The CJEU guidance in MEO on price discrimination in licensing may also impact FRAND / SEP licences

Introduction

AG Wahl began his Opinion in MEO v Autoridade da Concorrência by noting that it presented the CJEU with an opportunity to clarify the law on differential pricing. Under Article 102(c) TFEU it can be an abuse for a dominant undertaking to apply “dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage”. Discrimination has always been a tricky issue under Article 102 (it is one of relatively few competition issues to have received a thorough discussion by the English Court of Appeal - see British Horseracing Board, paragraphs 265-278)  and it has never been entirely clear to what extent the EU authorities consider that the practice of price differentiation necessarily results in a finding of competitive disadvantage, or how much disadvantage is required to infringe Article 102. 

Price differentiation is a topical issue. The increasing use of pricing algorithms offers the potential for companies to engage in ‘personalised’ pricing on a mass scale, offering different prices to different consumers based on an algorithmic assessment of the highest price each individual is likely to pay. But they may also facilitate anti-competitive price coordination and so could give rise to concerns (see here and here).

Similarly, as the Internet of Things and 5G lead to new market entrants requiring SEP licences, it will be important for licensors to consider how to charge different licensees different prices without infringing the non-discrimination limb of FRAND.

Can it be assumed that price differentiation is likely to distort competition? Should a competition authority have to demonstrate that the competitiveness of any business placed at a disadvantage by differential pricing has suffered? The CJEU decision in MEO offers some useful guidance on these questions.

Facts

MEO is a mobile / telecoms service offered by Portugal Telecom. As part of this service MEO provides television content, and therefore pays royalties to the Portuguese collecting society that manages the rights of artists and performers, GDA.  In 2014 MEO made a complaint to the Portuguese Competition Authority that GDA had abused its dominant position by (amongst other things) applying different terms and conditions (including price) to MEO compared to another entity also providing television content, NOS. The Portuguese Competition Authority found that GDA had applied different tariffs to different customers between 2009 and 2013. However, it concluded that this price differentiation had no restrictive effects on MEO, and so took no action against GDA. MEO appealed this decision to the Portuguese Regulation and Supervision Court, which referred a number of questions regarding differential pricing to the CJEU.

CJEU decision

The CJEU referred to its previous decisions in Intel and Post Danmark II in setting out three key principles that applied:

  1. Proof of actual, quantifiable deterioration of a particular customer’s competitive position is not required for a finding of competitive disadvantage.

  2. All the relevant circumstances must be examined to determine whether price discrimination produces or is capable of producing a competitive disadvantage

  3. The mere presence of an immediate disadvantage affecting operators who are charged more does not mean that competition is distorted or capable of being distorted.

The CJEU also noted that when assessing particular prices charged by a dominant undertaking, the authorities may assess the undertaking’s negotiating power, the conditions and arrangements for charging any tariffs, their duration and amount, and the existence of any strategy aimed at excluding companies from a downstream market. The CJEU also reaffirmed that there is no de minimis threshold for the purposes of determining whether there is an abuse of a dominant position, albeit this will feed into the analysis of potential effect (paragraph 29). 

Impact

This decision offers helpful clarifications on how Article 102(c) should be interpreted. Although relatively narrow in scope, it has broad implications, particularly in the FRAND context; price discrimination between licensees is a controversial topic that has received relatively little judicial or regulator attention to date.  

As we describe in this article, in its Communication on SEPs, the Commission appeared to endorse a specific non-discrimination obligation in FRAND, stating that SEP holders cannot discriminate between implementers that are ‘similarly situated’. However, it did not specifically say that there is a requirement for distortion of competition between those similarly situated licensees (as for example the High Court had held in Unwired Planet, though this issue is being appealed), or whether harm to an individual firm rather than harm to competition might be sufficient (as a US court recently decided in TCL v Ericsson).

The CJEU’s MEO decision suggests that price discrimination will only be abusive if it leads to a distortion of competition (paragraph 27). So it seems there is scope for licensors to charge similarly situated licensees different royalty rates without breaching their FRAND obligations, as long as they do not distort competition by doing so.

Advertising in the digital age – the future role for competition law

The House of Lords Select Committee on Communications has published its final report following a wide-ranging investigation into the UK digital ad market.  Its headline finding is that a lack of transparency hinders the ability of advertisers to ascertain whether they receive value for money for ads.

Of particular note for those who follow competition law is the Committee’s recommendation that the CMA conduct a market study into digital advertising to investigate whether the market is working fairly.  The Government has also been encouraged to undertake a review of whether current competition law is adequate to regulate the 21st century digital economy, potentially as part of its work on the UK’s Digital Charter (see here). 

Context for the review 

At its origin, the House of Lords’ inquiry had something of a Brexit flavour, focussing on the competitiveness of the UK advertising industry in the global economy.  The role of digital advertising was seen as signalling a potential need for the analogue industry to adapt to change.  The high value of advertising in the UK economy was also noted.

What were the Committee’s findings? 

The final report unsurprisingly notes the increasing role played by online advertising, the complexity of the business models involved and the increasing possibilities for individually targeted ads.  Concerns are expressed that online advertising is not held to the same standards as print advertising, which may lead to a decline in trust and thus value.  At the same time, the proportion of overall spend is rapidly switching to online ads.

Turning to the part of the report focussing on digital advertising, the Committee found that despite the proliferation of adtech models, the digital ad market in the UK is currently dominated by a small number of tech firms. 

Acknowledging that dominance is not illegal in itself, the Committee nevertheless noted the evidence given by Prof. Barwise on the economic impacts of increased market concentration and network effects: “once you achieve a dominant market share in this kind of market, it is almost impossible to be displaced … The most you can hope for is that they get eclipsed by someone dominating a new market that becomes bigger,” and “Most of the new technology is being developed by startups and the big tech players. When a startup is looking successful, it tends to get bought by one of the big tech players.

What are the prospects of regulatory intervention? 

Investigations into digital markets by competition authorities is something of a global trend, and the French authorities in particular have already carried out a specific study on digital ad markets (here).  The prevalence of these studies reflect wider political and public concerns about the perceived power and reach of some online players, as well as the concern to ensure the continuation of an open internet (the alternative to extensive advertising may be increasing use of paywalls). 

The Committee specifically calls upon the CMA to undertake a market study into the online ad industry “to investigate whether the market is working fairly for businesses and consumers”.  

However, it remains to be seen whether the CMA will pick up the Committee’s gauntlet.  Michael Grenfell (Executive Director for Enforcement, CMA) told the Committee that “the CMA had already been asked to conduct a market study into online advertising but declined to do so because they had not found any detriment to consumers on preliminary consideration”.  

Mr Grenfell appears to be referring to the CMA’s report on "The commercial use of consumer data", June 2015, which did not identify a specific competition issue in relation to online advertising and concluded that “we see no reason, at present, why our existing competition and markets tools would not be effective at tackling conduct that gave rise to competition concerns in these markets”. 

The CMA also pointed to its limited resources.  While it has received a cash boost since that date, the demands of Brexit may make such wide-ranging studies unlikely for now.

Nevertheless, the current Department of Business and Industry Strategy’s consultation on ‘modernising consumer markets’ (see here – the consultation is intended to review the effectiveness of the UK’s competition and consumer protection laws in digital markets) may lead to further intervention.

What next for digital advertising?

The Committee’s report illustrates that the digital ad market remains a focus of attention and concern.  Despite the CMA’s stated position in the report, discussion of increased ex ante regulation, and ex post competition based investigations cannot be ruled out. But for all the focus on British competitiveness, and even though localisation of ads is important, many aspects of this debate transcend national boundaries.  The British government and the CMA are not the only players who will define the evolution of online ad markets.

‘Baysanto’: EU merger clearance of the Bayer/Monsanto confirms continued attention to innovation markets

Last week, the European Commission confirmed that it had cleared the proposed merger between Bayer and Monsanto, the third mega-merger in recent times between seeds / pesticides giants following those between ChemChina and Syngenta, and Dow and DuPont.

In common with the previous mergers in the sector, the Commission has required divestments and commitments by the parties in order to remove problematic areas of overlap.  And these again focussed not only on existing products, but on areas of innovation where both parties had active R&D projects.

The full decision is not yet available, so it is unclear whether the Commission has gone as far in identifying potential ‘innovation spaces’ as in Dow/DuPont, where it used a patent citation analysis to measure ‘innovation output’ (see the relevant section of our Survey of IP/competition law developments from 2017 for more detail).  However, it has identified a number of areas of where innovation needed to be protected before the merger could be approved, including innovation competition in:

  • GM and non-GM traits (i.e. specific plant features traceable to identifiable genes) conferring herbicide tolerance or insect resistance; and
  • herbicides / herbicide systems (i.e. herbicide combined with a trait ensuring herbicide tolerance).
Other areas of innovation (e.g. biological pesticides) were not considered to raise competition concerns.

Relevant commitments offered by Bayer include divestment of its vegetable seed and broadacre (i.e. large-scale agricultural) seeds and traits businesses, including the associated R&D units in each case, as well as three specific lines of research for non-selective herbicides (to be divested to BASF, subject to a separate merger approval).  Bayer also committed to license its digital agriculture offering and pipeline to BASF, allowing it to replicate Bayer’s position in the EEA (where Monsanto was otherwise the main competitor to Bayer’s system).

The increased focus on very early stage product developments is controversial.  In its focus on ‘innovation spaces’, the Dow/DuPont merger traversed new ground in merger analysis, considering product pipelines at a time even before specific products may have been identified.  Our new CLIP of the month, by Andrea Lofaro, Stephen Lewis and Paulo Abecasis is an ideal introduction to the economic questions involved, including whether consolidation is likely to decrease incentives to innovate (as the Commission fears) or whether it may in fact encourage innovation (both by the parties and by others in the market) and enhance the ability to take advantage of innovation that has been carried out.  

Debate will no doubt continue over these questions for some time to come.  In the meantime, Bayer and Monsanto will continue their efforts to obtain clearance for the transaction from other authorities, including the USA.

Race to publish rival SEP & FRAND Codes of Conduct: new CEN-CENELEC working groups established

In October last year we reported on the difficulties that the Commission was facing in drafting its Communication on SEPs, in particular relating to the issues of use-based licensing or chipset licensing (see here).  We also noted that certain industry participants, such as Nokia and Ericsson, had confirmed their intention to establish an industry-wide code on best practices for SEP licensing.

In the subsequent months there have been some significant developments. The Commission’s Communication has been published (here, analysed in an article we wrote for the CIPA Journal here), although there was a notable absence of any specific reference to use-based or chipset licensing. The Nokia-backed proposal for a Code of Conduct has also crystallised into the form of a CEN-CENELEC workshop that kicked off in October 2017 (WS-SEP). 

Perhaps alive to the risk of that workshop producing a Code of Conduct that favoured SEP holders, a rival CEN-CENELEC workshop was set up by ACT (The App Association) and the FSA (Fair Standards Alliance) in February 2018 (WS-SEP2). Although slower off the mark, this second workshop is operating to a faster timetable; both workshops aim to produce a final text of their Code of Conduct by June 2018.

The detailed project plans for each workshop reveal exactly the sorts of differences in approach that one might expect. Both workshops intend their participants to discuss a range of FRAND issues in order to identify best practices from which a Code of Conduct can be developed. However, there are some clear differences in emphasis from each workshop.

WS-SEP focuses on the goal of concluding licence agreements and resolving licensing disputes quickly and efficiently. As part of this, it proposes the establishment of an ‘IoT SEP Licensing Gateway’, describing this as a “process and structure to engage in licensing discussions and resolution in a streamlined or more systematic way”.

On the other hand, WS-SEP2 envisages a broader range of topics being covered, making specific reference to the issues of patent hold-up and licensing without mandatory bundling on a portfolio only basis.

The differences in approach are perhaps most clearly seen in the sections of each workshops’ project plan which deal with what we have previously described as use-based and chipset licensing (here) – topical issues that the Commission did not address directly in its SEP Communication. 

Both workshops recognise the importance of developing guidance on the value of a standardised technology. However, while WS-SEP2 states that “a patent owner cannot seek to exaggerate the value of its patent by focusing on value created by downstream innovators and devices”, WS-SEP warns that “the price of a car does not reflect the value of connectivity in a car, equally the price of a chip may not reflect the value that connectivity, enabled by a chip brings to an end product”.

And though WS-SEP2 intends its guidance to cover “[t]he long history of FRAND licensing at all levels of the supply chain”, by contrast, WS-SEP takes a much narrower approach, proposing discussion on “[t]he appropriate licensing points to efficiently provide access-for-all”. 

The Commission’s decision to avoid taking a stance on either of these issues in its Communication, the value at stake in the light of the IoT and the impact that use-based and chipset licensing could have on royalties paid in new licences meant that these areas were always likely to become a battleground.  

We will be very interested to see the final products of both workshops. However, if the end result is two conflicting Codes of Conduct, they may have little impact on resolving the most contentious FRAND issues. 

Depression delayed: CMA’s paroxetine pay-for-delay case heads to Luxembourg

On 8 March 2018, the Competition Appeal Tribunal (CAT) gave an initial judgment (see here) in the appeals brought by GlaxoSmithKline (GSK) and a number of generic manufacturers against the Competition and Markets Authority’s (CMA) 2016 Paroxetine decision (see here and here).   As explained further below, the CAT has (in a move which perhaps goes against the prevailing zeitgeist) not reached final conclusions on the appeals, but has rather referred a number of questions to the Court of Justice in Luxembourg.

Background

The infringements identified by the CMA in its Paroxetine decision arose out of three patent settlement agreements made in 2001 and 2002 between GSK and various generic manufacturers of paroxetine.  

Paroxetine is an anti-depressant (selective serotonin reuptake inhibitor “SSRI”), marketed by GSK under the brand name “Seroxat”, which during the infringement period was one of its highest selling products, accounting for £71.6 million (10% of revenue) in 2001.

The CMA’s investigation into paroxetine was the first UK case to grapple with the contentious area of patent settlement agreements which limit generic companies’ ability to bring their own product to market.  The investigation was formally launched by the OFT in 2011 on the basis of information obtained by the European Commission through its pharmaceutical sector inquiry (2009). 

Following a significant further period of investigation, the CMA in 2016 issued a decision fining GSK, Alpharma and Generics (UK) a total of £44.99 million for agreeing to delay the entry of generic paroxetine in breach of Chapter I and/or Article 101 TFEU.  GSK received the largest penalty, being fined £37,606,275 for its parallel infringement of the Chapter II prohibition:

  • The CMA found that between 2001 and 2004 GSK agreed to make payments and other value transfers of over £50 million to generic suppliers of paroxetine; this amounted to a restriction of competition by object and/or effect. 

  • The CMA also found that GSK’s conduct induced generic providers to delay their efforts to independently enter the UK paroxetine market, abusing its dominant position in breach of Chapter II of the Competition Act.

The CAT Judgment 

The essential element of the CAT’s March 2018 judgment is the reference of five issues to the CJEU for a preliminary ruling.  As things stand, the exact text of the questions has not been formulated (and will no doubt be the subject of fierce debate among the parties).  However, the issues referred will relate to the following areas: 

  1. Potential competition: whether the existence of an interim injunction against generic manufacturers was an insurmountable barrier for entering the market.

    The provisional view of the Tribunal was to find that it was not (since, for example, it could have been discharged). However, it decided to refer a question to the CJEU as the question was similar to one raised in Lundbeck’s appeal (see here). This reference raises issues not dissimilar to those at play in the recent Roche judgment of the CJEU, which considered whether potentially unlawful products could be viewed as potential competitors (see here).

  2. Restriction of competition by object: when the strength of a patent is uncertain, does a transfer of value from the originator to a generic of an amount substantially greater than avoided litigation costs, under a settlement agreement in which the generic company agrees not to enter the market with its generic product and not to challenge the originator’s patent, constitute a restriction by object?

    The CAT emphasised a number of points in connection with this question, including a notable recognition that (a) the uncertainty over patent strength means that a possible outcome of the litigation was that the generic challengers would be held to infringe a valid patent; and (b) an outcome of litigation which upheld the patent should not be viewed as a less competitive outcome than the situation where the patent was overturned.

    A second related question was also identified, which seeks to establish whether a settlement comprising a value transfer which also provides some benefits to consumers (in the form of limited supplies of authorised generic products) should also be viewed as restrictive by object. Again, the preliminary view of the Tribunal was that such limited competitive benefits are not sufficient to draw into question the overall categorisation of the agreement as a by object infringement. If that is correct, it is necessarily a conclusion which will have to be considered in detail for any specific patent settlement agreement, and suggests that a blanket ‘by object’ approach will not be warranted.

  3. Restrictions by effect: in order to show a restriction by effect is it necessary to establish that the counterfactual would have been more competitive? The Appellants argued that the CMA’s Decision did not sufficiently consider the potentially pro-competitive effects of GSK’s agreements with generic manufacturers, for example the savings to the NHS compared to the situation where no authorised generics were on the market.

    The CAT also started to grapple with an issue which has been underplayed in the European decisions to date, namely the relevance of the outcome of the underlying patent litigation. If one realistic outcome of that litigation was success for GSK, the approach proposed by the CMA would be to reduce the test for identifying effects to “the probability of a possibility”. On the other hand, the CAT did not seem to acknowledge the risk of creating a situation where an agreement is considered restrictive of competition by object yet does not possess the requisite degree of probability for an effects finding that is not made out. This is surely an issue that will have to be fully played out before this, and similar cases, are finally resolved. (Damages litigation in relation to patent settlement agreements is likely to bring this issue to the fore, even if the CJEU elects to side-step the question.)

  4. The correct approach to defining the relevant product market: is the relevant product market paroxetine or all SSRIs? While the Tribunal supported the CMA’s finding of dominance on the basis of a market limited to paroxetine, it criticised its reasoning. It considered the CMA to have taken an overly narrow approach to market definition, based on the impact of generic entry on the price of paroxetine - following the Commission’s ‘natural events’ approach used in its AstraZeneca Decision (2005) (see here). However, the CAT supported the view that from the time when there were potential generic entrants, the market was limited to paroxetine and its generics. It recognised that this preliminary view, which suggests a significant change in the relevant market over time (despite no suggestion that the view of prescribing professionals was subject to a similar change) was a departure from existing case law. In the authors’ view, this approach will lead to legal uncertainty and, more importantly, inappropriately substitutes an analysis based on perceived competitive constraints for an assessment based principally on objective demand factors. As the CAT itself notes, this approach would suggest successful drugs will almost always be found to constitute a distinct market at least from the time when generic entry becomes likely. As the Tribunal notes, this approach would amount to a material change to the “IP bargain” which “might adversely affect the economic purpose of patent legislation”.

    Nevertheless, in making the reference on this point, the CAT has flagged some significant issues which should weigh in the CJEU’s eventual analysis.

  5. Abuse: are potential benefits to the NHS relevant to the assessment of whether GSK had abused a dominant position by entering into the agreements?

    The final question on abuse is limited to an allusion back to the questions referred in relation to the object and effect of anti-competitive agreements. The central issue is again the question of whether the limited pro-competitive benefits derived from the presence of the generic companies as distributors of an authorised generic product are sufficient to undermine the main finding as anti-competitive effects.

Although the judgment is provisional in nature, there is much to absorb. We will report further when the agreed text of the questions to be referred has been published.

The BKA’s Facebook investigation: new frontier or regulatory overreach?

At the end of 2017, the German competition authority (BKA) provisionally concluded that certain Facebook polices in relation to users’ data are an abuse of its dominant position in the German market for social networks.  It published an accompanying position paper

The BKA’s provisional dominance finding takes into account Facebook’s 30 million monthly users in Germany (with 23 million using Facebook on a daily basis), as well as the allegedly high barriers to entry for new social networking platforms (a point to which we return below).  

It considers the terms and conditions Facebook imposes on its users to be abusive, requiring them to choose between accepting “the whole Facebook package”, including an extensive disclosure of personal data, or not using Facebook at all. 
 
Specifically, the BKA takes issue with the requirement for users to accept Facebook’s right to collect data from third party websites: data which is made available to Facebook by operators that have embedded the Facebook ‘like’ or ‘login’ options.  Data is collected by Facebook even where users do not click on such options, and is then associated with the user’s Facebook account.  According to Cliqz, Facebook’s reach may stretch to over 25% of all websites. 

The BKA considers that users could not meaningfully consent to Facebook’s data processing requirements, as they have no alternative but to consent if they wish to access Facebook’s platform.  The BKA characterises this as "exploitative business terms”. 

As we have previously noted, the investigation is a test case on the interplay between big data, consumer protection and competition law (here and here). But is this investigation an opening salvo in a new frontier for competition enforcement, or more of a modish dalliance with the hipster zeitgeist?

It certainly concerns an unusual alleged form of abuse, since it does not appear to depend in any meaningful sense on Facebook’s dominance (save perhaps in the extent of the data collection).  Nor does it readily seem to fulfil the classical requirement of an abuse which uses “methods different from those governing normal competition [which …] has the effect of hindering the maintenance of the degree of competition existing in the market or the growth of that competition” (Case 85/76, Hoffmann La Roche).

It is not uncommon for investigations which challenge the boundaries of antitrust to be relatively clear about the potential harm to competitors, but much less clear about the harm to consumers or the competitive process.  This case is rather the converse – with its most controversial aspect perhaps being the BKA’s theory of consumer harm, which is based on users’ loss of control of their data: “Facebook offers its service for free.  Its users therefore do not suffer a direct financial loss from the fact that Facebook uses exploitative business terms.  The damage for the users lies in a loss of control: they are no longer able to control how their personal data are used”.  This theory necessarily assumes that users are sufficiently tied into the platform to be unwilling or unable to ‘click away’ and select an alternative messaging service.  Indeed, in Facebook’s public statement about the recent development in the BKA’s investigation, it strongly emphasised its lack of market power, which is both a pre-condition for any abuse finding and in this case is closely tied to the nature of the abuse itself.

The BKA’s position paper seeks to redress this apparent focus on consumers, noting the high economic value of the data gathered by Facebook, and its relevance for targeted advertising which in turn makes Facebook more attractive to advertisers, a concept referred to as “identity-based network effects”.  The interest in online advertising is of course not limited to the BKA, but is an increasingly hot topic in competition policy generally – see for example the ongoing French competition authority sector inquiry (see here and here). 

It is also questionable how the case can be reconciled with the Court of Justice’s more orthodox position in Case 238/05 Asnef-Equifax (here): “any possible issues relating to the sensitivity of personal data are not, as such, a matter for competition law”.  The BKA’s answer will have to be that its investigation does not relate to the sensitivity of personal data “as such”, but rather to Facebook’s use of the data.

In terms of next steps, Facebook can defend its positon and/or offer solutions.  A final decision in expected in the summer.

The competition law issues of the CRISPR patent pool

CRISPR-Cas9 is heralded as a revolutionary gene editing technology that is regularly hitting the headlines for both its scientific promise and fiercely fought patent wars. Our colleagues have written extensively on these aspects (see here and here), but in this blog, we focus on the competition law issues which surround the growing trend for the creation of patent pools in the life sciences sector.

The creation of the CRISPR patent pool was announced last spring by MPEG LA, an organisation well-known for creating patent pools for consumer electronics. Thus far, only the Broad Institute has publically revealed that it has submitted patents for evaluation.

Patent pools can be subject to anti-trust scrutiny. Both the European and US competition authorities have provided guidance on this issue – see section 4.4 of the European Commission’s Technology Transfer Guidelines and section 5.5 of the US DOJ’s IP Licensing Antitrust Guidelines. These guidelines recognise the pro-competitive benefits of patent pools which can help integrate complementary technologies, reduce transaction costs, and limit cumulative royalties. In this case, there appears to be a clear pro-competitive benefit in offering a single licence for CRISPR technology as there currently exists a complex web of relevant patents that is growing by around 100 new patent families each month. 

Having said that, the competition authorities on both sides of the Atlantic also identify a number of competition law risks – namely, the risk of collusion, price fixing or foreclosure of alternative technologies. Indeed, the European Commission has previously investigated a patent pool for non-invasive prenatal testing (see our commentary here). The authorities’ guidance suggests principles which can reduce this risk. In particular, the European Commission suggests that:

  • Participation (as a licensor or licensee) should be open to all.
  • Only complementary technology should be included (inclusion of substitute technology is likely to infringe competition law). 
  • Independent experts should be involved in the creation and operation of the patent pool.
  • Safeguards against the exchange of sensitive information should be in place.

For the CRISPR pool, MPEG LA has made an open call for patents, and will evaluate each patent before it is accepted. Its involvement, as a separate licensing body, should play an important role in safeguarding against the exchange of sensitive information. Looking ahead, MPEG LA may reduce the competition law risk by reviewing the pooled patents regularly, and considering licensing parts of the pool separately. In the life sciences sector, strands of research can head off in entirely new directions such that only half of the pool may remain relevant. 

There are also commercial concerns for the CRISPR pool to overcome. Whilst technology and telecommunications pools are common, life science pools, such as the Golden Rice and Medicines Patent Pool, are rare and often not profit driven. One reason for this may be the prevalence of exclusive patent licensing in the sector, as well as the relative lack of interplay between technologies in traditional small molecule medicines. 

This leaves MPEG LA with a tricky tightrope to walk. Having the Broad Institute on board is a promising start, but UC Berkeley, holding the patent to the underlying technology, must also join for the pool to be commercially successful. Beyond these two key players, the selection of patents to include will require some tricky choices: too few patents and the pool fails to achieve its aim of reducing transaction costs and may deter some investment by potential licensees altogether; too many and patent holders may be concerned about the returns they will achieve, and be wary of making the necessary large investments in further research.

We’ll be looking out for any further developments and will post them to the CLIP Board as and when they occur.

Excessive pricing spreads to Denmark - a cautionary tale about exclusive licensing

Following cases in Italy, the UK and before the European Commission, the Danish authorities have reached an abuse of dominance finding against CD Pharma (CDP). 

CDP was found to have imposed price increases of up to 2,000% on supplies of Syntocinon, without any justification in terms of increased costs. The product, used in connection with childbirth, is long off patent. 

Two points mark this case out from other excessive pricing investigations.

First, this is as much a cautionary tale about exclusive licensing as it is about excessive pricing. In acquiring an exclusive licence to what appears to be a ‘must stock’ product for hospitals CDP acquired a dominant position, leading to the risk of abuse. 

While exclusive licensing between non-competitors generally does not raise competition concerns, it is notable that Commission guidance refers specifically to the justification for exclusive licensing as the bringing of a new product to market. In the case of an old product which does not require further development, the basic justification for the exclusivity appears to be missing. In this case, if competitor Orifarm had been able to approach the manufacturer of Syntocinon rather than having to purchase from CDP as the local distributor, there would have been a greater chance of price competition on the Danish market. 

Second, the Danish authority is alive to the wider (umbrella) harm caused by the pricing strategy which extend beyond the period of direct infringement. The press release refers to the risk of permanent price increases - in particular where products are procured through periodic tender processes. This could be a significant point in any attempt by the Danish authorities to seek damages in  respect of the abuse. 


The chips are down! The Commission fines Qualcomm for abuse of dominance

The Commission has fined Qualcomm €997 million for abuse of dominance. The Commission found that Qualcomm had paid Apple to use only Qualcomm LTE baseband chips in its smartphones and tablet devices (see here) and that this was exclusionary and anti-competitive. 

Commissioner Vestager has said Qualcomm “denied consumers and other companies more choice and innovation – and this in a sector with a huge demand and potential for innovative technologies”, as “no rival could effectively challenge Qualcomm in this market, no matter how good their products were.

LTE baseband chips enable portable devices to connect to mobile networks. The Commission considers Qualcomm to have had a market share of over 90% between 2011 and 2016 (the period of the infringement). 
 
The Decision centres on an agreement between Qualcomm and Apple in force from 2011 to 2016 under which Qualcomm agreed to make significant payments to Apple. The payments were conditional on Apple not using chips supplied by Qualcomm’s rivals, such as Intel, in Apple’s mobile devices. Equally, Apple would be required to return a large part of Qualcomm’s previous payments if it decided to switch chip suppliers. The Commission also identifies Qualcomm’s IP rights as contributing to the significant barriers to entry in the chip market, reinforcing Qualcomm’s dominance.

The Qualcomm Decision is similar to the Commission’s 2009 Decision to fine Intel €1.06 billion for giving rebates to major customers in return for them exclusively stocking computers with Intel chips – a decision recently remitted by the CJEU to the General Court for further consideration of the ‘as efficient’ competitor analysis (see here and here). 

Applying the CJEU’s reasoning in Intel, Qualcomm sought to justify its rebate arrangements with Apple on the basis of the ‘as efficient competitor test’. However this attempt was rejected by the Commission as there were “serious problems” with Qualcomm’s evidence (see here).

Separately, Apple has also argued that Qualcomm’s dominance may be reinforced by its strategy for licensing its standard essential patents (SEPs) to competing chip manufacturers. Apple is bringing cases against Qualcomm around the world, alleging that it has engaged in “exclusionary tactics and excessive royalties”. In litigation launched in the English Patent Court in 2017, Apple alleges that Qualcomm is unwilling to license its SEPs to competing chip manufacturers, offering only patent non-assert agreements (see here) which could have a foreclosing effect on other chip manufacturers. (We understand that this case is subject to a jurisdiction challenge, due to be heard in the coming months.)

Qualcomm’s patent licensing arrangements are described (by Apple in its pleadings) in the diagram below:

The Qualcomm Decision reiterates the aggressive approach adopted by the Commission to policing rebates given by dominant companies and potential foreclosure effects. Following the Qualcomm Decision, Commissioner Vestager said “[t]he issue for us isn't the rebate itself. We obviously don't object to companies cutting prices. But these rebates can be the price of an exclusive relationship – the price of keeping rivals out of the market and losing the rebate can be the threat that makes that exclusivity stick” (see here). 
 
As litigation and antitrust clouds swirl around Qualcomm’s business model, in a separate case filed in the Northern District of California in 2017, the US Federal Trade Commission has similarly alleged that Qualcomm is using anti-competitive tactics to maintain its monopoly of baseband chips and has rejected requests for SEP licenses from Intel, Samsung and others (see here and here).

In parallel, competition authorities in China, South Korea, Japan and Taiwan have fined the company a total of $2.6 billion in relation to its SEP licensing policies and pricing (see here).

In summary, while the EU Commission fine is significant, and interesting for competition lawyers as it perhaps suggests that the significance of the Intel CJEU judgment may be more limited than anticipated, it is only part of the overall picture for Qualcomm (and for the sector as a whole). Indeed, even with today’s decision, the Commission has not brought its interest in Qualcomm to an end, as it is still investigating a separate predatory pricing complaint which was filed in 2015.  

The cumulative impact of these legal issues (as well as Qualcomm’s rejection of Broadcom’s takeover bid) may have contributed to a fall in Qualcomm’s share price – although Qualcomm had better news from DG Comp recently when its proposed acquisition of NXP was cleared by Brussels on 18 January (see here and here).

Licensing commitments sufficient for Qualcomm to secure NXP takeover green light

On 18 January 2018 the European Commission approved Qualcomm’s proposed $47 billion acquisition of the Dutch semiconductor manufacturer NXP after an in-depth second phase review. Qualcomm and NXP originally announced the deal on 27 October 2016, notifying it to the European Commission on 28 April 2017. The Commission’s Phase II review was initiated on 9 June 2017, following concerns that the merged entity would have a strong market position in a number of different technologies.

The technologies involved

Qualcomm is particularly known for its baseband chipsets which enable mobile phones to connect to mobile communications networks. NXP focuses on different semiconductors. Most notably, NXP manufactures near-field communication (NFC) chips used to enable a wireless link between two devices at close proximities over which data can be transferred, and secure element (SE) chips. SE chips control interactions between trusted sources: for example, used in combination with NFC, they enable mobile payments between a smart phone and a contactless card machine. 

NXP also developed MIFARE, a leading technology used by several transport authorities across the EEA as a ticketing/fare collection platform. London’s Oyster card transport system is one such use example of the use of MIFARE technology.

Competition concerns and remedies

NFC

Both Qualcomm and NXP hold a significant amount of IP related to NFC chips, including standard essential patents (SEPs) and non-essential patents. The Commission was therefore concerned that the increased level of bargaining power of the merged entity would enable it to demand significantly higher royalties in its patent licences. 

To address the Commission’s concerns (and it would appear similar concerns raised by the Korean Fair Trade Commission), Qualcomm offered to carve out NXP’s SEPs and some of its non-essential patents from the transaction. Instead, NXP will transfer these to a third party, who will be required to grant worldwide royalty-free licences to these patents for three years. 

Whilst Qualcomm will still acquire some of NXP’s other non-essential NFC patents, it has committed to grant worldwide royalty-free licences to these patents and not to enforce them against other companies. Interestingly, the Commission’s press release suggests that there is a significant caveat here: this commitment applies “for as long as [Qualcomm] owns these patents”. That implies the possibility of Qualcomm being able to adopt a similar strategy to that of Ericsson in Unwired Planet (see the judgment here and our blog posts here and here) – it could later assign these patents to another entity to monetise under a revenue-sharing agreement.

Interoperability

The Commission considered that the merged entity would have the ability and incentive to degrade the interoperability of Qualcomm’s baseband chips, and NXP’s NFC and SE chips with rivals’ products. This could lead to rival suppliers being marginalised, with smart phone manufacturers choosing only to purchase chips from Qualcomm/NXP.

In order to address this concern, Qualcomm agreed that for the next eight years it would provide the same level of interoperability between its own baseband chips and the NFC and SE chips it acquires from NXP with any corresponding products manufactured by rival companies.

MIFARE

For MIFARE, the Commission was again concerned about royalty levels, concluding that the merged entity would have the ability and incentive to raise royalties and make it more difficult for other suppliers to access MIFARE. It also suggested the merged entity might cease to offer licences to MIFARE altogether.

In response, Qualcomm committed to offer licenses to MIFARE technology and trademarks for an eight-year period, on terms that are at least as advantageous as those available today. The Commission was satisfied that this would enable competitors of the merged entity to continue to compete effectively.

Final thoughts

At the time of writing, the European Commission’s clearance was the eighth of nine mandatory approvals needed, with just China remaining.  

There’s an interesting discrepancy in the length of time the various commitments will run for. Eight years seems to be an extraordinarily long time in an industry driven by continual technological innovations; it also means that rival manufacturers will have some considerable time to think about alternatives to MIFARE and interoperability with Qualcomm chips. 

However, the third party that acquires NXP’s NFC SEP portfolio will be free to begin monetising that portfolio after just three years. Given the increasing use of NFC with contactless payment technologies like Samsung Pay or Apple Pay, and the expansion into other areas such as ‘smart tourism’ (e.g. using NFC tags in art galleries or museums that can show users additional information about an exhibit), there could be plenty of FRAND negotiation/litigation regarding NFC in the future.

It isn’t surprising that the Commission’s concerns centred on licensing royalty rates – this is a complicated, controversial area of law that is still developing. The Commission recently published some guidance on FRAND rates in its SEP Communication (see our blog here) and how royalty rates should be calculated was the key feature of the recent TCL decision in the US (here).

For Qualcomm, currently embroiled in a worldwide dispute with Apple over licences fees for its baseband chips (link), the NXP merger is a sensible move. It will significantly expand what Qualcomm can offer to manufacturers. However, despite regulatory approval being granted, there have been some rumblings of discontent about the value of Qualcomm’s offer (link), and the unsolicited bid by Broadcom to purchase Qualcomm (link) also has the potential to cause some interference with the acquisition. So the Commission’s decision is not quite the end of the story here…