OxFirst's Third IP and Competition Forum: Creating the Missing Link in the Digital Economy

This week Bristows is sponsoring, and I have the privilege to be speaking alongside fellow Bristows partner Myles Jelf and a host of luminaries from the world of SEPs and FRAND at OxFirst’s Third IP and Competition Forum in Brussels.  The Forum will be addressing a range of issues such as the EU’s position on FRAND licensing and SEPs, the role of the judiciary in patent governance, and evolutions in case law on SEPs around the world.  

I will be speaking on recent case law in light of the Huawei v ZTE decision, including the Court of Appeal’s recent Unwired Planet v Huawei decision (on which we reported here), which will be compared with the approach taken in cases elsewhere in Europe.   A copy of my slides can be found here in case of interest.  

The General Court’s judgment in Krka – some welcome clarity over licensing in the context of patent settlements

We reported on this blog about the General Court (GC)’s judgment in Servier on the day on which that judgment was handed down, noting in particular the rejection of the Commission’s novel approach to market definition. 

In this post, we focus on the analysis applied in one of the parallel judgments issued to the generic companies which were party to the infringements of Article 101.  While the finding of a ‘by object’ infringement was maintained in relation to the settlement agreements between Servier and other generic companies, the Krka judgment involved a full annulment of the relevant part of the Commission decision.  

What were the Commission’s findings?

The case concerned a patent settlement and licence agreement between Servier and Krka in relation to Perindopril, a cardiovascular medicine used (primarily) to treat hypertension). The settlement agreement put an end to UK patent litigation between Servier and Krka in October 2006, following the grant to Krka of a marketing authorisation for Perindopril earlier in the year. At the time there was no generic Perindopril in Western European markets, but Krka had launched its generic Perindopril “at risk” in certain central and eastern European (CEE) markets. On the same day as the settlement agreement, Servier and Krka entered into a royalty-bearing licence agreement in relation to the CEE markets where Krka had already entered.  This licence accorded Krka ‘sole’ licensing rights (i.e. while Servier itself also remained on the market, it committed not to grant licences to others).  

In its decision, the Commission treated the combination of these agreements as a form of market sharing arrangement.  According to this view, Krka obtained the licence in return for refraining from launching its generic product in a number of other European markets, notably the UK. The Commission considered that: (i) Servier and Krka were at least potential competitors at the time of entering into the agreements; and (ii) the sole licence which permitted Krka access to the CEE markets constituted an inducement to Krka to enter into the settlement agreement, under which it agreed to refrain from competing in the 18 restricted markets.

Findings of the GC

The GC rejected the Commission’s analysis that the mere conclusion on normal market conditions of a licence agreement could amount to an inducement, even if linked (whether legally and/or temporally) to a settlement agreement containing restrictive clauses. In the view of the GC, this would lead to a paradoxical outcome: the wider the scope of a licence agreement, the greater the inducement, and thus the easier it would be to find a restriction by object.

However, it accepted that a ‘side deal’ may amount to an inducement which renders any restrictive provisions in the linked settlement agreement unlawful where the side deal “serves as a vehicle for the transfer of value from the originator to the generic company”.  In that case, the restrictions in the settlement are considered not to reflect the parties’ recognition of the validity of the patent but rather to be the result of a (significant) inducement.  However, the GC went on to note that the Commission has to discharge its burden of proof that this is indeed so.  

In this case, the settlement itself did restrict Krka’s market access in the UK and other Western European markets while relevant patents remained in force; it was also clear that the licence agreement counted as a ‘side deal’ as it was temporally linked (the two agreements had been concluded on the same day; by contrast, a later assignment of patent by Krka to Servier was held not to be ‘indissociable’ from the settlement agreement).  A key question for the GC was therefore whether any value had in fact been transferred to Krka under the licence agreement.  The licence granted by Servier was royalty-bearing at the rate of 3%.  The GC emphasised that it was for the Commission to demonstrate that this rate was abnormally low, and thus not a commercial rate if it wished to prove that Krka had been induced to give up its other markets.  The GC found that the Commission had not demonstrated that this was the case – in fact, the Decision acknowledged that the rate was fair, albeit relatively low. 

The Decision was therefore annulled, insofar as it concerned restriction of competition by object.

The GC also reviewed the Commission’s conclusions that the agreement had an ant-competitive effect.  It again disagreed with the Commission’s conclusions, finding that absent the agreements, Krka would not have entered the French, Dutch and UK markets, based on Krka’s assessment of the strength of the ‘947 patent. The GC noted that, at the time of entering into the agreements, Krka was the subject of an interim injunction in the UK and that it was “very unlikely” that without a licence agreement Krka would enter other markets “at risk”. 

As with the cases concerning the other agreements between Servier and generic companies, the Court has sent an important message on the role of the concept of restrictions of competition ‘by effect’ under EU competition law.

The Court emphasised that where an agreement has been put into effect, it is not sufficient for the regulator to rely on the existence of ‘potential’ effects on competition.  To do so effectively obliterates the distinction between object and effect restrictions.  The GC conducted a careful analysis of past cases in which the consideration of effect restrictions has been limited to a consideration of potential effects, and distinguished this case from those earlier examples, which tended to concern preliminary references, or decisions in which no fine had been imposed.

Comment 

Whatever the ultimate outcome of any further appeals to the CJEU on the treatment of patent settlement agreements as restrictions of competition by object in the other Servier cases, in Lundbeck (where hearings have taken place within the past week) or in Paroxetine, the approach of the GC to side deals in the Krka case is to be welcomed. The GC has dialled back the risk of concluding a licence agreement where there is a link to a settlement of litigation, provided the licence itself can be demonstrated to be on commercial conditions.   

This sensible approach is likely to enhance the possibilities for companies in litigation to resolve those differences in a way which provides benefits to both parties, rather than requiring a total capitulation by one side or the other.


3rd Annual W@Competition Conference

For those of you with an interest in IP/tech issues, you may find the upcoming 3rd Annual W@Competition Conference of interest, in particular the session being chaired by our own Pat Treacy on excessive pricing (including in the Pharma sector) and the use of data as payment.  The conference is taking place on Thursday 21 February in Brussels and more information can be found here.

CLIP of the month: Competition law and innovation - where do we stand?

This month’s CLIP is an editorial in the Journal of European Competition Law and Practice written by leading  LSE economist Pablo Ibanez Colomo.  Pablo writes regularly and is a co-founder of the superb Chillin'Competition blog.  This particular article looks at the latest developments in the evolving relationship that exists between competition law and policy and innovation.  The debate of these issues in some ways came to a head in the Commission’s Phase II decision in Dow/DuPont in which the Commission delved more deeply into speculative research poles when considering overlaps not just of products on the market, but of those in an earlier stage of development.  In this article, Pablo looks at the tension that can exist between the legal framework and an economic assessment of the relationship between market concentration and innovation.  Looking beyond the field of merger control, Pablo also considers the ongoing Commission investigation into alleged collusion between German car manufacturers where the alleged collusion itself was in respect of future developments and innovation of clean emission technologies (see our own comment on this investigation: “The Cartelization of Innovation – a new emissions scandal?”).  It is clear that this topic is far from stale and that we can look forward to further developments across merger control and anti-trust decisions in the year ahead.

High Court rejects application to discharge CMA search warrant

In its judgment yesterday, the High Court rejected an application by Concordia to have a CMA search warrant discharged in relation to two specific drugs (Carbimazole and Hydrocortisone).

Background

The CMA was granted warrants under section 28(1)(b) of the Competition Act 1998 by Mann J on 5 October 2017 following a without notice and private application.  The warrant applied to documents relating to an ongoing CMA investigation into alleged anti-competitive behaviour in respect of a number of pharmaceutical drugs.  The legislation itself provides that the CMA should be granted warrants where it suspects that relevant material might be otherwise concealed or destroyed.  Unusually, the CMA was seeking a warrant despite the fact that Concordia had been subject to, and was cooperating in, an ongoing investigation in respect of both Carbimazole and Hydrocortisone for some 18 months as at the date of the warrant and that Concordia had responded to numerous section 26 notices during this time.  When granting the warrant, Mann J stated that he was satisfied that the application was focussed on “different types of abuse”.  The fact that Concordia would have been on notice from the first formal section 26 request and therefore had already had ample time to destroy or conceal evidence was not sufficient to conclude that no such documents existed on Concordia’s premises.

The warrants themselves were executed on 10 October 2017 and Concordia applied to have the warrant discharged in respect of Carbimazole and Hydrocortisone on the same day.  The reasons given were that there could be no basis for the CMA to conclude that there was a risk that relevant documents would be concealed or destroyed as Concordia had been co-operating fully with the CMA in its ongoing investigation, a fact that had not been raised before Mann J.  Further, the CMA had sought to widen the investigation by suggesting that it was investigating other potential abuses, whereas in fact the CMA had only ever been investigating one particular alleged abuse (i.e. market sharing).

In the interim, the Court of Appeal had given its judgment that in hearing the main application to vary, the High Court must be able to review all relevant materials including any that are subject to public interest immunity. The Court of Appeal also stated that the appropriate time for the court to form a definitive view on what material is subject to public interest immunity (and therefore should be withheld from Concordia) is when the application to vary is made.  On 12 December 2018, having heard arguments from the CMA in a closed hearing, the High Court held that the majority of the CMA’s requests for public immunity interest redactions were properly made and could not (consistent with the Court of Appeal’s view) be disclosed to Concordia, whether into a confidentiality ring or otherwise.

The Judgment 

Finding that Concordia’s application must fail, Marcus Smith J stated that this was primarily as a result of reviewing the material that was properly protected by public interest immunity (and which therefore had not been made available to Concordia).  This material made clear that the focus of the CMA’s ongoing investigation had shifted and that the scope of the document retrieval methodology was no longer appropriate in view of the type of documents and the range of custodians at issue.  In particular, the CMA had taken the view that whilst it was co-operating, Concordia’s response was incomplete and that there remained relevant material within Concordia that would not be caught by the proposed methodology.

Turning to the question of whether the CMA was indeed investigating a different abuse to that it had been following in the course of the ongoing investigation, Marcus Smith J stated his belief that Mann J was not using the term “in a technical way”.  Rather, the term was used to describe the reasonable suspicion raised by the CMA that Concordia may have deliberately framed its search methodology with a view to ensuring that relevant materials were omitted.  If that were the case, then it was reasonable for the CMA to also conclude that a further, targeted section 26 notice might well lead to concealment or destruction of relevant material.

Comment

It remains to be seen whether the CMA will seek to make more use of its section 28 powers to investigate under a warrant without notice. Historically, the CMA has preferred either to proceed under section 26 (on notice information requests) or by using its section 27 powers which enables the CMA to conduct unannounced visits without a warrant. The main practical difference for a company facing a section 28 investigation rather than a section 27 is that in the former the CMA has the power to conduct its search itself, whereas under section 27 the CMA must ask for relevant information to be brought to it.  It is certainly the case that the facts were unusual, particularly given that the decision to seek a warrant was taken despite the ongoing investigation and the fact that Concordia had been co-operating.  It also remains to be seen how the CMA will deal with its reasonable suspicion that Concordia might continue to conceal or destroy relevant materials in the context of any eventual infringement decision. 

Canal+ finds copyright is no match for the EU single market

The EU General Court (GC) has rejected an appeal brought by Groupe Canal+ (a French pay-TV broadcaster) against commitments proposed by Paramount, and accepted by the Commission, to address competition concerns related to cross-border access to pay-TV content (see here – only available in French). 

The GC found that: (i) the commitments proposed by Paramount addressed the Commission’s competition concerns in relation to its content distribution licence with Sky UK; and (ii) that the competition-infringing provisions could not be justified on the basis of copyright protection.

The key competition law issue arose from provisions in the Paramount/Sky UK licence which guaranteed Sky UK absolute territorial exclusivity in the UK and also prevented Sky UK from making its pay-TV services available to consumers in other parts of the EEA in response to unsolicited requests (i.e. a restriction of “passive sales”, the bête noire of competition law).

Background 

In 2014 the Commission began investigating certain clauses in licensing agreements between the six major Hollywood studios (Paramount Pictures, Disney, NBCUniversal, Sony, Twentieth Century Fox and Warner Bros) and pay-TV broadcasters which prohibited the broadcasters from providing content via satellite or online streaming outside their specific EEA member states.

In 2015 the Commission sent a statement of objection to Sky UK and the six Hollywood major studios which considered that bilateral licences that prevented Sky UK from offering access to its pay-TV services to EEA customers outside the UK and Ireland breached competition law (see here). 

In 2016 Paramount gave commitments to the Commission in order to close the investigation.  Paramount committed to stop using clauses preventing broadcasters from responding to unsolicited requests from consumers based elsewhere in the EEA and agreed not to enforce any existing restrictions. These commitments were accepted by the Commission on the basis that they would last for five years (see here).  The Commission Decision accepting the commitments laid out the basis for the infringement; however, as is typical for the commitments process, it did so rather briefly.

Canal+ also had a contract with Paramount and appealed the commitments decision before the GC on the basis that: (i) territorial exclusivity is essential for the production of European cinema, which is mainly financed by TV channels; and (ii) territorial exclusivity is necessary to protect intellectual property rights.

The GC’s findings 

The GC rejected the Canal+ appeal in its entirety. 

It considered that the Commission’s commitments decision established competition concerns under Article 101(1) TFEU and that these were sufficiently addressed by the Decision.  The GC noted that the commitments did not prohibit the granting of exclusive broadcast licences to pay-TV broadcasters; rather, it prohibited only absolute territorial exclusivity.

The GC rejected the argument that territorial exclusivity is necessary to protect intellectual property rights. In particular, it found that copyright owners are free to demand a premium in exchange for a pan-EEA licence. However, if a premium is paid to guarantee absolute territorial exclusivity this is irreconcilable with the imperative of the EU single market. 

Arguments that the relevant clauses promote cultural production and diversity and that their abolition would endanger the cultural production of the EU were also rejected.

Finally, the GC rejected the Canal+ argument that the commitments violate the interests of third parties (such as Canal+) as third parties could still sue Paramount for breach of contract.

Comment

The case is a further illustration of the Commission’s determination to tackle measures that undermine the EU single market, such as absolute territorial protection. Consequently, the use of copyright arguments to justify partitioning the single market will be given short shrift. 

The approach of the GC may also encourage the Commission to press ahead with the pending case against the remainder of the Hollywood studios – despite evidence of considerable concerns (including among politicians) about the impact of any decision on the economics of European TV/cinema.

Having said that, it is unclear what the actual impact of the commitments given by Paramount will be: given the national nature of copyright, anything other than a pan-EU licence will leave the broadcaster exposed to the risk of infringement proceedings if it sells into countries not covered by the licence. 

Partial annulment of Servier decision by the General Court – some good news for pharma innovators at last

The General Court has today handed down its judgment in the long-running Servier patent settlement case.  

It remains a rare event that the European Courts annul Commission decisions under Article 101 and, in particular, Article 102.  In this case, the General Court has partially annulled the 900 page decision.  In doing so, it has – subject to the outcome of further appeals – considerably reduced the range of competition law risks facing pharmaceutical companies.

Of particular note for innovators is the complete annulment of the fine for abuse of dominance.  The General Court has found that the Commission has failed to substantiate the alleged relevant market, and thus wrongly found that Servier held a dominant position in the EU.  

In the Decision, the Commission had held that perindopril, a treatment for hypertension, was a relevant market in itself.  This was despite it being one of a large class of drugs (‘ACE inhibitors’) with an essentially identical mode of action, and in relation to which clinical guidance existed which treated the products as substitutable.  The General Court has held that the Commission was wrong to rely on Servier’s promotional materials to claim that differences existed between the different members of the class of drugs, under-estimated the amount of switching which took place between different ACE inhibitors (in some cases driven by cost considerations on the part of organisations such as Clinical Commissioning Groups in the UK) and attributed too much importance to price in its analysis.  In its decision, the Commission had carried out a so-called ‘natural events’ analysis, which found that the only significant impact on sales volumes was sustained when perindopril generics entered the market.  The General Court has held that this paid insufficient attention to clinical decision-making, something the Commission had explicitly ruled out when considering what was relevant for market definition.

Although the particular market definition in this case is of limited relevance to third parties, the Commission’s failure to demonstrate that perindopril competed only with generics of the same drug has significantly wider implications for competition authorities’ ability to bring future abuse of dominance cases which rely on artificial differentiations between drugs with an equivalent mode of action.  Subject to the outcome of any appeal by the Commission to the Court of Justice, the position should now revert back to that established in AstraZeneca, which focuses on prescribers’ considerations as to the different therapeutic uses of the different drugs.  While a first in class product may still give rise to a dominant position in a period before further similar products come to market, a later drug is likely sit within the same relevant market, and will therefore be less likely to gain a dominant position (subject to market share growth, and specific factors which may indicate that a separate market in fact exists in a given case).  

As well as annulling the Article 102 portion of the case in its entirety, the General Court has also annulled the fine in relation to one of the anti-competitive agreements identified by the Commission, which was alleged to consist of a withdrawal from litigation in the UK in return for the grant of a licence in another Member State.  This annulment will also be welcome news to the pharmaceutical industry, as it may permit greater flexibility for companies wishing to enter into licensing agreements in tandem with settlements.  Provided any licensing agreement remains an arm’s length arrangement, at commercial rates, the risk that this will be categorised as an ‘inducement’ to settle the litigation now appears lower.

We conclude with a welcome recognition from the General Court of the value of patent protection and of patent settlements: “…intellectual property rights are protected by the Charter of Fundamental Rights, to which the Treaty of Lisbon has conferred the same legal value as the Treaties. …As regards patents, … when granted by a public authority, a patent is presumed to be valid and an undertaking’s ownership of that right is presumed to be lawful. The General Court emphasises, lastly, the importance of settlement agreements, since the parties to a dispute should be authorised, indeed encouraged, to conclude settlement agreements rather than pursuing litigation. The General Court concludes that the adoption of settlement agreements in the field of patents is not necessarily contrary to competition law.

Case T 691/14, judgment of 12 December 2018, press release here, full judgment (currently available only in French) here.

CLIP of the month: What is the best response to higher prices in the pharma sector?

Pricing issues in the pharmaceutical industry continue to keep European competition authorities busy. From the UK excessive pricing case involving Pfizer and Flynn (which has been remitted to the CMA following appeal – see here and here), and the Italian Aspen case (see here and here), to the European Commission’s continuing Aspen investigation (see here). Indeed, excessive pricing in the pharma sector was one of the topics discussed last week at the 130th Meeting of the Competition Committee of the OECD. The briefing paper for that session is our CLIP of the month.

The OECD paper provides a useful overview of recent competition law enforcement relating to excessive pricing in the pharma market, noting that such cases generally meet the stringent requirements developed in academic literature for the bringing of such cases: the presence of significant market power and high and durable barriers to entry, in scenarios where intervention will not adversely affect innovation, and where alternative regulatory intervention is not possible/inappropriate. In particular, the paper notes that each of the recent cases in Europe relates to:

  • medicines that have long been off-patent meaning that there were not R&D and investment recoupment justifications for high prices, nor concerns with interfering with innovation;
  • medicines which are essential to patients, and for which there was no prospect of timely market entry of alternative products (either because of supply constraints, the regulatory framework, or the limited size of the market); and
  • price increases which were sudden and significant, in respect of products that had long been in the market.

The OECD paper also notes that regulatory intervention in those cases was perceived to be unable to provide an appropriate, or at least timely, response to the price increase. Indeed, in light of the specific market and regulatory conditions, the stringent requirements for excessive pricing cases are more likely to be satisfied in the pharma sector. However, the OECD paper recognises that such cases are unavoidably fact-specific, operate ex post, are subject to high error risks and costs, and rarely set out bright-line guidance on how to set accurate prices. It therefore suggests that competition authorities should consider deploying other tools at their disposal including market studies, regulation, and joint initiatives with sectoral regulators. 

This is not the first we have seen of calls for broader methods for dealing with higher prices in the pharma market. Last year we reported on a recommendation by the Dutch Council for Public Health and Society for the government to use compulsory licences when a medicine is priced too high, or above a “socially acceptable price” (see here). However, there have not yet been any reports on the Dutch government’s response to that recommendation. 

In the UK at least, it seems that the CMA will not be abandoning its traditional competition tools for dealing with excessive pricing. In its contribution to the OECD meeting it states that new specific regulatory regimes are not always preferable to antitrust enforcement, as legislation takes time to implement and is generally fails to address the historic harm caused by higher prices. The CMA also emphasises that excessive pricing cases are important as a matter of policy, given that “[e]nsuring consumers are not exploited by unfairly high prices is at the heart of antitrust enforcement”. 

Maintaining competition in online advertising: the US FTC’s 1-800 Contacts decision

In an important case on the intersection of IP and antitrust, the US Federal Trade Commission (FTC) has held that 1-800 Contacts, the largest online retailer of contact lenses in the US, unlawfully entered into a series of anti-competitive settlement agreements with its online rivals.  Issued on 7 November, the Commission’s Opinion provides useful insight into the mechanics of keyword search advertising and emphasises that such advertising is fundamental to competition between retailers in an e-commerce context.  The case also serves as a reminder – if any were needed – that companies cannot rely on IP settlements to shield their conduct from competition law scrutiny.

Background

Internet search engines such as Google typically generate two types of results in response to search queries: ‘organic’ results and ‘sponsored’ links.  The latter are advertisements, which are often displayed above or beside the organic results. As the name suggests, advertisers have to pay to have their sponsored links appear on a search engine results page.  To determine which ads appear (and in which order), search engines use auctions to sell advertising positions.  Advertisers bid on ‘keywords’ – words or phrases that trigger the display of ads when they are deemed to match a user’s search.  Advertisers can also specify ‘negative’ keywords. For instance, a retailer of eye-glasses might bid on ‘glasses’ but list ‘wine’ as a negative keyword to prevent its ad from appearing in response to a query for wine glasses.

Between 2004 and 2013, 1-800 Contacts sent cease and desist letters alleging trade mark infringement to a number of its competitors whose online search advertising displayed in response to queries involving ‘1-800 Contacts’ and similar terms.  It subsequently filed suit against a number of these online retailers (even if the retailers had not been bidding on the keyword ‘1-800 Contacts’ but on more generic terms such as ‘contacts’).  Rather than litigating the trade mark disputes to conclusion, 1-800 Contacts entered into settlement agreements with each of the competitors.  The agreements prevented the competitors from bidding for search advertising involving ‘1-800 Contacts’ and similar terms. The agreements also required the competitors to employ negative keywords to prevent their ads appearing whenever a search included the ‘1-800 Contacts’ trade mark (even in situations where the advertiser did not bid on the actual trade mark and the ad would appear due to the search engine’s determination that the ad was relevant and useful to the consumer). The settlement agreements were reciprocal: 1-800 Contracts agreed to the same bidding restrictions and negative keyword requirements in respect of its rivals’ trade marks.

The FTC’s decision

Anti-competitive restraints 

The FTC held that the settlement agreements prevented online contact lens retailers from bidding for online search ads that would inform consumers about the availability of identical products at lower prices.  According to the FTC, the agreements:

  • harmed competition in bidding for search engine key words, artificially reducing the prices that 1-800 Contracts paid for search advertising, as well as reducing the quality of search engine result ads delivered to consumers; and
  • resulted in price-conscious consumers paying more for contact lenses that they would have absent the restrictions.  
Whilst the FTC did not suggest that all advertising restrictions are necessarily anti-competitive, it emphasised that the restrictions in this case prevented the display of ads that would enable consumers to learn about alternative sellers of contact lenses and to make price comparisons at a time when they would be considering a purchase.  Significantly, the restrictions in the settlement agreements were not merely “limitations on the content of an advertisement a consumer would otherwise see”; they were restrictions on a “consumer’s opportunity to see a competitor’s ad in the first place”.  The restrictions were particularly harmful to retail price competition because the suppressed ads “often emphasise[d] lower prices”.

1-800 Contacts’ efficiency justifications

1-800 Contacts put forward two efficiency justifications for the restrictions: (i) avoidance of litigation costs though settlement and (ii) trade mark protection.  The FTC found that whilst these justifications were plausible, they were insufficient to outweigh the restrictions’ anti-competitive effects.  Further, the claimed pro-competitive benefits could have been achieved through less restrictive means.  In the agency’s analysis, “when an agreement limits truthful price advertising on the basis of trade mark protection, it must be narrowly tailored to protecting the asserted trade mark right”.  The settlement agreements in this case were not: they restricted advertising regardless of whether the ads were likely to cause consumer confusion (a key element of the test for trade mark infringement) and regardless of whether competitors actually used the trade mark term.

The FTC was also unimpressed by 1-800 Contacts’ argument that a trade mark settlement requiring non-use is immune from antitrust review because a prohibition on use is within a trade mark’s exclusionary potential.  Citing the US Supreme Court’s 2013 ruling in Actavis, the FTC emphasised the importance of considering “both antitrust and intellectual property policies”.  According to the agency, the “crux” of the Actavis decision was that there could be antitrust liability for settlement of litigation, regardless of whether the agreement’s anti-competitive effects fall within the scope of the exclusionary potential of the IP right in question.  1-800 Contacts’ argument “look[ed] only to half of the equation, i.e. trade mark policies, and did not withstand a thorough understanding of Actavis”.

Comment 

The decision sends a clear signal that the FTC takes a dim view of agreements between competitors that restrict online search advertising to the detriment of consumers.  Whilst agreements to limit advertising are not per se illegal in the US, it seems that such agreements will likely fall foul of the antitrust rules unless the parties can establish robust pro-competitive justifications for the restrictions.  The FTC’s position is clear: online search advertising plays a crucial role in the effective functioning of retail competition in the modern internet economy.

Competition authorities on this side of the Atlantic have also shown an interest in the links between online advertising and competition in recent years. The European Commission’s Final Report in the E-Commerce Sector Inquiry noted that almost one in ten retailers were contractually restricted from advertising online. The French competition authority published a report on the functioning of the online advertising sector in March this year.  And in the German Asics case, the Bundeskartellamt found that the sports equipment manufacturer’s prohibitions on the use of price comparison websites and Asics brand names in online advertisements amounted to a hardcore restriction of competition under the Vertical Agreements Block Exemption.  That decision was ultimately upheld by Germany’s highest court, the Federal Court of Justice.  Given the continuing growth of e-commerce, it would hardly be surprising to see further cases in this area in the future.

US District Court confirms that Qualcomm must offer RAND SEP licences to rival chipset manufacturers

In California, Judge Koh has granted partial summary judgment in favour of the FTC against Qualcomm, making an order that Qualcomm must license its SEPs to rival chipset manufacturers (such as Intel). 

We explained the background to this judgment and its significance in a previous post. Although the ruling is limited to Qualcomm’s position vis-à-vis competing manufacturers without commenting on the position of other SEP holders, it indicates that FRAND requires ‘licensing to all’ (at least in respect of the rules of ATIS and TIA, which, like ETSI, are members of the Third Generation Partnership Project, the collaboration of standard setting organisations behind the development of standards such as 4G LTE and 3G UMTS). The result could be a shift in the focus point for licensing SEPs in cellular standards from the manufacturers of end devices (handsets) to the manufacturers of chipsets.

The issue

Qualcomm had declared its SEPs as essential to two US standard setting organisations (SSOs), the Alliance for Telecommunications Industry Solutions (ATIS), and the Telecommunications Industry Association (TIA). In return, each SSO required Qualcomm to license its SEPs on RAND terms (note that the exact wording of the ATIS IPR policy and TIA IPR policy differ slightly, although this made no substantive difference in these proceedings).

The FTC alleged that both of these policies required Qualcomm to license its SEPs to all applicants, including competing chipset manufacturers. Qualcomm argued that the IPR policies contain limitations and that Qualcomm is not required to license its SEPs to applicants, like chipset manufacturers, that only produce components of devices. The FTC applied for partial summary judgment on this point (the trial on the wider issue of whether Qualcomm’s actions have harmed competition is scheduled for January 2019).

The decision

Judge Koh preferred the FTC’s interpretation, taking into account the following points:

  • Non-discrimination: Judge Koh reasoned that “if a SEP holder could discriminate against modem chip suppliers, a SEP holder could embed its technology into a cellular standard and then prevent other modem chip suppliers from selling modem chips to cellular handset producers”. She suggested that such discrimination could enable a SEP holder to achieve a monopoly, in direct contradiction of the stated purpose of the TIA IPR policy.
  • Industry practice: as part of its argument, Qualcomm claimed that chipset manufacturers never receive SEP licences. However, Qualcomm itself had received licences to manufacture and sell components, and had received exhaustive licences from over 120 companies, indicating that it could not be contrary to industry practice for chipset manufacturers to obtain SEP licences. 
  • Prior litigation:  when defending a patent infringement case against Ericsson, Qualcomm had previously claimed that the TIA policy required Ericsson to license any patents ‘required to develop products compliant’ with a given standard. Qualcomm suggested that this requirement would enable all industry participants to develop, manufacture and sell compliant products, and importantly, that chipsets were ‘compliant’ products covered by the policy.
  • Implementing the standard: Judge Koh also dismissed Qualcomm’s arguments that chipset manufacturers do not practise its patents. She noted that neither the ATIS not TIA policy restricts a SEP holder’s FRAND obligations to applicants that themselves practice or implement a whole standard. She emphasised that Qualcomm’s own documents demonstrate that a modem chip is a core component of a cellular handset, and that such chipset implements key cellular technologies.

Judge Koh also referred to a Ninth Circuit precedent (Microsoft II) as establishing that that Qualcomm’s RAND commitments include an obligation to license to all comers, including competing chipset manufacturers. She noted that in Microsoft II the Ninth Circuit had been interpreting a SSO IPR policy with almost identical language to the TIA and ATIS IPR policies.

For all of those reasons, Judge Koh agreed that the test for partial summary judgment (that ‘the meaning of the contract is unambiguous’) was met, and that both IPR policies required Qualcomm to license its SEPs to chipset manufacturers.

Conclusion

Although it was only a hearing for partial summary judgment, this case aired a significant number of the issues and arguments involved in the ‘licensing to all’ debate. These were all dealt with thoroughly by Judge Koh, though Qualcomm is expected to appeal. 

Judge Koh’s reliance on Qualcomm’s previous conduct highlights a frequent problem for large SEP holders that act as both licensor and licensee; it is difficult for such companies to eliminate conflicting positions in different cases.  However, not every judge will place the same weight on such considerations: in Unwired Planet, Birss J dismissed the relevance of past statements made by Ericsson and other SEP holders as to the appropriate total royalty burden (although in TCL Judge Selna took the opposite approach).   

In any event, this ruling is unlikely to be the last word on the matter. The case primarily focussed on contractual interpretation, rather than on antitrust as such. Establishing a contractual requirement for Qualcomm to offer licences to competing chipset manufacturers is one thing. Whether Qualcomm and any chipset manufacturers can agree the terms of a (F)RAND licence is quite another, particularly given that the order relates only to the ATIS and TIA IPR policies and so has a direct impact only on licences to those of Qualcomm’s SEPs which have been declared to ATIS/TIA, rather than necessarily on its global portfolio.  It remains to be seen whether Qualcomm will elect to carry this finding across to SEPs declared to other standards bodies, such as ETSI, and whether chipset manufacturers will in fact benefit from an exhaustive licence from Qualcomm.