Most-favoured-nation clauses in e-commerce: a guest economist’s view!

The CLIP Board is delighted to welcome its first guest blog post, which has been kindly written by Dr Avantika Chowdhury of Oxera.  Avantika brings a much-needed economics perspective to the vexed question of MFN clauses.  For those who would like to read more on this subject, Oxera has also recently published an article on the topic in its regular Agenda series.

oOo

The use of ‘most-favoured-nation’ (MFN) clauses in e-commerce has recently become a closely debated topic in the antitrust world and is causing competition authorities some headaches. 

For those not too close to the developments, several national competition authorities (NCAs) across Europe have recently been grappling with competition issues in a variety of online markets including online hotel bookings, books, motor insurance and sports good retail. Among these, the hotels and books cases have been creating the most waves so far. Both cases involve MFN clauses, which are essentially agreements between a supplier (e.g. a hotel) and a specific distributor/retailer (e.g. a travel agency) stipulating that the supplier will offer the best available terms to the distributor/retailer. The scope of ‘best available terms’ does vary. For example, an MFN may require the supplier to offer the best available terms among those offered to all other sales channels (a ‘broad’ MFN), or it might require that the terms are best among those offered to specific sales channels or available through the supplier’s own distribution channel (a ‘narrow’ MFN). Although MFNs are not considered anti-competitive per se and in some circumstances will even have efficiency benefits, the authorities are concerned that certain types of MFNs may restrict competition among sellers and/or distributors/retailers. Broadly speaking, the potential concerns are the following.

  • Softening of competition in the downstream market, including anti-competitive foreclosure: This in essence arises from the fact that the distributor (or retailer as the case may be) with an MFN is assured of getting the best terms and hence is protected from competition, including from potential entrants. 
  • Softening of competition in the upstream market: An MFN, depending on its scope, may restrict a seller’s ability to offer selective discounts through specific channels. If very broad MFNs are used by a majority of the upstream and downstream firms, it can reduce the incentive of sellers to reduce prices.   
There is also a concern that MFNs or similar parity provisions can be used as a tool to implement collusive behaviour, especially in online markets where monitoring of rivals is easier. 

In the online hotel booking cases, the focus thus far has been on the potential restriction of downstream competition. More than 10 NCAs have been investigating agreements between hotels and online travel agents such as Booking.com and Expedia, which potentially prevent/restrict price competition. Interestingly, although the key issue(s) being looked at across various jurisdictions are similar, earlier this summer the Commission expressly decided not to launch its own investigation. It remains to be seen whether this changes following recent developments (e.g. the recent success of Skyscanner in persuading the UK Competition Appeals Tribunal to quash the OFT’s decision for the UK market - see here).  

The concern in the US e-books case, on the other hand, was about collusion. In this case, both the US DoJ and the European Commission investigated Apple and five publishers for price-fixing. While the Commission settled its case, the US investigation culminated in a decision which found that MFNs between Apple and each of the publishers served as a tool to implement explicit collusion that was aimed at stopping Amazon’s discounting of e-books and at increasing the prices above the ‘wretched $9.99’ price. It is notable that the MFNs, by themselves, were not found to be anticompetitive in this case (see US District Judge Cote’s opinion here, and an excellent summary here). The more recent debates about this market have Amazon under the spotlight, with calls by publishers in Germany and the UK to open a competition investigation into the market (see here). 

So, how do MFNs affect competition? 

The answer to this (fortunately or unfortunately) depends on a few factors, including whether the distributor is acting as an agent; whether the MFN is about wholesale terms,  or retail prices; the breadth of the MFN; the position of the parties to the agreement and the extent of use of MFNs in the market more broadly. 

To illustrate, I will focus below on the specific example of a retail MFN in an agency business model, i.e. where a supplier offers a product to consumers through retailers who merely act as ‘agents’ (with no involvement in price setting) and pays each agent a commission for every product it sells. For example, if a hotel H advertises a room through two online travel sites (Site 1 and Site 2), H will set the prices available through each site (in the figure, these are P1 and P2) and pay a pre-agreed commission to each (C1 and C2) based on their bookings. Suppose also that an MFN between H and Site 1 stipulates that H cannot advertise the same room for a lower price through an alternative travel site (e.g. Site 2) or even through H’s own website (i.e. it is a ‘broad’ retail-level MFN). 

Example of retail MFNs in an agency model

Such a broad MFN could restrict competition in a number of ways. First, it can reduce the incentive of Site 1 to compete for reduced commission rates. This is because, in the absence of the MFN, H has the incentive to ‘reward’ the site that offers the lowest commission rate by offering to advertise the lowest prices through this site to encourage sales. However, the broad MFN prevents H from ‘rewarding’ low-commission sites (e.g. Site 2) without extending the ‘reward’ to Site 1.. Hence, in presence of a sufficiently broad MFN, Site 1 will not be concerned about its competitiveness in the retail market even if it increases its commission. This in turn raises the likelihood of consumer harm, on the presumption that higher commissions ultimately feed through into higher retail prices.

MFNs can also restrict competition by undermining market entry and expansion. For example, a new travel site that wishes to offer lower commissions to H in order to be able to advertise lower prices to consumers and gain market share, will not be able to do so without facing a matching low price from Site 1. Hence low-cost/low-price entry and expansion may be foreclosed. Existing literature suggests that the larger the party (or parties) with the MFN(s) in place, the more likely the foreclosure effects. Given that innovation in e-commerce often arises from new business models, there is therefore a broader concern regarding potential dampening of innovation in e-commerce. 

It is worth noting, however, that some recent academic literature (for example, see here) shows that in certain situations, retail MFNs increase incentives to enter due to the increased profits available (this occurs, for example, when commissions are based on profit sharing and when an entrant’s business model is similar to the incumbent’s). It is also notable that there has been little assessment of the actual benefits of MFNs, although that they exist is accepted by economists and authorities (see, for example, the DoJ’s workshop here). One of the key benefits of MFNs is to prevent hold-up of investments by retailers/agents, because MFNs, by preventing the supplier from offering better terms to other retailers and/or undercutting via the supplier’s own sales channels, can prevent others ‘free-riding’ on a specific retailer’s investment (think of eBay and consumers using its reviews to make an informed decision but ultimately buying through another platform or through the supplier’s own site which offers lower prices). MFN clauses can also benefit consumers directly by, for example, allowing retailers to advertise their ‘lowest price offers’, and hence reduce consumer search costs. However, the real question is whether such efficiency arguments hold in specific online markets.  

All in all, lots of questions, not so many answers. The hotels investigations by the various NCAs will hopefully provide some answers quite soon. Now let’s just hope they come up with similar answers… 

Avantika Chowdhury, Oxera

The views expressed here are solely those of the author and do not necessarily reflect those of Oxera

The politics of SEPs – finding the third way to obtain/avoid injunctive relief?

The IP/competition interface was in the spotlight at the Court of Justice yesterday.  The opinion of the Advocate General in response to a reference from the German Court in Huawei v. ZTE had been eagerly awaited, but early readers had to be content with German and French versions. (As of yesterday evening, an English version is now available.)

The opinion starts with first principles – running through the Charter of Fundamental Rights, the Enforcement Directive, the ETSI IPR Policy, and the polarised perspectives provided by the framework for FRAND litigation used in Germany (based on the Orange Book case) and the European Commission’s view of these issues as expressed in the press release accompanying the Statement of Objections sent to Samsung at the end of 2012.  And then, in common with a long and distinguished line of  ‘political’ (or policy) decisions over the years by the European Courts, the AG seeks to offer something for everyone.  According to the AG, a “middle path” (a “third way”?) needs to be found between excessive protection for the right holder and excessive protection for the implementer.  As a result, he dismisses both the German Orange Book type approach (too much protection to the patentee), and the approach of the Commission (which apparently gives too much leeway to implementers (the opinion here refers only to the press release accompanying the Samsung statement of objections and does not address the Motorola and Samsung decisions – a clear expression of the status of Commission decisions in the EU legal system).  

But is this really something for everyone, or a disappointment to all concerned?  On balance, our view is that the framework provided by the AG’s Opinion is rather closer to the Motorola decision than to Orange Book, but does perhaps provide a shade more certainty for patentees faced with ‘unwilling’ licensees. (Unlike politicians, we are capable of revising our original opinions…!).  

So, what does the opinion actually say?  The operative parts can be summarised as follows:

  • On the central question of when an abuse of a dominant position will be found, the AG starts from the proposition that an injunction has at least the potential to restrict competition.  However, he also notes that the giving of a FRAND undertaking does not imply any renunciation of the right to seek injunctive relief, and the seeking of an injunction cannot in itself be an abuse of dominance.  Equally, the right to seek an injunction is not absolute, and can be overridden by the general public interest (including competition law considerations) - but any limitation on this right can be made only in exceptional and closely limited circumstances. (Note, this appears to reflect the approach now being taken in the 17th draft of the rules for the new UPC – have a look here if this is of interest.)  To determine whether such circumstances exist requires a factual examination of the conduct of both the SEP holder and the implementer, again a matter for the national courts to determine.  Where the implementer is “ready, willing and able” to conclude a licence, seeking an injunction will be an abuse of a dominant position.
  • The AG identifies a number of specific ‘Guidelines’ for situations relating to the negotiation of SEP licences.  These are informative, although it is not immediately obvious how these can be enforced in a national court setting or – if a party originally fails to abide by them but then remedies its conduct – what the remedy would be. One would think that some remedy ought to be available if conduct is illegal, short of involving the Commission and asking it to levy fines – another of the imponderable problems the CJEU is fond of leaving to national courts to disentangle:
  • For as long as an implementer is, and remains “able” to take and respect the terms of a licence on FRAND conditions and notably to pay an appropriate royalty, the SEP holder must take certain specific steps before seeking an injunction. (The word “able” is perhaps surprising in this context – in the conclusion the words “ready, willing and able” are used.  However, in the AG’s framework, the question of willingness arises more in relation to the response made by the licensee.)  The AG justifies this approach by noting that the implementer does not know if the patent is infringed, valid or essential – it is perfectly possible that even large telecommunications enterprises may not have made this assessment for all declared essential patents before launching a new product, in particular in relation to a standard such as LTE which comprises so many patents;
  • The SEP holder must alert the implementer in writing, noting the relevant SEP and how it is alleged to be infringed (raising the bar for pre-action steps in patent litigation?);
  • A written licence offer, corresponding to FRAND conditions, must be provided: this must contain all terms which are “normal” for the industry (likely to give rise to considerable scope for debate and disagreement, not to mention disclosure requests in disclosure jurisdictions until the meaning of “normal” is clarified) and must specify the amount of the royalty and how it is calculated;
  • The implementer must then react to the offer in a “diligent and serious” manner – “vague” indications of willingness to negotiate are not sufficient.  If the offer is not accepted, an explanation must be given within a “brief” time period, together with a written counter-offer for those clauses in relation to which there is disagreement.  
  • The time periods for exchange of offers and counter-offers as well as the duration of negotiations must be considered in the light of the “commercial window of opportunity” which the SEP holder has to obtain a return on its patent – something which will be a matter for the national court to decide.  It will also be for the national court to decide if stipulations such as a requirement to enter into a cross-licence are reasonable.
  • The conduct of the implementer will not be considered as dilatory or non-serious if it requests the court or an arbitral tribunal to set the terms of the licence.  In that case, it is reasonable for the SEP-holder to request a bank guarantee or payment of a deposit in respect of royalties which may be due.
  • The implementer must retain the right to challenge SEPs, or to contest infringement even after conclusion of a licence.  (This is in line with the revised Technology Transfer Guidelines which were published by the Commission earlier this year and on which we blogged (endlessly, some would say…)
  • There is also no obligation on an implementer to abide by the terms of a future contract before one has been concluded.  This was part of the Orange Book conditions, but is said not to be appropriate for FRAND-encumbered patents (the Orange Book case related to a de facto standard where no FRAND undertaking had been given).  However, as above, a bank guarantee or deposit can be requested.
  • The seeking of other remedies (e.g. delivery up of products) is said to be subject to the same rules as that applicable to injunctions.  However, there is no objection to seeking damages equivalent to a FRAND royalty.  Damages and interest may be sought for the past, although it is left unclear whether an argument could be made that such past damages could be sought at a higher (supra-FRAND) rate:  the AG observes that there can be no question of market exclusion where past damages are concerned, which might suggest that supra-FRAND damages are not wholly excluded.  Equally, the fact that the SEP holder has accepted through its FRAND undertaking that it will monetise its patents at a FRAND rate could suggest that there is no reason to accord a higher reward.
The Court has not been asked to rule on relevant market / dominance – but the AG could not resist expressing an opinion on this point.  His view is that a SEP holder is not inevitably dominant, but it may be presumed to be so.  The presumption can be rebutted by “specific, detailed evidence” – however, no further detail is given as to what that evidence might comprise.  This will remain an issue for the national court to consider in line with its usual evidentiary rules.

The opinion contains considerable detail, but, as is often the case with CJEU references (or CJEU pronouncements generally), a great deal is still left to the national courts to determine.  Even if the Court upholds the AG in all respects, this is unlikely to be the final shot or the last uncertainty in the great FRAND wars.  The AG may have proposed a ‘third way’, but we would be unsurprised to see fourth, fifth and sixth ways emerging in due course...

Sophie Lawrance and Pat Treacy

A barrel of laughs.....

While this blog usually grapples with serious matters relating to the interrelationship between Intellectual Property and Competition Law, we thought it was time for a more light hearted blog post as some pre festive cheer now that the nights are drawing in and to bring you news of competition of a different kind. If you are the serious type, you may wish to skip this blog for weightier fare and more intellectual discussion of competition in blogs below (and above).(PS have a glass of wine before you start reading to help you get over your groans at the intentional puns in the description below. We wonder if anyone can spot them all....)

On 11 November 2014 the Bristows Competition team (ably assisted by a couple of our Intellectual Property colleagues who have shown a quite unhealthy interest in competition law from time to time) hosted a wine tasting event and a related quiz/competition at our offices in London.  

The night was very well attended by a grape bunch of clients from a varietal of sectors some travelling from terroirs far and near (including Brussels and Manchester) to join us, as well as the Bristows vintage: Pat Treacy, Rosemary Choueka, Myles Jelf, Andy Bowler, Sophie Lawrance, Osman Zafar, Helen Hopson, David George, Kate Shires, Edwin Bond, Francion Brooks and Chloe Dickson – many of whom will be recognised by you as regular bloggers on The CLIP Board. 

Our taste buds were put to the test by an assortment of challenges at two tasting stations. These included identifying the region and vintage of a selection of wines. To see who really nose their stuff we also identified different aromas and took part in a quiz. We learnt that leaning forward and drawing air in through your mouth helps to identify the acidity level of a wine and acts as a great ice-breaker, but it is best to take a few steps back if you’re standing behind someone! We were not sure how this could be employed effectively in our day jobs – but thought that it might be a handy ice breaking technique at the next dawn raid…

Answer sheets were duly handed in and all attendees lapsed into a well-earned feeling of que syrah, syrah with treats of canapés, cheese, more wine and a chance to discuss our new world knowledge. Plus a bit of competition law gossip and speculation on the side about such timely topics as the forthcoming CJEU Opinions and Judgments on the Spanish Challenge to the UPC and the Huawei/ZTE referral – we kid you not: it is amazing how freely a few well chosen wines can make the brain/tongue function. 

The evening was led by wine tasting event company Thirty Fifty, who noted that while we could barrely be called experts the quiz was very well answered by all with no signs of collusion or cartel behaviour - and no one was driven to ask for leniency. Showing all the vigour of a new market entrant, perhaps under the pressure of riesling to the occasion, one of our trainees established true dominance over the subject in hand and scooped the market – sorry, the prize of a fabulous bottle of Viognier...

Helen Hopson and Chloe Dickson

STOP PRESS – AG Opinion in Huawei v ZTE published today

**For a more detailed commentary, see here.**

The Court of Justice of the European Union (‘CJEU’) has this morning published Advocate General Wathelet’s opinion in the Huawei v ZTE preliminary reference proceedings. An English language press-release is available here.  The full opinion can be read in 19 official EU languages here, although it is not yet available in English.  We are currently digesting the opinion,  our initial impression is that the AG Wathelet’s approach is somewhat more nuanced and even-handed than that of the European Commission in its Motorola infringement decision

AG Wathelet proposes that the European Court adopt a ‘middle-course’ between that taken by the German courts and that of the European Commission.  The AG accepts that seeking an injunction on a FRAND-encumbered patent can amount to an abuse of dominance in some circumstances.  The AG also makes a number of ‘implementer-friendly’ statements in line with the European Commission’s approach.  For example, he confirms that an implementer can show itself to be a ‘willing licensee’ by agreeing to a third party determination of FRAND terms.  Also, he confirmed that an implementer should be free to challenge the validity, use and essentiality of the patent in dispute without being considered an ‘unwilling licensee’.

However, the AG is also somewhat more nuanced than that of the Commission.  For example, he recognises that an implementer’s approach to negotiations may be dilatory and that seeking an injunction in such circumstances is legitimate.  He also states that it is legitimate for the patentee to ask the implementer either to provide a bank guarantee for the payment of royalties or to deposit a provisional sum at the court or arbitration tribunal in respect of its past and future use of the patent.  This requirement will go some way to ensuring that implementers do not abuse the negotiation process.

We will follow-up with further comments shortly.

David George


Europe’s Unitary Patent system draws one step nearer...

Yesterday, Advocate General Bot delivered two opinions giving the thumbs up to the proposed Unitary Patent system.  This is a very significant step towards the development of a transnational system of enforcing patents in Europe (currently patents have to be enforced on a state-by-state basis).

Under the Unitary Patent system, which is being driven forward via the EU’s ‘Enhanced Co-operation’ procedure (in which, for the avoidance of doubt, the UK will be participating!) private parties will be able to apply for a European Patent with unitary effect throughout the participating member states.  A related international agreement will establish a ‘Unified Patent Court’ where these Unitary Patents and, importantly, also all pre-existing ‘European Patents’ granted under existing European Patent Office procedures can be litigated.  The system will have courts spread across Europe, with a central division split between London, Paris and Munich (and so presumably with its spiritual centre in the Champagne region of Northern France).

Spain had refused to take part in the enhanced cooperation procedure and launched legal challenges to the underpinnings of the proposed system.  In political terms, Spain’s primary objection was that Unitary Patent system gives priority to three languages – English, French and German – over other official EU languages (including Spanish).

Advocate General Bot advises the European Court of Justice that the Spanish challenges should be rejected.  A handy press release summarising the opinion in English is here.  You can read the full text of the two Opinions here and here in Bulgarian, Spanish, Czech, Danish, German, Estonian, Greek, French, Italian, Latvian, Lithuanian, Hungarian, Maltese, Dutch, Portuguese, Romanian, Slovene, Finnish or Swedish .  Unfortunately, speakers of the other five official languages (Polish, Croatian, Irish, Slovak and English) will have to wait a little longer for a full translation.  But for those who speak English, Bristows’ dedicated Unified Patent Court microsite contains a more detailed discussion of the Opinion (in English!).

One has to wonder what impact the Unitary Patent and Unified Patent Court will have on competition law throughout Europe.  The procedures adopted by the Unified Patent Court are certainly very different from those of the High Court (significantly less cross-examination, for example) and it will be interesting to find out how the Court will deal with competition defences such as FRAND related defences. 

David George