New Commission interventions target geo-blocking via technical measures and blocking of innovation

Within the past week, the European Commission has issued two new statements of objections on topics of interest for this blog.

The first concerns geo-blocking by computer games companies, including Valve, which operates the ‘Steam’ platform for video game distribution, as well as 5 games publishers.  This case focuses on geo-blocking – bilateral contractual agreements which aimed at, or had the effect of, preventing consumers from making cross-border purchases.  According to the Commission’s press release, two forms of restriction are under consideration:

  • Explicit contractual prohibitions on selling cross-border;
  • Use of activation keys that operate only in a given country – i.e., a technical measure of preventing both active and passive sales in different countries.
This case is in line with the renewed focus on vertical agreements which has been evident in particular since the conclusion of the E-commerce sector inquiry, and follows other recent decisions in relation to Nike, Guess and others.  This is the first case to focus on geo-blocking achieved through technical measures, something that is likely to feature in discussions around reform of the Vertical Agreements block exemption (consultation page here).

The other case is in some ways a more traditional allegation of collusion between competitors.  However, as we discussed in our earlier post on ‘the cartelization of innovation’, the investigation into VW, Audi and BMW has some very unusual characteristics.  Since our last article, the Commission has focussed its case on alleged collusion in relation the development of fuel cleaning technologies: the allegation is that the companies colluded “to limit the development and roll-out of emission cleaning technology for new diesel and petrol passenger cars sold in the EEA” (see Commission press release dated 5 April 2019).  

The Commission points to two particular developments which it claims were delayed: (i) selective catalytic reduction systems for diesel cars and (ii) ‘OTTO’ particle filters for petrol cars.  The exact scope of the conduct under consideration remains somewhat unclear, but it appears that it was addressed at preventing or delaying the new technology from being brought to market.  As we speculated in our earlier article, this may have arisen in the context of exchanges around best practices and agreements approving informal technical or emissions standards for earlier technology.  What is fairly clear is that this case is likely to involve close consideration of the line between acceptable coordination for competitive ends and anti-competitive limitation of innovation.

FRAND in the UK (March 2019 edition): PanOptis takes on Apple; Vestel issues antitrust litigation against HEVC patent pool; injunction granted against ZyXEL

The dust has not quite yet settled on the Unwired Planet litigation saga; Huawei has applied for permission to appeal to the Supreme Court (see our report on the Court of Appeal judgment here).  Huawei and ZTE have also applied for permission to appeal the Court of Appeal’s rejection of their jurisdiction challenge in Conversant.  If the Supreme Court grants permission in both cases, it may well hear them together.  

Although potential further litigation may be required before we know for certain whether parties can have global licences determined in the UK, that has not prevented the emergence of cases raising new FRAND issues. 

PanOptis v Apple

As regular readers may recall, PanOptis purchased the Unwired Planet portfolio shortly before the original Unwired Planet trial.  PanOptis has now brought a claim against Apple before the High Court, asserting 7 different SEPs and seeking either: a declaration that offers it has made to Apple are FRAND; or that the Court settles the terms of a FRAND licence.  PanOptis requests an injunction if Apple does not take a licence on FRAND terms.  

This claim is similar to the Conversant FRAND case also currently before the High Court.  As in that case, the claimant’s offer is based upon the methodology set out by Birss J in Unwired Planet (as to which, see here).  

However, one distinguishing feature of the PanOptis case is the use of a ‘double-barrel’ strategy: the day before PanOptis issued its High Court claim, it also filed a claim against Apple in the Eastern District of Texas.  In the Texas claim PanOptis also asserts 7 SEPs against Apple, and seeks a declaration that PanOptis has negotiated in good faith and has complied with FRAND.  However, unlike in its  claim in London, PanOptis does not allege in the US that Apple has failed to comply with its FRAND obligations and does not request an injunction.  PanOptis also suggests that its US FRAND claim, ‘to the extent necessary to avoid any duplication or inconsistency, should be subordinate to the UK FRAND Proceedings’.

Despite that caveat, it is difficult to see how the two cases can avoid duplication and some potential inconsistency regarding FRAND matters.  Even on its own case, both the English Court and the Court in Texas will be required to assess whether PanOptis has complied with its FRAND obligations.  And, although PanOptis is not seeking an injunction in the US, it is seeking damages “at least in the form of reasonable royalties”.  This seems in  direct tension with the claim for a global licence from the English Court, unless, perhaps, it is argued that different legal principles apply to assessing ‘reasonable royalties’ for the purposes of assessing back damages and ‘FRAND terms’ for a future licence.  It seems likely that Apple will challenge jurisdiction in the US or the UK (or even both).  If it does not, the overlapping issues are likely to multiply.  This concern could be substantially mitigated if the courts revert to the traditional approach of setting national licences.    

Vestel v HEVC Advance* 

This recently-filed case is the reverse of the ‘typical’ FRAND claim brought by an SEP holder. The Courts have to date accepted that cases such as Unwired Planet and Conversant are anchored to the UK through the claim of infringement of a UK patent and for appropriate relief.  By contrast, Vestel has issued a claim against a patent pool and a representative SEP holder from that pool, alleging that they have abused a dominant position. So far as can be established from the papers on the Court file, there is no associated patent cause of action (e.g. for revocation or a declaration of non-essentiality). This marks the case out as different to another brought by a prospective licensee against an SEP holder, Apple v Qualcomm, issued in the High Court in 2017, which did involve invalidity and exhaustion claims (see here and here).   

HEVC is a standard for video compression published by the International Telecoms Union and widely used for high definition broadcasts.  HEVC Advance operates a patent pool on behalf of 19 members (one of which is Philips) that contains at least 256 SEP families comprised of over 2,430 declared SEPs.

Vestel claims that offers made by both HEVC Advance and the representative licensor constitute excessive pricing, contrary to Article 102 TFEU.  Its primary basis for this claim is that another patent pool covering the same standard, MPEG LA, is said to contain a higher number of declared SEPs while offering licences at a lower royalty rate than HEVC.  Vestel also claims that some 1,581 SEPs in the HEVC pool are also in the MEPG pool, to which Vestel has already taken a licence.  Vestel has made a counter-offer to HEVC Advance which it says takes into account the lower rates in the MPEG LA pool and the overlapping patents.  

Vestel also alleges a number of further abuses of dominance, including discrimination, failure to provide sufficient information and the seeking of injunctive relief (although no such relief has been sought in the UK courts).  These issues are advanced under competition law, rather than on a contractual FRAND basis as in Unwired Planet.  We have previously discussed whether CJEU case law on price discrimination is relevant to FRAND licensing (see here), and it will be interesting to see what approach the High Court takes, particularly given any trial may take place after Brexit.  It also seeks a declaration of FRAND terms, and reserves the right to claim damages if the defendants do not agree to enter into a licence on the FRAND terms determined by the Court.  

The competition/abuse of dominance claim goes well beyond the competition allegations raised in defence by Huawei in Unwired Planet (see here).  Vestel is alleging it is an abuse for a SEP holder merely to threaten to seek an injunction, even at a stage before the SEP holder has commenced litigation.  The allegation of a procedural abuse of failing to provide information would also – if made out – be an expansion to the law and would raise interesting issues of policy and of balancing the interests of third parties (existing licensees) against those of prospective licensees.  SEP licences usually contain strict confidentiality clauses, and so SEP holders may find themselves between Scylla and Charybdis: risking breach of confidence actions by licensees if licence agreements are made available to prospective licensees, and risking abuse of dominance allegations like this one if they do not.  

This case therefore raises a number of novel issues to be heard.  As Vestel is a Turkish company, while HEVC Advance is based in Delaware, it is possible that this case too will require complex questions of jurisdiction to be answered before it proceeds.  

TQ Delta v ZyXEL

This case, concerning patents claimed to be essential to the ADSL standard, is already established in the jurisdiction.  To date, the case has involved a fair degree of procedural wrangling, despite the optimistic pronouncement of the Court in a judgment from February this year that: “In relation to global licences for FRAND/RAND cases, the principles have been very clearly set by the Court of Appeal, in particular in Lord Kitchin's judgment in Unwired Planet v Huawei. As a result, hearings ought to be relatively straightforward and relatively simple.

One of the patents in suit has now been found to be valid and essential.  However, it is also due to expire shortly before the FRAND trial.  This unusual set of circumstances forms part of the backdrop that led to an unprecedented decision last month to injunct ZyXEL before its FRAND defence (which is due to come to trial in September) could be heard.  This decision was taken at the point of handing down of the patent judgment, and was based in part on a lack of clarity from ZyXEL as to whether it would take any licence ultimately determined by the English Court.  The judge reasoned that ZyXEL should not be allowed to take the benefit of the shield of the RAND undertaking if it was not prepared to accept the RAND licence.  This was so even though issues contested by ZyXEL as potentially non-FRAND (namely the global scope of the licence) remain in issue in potential UKSC proceedings in Unwired Planet, while at least one other issue (whether the Court can determine a RAND licence for ZyXEL’s parent company, which is not a party to the litigation) has to date not been dealt with to date by the English courts.  Despite this, the Judge made a determination that ZyXEL was guilty of ‘hold-out’, noting also that it had not taken a licence to any other ADSL standard essential patents.

Depending on ZyXEL’s willingness to sacrifice the UK market, this judgment may run the risk of coercing it into taking a licence at rates requested by TQ Delta, in circumstances where these may not be FRAND – something that the European Commission has sought to avoid in its Motorola and Samsung decisions.  On the other hand, once the patent has expired, it remains to be seen whether the RAND trial will have any relevance for either party.

It is likely that this judgment will be subject to an appeal by ZyXEL – it will need to seek permission from the Court of Appeal, as the first instance judge has refused permission. 


* Bristows is instructed for a party in this matter.

Just (Don’t) Do It – Commission fines Nike €12.5 million for restricting cross-border sales

On 25 March the European Commission handed out a €12.5 million (£10.7 million) fine to sportswear company Nike, following findings that Nike had banned traders from selling licensed merchandise across borders within the EEA. The Commission found that Nike had imposed a range of restrictions on retailers, which artificially inflated prices and prevented football fans getting their hands on their favourite teams’ merchandise. 

Background

Nike is best known for designing and selling clothing and accessories bearing its ‘Swoosh’ logo around the world. However, it also trades in ‘licensed merchandise’ – products which feature no Nike logos, only the brand of a football club or federation with whom Nike has partnered. Third-party retailers in different territories then take IPR licences from Nike in order to be able to manufacture and distribute the licenced merchandise.  

In June 2017 the Commission began its investigation into Nike’s licensing and distribution practices, in part prompted by its e-commerce sector inquiry, which had concluded in May that year. 

The Commission’s findings

After a two-year investigation, the Commission determined that Nike’s practices had breached EU competition rules in a number of ways: 

  • Imposing direct measures on licensees prohibiting out-of-territory sales or imposing double royalties on out-of-territory sales;
  • Enforcing indirect measures to implement out-of-territory restrictions, including threatening to end contracts with licensees if they did not comply; 
  • Forcing parties with whom Nike had entered into master-licences to enforce cross-border restrictions via their sub-licences; and
  • Prohibiting licensees from supplying merchandise to customers who might go on to sell it outside the allocated territories. Nike intervened to prevent retailers from purchasing products from licensees in other EEA territories. 

The Commission found that these anti-competitive practices had been in place for a period of 13 years (from 2004 to 2017), and had affected products such as mugs, bags and stationery featuring the brands of FC Barcelona, Manchester United, Juventus and AS Roma, as well as the French Football Federation.  


Nike’s cooperation

In its press release, the Commission notes that Nike cooperated with the investigation beyond its legal obligation to do so. Nike provided the Commission with information which led to the scope of the investigation being widened, therefore including additional merchandise of clubs which might not otherwise have been considered. The Commission also noted that when challenged, Nike acknowledged that its actions had infringed EU competition rules.  As a result of its cooperation, Nike’s fine was reduced by 40%.  Like the consumer electronics RPM decisions (July 2018) and the Guess decision (December 2018), this decision again demonstrates the importance that the Commission attaches to co-operation and an acknowledgement of wrongdoing from the party under investigation.

Comment

This decision follows a string of investigations triggered by the Commission’s recent e-commerce sector inquiry, and provides further evidence that the Commission will not tolerate vertical agreements which jeopardise the integrity of the Single Market to the detriment of consumers. When trying to consolidate their position on consumer goods markets in the EEA, brand owners need to be careful that their agreements with retailers do not impose illegitimate territorial restrictions. 

We may see further Commission decisions in this area in the coming months. When it opened its investigation against Nike in 2017, the Commission simultaneously started investigations into the licensing and distribution practices of both Sanrio and Universal Studios.  Those investigations are yet to be concluded. 

CLIP of the month: The Bundeskartellamt’s Facebook Decision and the intersection of competition law and data protection

This month’s CLIP is a comment from Assistant Professor John Newman on the German Competition Authority’s (BKA) recent Facebook Decision regarding its use of user data (see here and here). Importantly, he highlights that the harm identified in the Decision seems more like a breach of privacy than a competition law issue. Here at the CLIP Board we wonder if the BKA’s approach will set a trend for other national authorities. 

In February 2019 the BKA found that Facebook had abused its dominant position on the markets for social networks, with a market share of more than 95% (daily active users) and more than 80% (monthly active users).  “According to Facebook's terms and conditions users have so far only been able to use the social network under the precondition that Facebook can collect user data also outside of the Facebook website in the internet or on smartphone apps and assign these data to the user’s Facebook account. All data collected on the Facebook website, by Facebook-owned services such as e.g. WhatsApp and Instagram and on third party websites can be combined and assigned to the Facebook user account” (see here).

The BKA imposed a number of conditions on Facebook’s use of user data:

  • Facebook-owned services like WhatsApp and Instagram can continue to collect data, however assigning the data to Facebook user accounts will only be possible subject to the users’ voluntary consent. Where consent is not given, the data must remain with the respective service and cannot be processed in combination with Facebook data.
  • Collecting data from third party websites and assigning them to a Facebook user account will also only be possible if users give their voluntary consent.

If consent is not given for data from Facebook-owned services and third party websites, Facebook will have to substantially restrict its collection and combining of data. Facebook is to develop proposals for solutions to this effect.

The Decision reflects the importance attributed to non-financial parameters of competition for antitrust enforcement, such as privacy and data protection, in an environment in which many online platforms’ offerings are nominally “free”.  While it is clear that price is not the only parameter of competition, Assistant Professor Newman questions whether antitrust is the most appropriate tool for tackling these issues.

Final credits roll on the Hollywood movies pay-TV saga

The curtain has come down on the long running Hollywood movie/pay-TV licencing saga (see here). 

Plot synopsis

This epic has seen Sky and major Hollywood movie studios do battle with the Commission over exclusive territorial restrictions in copyright licences (see here). 

Midway through, Paramount offered Commitments to the Commission, removing these restrictions in its pay-TV licence agreements (here). The ending was never in doubt once French Film Producer Canal+ lost its challenge before the CJEU (here).

In the final act, the Commission (cast as sheriff of the Digital Single Market), has accepted formal Commitments from Disney, NBCUniversal, Sony Pictures, Warner Bros. and Sky to remove all restrictions on unsolicited (or “passive”) sales.  

Characters and chronology

US film studios typically license films to a single pay-TV broadcaster in each Member State.

In July 2015 the Commission sent a Statement of Objections finding that clauses in film licences for pay-TV between Disney, Fox, NBCUniversal, Paramount Pictures, Sony Pictures, Warner Bros. and Sky UK breached EU competition law. 

These clauses required Sky UK to block access to the studios' films through its online pay-TV services and/or through its satellite pay-TV services to consumers outside its licensed territory (UK and Ireland) (so-called "geo-blocking"); and required some of the studios to ensure that broadcasters outside the UK and Ireland are prevented from making their pay-TV services available in the UK and Ireland.

Crucially, these clauses restrict the ability of broadcasters to accept unsolicited requests (so-called "passive sales") for their pay-TV services from consumers located outside their licensed territory. 

Last stand – the Commitments 

In July 2016 the Commission accepted a series of Commitments from Paramount (see here) to remove all restrictions on passive sales, and in March 2019 the Commission accepted similar Commitments from Disney, NBCUniversal, Sony Pictures, Warner Bros. These specify that: 

  • When licensing its film output for pay-TV to a broadcaster in the EEA, each committing studio will not (re)introduce contractual obligations that prevent such pay-TV broadcasters from providing cross-border passive sales to consumers that are located in the EEA but outside of the broadcasters' licensed territory (no "Broadcaster Obligation");
  • When licensing its film output for pay-TV to a broadcaster in the EEA, each committing studio will not (re)introduce contractual obligations that require the studios to prevent other pay-TV broadcasters located in the EEA from providing passive sales to consumers located in the licensed territory (no "Studio Obligation");
  • Each committing studio will not seek to enforce or bring an action before a court or tribunal for the violation of a Broadcaster Obligation and/or Studio Obligation, as applicable, in an existing agreement licensing its output for pay-TV.
  • Each committing studio will not enforce or honour any Broadcaster Obligation and/or Studio Obligation in an existing agreement licensing its output for pay-TV.

Similarly, Sky will: 

  • neither (re)introduce Broadcaster Obligations nor Studio Obligations in agreements licensing the output for pay-TV of Disney, Fox, NBCUniversal, Paramount Pictures, Sony Pictures and Warner Bros.; and
  • not seek to enforce Studio Obligations or honour Broadcaster Obligations in agreements licensing the output for pay-TV of Disney, Fox, NBCUniversal, Paramount Pictures, Sony Pictures and Warner Bros.

The commitments will apply throughout the EEA for five years and cover online and satellite pay-TV and video on demand services.

The critics’ review

The Commitments have allowed the Commission to reprise its role of as the sheriff of the Digital Single Market and scourge of geo-blocking.  

However, while the Commission is able require the elimination of contractual territorial sales restrictions it cannot alter the fact that copyright law is national, rather than harmonised at the EU level, as illustrated by the copyright carve-out in the Geo-blocking Regulation (see here). 

Therefore, it seems likely that 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. 

Chancellor’s Spring Statement: Digital Advertising Market Study

Presenting his Spring Statement this afternoon, Chancellor Philip Hammond welcomed the Furman review, an independent review of competition in the digital economy. Following its recommendation he has written to the CMA asking it to carry out a market study of the digital advertising market (see here). The Chancellor also announced that the government will respond to calls in the review (and, indeed, from elsewhere) to update the UK’s competition rules for the digital age. This focus on digital and the tech sector is in line with recent  announcements in the UK and other jurisdictions (here and here).

The Furman review found that the major digital platforms have become increasingly dominant and there has been little scrutiny and no blocking of platform acquisitions (Google/YouTube, Facebook/WhatsApp) (see here).

The review recommended:

  • Setting up a digital markets unit (the Unit) tasked with fostering greater competition and consumer choice in digital markets (likely to be based in the CMA). 
  • A digital platform code of conduct, based on a set of core principles, which would apply to conduct by digital platforms that have been designated as having a ‘strategic market’ status.
  • The Unit should pursue personal data mobility and systems with open standards where these will deliver greater competition and innovation.
  • The Unit should be able to impose measures where a company holds a strategic market status and have enduring market power over a strategic bottleneck market (this is akin to ‘significant market power’ test applied to telecoms).
  • Updating merger policy and legislation to ensure that it can be more forward-looking and take better account of technological developments.
  • Clarify the standards for blocking or imposing conditions on a merger. 
  • The CMA undertake a market study into the digital advertising market encompassing the entire value chain, using its investigatory powers to examine whether competition is working effectively and whether consumer harms are arising.

Reflections

The recommendations of the Furman review and the request for a market study into the Digital Advertising Market Study are major developments for the digital economy. The shape of the proposals reflects existing telecoms regulation, particularly the suggestion that conditions might be imposed on incumbents’ ‘significant market power’. As mentioned above, the UK is not the only European jurisdiction grappling with these issues. For example, the EU is still in the process of implementing recommendations and developing policies in pursuit of the ‘Digital Single Market’  (see our previous posts here, herehere and here). The possible review of EU merger thresholds to deal with and review the possible competition consequences of so-called ‘killer acquisitions’ has also been discussed widely in Brussels. The recommendations in the Furman report, and the Chancellor’s embrace of the need for CMA involvement, bring into focus the wider question of how the UK will navigate the imperative of a pan-European approach to the digital economy with the political turbulence created by Brexit…

CLIP of the month: Competition restraints in online sales after Coty and Asics - what’s next?

This month’s CLIP comes from the Bundeskartellamt’s thought-provoking series of papers on ‘Competition and Consumer Protection in the Digital Economy’. In this paper the German competition authority considers the extent to which manufacturers and brand owners can impose vertical restraints on retailers in e-commerce markets.  Referring to the German Federal Court’s judgment in Asics and the European Court of Justice’s ruling in Coty, the BKartA suggests that restrictions on the use of online marketplaces always require case-by-case assessment.  In its view, the assessment may vary depending on the nature of the products and consumer preferences in the relevant geographic market.  “Especially with regard to products marketed on a large scale”, the BKartA “doubts whether restrictions on platforms and other internet distribution channels increase inter-brand competition to an extent that outweighs the considerable restrictions of intra-brand competition”. Such comments suggest that the German competition authority will continue to take a strict approach to enforcement in this area.

At the end of the paper, the BKartA also comments on the “dual role” of online platforms such as Amazon.  As we discussed here, this is an issue which has recently been taken up by the European Commission.  The Commission is considering whether competition concerns may arise if Amazon collects sensitive data about products sold via its Marketplace and then exploits that data to enhance its own online retail offerings.  As Commissioner Vestager put it in September 2018:

The question here is about the data […] Because if you, as Amazon, get the data from the smaller merchants that you host – which can be, of course, completely legitimate because you can improve your service to these smaller merchants – do you then also use this data to do your own calculations: as what is the new big thing, what is it that people want, what kind of offers do people like to receive, what makes them buy things?

Whilst the Commission’s investigation is still at the preliminary, information-gathering stage, it will be an important one to watch.  If the Commission does end up concluding that Amazon’s conduct is contrary to the competition rules, that could signal an important development at the intersection of data and antitrust enforcement. 

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.