Try before you buy: pre-action disclosure of licences

In a novel judgment handed down yesterday, Arnold J granted an application for pre-action disclosure of certain patent licences that a company had granted to third parties. 
The application was brought by Big Bus against Ticketogo, after it was threatened with patent infringement proceedings.  In correspondence Ticketogo told Big Bus that numerous other large travel and entertainment companies had already taken a licence to its technology.  Big Bus sought disclosure of these licences into a 'legal eyes only' confidentiality ring to help it decide whether it would be worth fighting or settling.  Big Bus argued that, even if proceedings did start, the disclosure would help the court and parties to allocate proportionate resources to the dispute in accordance with the Overriding Objective (as recently amended under the Jackson reforms).

Arnold J accepted that: "where the key information concerning the value of the claim was held by one party, then it was desirable for that party to be required to disclose that information by way of pre-action disclosure."  He also agreed "entirely" with the observation made by counsel for Big Bus that: "experience showed that, all too often, parties to intellectual property disputes spent large sums of money litigating issues on liability when the costs incurred were entirely disproportionate to what was at stake in terms of the quantum of the claim." 

Some may now wonder whether we will see pre-action disclosure applications against claimants in antitrust claims.  The cost vs. value disparity of litigation is certainly not unique to IP law.  These sorts of issue might even one day reach the CJEU now that the Directive on antitrust damages actions has been signed into law.  More fundamentally though, what are the implications of the court's willingness to shine a bright light in these opaque markets?  Arnold J considered that court involvement would improve market functioning.
 
56. [The respondent argued that] the order would unjustifiably infringe Ticketogo’s “freedom of negotiation”.  What does this mean?  As I understand it, the point being made by Ticketogo’s solicitor is that, for a party in the position of Ticketogo, it is desirable to be able to negotiate licences individually with licensees without each licensee knowing what other licensees have agreed to pay.  This will enable such a party to maximise the licence income it obtains from each licensee.  In my view this is the real point of principle raised by this application: is it an answer to an application for pre-action disclosure that is otherwise well founded that it would deprive a patentee (or other right owner) of the ability to conduct its business in that manner?  In my judgment, it is not.  On the contrary, I consider that, here as in other contexts, transparency is a virtue.  Availability of price information is one of the key requirements for the proper functioning of any market, and I see no reason why the market for patent licences should be an exception to that rule.  Why should Big Bus be obliged, if it does not wish to litigate, to accept whatever royalty rate Ticketogo now sees fit to offer it, if a court would award less by of damages?  Accordingly, I consider that it is appropriate to exercise my discretion in favour of disclosure.”
 
There is clearly some merit in Arnold J's observations.  But somehow I doubt the situation is quite as straightforward as he would make out.  Although in some cases pre-action disclosure may lead to a speedy settlement (e.g. if all previous licences are for nuisance sums), it is unlikely to do so in all cases.  Moreover, the prospect of a licensee knowing that the terms of a licence it enters into might influence the deal its rivals take may make it more difficult for licences to be agreed without litigation in the first place.  At the very least, it may increase incentives to ‘game’ licence structures so that they are less easily comparable.  The efficiency in terms of transactions costs of using a confidentiality ring to reach a settlement is also unclear.  Finally, in the absence of dominance, competition law imposes no general obligation on companies to license their technology on ‘non-discriminatory’ terms or at all.  Will knowledge of comparator licences be so important in negotiations once the infringer faces a permanent injunction?

European Commission announces e-commerce sector inquiry

Everything Online is the focus of the European Commission’s latest sector inquiry announced on 26 March 2015.  This inquiry focuses on the e-commerce sector and is aimed at identifying key technical or contractual barriers to cross-border trade imposed by companies themselves (as opposed to “other” barriers  such as differences in language, national legislation and consumer preferences).  These “other” barriers may be tackled by the Commission in its wider push to complete the Single Digital Market (see here).  

The Commission’s interest in technical barriers in e-commerce can be traced as far back as 15 years ago, when it began separate investigations into Visa and MasterCard.  The Commission found that via each of the Visa or MasterCard organisations, participating banks had collectively set multilateral cross-border credit and debit card fees (which were too high).  The MasterCard investigation and subsequent appeals has only just been concluded (for the recent MasterCard Court of Justice judgment see here and for the European Commission decision and press releases see here).  These investigations identified a need for regulation of multilateral interchange fees

However in 2013 Commissioner, Almunia signalled that the Commission shared wider concerns about the online sector, in particular e-commerce (see our blog post here).  Since then, recent regulatory investigations have focussed on the following areas: 

MFNs
The Commission is particularly alive to Most Favoured Nation clauses in contracts or “MFN” which have a number of different guises but which are essentially agreements between a supplier and a specific distributor/retailer stipulating that the supplier will offer the best available terms to the distributor/retailer.  The Commission and national competition authorities have conducted investigations into MFN clauses in a number of sectors, including online motor insurance and online sports good retail, but  the most high profile investigations have been the e-books investigation (see our guest blog post from Avantika Chowdhury of Oxera here) and hotel online booking investigations (see our post here – by way of update we note that Booking.com has just this week agreed to drop its “price, availability and booking conditions parity provisions” in commitments agreed with French, Italian and Swedish regulators; however, certain ‘narrow MFSs’ are retained).

Geo-blocking, online music streaming, online search engines
In parallel to its e-commerce sector initiative, the European Commission is also understood to have initiated some new related investigations:

  • An investigation into online retailers of video games for personal computers: the concern is understood to be the possibility that such retailers are taking technical measures to prevent consumers from accessing websites in other Member States by re-routing customers to the retailers’ websites in their home country.  This is not the first time the Commission has investigated such behaviour – it looked into similar practices by Apple iTunes in 2007, leading to a voluntary change in Apple’s business practices. 
  • An investigation into online music distribution: the Commission is understood to be investigating agreements between Apple (again) and online music labels/digital music companies over concerns that their agreements may be foreclosing competitors from the market.
Experience in the field of MFNs belies a growing feeling that the EU legislation governing vertical agreements is out-dated and doesn’t properly deal with the actual way in which online business operates.  For example, the current legislation does not provide enough detail on how MFNs should be categorised  are they hard-core restrictions incapable of exemption or lesser restrictions which may be exemptible?  If they are capable of exemption, under what circumstances? 

But it may not just be legislation relating to vertical agreements that needs to be re-cast.  While each new investigation tackles case-specific antitrust concerns, the results will all feed into the e-commerce sector inquiry, building a picture of the e-commerce landscape and the barriers to cross-border trade.  These may ultimately develop into a new vertical agreements regulation, changes to copyright (national TV rights, for example, seem to be in the scopes of the geo-blocking initiative) or even completely new sector-specific legislation  WATCH THIS SPACE!

Elisabetta Rotondo

New DG Connect Guidelines on interoperability information – shedding some light on the vexed question of IP valuation

Last year, I had the opportunity to contribute in a small way to an interesting project organised by DG Connect under the wider umbrella of the Digital Agenda for Europe initiative.  The project related to valuing and licensing interoperability information – and while competition law is of course not the central consideration in this context, it is a relevant factor underlying some of the issues involved.  
 
The project led to the creation of a specimen licence and the publication of guidelines (details below).  The latter offer an interesting perspective on the valuation of different types of IP which may constitute interface information.
 
In the competition law context, valuation issues in relation to IP most often come up in the standard essential patent context.  This project was explicitly aimed at non-standardised technology.  However, some of the guidance – while of course not binding, even for interoperability information – could be said to be transposable to the standards context also.  For example, the suggestion that, where patents are concerned, a judicial finding of validity may warrant higher royalty rates than patents which have not been tested is a principle which has its proponents (and opponents) in the FRAND context.  
 
Equally, other guidance is clearly not applicable – for example, the suggestion that royalty rates may vary depending on the relationship between the licensee’s product and the licensor’s own products.  In the standards context, licensors are of course subject to a FRAND obligation which limits their ability to discriminate on subjective factors of this kind.  Even for interoperability information, licensors should be cautious if they may be in a dominant position – as Microsoft of course found to its cost.  
 
The Guidelines can be downloaded (free of charge) from the European Commission online book store, here.  For completeness, the specimen licence can also be found on the Europa book store, at this link.

Sophie Lawrance

UK Supreme Court ruling on standard of review for CAT appeals in 08x numbers case

A rare foray by the UK Supreme Court into telecoms regulation provides a fascinating insight into the standard of review applicable by the Competition Appeal Tribunal (CAT) of regulatory decisions. The judgment also provides a useful statement of principle as to the relevant evidence a regulator can take into account in reaching a decision.  

In BT v Telefónica O2 and Ors the Supreme Court considered regulatory principles applied by Ofcom, in using its statutory adjudication powers under the Framework Directive (2002/19/EC) to resolve a dispute between BT and four mobile network operators on the pricing applied to termination charges for non-geographic numbers. Such numbers allow premium rates to be charged to consumers. 

In summary, a dispute came for adjudication before Ofcom when BT exercised a contractual variation right to implement a new interconnection pricing scheme. Under this scheme, prices would change according to the price the originating mobile network charged the customer. The networks complained to Ofcom that the proposed change was anticompetitive. 

Following the completion of its statutory adjudication procedure, Ofcom agreed - it found BT had failed to demonstrate the change would benefit consumers.  BT appealed Ofcom’s decision to the CAT, which conducted an appeal ‘on the merits’ and rejected Ofcom’s evaluation of the pricing structure as anticompetitive. The mobile operators appealed the CAT’s judgment to the Court of Appeal, which reversed the CAT decision.  Finally, BT appealed this judgment to the Supreme Court. 

The Supreme Court’s unanimous judgment (given by Lord Sumption) considers the EU Common Regulatory Framework for telecoms, of which the Framework Directive forms part, in depth. It provides useful comment on the nature of the regulator’s assessment and the role of the Courts in evaluating such assessments on appeal.  The judgment also contained several broad statements of principle worth highlighting:

  • Lord Sumption emphasised that freedom of contract is the primary subject of regulation. At paragraph 34 he stated: “The terms of the interconnection agreement are the necessary starting point for this process. If there is no contractual right to vary the charges, it is difficult to see how Ofcom can approve a variation unless it is necessary to achieve end-to-end connectivity (for example to enable operators to recover their efficient costs) or to achieve the Article 8 objectives. If there is a contractual right to a variation, but the proposed variation is not consistent with the Article 8 objectives, Ofcom may reject the variation.” 
  • At paragraph 42 Lord Sumption ruled that the burden of proof was on Ofcom to show consumer harm arose if it wished to reject a contractual variation proposed by BT: “the sole basis on which Ofcom rejected the new charges was that the welfare test having been inconclusive, it had not been demonstrated that BT’s new schedule of charges would produce consumer benefits. In my opinion, this was wrong in principle, [...]. BT were contractually entitled to vary their charges unless the proposed variations were inconsistent with the Article 8 objectives, including the objective of ensuring consumer benefit in accordance with Article 8.2(a).”  At paragraph 46 he also endorsed the CAT’s finding of fact that: “the effect of not allowing BT to introduce innovative charging structures was itself anticompetitive because innovative pricing structures are an effective mode of competing.”
The Supreme Court's approach is refreshing.  As a matter of principle it is surely correct that courts and regulators should intervene in markets only where good evidence supports such intervention.  The burden of proof is correctly placed on the regulator (or complainant). It cannot be right that a regulated firm (or, for that matter, a dominant firm) should be required positively to demonstrate consumer benefit in order to be permitted to make an innovative change. 

David George and John Townsend