The Commission’s 5th report on patent settlements – a pretty picture?

Earlier this month the Commission published its 5th report on the monitoring of patent settlements, looking at those concluded in 2013.  The picture painted by the report is one of triumph: the number of settlements which attract antitrust scrutiny has “stabilised at a low level” whereas the total number of settlements has generally increased over the last five years. From this, the Commission concludes that any concerns that it was forcing companies to litigate ‘until the end’ are unfounded. Unfortunately we are not so sure that the Commission’s stats are all they are cracked up to be. 

In the body of the report the Commission acknowledges that the increase in the number of patent settlements may be due to a number of reasons including medicines losing patent protection, a general increase in litigation and disputes, the greater readiness of parties to settle and the introduction of new legislation. But in making its firm conclusion that the Commission’s activities have not discouraged parties from settling, the report fails to note the possibility that without these factors we might have actually seen a decrease in the total number of settlements.  (The Commission should be familiar with this argument, which is akin to one it used in its British Airways abuse finding – responding to BA’s claim that competitors gained market share during the period of the alleged abuse, the Commission suggested that without the abuse, the competitor share would have grown even more).  In referring in the report to the numbers of settlements concluded over the last 5 years, it also fails to consider that the total figures** for 2013 are in fact lower than those for 2012 – perhaps indicating the start of a trend towards lower numbers of patent settlements.

The Commission has been using the same categorisation of patent settlements for some time now.  Unfortunately, this is also flawed.  The B.II category of patent settlements which “attract the highest degree of antitrust scrutiny” are those which limit access to the market and contain a value transfer. The Commission appears to use the low number of settlements falling into this category as a hallmark of its success despite the fact that in reality any settlement which involves a genuine compromise between the parties (as opposed to one party or the other just giving up) will fall into this category.  The Commission acknowledges itself that this type of settlement would not “always be incompatible with EU competition law” (Monitoring Report, p.5).  This provides little certainty for businesses in the pharmaceutical sector which need to be able to settle litigation, in the knowledge that the agreement reached will be enforceable and will not lead to years of investigation and litigation.  Until there is more certainty, in the form either of published decisions (even the Lundbeck decision, which dates back to June 2013, remains unpublished, although details of the fines imposed were of course given in a Commission press release) or a fuller analysis of the agreements notified under the monitoring process, companies in the pharmaceutical industry are likely to need to take a – perhaps unnecessarily - risk-averse stance to any settlement of litigation.  Until companies in the pharmaceutical sector have had a chance to adjust their litigation conduct (including, for generic companies in particular, the choice as to whether to launch before patent expiry or to bring revocation proceedings) in the light of the fines levied over the last two years, the Commission’s statistics do not provide very good insight into whether there really might be a chilling effect from these cases.  The impact of the Commission’s activities in the pharma sector may well be very different from the picture painted in the Monitoring Reports – the statistics do not necessarily prove otherwise.

Finally, anyone interested in this area may wish to read this critique by James Killick and Jeremie Jourdan (amongst others at White & Case) of the Commission’s 4th monitoring report.

** Excluding Portugal, which has special rules in this area.

More on predatory innovation – and innovative Apples…

I blogged a while back about the concept of predatory innovation in a competition law context. Since then, the French Competition Authority's Nespresso case has been decided, and I have had the opportunity to put together a more considered view on the issues, courtesy of Competition Law Insight.

The article, written jointly with Kevin Coates of 21st Century Competition blog fame (oh, and he also works for a small outfit in Brussels...), looks at whether the concept of predatory innovation could be a viable basis for an Article 102 case in the EU.  

Fortuitously, this issue has been under consideration just this week a new ruling in a class action lawsuit brought against Apple in the US. The case related to certain technical changes made to the Apple iPod software in 2007.  These changes, alongside certain improvements to graphics and video elements of the software, comprised a security update which made it impossible to play tracks based on reverse-engineered versions of Apple’s DRM technology.  

The jury tasked with assessing this issue was directed to consider, under the applicable US law, whether the changes to Apple’s technology represented a genuine product improvement – if it did, any harm to competitors was immaterial.  Reports (e.g. here or here) indicate that the jury rapidly decided the case in Apple's favour, holding that the technology did indeed represent a genuine product improvement, and that, as a result, there was no antitrust liability.  The Nespresso case and the points considered in my and Kevin Coates’ joint article suggest that the position in the EU in similar cases is likely to be somewhat more nuanced.  

SEPs and FRAND: The calculation of RAND royalties in the US - incremental guidance

The recent Judgment of the US Court of Appeal for the Federal Circuit (‘CAFC’) in Ericsson v DLink addresses an issue of perennial interest to those involved in litigating or licensing standard essential patents (SEPs) - and the competition community that shadows their every move.  The topic in question: the issues surrounding FRAND (or RAND) royalties, which is close to the heart of many of those practising on the interface between competition law and IP, not least because the failure to make a FRAND offer (or an offer capable of being FRAND), may mean that a patentee will not be able to obtain an injunction in infringement proceedings to enforce his patent

This is the first time the CAFC has had a chance to look at the ways in which the various US district courts have approached the establishment of RAND royalties; there have been only a few earlier district court cases (Microsoft v Motorola, In re Innovatio and Realtek v LSI).  This Judgment follows an appeal by DLink of a finding of patent infringement and also the subsequent calculation of damages in a suit brought by Ericsson enforcing a number of Standard Essential Patents (SEPs). 

The court highlighted a number of key principles to be considered when assessing an appropriate royalty award.  While these arise from the specific US context, including the so-called Entire Market Value Rule and the use of the Georgia-Pacific criteria to assess patent damages, we thought that those on this side of the Atlantic who take an interest in SEPs might find the appellate level approach revealing.  

The CAFC considered the implications of the US Entire Market Value Rule in the context of SEPs and suggested that the royalties for infringing patented technology that covers only a small part of a standard must be calculated by ascertaining the value of that specific technology rather than looking at the standard as a whole.  That being said, the court did recognise that in some cases the value of the infringing patented inventions could make up the entire value of the standard; in those circumstances apportionment would not be appropriate.  The court highlighted the importance of differentiating the value of the patented technology under an SEP from the value gained by the incorporation of such patented technology into a standard; the CAFC indicated that a patent holder should only be compensated for the incremental benefit derived from its invention.  Indeed, the court went on to say that the widespread adoption of standard essential technology is not necessarily indicative of the added usefulness of the patented technology - given that it may only be used because it is required to comply with the standard. 

This case offers some useful guidance on the way in which the calculation of RAND royalties may be approached by US courts.  This blog post has given only a very high level overview – not least because we are not US lawyers, so don’t want to go too far in extrapolating, given the US context. With the ongoing international interest in such issues it is certainly worth a read for anyone interested in the area.

With great patents, there must come great restraint (but a bit less in the EU than the US)

In a first superhero-related post on this blog, we note with interest that the US per se rule against post-term patent royalties is under challenge, courtesy of a Spiderman toy.  The US Supreme Court is set to rule in Kimble v. Marvel Enterprises Inc. on an attempt by the petitioner to obtain patent royalties from a company behind Spiderman even though the patent expired in 2010.  While the case remains to be decided, a notable amicus brief has recently been filed on behalf of the US government, which argues in favour of the status quo.
 
Perhaps surprisingly this is an area where the EU is currently more lenient than the US.  The Technology Transfer Guidelines countenance that in some cases it may be appropriate to structure royalties to be payable after patent expiry (see paragraph 187, which states: “Notwithstanding the fact that the block exemption only applies as long as the technology rights are valid and in force, the parties can normally agree to extend royalty obligations beyond the period of validity of the licensed intellectual property rights without falling foul of Article 101(1) of the Treaty”). This has some logic – in agreements where the licensed technology is an input into a larger, more complex product, or where significant development is necessary before a marketable product is ready, it makes a lot of sense not to over-burden the licensee at a time before the product has generated much income.  It also arguably makes sense to reward the licensor for an appropriate portion of the licensee’s income if pre-patent expiry royalties have been low.  The rationale given in the Technology Transfer Guidelines is, however, rather different, focussing on the fact that once rights expire, “third parties can legally exploit the technology in question and compete with the parties to the agreement.  Such actual and potential competition will normally be sufficient to ensure that the obligation in question does not have appreciable anti-competitive effects”.  
 
The approach to this issue in the Technology Transfer Guidelines has always seemed something of an outlier compared with other aspects of the treatment of pricing agreements in the Commission’s Guidelines: pricing restrictions are usually assumed to have effects on the market.  The fact that the effects of a pricing provision are felt only by a particular competitor is not usually enough for them to escape the rule in Article 101: the same could also be said of some (many?) minimum resale price obligations, yet these are still regarded as ‘hardcore’ restrictions in the EU (it is the US which is more lenient in this case, following Trinko).  Perhaps it is more pertinent to focus on the fact that – in the absence of unusually restrictive termination provisions – there will be nothing to stop the licensee from terminating the agreement once the licensed technology has expired.  This is in fact in line with the US government’s amicus brief in Kimble, which proceeds purely on the basis of patent law, arguing that it is unnecessary to have any regard to antitrust principles in this context.
 
However, it may not be easy in practice for a licensor to provide for post-term royalties in reliance on paragraph 187.  For one thing, if the geographic scope of the agreement includes the US, the current rules on post-term royalties will apply unless Kimble changes the position. The agreement could be structured so that only non-US sales count for the post-term royalties, but this would be a rather artificial approach.  Secondly, unless the agreement prohibits licensee termination, or unless there is some allied know-how (which must, according to the TTBE, be secret, substantial and identified) which is also licensed, there will be nothing to stop the licensee from simply ending the agreement after patent expiry.  If the licensee is contractually locked in, then there will be a question as to the compliance of the post-term royalty provisions with competition law.  If know-how is also licensed, there could be questions over the relative value of the different parts of the licensed technology.  Given the lack of clear guidance on when post-term royalties may be charged (how much, for how long?), an agreement which provides for them is likely to be at risk of unenforceability.  Evidence as to the parties’ intentions when the agreement was signed, and the period over which investments were expected to be recouped, could be critical to the outcome, were this issue to be litigated.  In practice, the shorter the period over which post-term royalties are payable, the greater the prospect of the provision being enforceable.  Sadly, superheros – Spiderman or otherwise – are unlikely to assist.