Geo-blocking and the Single Digital Market: a new statement of objections

Last week, the European Commission made concrete moves which it thinks will help it to deliver on its promise to create a Single Digital Market.  On Thursday (23 July) DG Competition sent a statement of objections to six major Hollywood studios and Sky UK claiming that their contracts involve anti-competitive clauses.  What is at issue?  Nothing other than the “geo-blocking” clauses that have already been the subject of sceptical comment in the context of the European Commission’s e-commerce sector inquiry (for more on this see here and here and here and here). 
Geo-blocking, in the words of the European Parliament in its recent study (studies on challenges for competition policy in a digitalised economy), is the practice of “preventing users from accessing content based on location”.  DG Competition alleges that Sky UK and each of six major Hollywood studios (NBC Universal, Paramount Pictures, Sony, 20th Century Fox, Warner Brothers and Disney) bilaterally entered into licensing agreements which obliged Sky UK to restrict consumers from other EU Member States from accessing UK pay TV services either online or via satellite when in other EU Member States.  Film rights (and indeed other rights) are often licensed on an exclusive basis to a single broadcaster in each Member State. The Commission suggests that where licensing terms prevent the exclusive broadcaster being able to respond to unsolicited requests to transmit content to other countries, then this may partition the single market and infringe Article 101(1) – a transfer of the active/passive selling distinction from the realm of goods and services to the world of digital content and national copyright. 
The investigation began in 2014 and similar investigations are under way in other EU Member States. They follow the FAPL decision of October 2011 (here). Those familiar with this area will recall that the Murphy case did not hold that it was anti-competitive for the FA Premier League to enter into exclusive licensing arrangements with a broadcaster in each country but it did hold that it was contrary to the competition rules to require a broadcaster to prevent its satellite decoder cards (which enable reception of the licensed program content) from being used outside the licensed territory see here for a discussion on the Advocate General’s opinion in FAPL.
However, dealing with this issue does not merely involve contractual arrangements that impose absolute territorial protection - complicating the matters under investigation are national cultural concerns and national copyright rules. The European Parliament recently noted in its studies on challenges for competition policy in a digitalised economy that the ability to access content from anywhere in the EU may also be as a result of geographical restrictions imposed by owners of intellectual property rights. This is why geo-blocking will be assessed not only under the antitrust rules but also by reviewing copyright law across Europe.  The Commission is also keen to ensure wider access to online content within the internal market which will involve a review of the Cable and Satellite Directive. The allegations raised by the Commission against Sky UK and the Hollywood Majors may have a profound impact on the scope of copyright protection (particularly in relation to the doctrine of exhaustion) and may foreshadow significant changes to the copyright landscape once the modernisation of EU copyright law gets underway. 
Geo blocking is a major focus of the e-commerce sector inquiry and we will undoubtedly be seeing more investigations on this topic.  As companies start to respond to the chunky Commission information requests now being sent out by the sector enquiry case team, they need to have an eye on key Commission’s concerns on this subject, which may ultimately result in some significant pressure on existing business practices.

CJEU judgment in Huawei v ZTE (Case C-130/13): theory and practice (1: Theory)

Judicial desk-clearing at the Court of Justice before the 2015 summer recess included the handing down of judgment in Huawei v ZTE.  Cases are often described as “eagerly awaited”, but this is genuinely one which has had owners and users of standard essential patents (SEPs) on the edge of their seats.  And there are a lot of SEPs out there, as the judgment observes. 

Having been involved in a number of cases relating to the enforcement of SEPs (on both sides of the fence), we would predict that there will be a considerable mismatch between the theory and practice.  This first post takes a look at the theory.  A second post will follow shortly where we’ll consider some areas where the judgment perhaps doesn’t resolve all the difficulties.

But let’s look first at the theory:

The overall approach of the judgment remains in line with the recommendations of Advocate General Wathelet, who espoused a “middle path” between the interests of owners of standard essential patents and those of SEP users (as discussed in our earlier post on this subject). 

In accordance with this, the Court outlines the applicable legal principles under both patent law and competition law: 

  • On the IP side, the Court briefly notes the relevant provisions of the EPC (Convention on the Grant of European Patents) and the Enforcement Directive (noting in particular the provision for patentees to seek injunctive relief), as well as the ETSI rules.
  • On the competition side, the judgment recalls that the exercise of an IP right will amount to an abuse of a dominant position only in exceptional circumstances – however, the circumstances of this case are rather different from prior case law due to the essentiality of the patents and the fact that irrevocable FRAND undertakings have been given. Such undertakings are said to create “legitimate expectations” on the part of implementers as to the availability of licences.  Accordingly, a refusal by a SEP holder to grant a licence may “in principle” amount to an abuse. 
The judgment then sets out a theory of how FRAND-encumbered SEPs should be litigated in the EEA. It is actually quite limited in scope – since the judgment includes an almost unconditional endorsement of the ability of SEP holders to seek damages/other financial relief, the relevance of the ruling is limited to:

  • SEP holders wishing to avoid abusing a dominant position when they seek injunctive relief against unlicensed implementers; and
  • Implementers of SEPs which wish to avoid having an injunction enforced against them. 
If no injunction is in play, the steps below simply do not apply. (Of course, for implementers, there is likely to be uncertainty about whether an injunction may be sought for a considerable period – they are therefore likely to need to comply with their ‘obligations’ under the CJEU judgment in most cases where SEP licensors seek to engage them in licensing negotiations.  Although perhaps “negotiations” is not the right word for what the CJEU proposes should occur...)

In summary, the steps required by the CJEU ruling are as follows:

Perhaps the main conclusion to be drawn at this stage is that the Court seems to have engineered something of a shift in the obligations applicable.  Even though the implementer is not subject to the special responsibilities which apply to dominant companies, it now has some clear obligations to fulfil if it wishes to avoid being subject to an injunction (provided the SEP owner has fulfilled its prior responsibilities, of course).  This could perhaps be seen as the “price” for unlicensed use of the rights.

CJEU judgment in Huawei v ZTE (Case C-130/13): theory and practice (2: Practice)

This is the second of two related posts looking at the recent CJEU ruling in Huawei v. ZTE.  In the first post, I reviewed the “theory” proposed by the Court – i.e., what it says that SEP owners and implementers need to do to avoid, respectively, committing an abuse and being injuncted.  In this second post, I’m joined by Pat to consider some of the practical implications and open questions.

And now for the practice…:

But while some things are now, perhaps, clearer, for licensors and litigants, the judgment is arguably as important for what is left unsaid as for the points which are now clearly laid out. 

Picking out the most significant:

  • Portfolio licensing: this is the largest of a couple of elephants in the room. It is striking quite how careful the judgment is to avoid referring to anything other than “the SEP” in the singular.  (There is one slip-up/exception [?] in paragraph 69, which suggests that patentees shouldn’t think about trying to prevent licensees from challenging any patents in their portfolios.) 
There are two possible interpretations for this: (1) the referred questions relate only to a single patent, so it is simply unnecessary for the court to consider any other situation; (2) the court positively wishes to require SEP holders to make specific offers on any SEPs which they propose to litigate seeking an injunction, rather than being able to rely on a portfolio offer.  I think the answer is that there is a bit of both going on – the judgment does, after all, refer to the making of a “specific written offer”.   In a similar vein, he English court has recently given a strong steer that a SEP proprietor which does not make a FRAND offer specific to the patents in suit risks a finding that its portfolio offers (which cover numerous untested patents) are “equitably refusable” – see the judgment of Birss J given in Vringo v. ZTE in January 2015, and picked up again this March in Unwired Planet v. Huawei and others [health warning: the latter is a case in which we are involved]. For now, it’s not possible to be categorical as to how this issue will play out in future cases, but prudent licensors and licensees in this field are likely to need to consider very carefully whether they can risk making a portfolio only offer if injunctions are potentially in play. 

  • Delay and commercial practice: here the question is really “how long is a piece of string?”.  For those in the industry, the considerations are: how will a SEP proprietor know it has left long enough to have reduced the risks of seeking injunctive relief to a tolerable level, and, for implementers, how much time can they take to consider their position without running unacceptable risks of an enforceable injunction being sought.  While the CJEU (and the AG beforehand) may be aiming to bring about a reduction in the time taken for negotiations in this industry, it is far from clear that this will in fact be the result.
  • “FRAND offer”: the other elephant in the room: when the CJEU refers to “FRAND offers”, is this intended to mean “an offer of a type which may be adjudicated as to whether it complies with FRAND”, or an offer which is objectively within the FRAND range? If the latter, and if the original offer proves to be higher than FRAND, licensors could find that an abuse has been committed even if they have followed to the letter all the requirements relating to injunctions. My purely personal view is that the answer follows from Article 102: an abuse may be committed if a dominant undertaking seeks to impose excessively high prices or discriminates against certain customers in a way which affects competition on the market.  On this view an offer which ultimately proves to be slightly in excess of an adjudicated FRAND rate, or only imperfectly non-discriminatory would not lead to a finding of an abuse.  A clearly excessive or discriminatory royalty demand may, however, be an abuse - regardless of the position on injunctions.
Of course, this view depends on an analysis of the nature of the abuse which the CJEU is focusing on. This is something on which reasonable people can disagree (or at least have a healthy debate – see the comments on the Chillin’ Competition blog post on this topic): if the focus is on exploitation and on the excessive nature of the offer, then the excessive pricing aspects of 102 may provide the answer. If the focus is on exclusion and leveraging, then the nature of the conduct and the seeking of the injunction against a “willing licensee” may mean that the FRAND offer must objectively be clearly FRAND to avoid liability.  If the concern is akin to the ‘hold up” concern that underpinned the Commission’s Samsung and Motorola decisions, then again, the focus may be on the conduct in combination with an offer that is not objectively FRAND. 

It is a shame that the CJEU, unlike the Advocate General, did not explain particularly clearly the anticompetitive harm it was seeking to address and how it fitted into broader aspects of Article 102. It was not particularly analytical in identifying whether it was most concerned about excessive pricing or the potential coercive power of potential injunctions – just one more area of uncertainty.

Anyone for a few more preliminary rulings?

The unseen risks of e-commerce - a timely AG opinion on technical measures for breaching the competition rules

Those interested in all things e-commerce and competition will want to keep an eye out for the Court of Justice's ruling on a preliminary reference made by Lithuania's Supreme Administrative Court. 

The case (Case C 74/14 - Eturasconcerns an allegation about an anti-competitive concerted practice in the online travel industry. The notable (and novel) point is that the alleged concertation was achieved entirely through the technical workings of an online travel booking system, used by around 20 travel agents (who are now subject to competition investigation). 

The act giving rise to the alleged breach of Article 101 consisted in the making of a technical change which restricted the level of discounts that could be offered by the travel agents to their customers.  There appears to be some very slight evidence that some of the  travel agents had an interest in such a change being made, but the complaint essentially relates to the administrator’s actions in introducing the change, and sending a system notice notifying the travel agents about the change.  It is unclear if the majority of the travel agency users actually saw the system notice, but the fact that they failed to distance themselves from the measure by communicating their disagreement or ceasing to use the service is alleged to amount to a concerted practice. 

The opinion of AG Szpunar (not seen so often in competition cases) was published last week. The opinion  takes the opportunity to engage in a bit of inter-AG dialogue, picking up on AG Wahl's very interesting opinion of a few weeks ago on the role of "cartel administrators" in AC Treuhand (currently only available in French)**.  

Leaving such  benign (or even beneficial) rivalry aside, AG Szpunar concludes that a unilateral communication from an IT system administrator is capable of giving rise to a concerted practice between the administrator and recipients – provide the latter at least give their tacit approval to the measure in question.  According to the AG, such approval can be inferred from the fact that the recipients of the system notice remained silent following receipt of the notice, in particular in circumstances where they were aware that the same information had been communicated to competitors.  While the use of systems messages is not  exactly equivalent to other methods of communication between cartel participants (as the European Commission has urged), a presumption of awareness of the communication may be inferred if a “reasonably attentive and prudent economic operator” would have become aware of the system notice.  Such an operator should have acted in the same way as if it had become privy to illicitly shared information, and should have taken steps to distance itself from the conduct (e.g. by informing the systems administrator).  The ultimate decision on the facts will of course be left to the Lithuanian court on the basis of the full evidence, but the likely outcome (if the AG’s opinion is followed), is that the conduct amounts to an unlawful concerted practice.

In sum, this case is something of a cautionary tale for users of the-commerce systems – who would be well advised to keep an eye out for communications from systems administrators if they wish to avoid being implicated in an unexpected breach of the competition rules.  The view of the Commission (that such communications are entirely equivalent to “normal” business communications) should also be noted – since the Commission will shortly be in receipt of detailed and copious information from its ecommerce questionnaires, it would not be at all surprising to see further cases of this nature emerge in the years to come.

This was of course, only an AG opinion – I, for one, will be keeping a weather eye out for the CJEU ruling.

** It has been a particularly fascinating few weeks for AG opinions in the completion field - and perhaps one where the existence of bit of internecine rivalry among the AGs can be inferred. Important recent AG opinions (aside from this one) include:

  • AG Wahl in AC Treuhand - probably the most radical of this group, suggesting that a “cartel administrator” which is not active on the market does not bear responsibility for the infringement – this is the one, in my opinion, which is the most likely of this group not to be followed;
  • AG Kokott in Post Danmark II - my least favourite - if followed, it represents a 180o change in direction since Post Danmark I, and could well be the nail in the coffin of the supposed economic approach to abuse cases (an “ephemeral trend”, to judge by AG Kokott...);
  • AG Wathelet in Toshiba - an interesting opinion on (inter alia) potential competition.  This one has the potential to be unhelpful for the pending patent settlement cases (companies treated as potential competitors unless the barriers to market entry are “insurmountable”...).
Finally, I note that AG Szpunar has something of a gift for a readable opinion – following a search on a “popular search engine” I found another recent Szpunar opinion in New Media Online, relating to the Audiovisual Media Services Directive (not an instrument with which I currently claim great familiarity), which delights with the following opening paragraph: 

‘Koń jaki jest, każdy widzi’ (“We all know what a horse is”). Thus read one of the definitions contained in the first Polish encyclopaedia, published in the eighteenth century. (2) The problem of defining an audiovisual media service in the internet context, which is the subject of the present case, might seem similar — intuitively everyone is capable of identifying such a service. However, when it comes to describing it in legal language, it is difficult to find terms which are at the same time sufficiently clear-cut and comprehensive.

For those who like their law Denning-esque, AG Szpunar is certainly one to watch!

Sophie Lawrance

A sympathetic Australian approach to life cycle management and recent CMA guidance on Pharma sector rebates

Our new CLIP of the month comes from one of the antitrust blogs recommended on our sidebar.  A guest contributor on ‘Chillin Competition’ has blogged on a recent Australian judgment which eschews the EU/US trend towards infringement findings in cases concerning life cycle management strategies in the pharma sector.  
In a ACCC v. Pfizer Australia, handed down earlier this year, Judge Flick of the Federal Court of Australia (FCA) held that Pfizer’s adoption in 2011 of a ‘direct-to-pharmacy’ (“D2P”) sales model, along with a rebate accrual scheme, for atorvastatin (Lipitor) in the period immediately preceding patent expiry did not contravene the applicable competition rules.  Attentive readers will recall that Pfizer had introduced a D2P model a few years earlier in the UK, and successfully resisted an application for mandatory interim relief brought by a group of wholesalers including AAH and Phoenix.  The fact that the OFT was already considering Pfizer’s new scheme weighed heavily in the English Court’s unwillingness to grant the relief sought (query whether this would still be the outcome if the case were heard today, given the renewed focus on private actions and the increasing willingness of the courts to grant mandatory interim relief, a topic to which we hope to return soon).  Ultimately, the OFT determined in its Medicines Distribution market study report that it would, broadly, “keep an eye” on things – and there have been no infringement findings on D2P or other forms of limited distribution, which have subsequently seen widespread adoption.
Indeed, just a few weeks ago, the CMA announced that it was closing an investigation into the distribution practices of an unnamed pharmaceutical company.  This case also involved the grant of rebates, and the CMA has given guidance on its approach to this issue (although it is expressed in rather general terms, without any indication as to the features of the particular scheme which raised initial concerns).
Returning to the Australian Pfizer case, it is notable that the case was decided not on the merits of whether Pfizer’s conduct amounted to a breach of the rules, but rather on the basis that Pfizer did not have the requisite market power in the relevant period, due to imminent generic entry.  This approach both accords with recent European Commission patent settlement decisions in Lundbeck and Servier (newly published this week) which find that generic companies represent a source of potential competition even before patent expiry for the purposes of Article 101, and contrasts with the approach to dominance in Servier, which takes no real account of such imminent entry. The FCA’s remarkably sympathetic approach to Pfizer’s life cycle management strategies (“There can be no doubt that Pfizer had to take some steps to combat the competition which it would confront when the atorvastatin patent expired in May 2012”) has – unsurprisingly – been appealed by the ACCC.

The e-Commerce sector inquiry gets under way

Yesterday evening, together with a few colleagues, I attended a seminar on the European Commission's e-commerce sector inquiry, which was launched in May this year.  The presentation was given by Thomas Kramler, who heads the Commission task force running the inquiry.
Thomas provided some interesting insights into the scale and scope of the inquiry.  In the UK alone, some 300 companies have received lengthy questionnaires. The recipients are digital content service providers (e.g. video-on-demand providers), online platforms (marketplaces such as eBay and price-comparison sites) and e-tailers (both online-only ‘pure-players’ and ‘hybrid’ (online and bricks-and-mortar) retailers).  

The inquiry will focus on private (contractual) barriers to cross-border trade, in particular in areas where e-commerce is already widely used such as clothing and consumer electronics. It is hoped that the information gathered will complement other portions of the Commission's 'Digital Single Market' initiative, which will examine public barriers to trade arising from copyright rules, consumer protection laws and the like.

The inquiry will in particular examine contractual clauses which create barriers to passive sales, hinder online sales generally (e.g. bans on sales via online platforms such as eBay or Amazon marketplace) and restrict price competition to the detriment of consumers (e.g. classic resale price maintenance (RPM) clauses and most favoured nation obligations (MFNs)).

Thomas admitted freely that the Commission had not actively investigated vertical restraints in the last decade. However, he indicated that the inquiry was likely to lead to enforcement which may clarify the Commission's approach to developments in distribution agreements which have arisen in response to the huge popularity of online commerce.

On timing, Thomas explained that the Commission is hoping to issue a preliminary report in mid-2016.  Following a public consultation, the Commission’s final report is due to be published in early 2017.

For those interested in more detail about the e-commerce inquiry, I’d recommend reading Sophie and Elisabetta’s recent article on the topic published in Competition Law Insight, which you can access here.  You might also want to take a look at Elisabetta’s Cookie Jar post here and Thomas' slides here.  The European Parliament has also very recently chipped in with its thoughts on competition policy in digital markets with this 80-page report.  There is clearly a lot going on in this space and so we will be sure to follow up with further comment. Watch this space.