The chips are down! The Commission fines Qualcomm for abuse of dominance

The Commission has fined Qualcomm €997 million for abuse of dominance. The Commission found that Qualcomm had paid Apple to use only Qualcomm LTE baseband chips in its smartphones and tablet devices (see here) and that this was exclusionary and anti-competitive. 

Commissioner Vestager has said Qualcomm “denied consumers and other companies more choice and innovation – and this in a sector with a huge demand and potential for innovative technologies”, as “no rival could effectively challenge Qualcomm in this market, no matter how good their products were.

LTE baseband chips enable portable devices to connect to mobile networks. The Commission considers Qualcomm to have had a market share of over 90% between 2011 and 2016 (the period of the infringement). 
 
The Decision centres on an agreement between Qualcomm and Apple in force from 2011 to 2016 under which Qualcomm agreed to make significant payments to Apple. The payments were conditional on Apple not using chips supplied by Qualcomm’s rivals, such as Intel, in Apple’s mobile devices. Equally, Apple would be required to return a large part of Qualcomm’s previous payments if it decided to switch chip suppliers. The Commission also identifies Qualcomm’s IP rights as contributing to the significant barriers to entry in the chip market, reinforcing Qualcomm’s dominance.

The Qualcomm Decision is similar to the Commission’s 2009 Decision to fine Intel €1.06 billion for giving rebates to major customers in return for them exclusively stocking computers with Intel chips – a decision recently remitted by the CJEU to the General Court for further consideration of the ‘as efficient’ competitor analysis (see here and here). 

Applying the CJEU’s reasoning in Intel, Qualcomm sought to justify its rebate arrangements with Apple on the basis of the ‘as efficient competitor test’. However this attempt was rejected by the Commission as there were “serious problems” with Qualcomm’s evidence (see here).

Separately, Apple has also argued that Qualcomm’s dominance may be reinforced by its strategy for licensing its standard essential patents (SEPs) to competing chip manufacturers. Apple is bringing cases against Qualcomm around the world, alleging that it has engaged in “exclusionary tactics and excessive royalties”. In litigation launched in the English Patent Court in 2017, Apple alleges that Qualcomm is unwilling to license its SEPs to competing chip manufacturers, offering only patent non-assert agreements (see here) which could have a foreclosing effect on other chip manufacturers. (We understand that this case is subject to a jurisdiction challenge, due to be heard in the coming months.)

Qualcomm’s patent licensing arrangements are described (by Apple in its pleadings) in the diagram below:

The Qualcomm Decision reiterates the aggressive approach adopted by the Commission to policing rebates given by dominant companies and potential foreclosure effects. Following the Qualcomm Decision, Commissioner Vestager said “[t]he issue for us isn't the rebate itself. We obviously don't object to companies cutting prices. But these rebates can be the price of an exclusive relationship – the price of keeping rivals out of the market and losing the rebate can be the threat that makes that exclusivity stick” (see here). 
 
As litigation and antitrust clouds swirl around Qualcomm’s business model, in a separate case filed in the Northern District of California in 2017, the US Federal Trade Commission has similarly alleged that Qualcomm is using anti-competitive tactics to maintain its monopoly of baseband chips and has rejected requests for SEP licenses from Intel, Samsung and others (see here and here).

In parallel, competition authorities in China, South Korea, Japan and Taiwan have fined the company a total of $2.6 billion in relation to its SEP licensing policies and pricing (see here).

In summary, while the EU Commission fine is significant, and interesting for competition lawyers as it perhaps suggests that the significance of the Intel CJEU judgment may be more limited than anticipated, it is only part of the overall picture for Qualcomm (and for the sector as a whole). Indeed, even with today’s decision, the Commission has not brought its interest in Qualcomm to an end, as it is still investigating a separate predatory pricing complaint which was filed in 2015.  

The cumulative impact of these legal issues (as well as Qualcomm’s rejection of Broadcom’s takeover bid) may have contributed to a fall in Qualcomm’s share price – although Qualcomm had better news from DG Comp recently when its proposed acquisition of NXP was cleared by Brussels on 18 January (see here and here).

Licensing commitments sufficient for Qualcomm to secure NXP takeover green light

On 18 January 2018 the European Commission approved Qualcomm’s proposed $47 billion acquisition of the Dutch semiconductor manufacturer NXP after an in-depth second phase review. Qualcomm and NXP originally announced the deal on 27 October 2016, notifying it to the European Commission on 28 April 2017. The Commission’s Phase II review was initiated on 9 June 2017, following concerns that the merged entity would have a strong market position in a number of different technologies.

The technologies involved

Qualcomm is particularly known for its baseband chipsets which enable mobile phones to connect to mobile communications networks. NXP focuses on different semiconductors. Most notably, NXP manufactures near-field communication (NFC) chips used to enable a wireless link between two devices at close proximities over which data can be transferred, and secure element (SE) chips. SE chips control interactions between trusted sources: for example, used in combination with NFC, they enable mobile payments between a smart phone and a contactless card machine. 

NXP also developed MIFARE, a leading technology used by several transport authorities across the EEA as a ticketing/fare collection platform. London’s Oyster card transport system is one such use example of the use of MIFARE technology.

Competition concerns and remedies

NFC

Both Qualcomm and NXP hold a significant amount of IP related to NFC chips, including standard essential patents (SEPs) and non-essential patents. The Commission was therefore concerned that the increased level of bargaining power of the merged entity would enable it to demand significantly higher royalties in its patent licences. 

To address the Commission’s concerns (and it would appear similar concerns raised by the Korean Fair Trade Commission), Qualcomm offered to carve out NXP’s SEPs and some of its non-essential patents from the transaction. Instead, NXP will transfer these to a third party, who will be required to grant worldwide royalty-free licences to these patents for three years. 

Whilst Qualcomm will still acquire some of NXP’s other non-essential NFC patents, it has committed to grant worldwide royalty-free licences to these patents and not to enforce them against other companies. Interestingly, the Commission’s press release suggests that there is a significant caveat here: this commitment applies “for as long as [Qualcomm] owns these patents”. That implies the possibility of Qualcomm being able to adopt a similar strategy to that of Ericsson in Unwired Planet (see the judgment here and our blog posts here and here) – it could later assign these patents to another entity to monetise under a revenue-sharing agreement.

Interoperability

The Commission considered that the merged entity would have the ability and incentive to degrade the interoperability of Qualcomm’s baseband chips, and NXP’s NFC and SE chips with rivals’ products. This could lead to rival suppliers being marginalised, with smart phone manufacturers choosing only to purchase chips from Qualcomm/NXP.

In order to address this concern, Qualcomm agreed that for the next eight years it would provide the same level of interoperability between its own baseband chips and the NFC and SE chips it acquires from NXP with any corresponding products manufactured by rival companies.

MIFARE

For MIFARE, the Commission was again concerned about royalty levels, concluding that the merged entity would have the ability and incentive to raise royalties and make it more difficult for other suppliers to access MIFARE. It also suggested the merged entity might cease to offer licences to MIFARE altogether.

In response, Qualcomm committed to offer licenses to MIFARE technology and trademarks for an eight-year period, on terms that are at least as advantageous as those available today. The Commission was satisfied that this would enable competitors of the merged entity to continue to compete effectively.

Final thoughts

At the time of writing, the European Commission’s clearance was the eighth of nine mandatory approvals needed, with just China remaining.  

There’s an interesting discrepancy in the length of time the various commitments will run for. Eight years seems to be an extraordinarily long time in an industry driven by continual technological innovations; it also means that rival manufacturers will have some considerable time to think about alternatives to MIFARE and interoperability with Qualcomm chips. 

However, the third party that acquires NXP’s NFC SEP portfolio will be free to begin monetising that portfolio after just three years. Given the increasing use of NFC with contactless payment technologies like Samsung Pay or Apple Pay, and the expansion into other areas such as ‘smart tourism’ (e.g. using NFC tags in art galleries or museums that can show users additional information about an exhibit), there could be plenty of FRAND negotiation/litigation regarding NFC in the future.

It isn’t surprising that the Commission’s concerns centred on licensing royalty rates – this is a complicated, controversial area of law that is still developing. The Commission recently published some guidance on FRAND rates in its SEP Communication (see our blog here) and how royalty rates should be calculated was the key feature of the recent TCL decision in the US (here).

For Qualcomm, currently embroiled in a worldwide dispute with Apple over licences fees for its baseband chips (link), the NXP merger is a sensible move. It will significantly expand what Qualcomm can offer to manufacturers. However, despite regulatory approval being granted, there have been some rumblings of discontent about the value of Qualcomm’s offer (link), and the unsolicited bid by Broadcom to purchase Qualcomm (link) also has the potential to cause some interference with the acquisition. So the Commission’s decision is not quite the end of the story here…

French competition authority fines pharma company for its anti-generic ‘commando’ sales tactics

On 20 December 2017, the French competition authority, the Autorité de la Concurrence (ADLC) announced that it had fined Janssen-Cilag and its parent company Johnson & Johnson €25 million for having delayed the entry and subsequent development of generic alternatives to the drug Durogesic.  The ADLC focused on two distinct types of behaviour:  repeated attempts to persuade the French regulatory body, the Agence française de sécurité sanitaire des produits de santé (AFSSAPS), which were characterised as frivolous and without merit; and a sustained marketing campaign by Janssen-Cilag aimed at undermining the efficacy of the generics before medical practitioners.  

Background.  Durogesic is a powerful opioid analgesic, marketed in France by Janssen-Cilag, a subsidiary of Johnson & Johnson.  It is prescribed in cases of severe pain, including those suffering from cancer and is administered in the form of a skin patch.

Interventions with medical authorities. Following authorisation in Germany of its generic formulation, Ratiopharm sought to obtain mutual recognition across the European Union to enable distribution of its new medicine.  The European Commission gave its approval in October 2007, requiring member states to comply within 30 days.  However, Janssen-Cilag wrote on several occasions to AFSSAPS, requesting meetings and calling into question both the European Commission’s decision and its legal status in France.  Seeking to argue that the generics were not identical to Durogesic, Janssen-Cilag went so far as to question the efficacy and quality of the generic medicine, despite its bioequivalence having already been established.  Janssen-Cilag also raised potential public health concerns, questioning the impact that substitutions could cause to some patients.  This campaign was successful in delaying entry as AFSSAPS initially refused to recognise the generic drug, with authorisation following only one year later in 2008.

Targeted marketing campaign.  Following authorisation, Janssen-Cilag engaged in a marketing exercise which the ADLC found was aimed at casting aspersions on the efficacy and quality of the generic versions with doctors and pharmacists.  Its sales representatives were told to emphasise that generic alternatives did not have the same composition, nor quantity of active ingredient fentanyl as its Durogesic patch.  This involved Janssen-Cilag training a specialist team of 300 sales representatives known as “commandos” and sending out numerous newsletters direct to medical practitioners, supported by statements in the trade press.  In particular, Janssen-Cilag distorted the warning messages that had been issued by AFSSAPS, providing an incomplete and essentially alarmist message.  The campaign also resulted in screensavers installed on doctors’ computers giving a special warning, complete with warning triangles.  The campaign was so successful that a very low flat-rate reimbursement price was imposed by the French public authorities, fixing the price of the generic and the originator at the same low level.

Impact.  The ADLC considered these practices to be very serious, delaying the entry of the generic in France by several months, whereas the ‘smear’ campaign was successful in ensuring a low penetration rate of the generic alternatives even after their launch.  The ADLC report that 12,800 pharmacies, accounting for just over half of all French pharmacies, were subject to direct discussions.  Janssen-Cilag itself conducted a survey to evaluate the effects of its campaign which concluded that 83% of pharmacists had memorised the risks associated with switching between fentanyl products.  In addition, 12,000 French doctors have the screensaver installed on their computers.

Comment.  This is not the first time that the ADLC has fined pharmaceutical companies for defamatory practices, with both Sanofi-Aventis and Schering-Plough being fined in 2013 for similar activities (see here).  The question of misleading statements about product safety has also recently been addressed at EU level in the context of anti-competitive agreements, with Advocate General Saugmandsgaard concluding that an agreement to present scientific information in a misleading or unbalanced fashion is likely to restrict competition by object (more details here – and watch this space for the CJEU ruling due in a couple of weeks).

Nor is it the first time that Janssen has got into hot water over the marketing of Fentanyl – the marketing of this drug in the Netherlands was central to the European Commission’s 2013 decision in which fines totalling €10.7M were issued (the parties did not appeal this finding).

However, whilst there can be little surprise in the ADLC seeking to sanction the behaviour of Janssen-Cilag in the post-launch phase (particularly given the misleading nature of the communications to medical practitioners), its success in delaying entry onto the market in the first place seems to be as much the fault of AFSSAPS as a consequence of Janssen-Cilag’s regulatory interventions.  The case appears very different from the conduct sanctioned in AstraZeneca, where patent authorities had no reason to doubt the factual information provided.  Although the ADLC refers in this case to ‘legally unjustified’ arguments being presented, it also makes clear that the European Commission’s approval was binding on the French authority, something which should have been clear to AFSSAPS.


Online sales bans in the sports equipment sector: the CMA’s Ping decision

In August last year, the UK Competition and Markets Authority (CMA) announced that it had imposed a fine of £1.45 million on Ping Europe Limited (Ping) for breaching the EU and UK competition rules.  The CMA found that Ping had infringed the Chapter 1 prohibition of the Competition Act 1998 and Article 101 of the Treaty on the Functioning of the European Union (TFEU) by entering into agreements with two UK retailers which banned the sale of its golf clubs online.  The CMA chose to apply Rule 10(2) of its procedural rules and addressed the decision only to Ping.  A non-confidential version of the decision was published in December 2017, revealing the UK competition authority’s detailed reasoning for the first time.  

Background. Ping is a manufacturer of golf clubs, golf accessories and clothing.  It operates a selective distribution system in the UK, supplying only retailers which meet certain qualitative criteria. Ping considered that ‘dynamic face-to-face custom fitting’1 was the best way to enhance golf-club choice and quality for consumers, and that such custom fitting could not take place over the internet.  As a result, Ping instigated an ‘internet policy’ which banned its authorised retailers from selling any of its golf clubs online.

The CMA’s competition assessment.  Relying on the CJEU’s judgment in Pierre Fabre, the CMA held Ping’s online sales ban restricted competition ‘by object’.  In the UK authority’s analysis, the ban reduced retailers’ ability to reach customers outside their local geographic areas and to win customers’ business by offering better prices online.  The CMA also relied on Advocate General Wahl’s Opinion in Coty (the CMA’s decision pre-dated the CJEU’s Coty judgment, which we commented on here).  AG Wahl had contrasted the contractual clause at issue in that case (which prevented authorised retailers from selling on third-party online platforms) with more serious restrictions, such as the outright internet sales ban that gave rise to the Pierre Fabre ruling.

Ping had argued that its online sales ban was objectively justified under the competition rules for three main reasons:

  1. The aim of the ban was to promote face-to-face custom fitting, which fosters inter-brand competition by enhancing product quality and consumer choice;
  2. The ban was necessary to protect Ping’s brand image.  Selling non-custom-fitted clubs would result in an inferior product being placed in consumers’ hands, which would damage Ping’s reputation;
  3. The ban enabled Ping to resolve a ‘free rider’ problem by ensuring that authorised retailers had appropriate incentives to invest in custom fitting. It would be commercially unsustainable for retailers to make investments in appropriate facilities if a potential customer could obtain a custom fitting in a bricks-and-mortar store and then buy the clubs online.

Noting that other high-end golf club manufacturers such as Callaway and Titleist did not restrict online sales of custom-fit clubs, the CMA dismissed Ping’s submissions on objective justification.  Whilst the CMA accepted that the promotion of custom fitting was a “genuine commercial aim”, it thought Ping could have achieved this through alternative, less restrictive means.  According to the CMA, the “main alternative” available to Ping was to permit authorised retailers to sell online if they could “demonstrate [their] ability to promote custom fitting in the online sales channel”.2

Ping’s appeal to the CAT.  Ping has appealed against the CMA’s decision.  In its press release responding to the decision, Ping stated: “Our Internet Policy is an important pro-competitive aspect of our long-standing commitment to custom fitting”.  It also argues in its Grounds of Appeal that the CMA was wrong to find that the online sales ban was disproportionate: the CMA’s proposed alternative measures would, in Ping’s view, be impractical and less effective at maximising rates of custom fitting.  The appeal is due to be heard by the UK Competition Appeal Tribunal (CAT) in May this year.

Comment.  The Ping decision is the latest in a line of recent cases in which suppliers have sought to restrict retailers’ ability to sell products over the internet.  As we noted here, the German Bundeskartellamt has taken a particularly dim view of online sales restrictions in a number of decisions concerning brand owners’ selective distribution systems.  The publication of the Ping decision also comes hot on the heels of the CJEU’s preliminary ruling in the Coty case, in which it was held that manufacturers of luxury goods can, in principle, prevent their authorised retailers from selling via third-party online platforms such as Amazon and eBay, provided that certain conditions are fulfilled (see here).

Also of note was the CMA’s decision to set out in an ‘Alternatives Paper’ its provisional considerations of ‘realistic alternatives’ to achieve the legitimate aims identified by Ping.  Whilst the CMA states that the evidential burden of establishing whether the online sales ban was justified was Ping’s and despite the CMA’s assertion that it was not required to do so, it is interesting that the CMA was willing to engage in its own alternatives assessment.

It remains to be seen what the CAT will make of Ping’s justifications for its online sales ban.  In the meantime, however, the CMA’s decision again highlights the competition law risks of imposing an outright ban on internet sales.  Like other national competition authorities, the CMA has frequently emphasised the importance of the online sales channel in intensifying intra-brand price competition.  As Senior Director for Antitrust Enforcement Ann Pope put it in the CMA’s press release of August 2017: “The internet is an increasingly important distribution channel and retailers’ ability to sell online, and reach as wide a customer base as possible, should not be unduly restricted.

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1 Dynamic face-to-face custom fitting generally involves: an initial interview; a static fitting in which the golfer’s basic measurements are taken; the fitter identifying potential club shafts for the golfer; a dynamic fitting, including a swing-test assessment of how the golfer is hitting the ball; purchasing advice; and grip fitting.

2 In particular, Ping could (according to the CMA) require its retailers to display on their websites a prominent notice recommending that customers take advantage of custom fitting; and it could determine that only retailers with an appropriate website providing a range of Ping custom fit club options would satisfy its selective distribution requirements.

USA v. UK – a united approach to FRAND? Comparing the new judgment in TCL v. Ericsson with Unwired Planet v. Huawei

On 21 December 2017, Judge Selna of the US District Court for the Central District of California released a judgment which is likely to be the most significant US FRAND decision yet. In a case brought to end the global dispute between two giants, TCL (the seventh largest manufacturer of mobile phones worldwide) and Ericsson (holder of one of the largest mobile telecommunications SEP portfolios), Judge Selna set a FRAND royalty rate for Ericsson’s 4G, 3G and 2G patents as part of a five year global licence agreement.

The judgment is of comparable length and complexity to last year’s UK Unwired Planet decision (which we discussed here and here). The approach taken by Judge Selna shares a number of similarities with that of Birss J in Unwired Planet, making use of a top-down methodology and comparable licences. However there are also a number of key differences that, if applied in future judgments, could have a significant impact on how FRAND rates are calculated.

Key differences at a glance 


Analysis

Due to the wealth of detail contained in the TCL judgment, we have picked out just a few key points in this article. For a more detailed analysis, we recommend a post by Professor Contreras (here).

Ericsson’s offers: Judge Selna concluded that Ericsson’s offers were not FRAND, but that (as in Unwired Planet) offering a rate higher than that ultimately determined as FRAND was not a breach of FRAND obligations. Interestingly, Judge Selna also explicitly stated that royalty floors proposed in Ericsson’s offers, aimed at ensuring minimum levels of revenue despite the low prices of TCL’s products, were discriminatory and non-compliant with FRAND. 

Top-down Approach: Both judgments made use of a top-down analysis, but in slightly different ways. In TCL, the focus was on the aggregate royalty burden, established by reference to statements about aggregate rates made by Ericsson and a number of other significant IP holders at around the time the standard was adopted. Whereas Birss J considered such statements to be unenforceable statements of intent, Judge Selna noted the role that they played in ensuring adoption of a particular standard (resulting in global use of LTE rather than WiMax for example), and considered it appropriate to tie the aggregate royalty rate for the standard to those rates. 

Having determined the industry total number of essential patents (a considerably lower number than the total number of declared patents, due to the problem of over-declaration, also considered in detail in Unwired Planet), the Judge then established Ericsson’s share of the total royalty rate.  This was cross-checked with an analysis of comparable licences to ensure a FRAND rate – in principle this was particularly important for 4G, where the ex ante statements pointed to a range of aggregate royalty rates (of between 6 and 10%) – but in practice, it was the 3G top down rate which was adjusted as a result of the comparator licences review. In Unwired Planet the opposite approach was taken, determining a rate using comparable licences, and cross-checking against the implied aggregate royalty. 

Expired Patents: When determining Ericsson’s share of the relevant standards, any of its patents which had expired prior to the date of closing arguments were excluded from its share. However, expired patents were left in the number of total SEPs used as the denominator. The judge argued that removing them would unfairly reward those patentees who still had patents remaining in the standard rather than the public.  While the exclusion of such patents was in part motivated by specific considerations of US law (the prohibition on paying royalties on expired rights), there also appears to be a sound economic basis for ensuring that patentees holding later-expiring patents are not over-rewarded for their rights. This is also arguably in line with the recent Commission Communication on SEPs (discussed here) which suggests that the value of technologies declines over time.

Non-Discrimination: In assessing the non-discrimination aspect of FRAND, both judges agreed that licensors cannot discriminate against similarly situated licensees. Judge Selna looked in some detail at what ‘similarly situated’ means and concluded that the basis for comparison must be all firms reasonably well-established in the world market. This excludes ‘local kings’ – firms that sell most of their products in a single country – but includes industry giants such as Samsung and Apple, despite their greater market share and brand recognition. This approach is good news for licensees whose products retail at lower price points, as it means they should benefit from the same level of rates they do.  Judge Selna explicitly dismissed the relevance of competition law (in this case the US Sherman Act) for this assessment – whereas Birss J. applied Article 102 in determining that – if his primary conclusion about benchmark rates was incorrect – Huawei would still need to show harm to competition resulting from any discrimination between it and other similarly situated licensees. (Coincidentally, the same approach to discrimination has recently been endorsed in the IP – albeit not the SEP – context by Advocate General Wahl in Case C-525/16 MEO – Comunicaçoes e Multimédia.)

Multi-mode: The issue of multimode devices was dealt with differently in the two cases. In Unwired Planet, Birss J computed separate multimode rates based on a set of ratios. In TCL, it was implicit that the rates were single mode, but they appear to apply to multimode products.  Notably, the top-down figures established by the Judge were held to be implicitly multimode rates.

Geographical Regions: Judge Selna considered Ericsson’s patent portfolio strongest in the USA, so applied a discounted rate elsewhere. He divided the world into three regions – USA, Europe and the Rest of the World and established a precise discount rate for each region and each standard. This was clearly a fact-specific exercise, and would depend on the particular; while the Judge indicated that it could have been helpful to break the regions down further, he also noted that any royalty regime should be reasonably straightforward.  
 
Compare this to Birss J in Unwired Planet where the world was divided into only two regions – major markets (for countries where Unwired Planet held 3 or more patents) and other markets.  One striking similarity between the two judgments was that both treated China (where the licensees in each case manufactured their products) as a floor for global royalties, allowing the licensors to claim rates on all global sales, even if there is no local patent protection.  In the case of the TCL judgment, this meant that for 3G, Ericsson’s lower patent holdings in Europe compared to China led to the Rest of World rate applying in Europe as well.

FRAND Rates: The aggregate patent numbers and final rates as determined in both cases are set out below:


It’s worth noting that once Unwired Planet’s and Ericsson’s respective shares of the total relevant SEPs are taken into account, the rates in TCL are more favourable to the licensee than those in Unwired Planet. The comparison between the cases is all the more interesting, given the provenance of the Unwired Planet portfolio which was drawn from Ericsson’s.  In Birss J’s judgment, the Unwired Planet portfolio was considered to be representative of a subset of Ericsson’s, while Ericsson’s 4G benchmark royalty rate was held to be 0.80%.  Given that Judge Selna calculated total industry patent numbers of close to double those found by Birss J, the fact that the Ericsson per patent rate in TCL was almost half that found in Unwired Planet is mathematically unsurprising, and points to considerable convergence on other parts of the analysis.

While the TCL judgment may be welcomed by implementers, an appeal is to be expected.  Meanwhile the appeal in Unwired Planet is due to come before the English Court of Appeal in May 2018, so there is no doubt there will be further developments in this field in the near future. Whether the outcomes of those appeals will further align both sides of the Atlantic or draw them further apart is something that we will have to wait to find out.