Non-challenging reading for the weekend

It has been a little while since we have published on the Technology Transfer Block Exemption on this blog (our last post on this subject was back in May).  For those who have been longing for an aid to insomnia some further insights, I have published a couple of articles on this topic over the last few months:

First, Competition Law Insight published an article containing some high level comments on the amended block exemption and Guidelines.

Secondly, a rather more discursive piece on the rights and wrongs of the Commission’s approach to non-challenge provisions has recently appeared in the Journal of IP Law and Practice.  As well as looking at the competing policies in this area (benefits to implementers vs strong protection for IP and incentives to innovate), the conclusion also considers the prospect for such issues to come before the General Court in the appeals of decisions such as Motorola and Lundbeck.  We now know that the former is off the table, but non-challenge clauses in the settlement context appear likely to feature in the various appeals of the Lundbeck decision, even though none of the various parties’ grounds of appeal specifically mention them (e.g. the Lundbeck grounds of appeal here).  

The settlement context is in any case somewhat different from the licensing context on which I concentrated in my article.  It may still be too early to say whether the Commission’s new approach is having a significant effect on licensing negotiations in practice, but if anyone reading this blog does have any feedback, we would be extremely interested to hear about it.  (Perhaps Mark Anderson over on the IP Draughts blog might like to complement his excellent post on the practical implications of the TTBER’s treatment of grant-back clauses – the fact that the article features the word ‘bonkers’ may give away something of Mark’s conclusions – with a companion piece on non-challenge provisions?)

In addition to the articles, Osman and I have also presented a two-part podcast on the new technology licensing regime – the podcasts are available from CPDCast.

And if none of that works, I recommend sleeping pills...

Sophie Lawrance

Huawei v ZTE: will the CJEU be first past the post on SEP policy....?

The Huawei v ZTE CJEU (C-170/13) oral hearing took place on 11 September 2014.  As ‘standardized’ readers will know this case has the potential to bring about a sea-change in EU policy on the enforcement of SEPs and so is being followed very carefully all over Europe – and even beyond, given that many of those involved in this sector are from elsewhere, including the unfortunate litigants in the case.  Similar issues have been/are being debated in other jurisdictions  for example, we commented on the US perspective here and here earlier on in the year.

In March 2013 a German court referred five questions to the CJEU owing to the seemingly divergent approaches being taken in Europe on the conditions under which a claim for injunctive relief for SEPs can be sought without infringing EU competition law.  The German courts have a long line of case-law (commencing with the OrangeBook case) which gives prospective licensees a valid defence against an injunction if they behave as a licensee should behave (according to the courts' view) when seeking a licence.  This German version of the ‘FRAND licence defence’ requires licensees to:

  • make an unconditional licence offer which the SEP holder cannot reject without unfairly obstructing or discriminating against them (the licensee can also make a licence offer agreeing to a royalty rate specified by the SEP owner, subject to review/control by the court);
  • comply with the obligations which affect any actual licensee – i.e. account for past use and pay either directly or into escrow accrued licence fees.
This line of case-law has been put in the spotlight by the recent EU Commission cases dealing with injunctions sought by Motorola and Samsung for mobile telecoms SEPs.  The decisions in these cases (an infringement decision and a commitments decision respectively) revealed that the Commission applies different criteria to the admissibility of the FRAND licence defence under competition law than those applied in Germany under its rules over recent years.  The Commission considers that SEP holders should neither seek nor enforce injunctive relief against ‘willing licensees’.  It is clear, particularly from the Motorola infringement decision which arose out of German patent litigation between Motorola and Apple, that it does not envisage the same criteria as in the OrangeBook line of case law, although its press release and FAQs announcing the Motorola decision sought to differentiate that case from the general line of OrangeBook cases (not entirely successfully in this blogger’s humble opinion).  The questions posed by the court in the Huawei v ZTE reference therefore attempt to clarify what standard of licensee ‘willingness’ is sufficient for an SEP holder to be held to have abused a dominant position by seeking an injunction for an SEP against that potential licensee  and, perhaps more to the point from a practical perspective, what criteria can be applied to identify who is willing and who is not – or in the curious words of the Commission, who is ‘not unwilling’?.   

Some commentators have argued that such an intense focus on the behaviour of the licensee is misguided (for example, see here) as it is the licensor who has given a FRAND undertaking (and who the Commission has stated is likely to be dominant).  That being the case, arguably it is its behaviour that should be tested – has it made a FRAND offer and/or, at the very least, has it given the licensee the opportunity to negotiate and/or to show that it is willing?  Some flavour of this can be found in the Samsung commitments, which provide for a minimum negotiation period and offer a mechanism for third party determination, allowing the potential licensee to take advantage of a clearly defined ‘safe harbour’.  Notwithstanding views to the contrary, however, the Huawei v ZTE proceedings, unsurprisingly given their German origins, focus squarely on the question of licensee willingness.

The only member states that intervened at the oral hearing were the Netherlands and Finland.  A representative from the Commission also made submissions, as did the parties.  The Netherlands and Finland strongly argued that SEP holders have the right to seek injunctive relief for all patents and that this can only be limited in ‘exceptional circumstances’.  For example, Finland asserted that an SEP holder can only abuse a dominant position if it refuses to license its SEPs when offered terms proven by a court or arbitration to be FRAND. The Netherlands, in line with the commentators mentioned above, emphasised that the conduct of the licensor is more relevant to the issue of abuse than that of the licensee.  On the other side of the Court room the Commission and ZTE asserted that as we are dealing with very ‘special’ kinds of patents, a lower threshold for abusive behaviour should apply i.e. that the seeking of injunctive relief against someone who agrees in principle to take a licence is abusive.   

The CJEU judges asked a number of questions (from how to assess dominance in SEP cases; the proper method for determining FRAND royalties; to whether injunctive relief could be sought if the potential licensee does not make an offer to be bound by a third party determination and/or if such offer can also be made by the SEP holder).  Interestingly, all parties appeared to agree that a licensee must remain free to challenge validity and infringement in general (although Huawei submitted that licence proposals made by prospective licensees must not be conditional on proving the validity or infringement of the SEP(s) in question as this creates undue delay in agreeing a licence).  The acceptance of third party determination of the terms of a FRAND licence (by Court or arbitration) was also a central theme indicating that this may become a key criterion in the assessment of both licensor’s and licensee’s conduct. This would, of course, be in line with the Commission’s Decisions against Samsung and Motorola.

The next procedural step is the Advocate General (AG) opinion from AG Wathelet on 20 November 2014.  This will not be binding on the CJEU (although the CJEU follows AG opinions in the majority of cases...).  The Commission has indicated that the CJEU’s judgment is likely to be handed down in early 2015 so, if that timetable is followed, the industry could finally get some* clarity within half a year.

The ability of SEP holders to seek injunctive relief also continues to be debated within ETSI in the IPR SC meetings which began in March 2010.  At the end of 2013/beginning of this year it looked as though some progress was being made towards agreeing an ‘industry led solution’.  However, submissions made before and during the most recent ETSI IPR SC meeting held in mid September suggest that any progress that appeared to have been made may have been illusory.  At this rate it looks like the CJEU may get there first, presenting ETSI members with something of a dilemma, given that ETSI is an official European Standardisation Body and might be expected to reflect EU law in its policies, notwithstanding that there clearly remains intense disagreement within the industry (and thus among ETSI members) about how, if at all, to limit recourse to injunctions for SEPs.

* ‘Some’ is a key word in this sentence.  Given the sometimes perfunctory nature of CJEU judgments, we do not expect that all of the questions surrounding this issue are likely fully to be answered.

Helen Hopson

The CJEU serves up a little common sense in Cartes Bancaires?

Sophie blogged a wee* while ago on the Opinion of AG Wahl in Cartes Bancaires, of interest because it discussed the distinction between agreements which are anti-competitive ‘by object’ and those which are anti-competitive ‘by effect’.  AG Wahl noted that the former ought to be reserved for “conduct which presents an intrinsic risk of particularly serious prejudicial effects or of conducts where it can be presumed that the detriment to competition outweighs the pro-competitive effects” – the Court of Justice (CJEU) has in its judgment last week broadly followed this approach.

First, the CJEU criticised the General Court for blurring the boundaries between the two concepts, noting that the lower court had failed to have regard to the fact that “the essential legal criterion for ascertaining whether coordination between undertakings involves such a restriction of competition ‘by object’ is the finding that such coordination reveals in itself a sufficient degree of harm to competition (recital 57, emphasis added).  The CJEU refers frequently to its ruling in Case C-31/11 Allianz Hungária Biztosító (Allianz), though says little more about what might actually constitute a ‘sufficient degree of harm to competition’.** 

Second, the CJEU followed AG Wahl in noting that a “restrictive” interpretation must be given to the question of which agreements are anti-competitive by object: “The concept of restriction of competition ‘by object’ can be applied only to certain types of coordination between undertakings which reveal a sufficient degree of harm to competition that it may be found that there is no need to examine their effects, otherwise the Commission would be exempted from the obligation to prove the actual effects on the market of agreements which are in no way established to be, by their very nature, harmful to the proper functioning of normal competition” (recital 58).  Unlike the General Court, the CJEU was clearly not in the mood to make life any easier for the Commission.

Given the interesting role of parties’ intentions in cases on the competition/IP interface, it’s also worth a comment on what the CJEU has to say on this.  The case law tells us that although the parties’ intentions are not a necessary factor in determining whether an agreement is restrictive, there is nothing to prevent authorities/courts from taking intentions into account (recital 54).  If authorities/courts do so, the CJEU seems to suggest (recitals 64-65) that they will have to go further than just pointing to some vague evidence of the parties’ intentions as “additional confirmation”.  But perhaps I am reading too much into the following: 

“Although it is apparent […] that the General Court took the view that the restrictive object of the measures at issue could be inferred from the[ir] wording [of the documents evidencing intention] alone, the fact remains that it did not at any point explain, in the context of its review of the lawfulness of the decision at issue, in what respect that wording could be considered to reveal the existence of a restriction of competition ‘by object’.”

So it seems that to the extent that intentions are relevant to determining whether or not there is a restriction of competition ‘by object’, they must explain “in what respect that restriction of competition reveals a sufficient degree of harm in order to be characterised as a restriction ‘by object’” (recitals 69 and 75).   If this is right, then this could rein in the role of the parties’ intentions in many cases on the competition/IP interface which have been articulated as ‘by object’ infringements (Sophie mentions some of these here).  Authorities might want to start thinking about exactly how the parties’ subjective intentions are relevant to the legal determinations that they are required to make, certainly in ‘object’ cases at least.  Of course, whether evidence of an exclusionary intent should be relevant at all in cases where parties have already signalled to the world their intent to exclude others by seeking/obtaining/enforcing an exclusionary IP right, is a question that keeps many of us up at night at Bristows.  Thoughts and/or comments welcome.
_ _ _

* For the avoidance of doubt: yes, I am a big fan of the Scottish – I’ll be going to a haggis and whisky evening on Thursday!

** Allianz commented on three relevant issues: (i) how the distinction between ‘by object’ and ‘by effect’ restrictions of competition operates; (ii) the way in which an assessment of whether an agreement constitutes a ‘by object’ restriction is to be approached; and (iii) the role of the parties’ intentions.  In relation to (ii), Allianz has been criticized for blurring the boundary between ‘by object’ and ‘by effect’ restrictions by requiring there to be regard to the economic and legal context in which they appear and to the “nature of the goods and services affected as well as the real conditions of the functioning and structure of the markets in question” (see the excellent article here which criticises the italicised text for going too far in the direction of an effects analysis).  It therefore may seem odd that the CJEU in this case relies on Allianz to re-establish a firmer distinction between the two.  However, on a careful read it seems that the CJEU in Cartes Bancaires refers to this aspect (ii) of Allianz only in passing (only recitals 53 and 78 refer to taking into account of the nature of the goods and services).  The principal reliance on Allianz is in relation to issue (i), i.e. simply to establish that to constitute a restriction ‘by object’ an agreement must reveal “a sufficient degree of harm to competition”.  An interesting (and perhaps intentional?) reconciliation…

“…hard cases make bad law …” – round table discussion on Intellectual Property and Competition

As you may have gathered by now, on this blog we are a little obsessed by the topic of Intellectual Property and how it is dealt with (for good and bad) by competition law. 

As part of our wider focus on Intellectual Property issues, in 2013 we worked with Journal “Legal Business” on a research project looking at client attitudes to Intellectual Property and its importance to business (see here). By way of follow up to that, during the summer we hosted a round table discussion with representatives from a number of major companies who see Intellectual Property and innovation as core to their business. We asked them to discuss whether DGComp’s recent cases applying competition law to the exercise of intellectual property, or in dynamic industries where innovation is rapid and essential, might help or hinder innovation. The resulting discussion perhaps bears out the continuing relevance of the comment by Supreme Court Justice Oliver Wendall Holmes Jr (made in a dissenting opinion in an antitrust case) that “Great cases like hard cases make bad law”. 

The general tension between effective long term policy choices and expedient short term resolutions was a theme of the discussion. This arose in a number of guises, indicating why policy making through case law can be a fraught exercise and why policy considerations can take a back seat when dealing with immediate pressures. 

For example, several participants spoke of the incentives to settle disputes, remarking that such settlements can make perfect sense in their own immediate short term context but can have long term consequences if all of the nuances of that context are not understood. This was raised both in the context of the settlement of pharmaceutical patent litigation, which several particpants felt was capable of being misinterpreted by DGComp, and also in the context of competition cases themselves. In competition enforcement, settlements by companies who do not wish lengthy fights with DGComp, or to pursue appeals through the Luxembourg process at the General Court or the CJEU, can result in a form of “soft law”. Such legal developments evolve without rigorous testing through an adversarial process and may be the result of significant prosecutorial zeal, not always leavened with a balanced reflection on the possible long term policy impact beyond the confines of the immediate case. 

It is fair to say that while some of the difficulties with aspects of IP grant and enforcement were recognised by all of the participants, there was also a good deal of frustration at the uncertainty for business caused by very active competition enforcement in novel areas, particularly when the appeal process is so long drawn out that any significant investigation can take in excess of 10 years to reach a final outcome, unless the parties agree to settle, or to accept the Commission’s decision. It was noted that the long term nature of incentives for much investment in R&D and resulting intellectual property can make this a particular problem, and it seems that the additional uncertainty caused by unexpected interventions from the competition authorities makes corporate decision making much more difficult.  

During the debate, even those who have gone on record as saying that the patent system needs reform were not persuaded that the use of competition law by DGComp was an effective or appropriate mechanism for bringing about reform. Notwithstanding the current moves towards a unitary patent and a unified patent litigation system in Europe, which were the result of a huge political effort by the Commission generally (you can find more detail on everything to do with the UPC here) there was a sense that one of the difficulties is the lack of a single powerful voice within Europe on intellectual property issues capable of consistently engaging in the policy debate alongside DGComp about the potential long term impact of signals given in individual cases. While the Commission has many advocates for innovation and intellectual property within it (including within DGComp), they are spread across a number of DGs, and much of the development of intellectual property law and policy happens outside or alongside the Commission, at national patent or IP offices, within the European Patent Office or in national courts.

Having said all that, some of DGComp’s interventions were welcomed as providing valuable guidance to companies in areas where there had been real uncertainty – the decision in the recent Motorola SEP investigation about the circumstances in which a patentee can safely seek an injunction being mentioned as a case in point. 
The debate was interesting and at times heated, kept moving along by comments from, among others, Fidelma Macken, formerly a judge at the CJEU, and Simon Thorley QC, one of the foremost IP barristers of the last 25 years. The discussion has been summarised in the September edition of Legal Business (see here  subscription only)  for space reasons we have given only a flavour on this blog.  It will be interesting to see how Commissioner Almunia’s successor chooses to move forward on some of these charged topics – something that this blog will return to as the new era takes shape.

Nespresso finalises its competition commitments in France – but at what price for innovation?

I wrote on this blog (here) about commitments offered by Nespresso to the French Competition Authority (FCA) a few months back.  The FCA has now reported that the commitments have been finalised.

The final commitments package is very similar to Nespresso’s original proposal, subject to a few additional concessions.  For those interested in the interplay of competition law, IP rights and innovation, the FCA’s decision makes for interesting reading – as much for what it omits as what it includes.  At the heart of the abuse of dominance identified in the preliminary assessment is the ‘technological tie’ between Nespresso’s coffee machines (dominant on the market for espresso machines) and the compatible Nespresso-branded capsules (which was inevitably limited to Nespresso’s machines – Nespresso was again obviously dominant on that consumables market also).  The identified abuse encompasses in particular four changes to the design of Nespresso’s coffee machines and/or the capsules used with the machines which, it is said, rendered it more difficult for ‘generic’ competitors to access and remain on the market.  (The resonances with the pharma market are deeper than terminology alone – the alleged abuse has considerable similarity to a product-hopping type allegation as seen in AstraZeneca and Reckitt (UK), and there are also allegations of denigration of the competitors products, as with recent FCA abuse of dominance cases in the pharmaceutical sector – an issue which seems to concern the French in particular.)  

It is common to hear competition lawyers complaining about the explosion of commitments decisions at national and, in particular, EU level over the past few years.  While these are sometimes good for the companies concerned, they typically leave much to be desired in terms of legal reasoning, and thus legal certainty for third parties (and their advisors).   The frustrating part in this case is the lack of any assessment of the potential defensive elements, including as to possible objective justifications, that could have been available to Nespresso. Despite a mention (in para. 20) of the patents covering the machines and capsules, there is no discussion of whether patents could have legitimately excluded the generic competitors or the role played by trademarks where competitors seek to introduce compatible products.  While it is possible that there was no plausible case on these facts for any patent applying to Nespresso’s past technological developments, Nespresso’s commitment to make details of future changes available to competitors has the potential to cover patented inventions in future – yet it is far from clear that Nespresso’s conduct would pass the “exceptional circumstances” test required for a compulsory licence to be granted, still less that the competitors producing generic capsules would pass the new product test.  There is a mention (para. 117) of Nespresso having made the technical changes in order to remedy malfunctions (presumably of the products), but commentary on this in the decision is limited to a statement that the existence of such malfunctions is not conclusively demonstrated by the case file.  Equally, only minimal evidence is presented to suggest that the re-designs were motivated by a sustained corporate strategy to exclude competitors. The lack of any in depth consideration of these elements means that the final decision comes to look like a per se rule on product redesigns by dominant companies where there is any prospect of third parties wishing to interface with the dominant product.

Nevertheless, the FCA appears to have taken a pragmatic view to finalising the commitments, noting the existence of a “double asymmetry” on the market – first, where Nespresso makes changes to its machines, these will usually be designed to have the minimum impact on its own capsules, whereas competitors will have to modify their capsules to make them compatible with the new machines –  the time needed for competitors to make this adaptation may be longer than that needed by Nespresso; and secondly, the various competitors on the consumables market will be affected in different ways by each change. According to the FCA, these factors meant that it was impossible to achieve absolute neutrality between Nespresso and its competitors as to the impact of technological changes.  Only excessively extending the prior notice period for Nespresso to advertise technical changes to its competitors could potentially achieve such neutrality, but the decision rightly notes that a period of adaptation is entirely normal in a competitive market.  The FCA also exhibits an awareness of the need to maintain possibilities for competition between the ‘generic’ capsule manufacturers.  For these reasons, the changes to the commitments compared to the original draft are relatively limited, with Nespresso notably having agreed to give an additional month’s notice of appreciable technical changes (extending the period to four months, but not the 18 months requested by some competitors), and to place a larger number of prototype machines at the disposal of the competitors.

This decision relieves Nespresso of the need to fight a competition action, at least in France, gives its downstream competitors a leg-up in the capsules market, and doubtless lays the ground for increased price competition at the consumables level.  But there is no discussion in the decision as to the impact on companies’ incentives to innovate and to improve product design, and the decision certainly does not heed the approach of US antitrust law which, in the words of the Court in Allied Orthopedic v. Tyco (US Court of Appeals, 9th Circuit, 2010), has noted that: "to weigh the benefits of an improved product design against the resulting injuries to competitors is not just unwise, it is unadministrable".  The FCA, perhaps unsurprisingly, evidently does not agree.

Innovation and Intellectual Property – a controversy?”

Earlier this year I posted a blog relating to competition innovation and intellectual property rights. One of the things I noted was that there is some debate about the extent to which intellectual property rights actually stimulate innovation. Recent consensus/received wisdom among enforcers is that it does – for example the recent EU Technology Transfer Guidelines (March 2014) say “Innovation constitutes an essential and dynamic component of an open and competitive market economy. Intellectual property rights promote dynamic competition by encouraging undertakings to invest in develop[ping new or improved products and processes.” (para 7) 

At the time of my blog I suggested that we might ask some economists to comment on the issue, in part because within the regulatory agencies and at the Court level it is not clear how much weight is actually given to the long term incentives offered by Intellectual Property when weighed against the shorter sharper shock tactics of existing competition and active competition enforcement.  So far we haven't quite got around to arranging for someone to guest on that topic (but do feel free to volunteer if you are interested!). 

In the meantime, those who are particularly interested could have a look at recent posts on the US blog “Truth On The Market”. An interesting spat has broken out between some of those commenting on that blog and others, principally those at The Mercatus Center. The initial debate appears to have arisen in the context of copyright and has some particularly  US aspects, but it is worth reviewing for those who  take a close interest in the relationship between IP rights and innovation, whether it actually exists and how direct it is - something that is, of course, relevant to policy choices made by competition enforcers. 

The particular dialogue in the US seems likely to run and run given the heat on both sides (see some of the comments on the blog post) and we will be watching it, given the importance of the issue – we may even find a future “CLIP of the Month”!

Pat Treacy