatapercentage-basedrunningroyaltyisoneformof“price”fortheuseofintangibleintellectualproperty,asisafixeddollars-per-unitrunningroyalty.Ericssonproposedtochargealllicenseesthesamepercentage-basedroyalty,andinthatsenseitsroyaltywasnot“discriminatory”among/acrosslicensees.Suchastructurehastheimplicationsthattheper-unitroyaltywouldvaryacrossproducts,withhigher-pricedproductsbearinghigherper-unitroyaltiesthanlower-pricedproducts.TheCommissionconcludedthatthiswas“primafaciediscriminatory”ona“perunitphone”basis,48butitprovidesnoexplanationforwhythe“perunitphone”approachistherequiredone.(Obviously,patentholderscouldchargeper-unitroyalties,butEricssonelectednotto,andthatchoiceisconsistentwithonecommonindustrypractice.)ThatisnotthewaythatroyaltieswerespecifiedinEricsson’sproposedlicense,49andtheCommissionfailstoexplainwhytheybelieveaper-unitroyaltyistheappropriatewaytointerpret“price,”asthattermisusedintheAct,intheroyaltycontext.Ineffect,theCommissionseemstobelievethattheActmandatesthat,toavoid“discrimination”insettingroyalties,“dominant”firmsmustuseaper-unitroyalty“price”approachratherthanapercentage-basedapproach,asspecifiedinEricsson’sproposedlicense.Giventhateitherapproachisawidely-usedmethodforsetting“prices”fortheuseofintellectualproperty,itisbynomeanscleartousthattheCommission’sapproachshouldprevail.(Returningtoourlaboranalogy,itwouldbeasthoughtheCommissionmandatedaper-unit-of-output“piecework”approachratherthanaper-unit-of-inputhourlywageapproachtosettingcompensationforlabor,orviceversa,onthegroundsthatthealternativeinvolvedimproper“discrimination.”Orusingourcommissionsalesanalogy,itwould

47Seehttp://www.cci.gov.in/images/media/competition_act/act2002.pdf?phpMyAdmin=QuqXb-8V2yTtoq617iR6-k2VA8d.InitsOrders,theCommissiondoesnotcitetoanyIndiancaselawinterpretingtheterm“discriminatory”asusedintheAct,eithergenerallyorinthecontextofpatentlicensing.48IntexOrder,Para.17;MicromaxOrder,Para.17.49Royaltieswerespecifiedasapercentageofrevenues,notona“perunitphone”basis.

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beasthoughtheCommissionmandateda“perunitsale”commission,withthecommissionbeingthesameforeachsaleregardlessofthesizeofthesale,ratherthanapercentage-basedcommission.50)

ThestatedpurposeoftheIndianCompetitionActis“topreventpracticeshavingadverseeffectoncompetition,topromoteandsustaincompetitioninmarkets,toprotecttheinterestsofconsumersandtoensurefreedomoftradecarriedonbyotherparticipantsinmarkets,inIndia.”51TheCommissionhasidentifiedno“adverseeffectoncompetition”oron“theinterestsofconsumers”fromallowingtheuseofpercentage-basedroyalties.Wesubmitthatthewidespreaduseofpercentage-basedroyaltiessuggeststhattheyareconsistentwith“promot[ing]andsustain[ing]competitioninmarkets.”

VII. “ExcessiveRoyalty”Issue

AsfortheCommission’sconclusionthat“Chargingoftwodifferentlicensefeesperunitphoneforuseofthesametechnology…reflectsexcessivepricingvis-à-vishighcostphones,”52unlessanduntiltheCommissionexplainsthecriteriathatitusestodeterminewhy,whenandhowroyaltiesare“excessive”(whetherwithrespecttoparticularproductsorgenerally),itisnotpossibletofullyevaluatethisconclusion.WenotethatEricsson’sproposedratesarewellwithintherangeofratessoughtbyotherholdersofportfoliosofstandards-essentialpatentsrelatedtocellularstandards.53

Inthecontextofphysicalgoods,onemetriccommonlyusedtoexaminetheextentofmarketpoweristheLernerindex,definedas(P-MC)/MCwherePisthepricechargedandMCisthemarginalcostofproducingthegoodinquestion.ButeconomistsrecognizethattheLernerindexisuselessinthecontextofintangibleintellectualpropertyrights,wherethe“marginalcost”oflicensinganadditionalitemiseffectivelyzero54(sothattheLernerindexiseffectivelyinfiniteregardlessofthepricecharged).

Anothercriterionsometimesusedtoevaluatewhetherroyaltieschargedare“excessive”istocomparethetotalroyaltiespaidby(chargedto)licensees(orthelicensor’stotallicensingrevenue)withthetotalvaluetothelicenseesofbeingabletousethepatentedtechnology.Theargumentisthatroyaltiesare“excessive”iftheyexceedtheexantevalueofbeingabletousethepatentedtechnology.

5050Commissionscould,ofcourse,becalculatedonsuchabasis,buttheeconomic(incentive-alignment)andorganizationalbehaviorproblemswithsuchanapproachareobvious.51PreambletoCompetitionAct,availableathttp://www.cci.gov.in/images/media/competition_act/act2002.pdf?phpMyAdmin=QuqXb-8V2yTtoq617iR6-k2VA8d.52IntexOrder,Para.17;MicromaxOrder,Para.17.53Seetheproposedroyaltyratesforpatentportfolios“essential”totheLTEstandardsummarizedinStasik,“RoyaltyRatesandLicensingStrategiesforEssentialPatentsonLTE(4G)TelecommunicationsStandards,”LesNouvelles,September2010,pp.114-119,availableathttp://www.investorvillage.com/uploads/82827/files/LESI-Royalty-Rates.pdf.Admittedly,theLTEstandardisadifferent(latergeneration)cellularstandardthantheGSMandCDMAstandardsthatwerethesubjectofEricsson’slicensingproposalandtheCommission’sarguments,butpublicly-availabledatasuggeststhatpatentholdersareseekingroyaltyratesforLTEthatarecomparabletotheratesthathadbeensoughtforGSM/CDMA.54Itdoescostmoneytopayrenewalfeesforpatentsandtoadministeralicensingprogram,butthe“marginalcost”tothelicensorwhenthelicenseemakesanadditionalsaleiszero,asinformationisnon-rivalinuse.

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Insuchcontexts,whereroyaltieschargedfordifferentproductsaredifferent,therelevanttestinvolvescomparingthetotalroyaltieschargedwiththetotalvalue.ButtheCommissionmadenoefforttodeterminethevaluetolicenseesofbeingabletouseEricsson’spatentedtechnology,anddidnotaddresstheapproachthatwouldbeneeded(orthedatathatwouldberequired)toperformthatcomparison.

IftheCommissionmerelymeanstosaythat(a)underapercentage-basedrunningroyalty,theper-unitroyaltyforhigher-pricedproductsishigherthanforlower-pricedproductsand(b)ifalowperunitroyaltyisacceptabletothepatentholderforlower-pricedproducts,anyhigherper-unitroyaltymustafortioribe“excessive,”theobviousproblemwithsuchapositionisthatitignoresthefactthatthepatentholderpresumablyonlyagreedto“accept”agivenpercentage-basedroyaltyrateinthefullknowledgethattheper-unitroyaltywouldbelowerforlower-pricedproductsandhigherforhigher-pricedproducts,andthatitsoverallroyaltyincomewouldreflectthemixoflicensedproducts.Thepatentholderdidnotagreeto“accept”thelowestimpliedper-unitroyalty(i.e.,thepercentageroyaltyratetimesthelowest-pricedlicensedproduct)ifitwouldonlyreceivethatamount“acrosstheboard.”

Inorderforthepatentholdertoreceivethesametotalroyaltieswithasingle“flat”per-unitroyaltyasitwouldreceiveunderapercentage-basedroyalty–inordertoholdthetotalcompensationforuseofthepatentedtechnologyconstant–theper-unitroyaltywouldhavetoincreaseforlower-pricedproducts(andfallforhigher-pricedproducts).55Toillustrate,wewillfleshouttheCommission’s(incompleteandpurelyillustrative)numericalexample.Supposethatthereareonlytwocategoriesoflicensedproducts:lower-pricedproductssellingforRs.100,andhigher-pricedproductssellingforRs.1000.56AstheCommissionnotes,witha1.25%runningroyalty,theper-unitroyaltyforthelower-pricedproductisRs.1.25andtheper-unitroyaltyforthehigher-pricedproductisRs.12.5.Supposeforconcretenessthatlicenseessell1millionunitsofthelower-pricedproductand100,000unitsofthehigher-pricedproduct.57Thenthepatentholder’stotallicensingrevenueis(1millionunits)×(Rs.1.25/unitroyalty)+(100,000units)×(Rs.12.5/unitroyalty),orRs.2.5million.Inordertoholdthetotalcompensationreceivedbythepatentholderconstantwithasingleflatper-unitroyaltyrateacrossallproducts,theper-unitroyaltywouldhavetobe(Rs.2.5million)/(1.1millionunits),58orRs.2.2727perunit.Thatis,theper-unitroyaltyonthelow-pricedproductswouldhavetonearlydouble,whiletheper-unitroyaltyonthehigher-pricedproductwouldfallbyafactorofroughlyfive.59Ascomparedtoapercentage-basedroyalty,sucharoyaltystructurewouldfavorthehigher-pricedproductanddisadvantagethelower-pricedproduct.Itisbynomeansclearthatthisoutcomeismoreconsistent

55WethankKatyaMadridforthispoint.56AsnotedinFn.8above,Intex’sactualsellingpricesarefromRs.950toRs.25000.IntexOrder,Para.3.57Thereisnoapriorireasonwhyfirmsthatselllower-pricedproductswouldnotalsosellhigher-pricedproducts.Thereisnoapriorireasonwhyfirmswillsellmorelower-pricedproductsthanhigher-pricedproducts;thatdependsonthemarket’sreactiontothepricedifferentialvis-à-visanyperceivedvaluedifferential.58Thisisnotquitecorrect.Forsimplicity,thiscalculationignoresthefactthat,iftheper-unitroyaltyincreasedforlower-pricedproductsanddecreasedforhigher-pricedproducts,andifthoseroyaltieswerereflectedinsellingprices,thequantitiessoldwouldbeaffectedduetoprice-elasticityeffects,sothatthedenominator(thenumberofunitssold)wouldnotstayconstant.59Theactualeffectwoulddependontherelativequantitiesofthehigher-andlower-pricedproductssold.

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withEricsson’sRANDcommitments,orthepurposeandintentoftheAct,thanEricsson’sproposed1.25%runningroyaltyis.

Ofcourse,theCommissionmightarguethatthereisnoneedtoholdthetotalcompensationreceivedbythepatentholderconstant.Butinordertobemeaningful,anycomparisonrequiresholdingsomethingconstant,whethertacitlyorexplicitly.TheCommissionhasnotgivenanyreasonedexplanationwhypercentage-basedroyaltiesappliedtohigher-pricedproductsareinherently“excessive,”orwhyEricsson’sproposedRs.12.5royaltyonaRs.1000cellphoneis“excessive”simplybecauseitismanytimestheproposedper-unitroyaltyonaRs.100cellphone.

VIII. “PatentedProduct”Issue

OnefallacyintheCommission’sreasoningisthattheCommissionseemstotacitlyassumethatthe“patentedproduct”istheGSMchipset,60ratherthanthecellphonesthatIntexandMicromaxactuallysell.(Theybuychipsetsfromotherfirms;theydonotsellchipsetsotherthanimbeddedinthecellphonestheysell.)NothinginEricsson’sRANDcommitment,andnothingintheETSIIPRpolicy,requireslicensingatthechipsetlevelratherthanatthecellphonelevel.61IntexandMicromaxsellcelllphones,notchipsets.AndthefactthatEricssonisseekingtolicenseend-userdevices(suchascellphones)ratherthanchipsetssuggeststhatthe“licensedproducts”wouldbetheend-userdevices,notthechipsets.

TheCommissionmadenoefforttoinvestigatethenature,claims,coverageorscopeofEricsson’spatents.(TheyacknowledgethatEricssonhas33,000patentsissuedworldwide,withsome400ofthemgrantedinIndia.62)WhileitmightwellbetruethatachipsetitselfwouldbeinfringingsomeoftheclaimsofsomeofEricsson’spatents(whetherdirectlyorviathedoctrinesofcontributoryinfringementand/orinducementtoinfringe,giventhatchipsetshavenopracticaluseotherthantobeincorporatedintocellphonesandusedtoaccesscellularservices),webelievethatitislikelythatsomeofEricsson’spatentclaimsarenotdirectlyinfringedbychipsets,butratherareeither(a)deviceclaimsthatrequirethatthechipsetbeincorporatedintoahandset/cellphoneor(b)“systems”claimsthat60SeeIntexOrder,Para.17;MicromaxOrder,Para.17.Technically,becausedifferentchipsetscanhavedifferentfeaturesandcansellfordifferentprices,apercentage-basedroyaltybasedonthesellingpriceofthechipsetwouldcharge(somewhat)differentper-unitroyaltyamountsdependingonthesellingpricesofthechipsets(notonthepricesoftheend-userproductsintowhichthosechipsetsareincorporated,asEricssonproposed).However,becauseatanygivenpointintimechipsetpricesvarylittleascomparedtothemuchlargervariationinend-userproductprices,apercentage-basedroyaltybasedonchipsetpriceswouldeffectivelychargeroughlythesameper-unitroyaltyfordifferent-pricedend-userproducts. BecausechipsetpricesaredrivenbycompetitioninchipsetmarketsandbecausecompetitionamongchipsetprovidersisdriveninlargepartbyMoore’sLaw,cellularchipsetpriceshavefallensignificantlyovertime.Afixedcents-per-unitroyaltywouldnotfallwithfallingchipsetpricesovertime,andthusovertimewouldloomlargerasapercentageofthechipsetpricethanapercentage-basedroyaltybasedonthesellingpriceofthechipset.61TherequirementthatEricssonmakean“unlimited”numberoflicensesavailableonRANDtermscanbesatisfiedbylicensingattheend-userdevicelevelratherthanatthechipsetlevel.62IntexOrder,Para.16.

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requirethecellphonetobeusedaspartofacellularnetworkconsistingofmultiplecellphonesandbasestationequipment.Ifso–ifsomeoftheclaimsinsomeofEricsson’spatentsreadoncellphonesand/orcellularsystems--thenthe“patentedproduct”isbroaderthanthechipset,andtheCommission’s(unsubstantiated)assertionsthatpercentage-basedrunningroyaltiesbasedonthesellingpriceofthecellphones“hadnolinkagetopatentedproduct”63aresimplyfalse.

TheCommissionmayhavebelievedthat,inordertobeRAND-compliant,theroyaltybaseinanylicenseforSEPsrelatingtocellularcommunicationsstandardsshouldhavebeenthechipset,ratherthanthecellphone,buttheCommissiondidnotarticulateanyreasonwhythatshouldbethecase,anditisinconsistentwithcommonindustrypracticewithrunning-royaltylicenses,manyofwhichcallforthelicenseestopayroyaltiesbasedonthesellingpricesoftheproductstheysell(ratherthanbasedonthesellingpriceofsomecomponentthattheypurchase,suchasachipset).

IX. EconomicReasonsInFavorofPercentage-BasedRoyalties

Thereareanumberofgood,andconceptuallydistinct,economicreasonswhyitiscommon(thoughnotuniversal)practice,andthus“reasonable”inthesenseof“commerciallyreasonable,”forlicensestocallforpercentage-basedrunningroyaltiescalculatedonthesellingpricesofthelicensedproductssoldbythelicensee.Overthelifeofapatentlicense,licenseesoftenselldozensifnothundredsofdifferentlicensedproductswithdifferentfeatures,atawidevarietyofpricepoints(andpricesforparticularproductscanandoftendochangeovertimeinresponsetomarketconditions).Fixedcents-per-unitroyaltiesdonothavetheflexibilitytoadjusttochangingmarketconditionsthatpercentage-basedrunningroyaltiesinherentlydo.Itiseasiertospecifyasinglepercentage-basedroyaltyratetobeappliedacrosstheboardtoalllicensedproductsthantospecifydifferentper-unitroyaltyratesfordifferentproductsorproductcategories,especiallyastheboundarylinesbetweendifferentproductcategoriesbecomeblurredovertimeasnewproducts(e.g.,smartphonesortablets)combiningfeaturesofwhathadpreviouslybeendistinctproductcategoriesareintroduced,causingdisputesastowhichproductcategoryanewproductfalls.

Oneofthekeybenefitsofapercentage-basedrunningroyaltystructureisthatittendstoaligntheincentivesofthepatentholderandthelicenseebetterthanafixedcents-per-unitroyaltydoes.Incentive-alignmentisawell-recognizeddesideratumineconomics,asittendstoalleviatetheproblemscausedbymisalignmentofinterestsbetweentheparties.Withafixedcents-per-unitroyalty,theinterestsofthepatentholderandthelicensearesignificantlyopposed.Forexample,thepatentholderwantsthelicenseetosellmoreproducts(soastoincreasetheroyaltybaseandthustheroyaltiescollected),andthiscanbestbeaccomplishedbyloweringthepricethatthelicenseesellsthelicensedproductsfor.Butifthelicenseelowersthepricethatitchargeswhiletheper-unitroyaltyremainsfixed,thatcutsintothelicensee’sprofitmargins,thusharmingthelicensee.Conversely,withapercentage-basedrunningroyalty,ifthelicenseecutsitsprice,italsoreducestheper-unitroyaltythatitpays(whileboostingthenumberofunitssold).Similarly,percentage-basedrunningroyaltieshelptoaligntheparties’incentivesinthefaceofcostchanges,whetheridiosyncraticorduetoeconomy-orindustry-

63IntexOrder,Para.17.

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wideinflation.Ifproductpricesincrease(ordecrease)duetoinflation(orotherfactorssuchasMoore’sLaw),withapercentage-basedrunningroyaltysotoodotheper-unitroyalties,whichdoesnothappenwithfixedcents-per-unitroyalties.

Apercentage-basedroyaltyalsoallocatesrisks(ofbothmarketsuccessandmarketfailure)asbetweenthelicensorandthelicenseedifferentlythanafixedper-unitroyaltydoes.Andasdiscussedinmoredetailbelow,totheextentthatdifferentlicenseesgetdifferent“values”frombeingabletousethepatentedtechnology,andtotheextentthosevaluesarecorrelatedwiththesellingpricescharged,apercentage-basedrunningroyaltytendstoaligntheroyaltiespaidwiththevaluethatthelicenseegetsfrombeingabletousethepatentedtechnology.

Moreover,inourexperience(basedonareviewofthousandsoflicenses)chargingpercentage-basedroyaltiesisacommonpractice,evenforfirmswithnomarketpowerwhatsoever.

TheCommission’sargumentthatusingapercentage-basedroyaltyratebasedonthesellingpricesoftheend-productsis“primafaciediscriminatory”ignoresallofthosepragmaticconsiderationsinfavorofusingpercentage-basedroyalties.

Weshouldnotbemisunderstoodasopiningthatacents-per-unitroyaltystructureisnotRAND.Therelevantquestion,however,iswhetherapercentage-basedroyaltybasedonthesellingpriceoftheend-userdevice(thecellphone)soldbythelicensee“primafacieisdiscriminatory,”astheCommissioncontends,64evenifalllicenseespaythesamepercentageroyaltyrate.

Itistruethatsomelicensescallforfixedcents-per-unitroyalties(inwhichcasetheroyaltybaseisthenumberofunitssold,anddoesnotvarydependingonthenatureorthesellingpriceoftheproductsinquestion),ratherthanpercentage-basedroyalties.OneexamplefromtheproposedEricsson-MicromaxlicensewastheprovisionthatMicromaxshouldpayafixedroyaltyofUS$2.50perdongle,ratherthanapercentageofthesellingpriceofthedongle.65

Somepatentpools,notablythe802.11patentpooladministeredbyViaLicensingandtheH.264patentpooladministeredbyMPEG-LA,chargecents-per-unitroyalties.(Todate,attemptstoformapatentpoolforGSM-relatedpatentshavebeenunavailing,sothereisno“comparable”patentpoolforsimilartechnologytoEricsson’sGSM-relatedSEPsforeithertheroyaltystructureorthelevelofroyaltyrates.)Butthosepatentpoolsalsooffersignificantvolumediscounts,withfirmssellinghighvolumesoflicensedproductspayingaslittleas9%oftheper-unitroyaltypaidbyfirmssellingsmallervolumesoflicensedproducts.66Itisatleastdebatablewhethersuchsubstantialquantitydiscounts,forwhichthesmaller-volumesellerscannoteffectivelyqualify,satisfythe“non-discrimination”aspectofRAND.Suchsubstantialvolumediscountsaredifficulttojustifybasedonthecostoflicensing.

64IntexOrder,Para.17;MicromaxOrder,Para.17.65MicromaxOrder,Para.4.66Forexample,theViaLicensing802.11(a-j)patentpoolchargesroyaltiesof$0.55/unitforlicenseesalesbelow500,000units/year,fallingto$0.05/unitforlicenseesalesabove40million/year,lessthan1/10ththeper-unitratechargedtothelowest-volumelicensees.Seehttp://www.vialicensing.com/licensing/ieee-80211-fees.aspx.

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X. Value,CostandPrice

ThequestioniswhethertheCommission’sinterpretationof“discriminatory”makessensefromapublicpolicy,abuseofdominance,and/orcontractualinterpretationperspective.Onecommonly-acceptedprincipleofRANDlicensingisthattheroyaltyrateshouldsomehowreflect“thevalue”tothelicenseeofbeingabletousethepatentedtechnologyinmakingandsellingitsproducts.Butalicenseethatusesthepatentedtechnologytomakeandsella$100cellphoneisgettingdifferentvaluefromusingthepatentedtechnologythanonethatmakesandsellsa$1000cellphone.Boththepricesandthelikelyprofitmarginsofthetwoproductsaredifferent.

TheCommissionasserts(withoutsupport)that“Highercost[sic]ofasmartphone[presumably,ascomparedtoalower-costcellphonewithoutcertainfeaturesofthesmartphone]isduetovariousothersoftware/technicalfacilitiesandapplicationsprovidedbythemanufacturer/licenseeforwhichhehadtopayroyalties/chargestootherpatentholders/patentdevelopers.”67Wehaveanumberofconcernswiththisstatement.First,“cost”persedoesnotenterintoit;therelevantissueistheroyaltiespaid,which(withapercentage-basedroyalty)arebasedonthesellingpricethatthelicenseechargesforitsproduct,notonthecosttothelicenseeofmakingandsellingamoresophisticatedcellphonecontainingadditionalfeatures.Second,thereisnoapriorireasontobelievethatdifferencesinsellingpricesaredrivenby“royalties/chargestootherpatentholders/patentdevelopers.”Wewouldagreethatamorecomplexproductcontainingmorefeaturesislikelytocostmoretomakethanaless-complexproductcontainingfewerfeaturesandsellingforalowerprice,andthatmuchofthecostdifferentialisdrivenbythedifferentcostsofphysicalinputsratherthan“royalties/chargestootherpatentholders.”(Forexample,incorporatingahigher-resolutiondigitalcamerawithmorememorycostsmoreintermsofphysicalinputsthanincorporatingalower-resolutioncamerawithlessmemory.)ButtheCommissioncitedtonoevidence,andapparentlymadenoattempttoinvestigate,astowhat“royalties/chargestootherpatentholders/patentdevelopers”existed(otherthanmakingageneralandnon-empirically-basedstatementaboutthepossibilityof“royaltystacking”68),orwhetherdifferencesinsuchroyaltiesacrossdifferentlicenseesexisted,orwhethertheyexplainedthelevelsof(ordifferencesin)sellingprices.Indeed,thewell-knownfactthatApple’smarginsoniPhonesaredramaticallyhigherthanthemarginsearnedbyothercellphoneandsmartphonedevelopers69castsstrongdoubtonthepropositionthatpricedifferencesaredrivenbyroyaltycost(orothercost)differences.

XI. ValueSuperadditivityandSynergies

AnotherfallacyintheCommission’sargumentisitstacitassumptionthatvalueisadditive.Weareusedtoprices(whichgenerallyareobjectivepublicly-observablemarketphenomena)beingadditive;thepriceofabundleofitemsis(generally)thesumoftheindividualpricesoftheitemsinthebundle

67IntexOrder,Para.17;MicromaxOrder,Para.17.68MicromaxOrder,Para.13;IntexOrder,Para.13.69See,e.g.,http://www.theregister.co.uk/2013/11/16/android_powers_7x_more_handsets_than_iphone_but_apple_bags_more/(visitedMarch6,2014).

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(absentquantitydiscounts).Bycontrast,value-in-use70isinherentlysubjective(varyingfromentitytoentity)andneednotbeadditive.Thevaluetoaparticularentityofacombinationoffeaturescanbelessthan,equalto,orgreaterthanthesumoftheindividualvaluesofthefeaturesconsideredseparately.(Thesethreealternativescorrespondtowhatmathematicianscallsubadditive,additive,andsuperadditivevalues,respectively.)Onetermcommonlyusedtodescribesituationscharacterizedbysuperadditivevaluesis“synergy,”wherethevalueofacombinationoffeaturesisgreaterthanthesumoftheindividualvaluesofthosefeaturesconsideredinisolation.

Thisimpliesthat“thevalue”ofbeingabletoaddEricsson’spatentedfeaturestoaparticularcellphonecanvarydependingontheotherfeaturesofthecellphone.Forexample,cellularcommunicationstechnologyallowsnotonlyvoicesignalsbutalsodatatobecommunicatedoverthecellphonenetwork.Ericsson’spatentedtechnologyrelatestocellularcommunications,whichistechnicallyunrelatedtootherfeaturesofacellphone(suchaswhetherthephonehasadigitalcameraand/orPDAfunctionalityornot);butfromaneconomicperspective,therelevantquestionisnottechnologicalrelatedness,buttheimpactonvalue.Whenoneaddsafeature(suchasadigitalcamera)toacellphone,thevaluetousersoftheabilitytotakepictureswiththatcameraisenhancedbytheabilitytosendthoseimagestoothersoverthecellularnetwork.Similarly,thevalueofcellularconnectivityisaffectedbythetypesofusesthatcanbemadeofthatcellularconnectivity,andbeingabletosenddigitalimagestakenbyacameraenhancesthatvaluerelativetothesituationinwhichthecellphonedoesnothaveacamera,despitethefactthatthecellularcapabilityandthecameraaretechnologicallyunrelated.Similarly,thevalueoftheabilitytocommunicateoveracellularnetworkisenhancedbytheabilitytousethecellphonetosurftheInternet,whichdependsonaddingfeatures(suchasInternetbrowsing)thatmaybetechnicallyunrelatedtoEricsson’scellulartechnology,butthatisnottherelevanteconomicquestion.

GiventhissynergybetweenEricsson’spatentedtechnologyandotherfeaturesofacellphone,thereisnoreasonwhytheperunitroyaltyrateappropriateforamore-complexsmartphoneincorporatingmorefeatures(andsellingforahigherprice)shouldnotbehigherthantheperunitroyaltyrateforaless-complexcellphonecontainingfewerfeatures(andsellingforalowerprice),evenifbothproductsuseEricsson’scellulartechnologyin“thesame”manner.TheCommission’sconclusiontothecontrary,that“increaseinroyaltyforpatentholderiswithoutanycontribution[ofthepatentedtechnology]totheproductofthelicensee,”71issimplyinvalidfromaneconomicperspective.Itconfusestechnologicalcontributionwitheconomic(value)contribution.Itignoresthepresenceofsynergies.

ItmaybethattheCommissionintendstosuggestthat,underapercentage-basedroyaltystructure,thedifferencesinper-unitroyaltiesbetweenhigh-pricedandlow-pricedproductsarenotcommensuratewithdifferencesinthe“contribution”ofthepatentedtechnologytothedifferentproductssoldbythelicensee,and/orarenotcommensuratewiththe“value”thatlicenseesgetfromusingthepatentedtechnologyindifferentproducts.Thatisadifferentargumentthantheonethe

70Ascontrastedwith“valueinexchange.”71MicromaxOrder,Para.17;IntexOrder,Para.17.

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Commissionactuallymade.Itisdifficulttomeasurethe“contribution”ofthepatentedtechnologytodifferentproductssellingfordifferentprices.AsdiscussedinthenextSection,licenseshavetobeadministrable,inthesenseofbasingtheroyaltiesdueonsomemetricthatisobservable,non-manipulable,andcollectedintheordinarycourseofthelicensee’sbusiness.Sellingpriceissuchanobservablemetric.

XII. “ReasonableRoyalties”andTheValuetoLicenseesofBeingAbletoUsethePatentedTechnology

OneprinciplethathassometimesbeenproposedasatouchstoneforRANDroyaltiesrelatestheroyaltiessoughtto“thevalue”tothelicenseeofbeingabletousethepatentedtechnology,typicallymeasuredrelativetousingsomenon-infringingalternativetechnology.

Givensynergies,thereisnoreasontobelievethatalllicenseesreceivethesame“value”frombeingabletousethepatentedtechnology,eveniftheyuseitin“thesame”manner.Differentlicenseescangetdifferenttypesand/ordifferentamountsofsynergiesfromtheiruseofthepatentedtechnologies.ManycommentatorshavearguedthattheNDaspectofRANDdoesnotrequirethatalllicenseespaythesameroyalties,butonlythat“similarlysituated”licensesbetreatedsimilarly.Totheextentthatdifferentlicenseesreceivedifferentvaluesfrombeingabletouse“thesame”patentedtechnology,onemightarguethatchargingdifferentlicenseesthesameper-unitroyaltyratewouldviolatethespiritofa“non-discrimination”provision,andthatcharginghigherper-unitroyaltiestothosewhoreceiveahigher“value”frombeingabletousethepatentedtechnologyisnot“discriminatory”inanysensethataRANDpolicyisintendedtoaddress.

Asapragmaticmatter,itisnotpossibletoobserve“thevalue”thatanyparticularlicenseegetsfrombeingabletousethepatentedtechnology.Partiestolicenseswantthoselicensestobeadministrable,inthesensethattheydonotleadtodisputesastowhatandwhatisnotcoveredandastotheamountofroyaltyowed.Tobeadministrable,licensesmustrelyoninformationthat(a)iscollectedintheordinarycourseofthelicensee’sbusinessand(b)isnot“manipulable”(subjecttovariationduetoarbitrarychoices).Forexample,whileinasense“thevalue”ismoretiedtotheprofits(orprofitdifferential)thatthelicenseegetsfrombeingabletousethepatentedtechnologythantotherevenue(price)thatthelicenseereceives,reportedprofitmarginsaresubjecttomanipulationbythelicenseeduetotherangeofchoicesofoverheadallocationrulesacrossmultipleproductsavailabletothelicensee(whenthelicenseemakesandsellsmultipleproducts),andconsequentlyitisquiteuncommonforlicensestospecifythatthelicenseewillpayroyaltiesbasedontheprofitmarginsthatthelicenseeearnsondifferentproducts.Instead,licensestypicallycallforthelicenseetopayroyaltiesbasedonthesellingprices,whichareagreedtoinarms’-lengthtransactionsbetweenthelicenseeandthecustomerandthusaremuchlesssubjectto“manipulation”thanreportedprofitmarginsare.

Itisnotrealistictoexpectthatroyaltytermscanbeperfectlytitratedtomatch“thevalue”thatdifferentlicenseesgetfromtheuseofthepatentedtechnology,whetherforeachandeveryproductsoldbyagivenlicenseeoracrosslicensees,especiallywhentheproductsthelicenseesells,theirproductcharacteristics,andproductpriceschangeoverthelifeofthepatentlicense.Whatisrequiredisthat

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licensingtermsbe“reasonable”and“non-discriminatory,”notthattheybeperfect.Moreover,onewouldexpectthatthesesortsofissueswouldberesolvedbynegotiationsbetweenthepartiesoverlicensingterms.

XIII. OtherCompetitionAuthorities’Positions

TheissueofRANDlicensinghasattractedtheattentionofanumberofcompetitionauthorities,includingtheFTC/DOJintheU.S.andDGCompinEurope.Toourknowledge,basedonourreviewoftheirpublicpositions,noneofthemhaveadoptedthepositionapparentlytakenbytheIndianCompetitionCommission,thatpercentage-basedroyaltiesbasedonthesellingpricesofconsumerproducts(suchascellphones)are“primafaciediscriminatory”(andthusinconsistentwithRANDcommitments)and/oranabuseofadominantposition.Allofthemseemtohaveadoptedthepositionthatthepurposeofthenon-discriminationaspectofRANDistopreventdiscriminationacrosslicensees,toprovidelicenseeswitha“levelplayingfield,”andthatlicensesthatcallforallsimilarly-situatedlicenseestobeofferedthesamepercentage-basedroyaltyratearefullyconsistentwithbothRANDcommitmentsandpublicpolicyconcerns.

Indeed,inconnectionwithapatentpoolfor“essential”patentsheldbyPhilips,SonyandPioneerrelatingtoDVDtechnology,inDecember1998theUSDOJissuedabusinessreviewletterapprovingapatentpoolthatproposedtochargeroyaltyratesof3.5%ofthesellingpriceoftheDVDplayer(and$0.05perDVD),withaper-playerminimumplayerroyaltyof$7/unit(fallingto$5/unitafter2000)72–i.e.,aroyaltystructureofthe“greaterofX%or$Y/unit”form.Similarly,inJune1999theDOJissuedabusinessreviewletterapprovingadifferentDVDpatentpool,thisoneformedbyHitachi,Matsushita,Mitsubishi,TimeWarner,Toshiba,andVictorCompanyofJapan,whichproposedroyaltiesof“$0.75perDVDDiscand4%ofthenetsalespriceofDVDplayersandDVDdecoders,withaminimumroyaltyof$4.00perplayerorrecorder,”73whichisthesameform(albeitwithsomewhatdifferentvalues)asthePhilips-Sony-Pioneerroyaltystructure.SincedifferentDVDplayershavedifferentfeaturesandsellfordifferentprices,74theDOJ’sapprovaloftwodifferentpatentpools,eachcharging

72SeeletterfromJoelKlein,AssistantAttorneyGeneral,AntitrustDivision,USDOJ,toGarrardBeaney,datedDecember16,1998,p.6,(hereafter“PSPBusinessReviewLetter”),availableathttp://www.justice.gov/atr/public/busreview/2121.pdf.73LetterfromJoelKleintoCoreyRamos,pp.6-7(hereafter“HMMTWTVBusinessReviewLetter”),availableathttp://www.justice.gov/atr/public/busreview/2485.htm.74AsofMarch9,2014,anInternetsearchof“DVDplayer”pricesatBestBuy,aUS-basedretailer,found34DVDplayerssellingforretailpricesfromalowof$29.99toahighof$381.59.Thelowest-pricedproductwasabasicDVDplayer;thehighest-pricedproductwasaDVDplayer-recorderwitha500GBharddrive.Therewere19productssellingforpriceslessthan$50,11productssellingforbetween$50and$100,and3productssellingbetween$100and$150.Seehttp://www.bestbuy.com/site/olstemplatemapper.jsp?_dyncharset=UTF-8&dynSessConf=-5665426031039108075&id=pcat17071&type=page&ks=960&st=categoryid%24abcat0102005&sc=Global&cp=1&sp=-bestsellingsort+skuidsaas&qp=currentprice_facet%3DSAAS%7EPrice%7E%24250+-+%24499.99&list=y&usc=All+Categories&nrp=15&fs=saas&iht=n&seeAll=&browsedCategory=abcat0102005AllpresumablyusedtheDVDtechnologycoveredbythepatentpoolin“thesame”fashiontoplaybackDVDs,thoughDVDplayer-recordersmaywellhaveusedthepatentedtechnologyinanadditionalfashionthandoDVDplayers.

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thegreaterofapercentage-basedroyaltyandafixeddollar-per-unitminimumroyalty,castsstrongdoubtonthepropositionthattheDOJconcludedthatpercentage-basedroyaltiesbasedonthesellingpricesofthelicensedproductswere“primafaciediscriminatory”andhencenotRAND,75astheCommissionconcluded.76

ThatlackofendorsementoftheCompetitionCommission’spositioncould,orcourse,merelyreflectthepossibilitythatothercompetitionauthoritieshavenotconsideredtheissue,77butwefindthatpossibilityimplausible.

XIV. U.S.RANDCaseLaw

TheBestBuydatacitedaboveiscurrent.Thepoolswereapprovedbackinthe1998-99period.Itdoes

notappearthatthepoolrateshavechangedovertime.FortheHitachi-ledpool,thecurrentratesareavailableathttp://www.dvd6cla.com/royaltyrate.html;thewebsiteindicatesthatthepercentageroyaltyrate(of4%)isunchangedfromwhatitwaswhentheBusinessReviewLetterwasissued,andthattheper-playerminimumroyaltywillfallfromthecurrent$4/unitto$2/unit“aftertheeffectivedateoftheNewDVD6LicenseAgreement,”butthereisnoindicationwhatthat“EffectiveDate”isorwillbe.

DVDplayerpriceshavefallensignificantlyovertime.Anundated(latestdatafrom1999)BureauofLaborStatisticsreporton“DevelopingaHedonicRegressionModelforDVDPlayersintheU.S.CPI”reportedthatInfoTech,Inc.,amarketdatafirm,“reportsthattheaverageretailpriceforDVDvideoplayershasdeclinedfrom$735inthefirsthalfof1997to$470inthesecondhalfor1998,”and“ThemeanpriceforallDVDplayersincludedinthisstudyduringthefirsthalfof1999was$443.39.”Seehttp://www.bls.gov/cpi/cpidvd.htm. ThefactthatDVDplayerpriceshavefallenprecipitatelyovertimemakesitmorelikelythattheminimumper-unitroyaltieschargedbytheDVDpatentpools,withtheir“thegreaterofX%or$Y/unit”structure,becomebinding,thusincreasingtheburdenoftheroyaltyasapercentageofthesellingpriceoftheproduct(thoughthisadmittedlyreducesthelikelihoodthatdifferentlicenseeswillbechargeddifferentroyalties,astheper-unitminimumismorelikelytobebinding).Simplyput,whenretailDVDplayerpricesaveragedover$400/unit(astheydidbackin1998-99),the4%royaltysoughtbytheHitachi-ledpool(presumablycalculatedonwholesale,notretail,prices)wouldlikelyhavebeengreaterthanthe$4/unitminimum,andtheroyaltythatthelicenseepaidwouldhavebeenthepercentage-basedamount;withretailDVDplayerpricesnowaslowas$30,thatisnolongerthecase.75ThepoolparticipantsinthePhilips-Sony-Pioneerpoolhadagreedtolicensealloftheir“essential”patents“non-discriminatorilytoallinterestedthird-parties.”PSPBusinessReviewLetter,supranote56,atp.6.ThepoolparticipantsintheHitachi-Matsushita-Mitsubishi-TimeWarner-Toshiba-Victorpoolhadagreedtomakelicensesavailableto“interestedthirdparties”on“fair,reasonableandnon-discriminatory”terms.HMMTWTVBusinessReviewLetter,supranote57,atp.3.76Fromaneconomicperspective,theonlydifferencebetweenthetwosituationsisthattheCommission’sOrdersweredirectedtoEricsson’srequestforapurepercentage-basedrunningroyalty,whilethetwoDVDpatentpoolsbothusedahybrid“thegreaterofX%or$Y/unit”approach.Thetwoareeffectivelyidenticalabovethe“cross-over”levelofproductpriceatwhichthepercentageroyaltyequalstheminimumper-unitroyalty.Forproductpricesabovethat“cross-over”price,thepercentage-basedroyaltycontrols(andhigher-pricedproductspayhigherper-unitroyalties);forproductpricesbelowthat“cross-over”price,theminimumroyaltycontrols(andallsuchproductspaytheminimumroyalty).77Analternativepossibilityisthatothercountries’competitionlawsdonothaveprovisionscomparabletoSection4oftheIndianCompetitionAct.EUArticle102(c)refersto“abuseofadominantposition,”butitslanguageprevents“applyingdissimilarconditionstoequivalenttransactionswithothertradingparties,therebyplacingthematacompetitivedisadvantage.”Availableathttp://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12008E102:EN:NOT.IntheU.S.,theShermanActandClaytonActdonothavethe“abuseofdominantposition”language,thoughtheRobinson-PatmanActdoesprohibitpricediscriminationinsomecontexts.Toourknowledge,neitherArticle102(c)northeRobinson-PatmanActhasbeeninterpretedasprohibitingpercentage-basedroyaltiesas“primafaciediscriminatory.”

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Weareawarethat,inMicrosoftv.Motorola,oneU.S.caseinvolvingRANDlicensingissues,thetrialjudge,JudgeRobart,opined:“‘apatent’sroyaltyrateshouldbebasedontheimportanceofthepatenttothestandardandtotheimplementer’sproduct.Underthisanalysis,thisroyaltyratewouldfluctuatelittle,ifatall,basedontheendsellingpriceoftheproduct.Accordingly,if0.8centsperunitisareasonableroyaltyratefora$200.00Xbox,thenitshouldbeareasonableroyaltyrateforanXboxsellingfor$400.00thatusesthepatentedtechnologyinthesamemanner.”78Thisisasignificantaspectofhisruling,asitappearstoruleoutpercentage-basedroyaltiesbasedonthesellingpriceoftheend-userproductasbeinginconsistentwith(hisviewof)RAND.Sincesuchroyaltiesarecommonintheindustry(thoughnotinthetwopatentpoolsheconsideredinhisanalysis)andthusarepresumably“reasonable”inthe“commerciallyreasonable”sense,hedoesnotexplainhowhewoulddealwiththem.

WedisagreewithJudgeRobart’sanalysisinthisregard.Duetosynergy/valuesuperadditivity,“theimportanceofthepatent…totheimplementer’sproduct”canvarysignificantlydependingonthevaluetothelicensee(implementer)ofbeingabletousethepatentedtechnologyindifferentproductsthatvarywithrespecttofeaturesotherthanthelicensedpatentedtechnologyandsellingfordifferentpricepoints.Thereissimplynoreasontobelievethatthevalueofbeingabletousethepatentedtechnologyindifferentproducts“wouldfluctuatelittle,ifatall”acrossdifferentproductssellingfordifferentpricepoints,merelybecausetheproducts“use[]thepatentedtechnologyinthesamemanner.”

Moreover,neithertheCommissionnorJudgeRobartaddressedthepragmaticadvantagesofapercentage-basedroyaltystructure.AsnotedinSectionXabove,thereareanumberofgoodeconomicreasonstochooseapercentage-basedroyaltystructureovertheavailablealternatives.

WenotethatJudgeRobart’sopinionandreasoning,asstated,appearstobebasedonthe“reasonable”prongofRAND,whereastheCommission’sopinionandreasoningisbasedonthe“non-discrimination”prongofRAND(orthestatute).Again,wedisagreewithJudgeRobart’sreasoningformuchthesamereasonswedisagreewiththeCommission’sreasoning.ButJudgeRobart’srelianceonthe“reasonable”prongofRANDisproblematicforanotherreason.Indeterminingwhatis“reasonable,”webelievethatonetouchstoneiswhatis“commerciallyreasonable”inthesenseofwhatwouldlikelybeagreedtoinarm’s-lengthnegotiationsbetweenunaffiliatedentities.Giventhatpercentage-basedroyaltiesarecommoninthisindustry(aswellasmanyothers),forbothSEPsandnon-SEPs,wefindithighlyunlikelythatETSIand/orEricsson,byadoptingaRANDpolicy,intendedtoprecludetheuseofpercentage-basedrunningroyaltylicenses.JudgeRobartdidnotrenderanyopinionastotheappropriateroyaltybase,otherthanconcludingthattheappropriateroyaltystructurewasa

78“FindingsofFactandConclusionsofLaw,”Microsoftv.Motorola,U.S.DistrictCourt,WesternDistrictofWashingtonatSeattle,Para.617;availableathttp://www.scribd.com/doc/138032128/13-04-25-Microsoft-Motorola-FRAND-Rate-Determination.

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cents-per-unitroyalty79(sothattheroyaltybasewasthenumberofunitssoldanddidnotvarywiththesellingpriceofthelicensedproducts).

Weareawarethat,inInreInnovatio,anotherU.S.caseinvolvingRANDlicensingissues,thetrialjudge,JudgeHolderman,concludedthattheappropriatedamagesbasewasthesellingpriceoftheWi-Fichipset.80However,thejudgeinthatcasereachedthatrulingafterconcludingthatthepatentholderhadfailedtoproveotherwise,andhad“providedthiscourtnolegallyandfactuallycrediblemethodtoapportionthepriceoftheaccusedend-productstothevalueofonly[thepatentholder’s]patentedfeatures.Thecourtthereforehasnochoicebuttolooktothe[defendants’]proposedmethodofcalculatingaRANDroyaltybasedonthepriceofaWi-Fichip.”81Thatisnotabasisforageneralfindingthattheappropriateroyaltybaseinconnectionwithcellularcommunicationsstandardsisalwaysthechipset.Instead,itwasacommentonthepatentholder’sfailure(inthatparticularcase)tocarryitsburdenofadequatelysupportingadifferentresult.(JudgeHoldermanultimatelyawardeddamagesof9.56centsperWi-Fichip,ratherthanapercentage-baseddamageamount.)

Finally,inEricssonv.D-Link,anotherU.S.caseinvolvingRANDissues,thetrialjudge,JudgeDavis,rejectedD-Link’sargumentthatEricssonhadfailedtocomplywithitsRANDcommitmentbynotlicensingIntel,thechipmakerthatsuppliedchipsetstoD-Link,andbynotsuingIntelafterIntelintervenedinthecase.EricssonhadcommittedtoofferRANDlicensesto“fullycompliant”products.82JudgeDavissaidthat“Ericsson’sobjectiveinlicensingonlyfullycompliantproductswastoisolateaparticularlevelofthesupplychainandtolicensecompaniesatthatlevel.Bylicensingend-productmanufacturers,EricssonbelieveditwasindirectlylicensingchipmanufacturerssuchasIntel.…ThereisnoIEEErulepreventingrestrictedRANDcommitments,andothercompanieshaveadoptedthesame‘fullycompliant’licensingpolicyasEricsson.”83

79Hisreasoningmayreflectthefactthatthetwopatentpoolsheusedas“reference”pointsbothchargedcents-per-unit(ratherthanpercentage-based)royalties.80Thechoiceofdamagesbaseforpatentinfringementdamagesraisesdifferentissuesfromthechoiceofroyaltybaseforpatentlicenses.Inparticular,patentinfringementdamagesawardsarelimitedbyvariouslegalconsiderations,suchasthepropositionthatdamagescanonlybeawardedforproductsthat(a)havebeenshowntoinfringeoneormorevalidpatentclaimsand(b)are“made,usedorsold”inthecountryinwhichthepatentisinforceandinwhichsuitisbrought.Thoseconsiderationsdonotapplytolicensing,wherelicensescommonlycallforthelicenseetopayroyaltiesonitsworldwidesalesofall“licensedproducts”(whetherornottheyhavebeenshowntobeinfringing,asoneobviouspurposeoflicensingistoavoidthenecessityoflitigatinginfringementissues)anddespitethefactthatthepatentholdertypicallydoesnothavepatentsineverycountryinwhichthelicenseeoperates.81“MemorandumOpinion,Findings,ConclusionsandOrder,”InreInnovatioVenturesLLCPatentLitigation,U.SDistrictCourtfortheNorthernDistrictofIllinois,EasternDivision,September27,2013,p.34;availableathttp://www.essentialpatentblog.com/wp-content/uploads/sites/234/2013/10/2013.10.03-975_Public-Version-of-Memorandum-Opinion-and-Order.pdf.82AfterIntelintervened,EricssonofferedtolicenseIntelatthesame50-cents-per-unitroyaltythatitofferedtoD-Link.InteldidnotrespondtoEricsson’sproposeddraftlicense.“MemorandumOpinionandOrder,”Ericssonv.D-Link,U.S.DistrictCourtfortheEasternDistrictofTexas,TylerDivision,August6,2013,p.46;availableathttp://www.essentialpatentblog.com/wp-content/uploads/sites/234/2013/08/13.08.06-Dkt-615-Ericsson-v.-D-Link-Order-on-Post-Trial-Motions.pdf.83Id.atp.48.

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XV. The“Reasonable”AspectofF/RANDLicensing

TheCommission’sanalysisfocusesonthe“non-discriminatory”aspectofRANDlicensing.Butthereisalsothe“reasonable”(or“fairandreasonable”)aspect.Otherthanthe“excessivepricing”issue(alreadyaddressed),theCommissiondoesnotsuggestthatEricsson’sproposedroyaltystructure(percentage-basedroyaltiesbasedonthesellingpricesthelicenseechargesfortheproductsitsells)failstosatisfythe“R”(or“FR”)aspectofF/RAND.

ThismayormaynotreflectanintentionalchoicebytheCommission.ItmaybelievethatitissufficienttoarguethatEricsson’sproposedpercentage-basedroyaltiesfailtosatisfythe“non-discriminatory”aspect,andsimplychoosenottoreachthe“reasonable”aspect.(ThefactthatSection4oftheActdoesnotaddresswhetherroyaltiesare“reasonable”maybeanotherreasonwhytheCommissionfocusedonlyonthe“non-discriminatory”aspect.)Butasnotedabove,thereareanumberofgoodandconceptually-distincteconomicreasonswhypercentage-basedroyaltiesare“reasonable”inthesenseof“commerciallyreasonable,”andwhychargingallsimilarly-situatedlicenseesthesamepercentage-basedroyaltyratedoesnot“discriminate”among/acrosslicenseesinanymeaningfuleconomicsense.