Polish Plant Protection Products: CJEU confirms Commission was right to reject investigation

In its judgment of earlier this year, the Court of Justice of the European Union (CJEU) upheld a decision of the European Commission to reject a case involving distributors and manufacturers of plant protection products (PPPs) on the grounds of insufficient EU interest. 

Facts

The facts in the case date back to the 2000s, when Agria Polska, a Polish company involved in the parallel importation of PPPs, claims it was subjected to a coordinated series of wrongful allegations which sought to impugn the legality of its PPPs.  Agria Polska characterised the statements made against it by its competitors (including DuPont, BASF and others) to national authorities and courts as “false” or “misleading”, and the resulting inspections and court cases as “vexatious proceedings” within the meaning of ITT Promedia v Commission.  

In 2010, it lodged a complaint with the European Commission, alleging that the entities referred to in the complaint, had engaged in practices that amounted to infringements of Articles 101 and 102 TFEU. The allegation encompassed the use of customs control procedures which the competitors used to seek to block the import of Agria Polska’s products into Poland.

The Commission declined to open an investigation, finding that that there was insufficient evidence in support of the complaint, and that the resources necessary for the investigation would be disproportionate in view of the limited likelihood of establishing the existence of an infringement. 

Agria Polska’s appeals

Agria Polska appealed the Commission’s refusal to open an investigation, seeking an annulment of the Commission’s decision on procedural and substantive grounds, also alleging that the Commission infringed its right to effective judicial protection under Article 13 of the Convention for the Protection of Human Rights and Article 47 of the Charter of Fundamental Rights.

The General Court (GC) rejected the appeal, finding that the Commission had not committed a manifest error of assessment when it declined to open the investigation. 

On a further appeal, in which judgment was given in September 2018, the CJEU upheld this finding.  According to the CJEU, the entities referred to in the complaint were entitled to inform national authorities of the alleged IP infringements committed by Agria Polska, and to cooperate with the authorities carrying out investigations into Agria Polska. The Court cited the Commission’s viewpoint that the principles on vexatious litigation drawn from ITT Promedia and on the provision of misleading statements from AstraZeneca were not intended to apply to situations in which undertakings informed the national authorities of allegedly unlawful conduct or actions by other undertakings.  The CJEU noted in particular that the administrative and judicial authorities involved in those cases “had no discretion as to whether or not it was appropriate to act on the applications made by those undertakings”; this was contrasted with the position of the relevant Polish authorities involved in the complaints lodged by Agria Polska’s competitors which were able to take decisions on the merits.   

The CJEU therefore upheld the GC’s judgment, declining to annul the Commission’s decision. The CJEU noted that “…it is for the Member States to provide remedies sufficient to ensure effective judicial protection for individual parties in the fields covered by EU law”, and that it is not the Commission’s responsibility to plug gaps in judicial protection left by national courts by opening an investigation where the likelihood of finding an infringement of Articles 101 and/or 102 is low.

Impact

As human rights and competition law continue to brush against each other in the EU courts, it is noteworthy that the CJEU was not convinced by Agria Polska’s arguments. The courts have established that a complainant does not have a fundamental right to a full Commission investigation, particularly in cases where it would not be in the interest of the EU to launch an investigation. 

The CJEU’s approach in Agria Polska also demonstrates the high hurdle that represented by the ITT Promedia line of cases.  It seems that it is particularly difficult to justify an investigation into “vexatious proceedings”; as previous case law has established, recourse to legal action will be considered abusive only in exceptional circumstances.  In the opinion of the authors, the case arguably overstates the distinction between the lack of discretion supposedly held by regulatory and patent authorities in AstraZeneca with the position in this case.  Such authorities are well able, and routinely do, ask questions and seek more information from applicants for patents or marketing authorisations.  Conversely, it understates the impact of multiple litigation proceedings on an undertaking whose competitors are undoubtedly better funded than it.  (There is no doubt either that the parallel trade carried out by Agria Polska represented a disruptive influence on the market, which the competitors would have had an interest in hindering.)  It cannot be excluded a different case could be pursued in future, if, for example, the foreclosure effects were clearer.  Indeed, the case must be seen for what it is – namely, an appeal against a Commission decision not to investigate.  Given the implications for public resources, it is unsurprising that such cases are only rarely overturned.

Case C-37/17 P Agria Polska v Commission, judgment of 20 September 2018.

CLIP of the month: Does orphan drug pricing pose an antitrust problem?

In the USA, a rare or orphan disease is defined as affecting fewer than 200,000 people and more than 7,000 rare diseases have been identified to date. The EU adopts a similar definition and identifies the existence of a similar number of rare diseases (see here). 

Pharmaceutical companies are often reluctant to fund R&D for orphan diseases. As they affect so few people, there is no guarantee that successfully developed orphan drugs will be profitable. The Pharmaceutical Research and Manufacturers of America estimates that 95% of rare diseases do not have approved treatments (see here).

Both the US and EU have therefore sought to incentivise companies to develop orphan drugs. For example, in the US, the Orphan Drugs Act 1983 provides tax credits for clinical research into rare diseases, and the EU’s Horizon 2020 scheme provides funding of around €900 million for collaborative projects related to rare diseases.

Although more than 600 orphan drugs and biological products have now been approved in the US, they are still scarce, and often come with a high price attached. Given the relative lack of competition in this area, it’s no surprise that antitrust concerns have been raised about the potential for excessive prices to be charged.

This month’s CLIP examines antitrust enforcement actions involving orphan drugs in the US. It concludes that there has not been a special focus on orphan drug pricing compared to any other drugs. 

From the European perspective, we’ve noted the attempt by the Dutch foundation for ‘pharmaceutical accountability’ to secure an investigation into orphan drug pricing in the Netherlands (here).  As long ago as 2003, the OFT (as it then was) issued an abuse of dominance decision against Genzyme, in relation to a margin squeeze involving a treatment for an orphan indication. More recently, the question of excessive pricing in the pharmaceutical sector has been a focus across Europe.  The UK’s CMA and CAT looked at it in Pfizer/Flynn (see here), and the European Commission is investigating Aspen Pharma for its pricing practices for cancer medicines (here). 

In this current climate, whether it’s an orphan drug or any other potentially dominant product, pharmaceutical companies need to be prepared to justify their prices in case one of the competition regulators does come calling. 

Unwired Planet v Huawei: Court of Appeal upholds Birss J’s judgment

The keenly awaited appeal judgment in Unwired Planet v Huawei was handed down yesterday. In its unanimous judgment, the Court of Appeal dismissed Huawei’s appeal, confirming Mr Justice Birss’s first instance decision (see previous commentary here and here) on FRAND licensing of standard-essential patents (‘SEPs’). We summarise the key findings below. 

1. Global licensing may be FRAND

The Court of Appeal held that a global licence can in principle be FRAND, and that if such a licence is refused by an implementer, the SEP holder should be entitled to the usual relief available for patent infringement, including an injunction. Agreeing with Birss J that Unwired Planet’s portfolio is substantial in size and scope and that Huawei’s business is global in nature, the Court decided that a global licence is what reasonable companies would have agreed on the facts of this case.

The Court of Appeal disagreed with Birss J on one point.  In the Court’s analysis, Birss J’s finding that there is only one set of FRAND licence terms in any given scenario was at odds with the complexities of patent licensing – and concepts such as fairness and reasonableness did not sit easily with Birss J’s rigid approach. This did not affect the Court’s overall conclusion on the global licensing issue, however. 

Implications

The Court of Appeal’s strong endorsement of Birss J’s approach means that the UK is likely to remain an attractive forum for SEP holders seeking to resolve global licensing disputes.  Nevertheless, the judgment still leaves scope for new issues to be raised: the Unwired Planet saga turned very much on its own facts and on Birss J’s assessment of those facts. The judgment does not mean that every future court-determined SEP licence will necessarily be global: this will depend on the nature of the portfolio to be licensed and the implementer’s sales and manufacturing footprint.  The law in this area is likely to continue to develop as new issues are raised (for example, an appeal of a jurisdiction challenge is currently pending before the Court of Appeal in another FRAND licensing case) and as other jurisdictions continue to develop their FRAND jurisprudence. 

2. Unwired Planet’s offer was non-discriminatory

The Court of Appeal agreed with Birss J that the ‘ND’ limb of the FRAND obligation only requires a SEP holder to offer a rate which reflects the proper valuation of the portfolio to all potential licensees. However, a SEP holder is not prevented from charging less than that benchmark rate if it chooses to do so. Indeed, the Court acknowledged that price discrimination is inherently neither pro- nor anti-competitive, stating that “an effects-based approach to non-discrimination is appropriate”. In cases where discrimination below the FRAND benchmark rate does cause competitive harm, this can be addressed by the application of competition law.

The approach of the Court of Appeal is in line with European competition law, which only identifies anti-competitive discrimination where there is a risk of competitive harm.  Arguably, the ruling at first instance went further, and required actual harm to be proved (the Court of Appeal did not address this point). 

Implications

SEP holders are likely to welcome this flexibility, which may also be beneficial for implementers who are looking to take advantage of a bespoke deal.  But in the context of litigation, implementers may be concerned that the ND obligation now lacks teeth. Nevertheless, prior licences of a particular portfolio are likely to remain of critical importance in any comparator licence analysis under the “fair and reasonable” limb of FRAND (unless they can be sufficiently differentiated, such that they are deemed not to be comparable), so the Court of Appeal’s judgment doesn’t give SEP owners a free hand to license at differential rates.

3. The Huawei v ZTE negotiation framework is not a set of prescriptive rules

The Court of Appeal has taken a pragmatic view, holding that just one part of the Huawei v ZTE framework is mandatory: the obligation on the SEP owner to contact and notify the implementer before starting litigation. The remainder of the framework is said to provide a ‘safe harbour’ – the licensor may stray from it, but in doing so faces risks of infringing Article 102 and being unable to obtain an injunction.

Implications

Whilst the Court has endorsed Birss J’s relatively flexible approach to applying the Huawei v ZTE framework, parties should nonetheless think carefully before straying too far from the scheme established by the CJEU.  Non-compliant conduct may remain high-risk if litigation occurs in the courts of other EU member states.

What next for FRAND?

The High Court’s judgment has been upheld and so the ‘FRAND injunction’ issued by Birss J will now take effect, unless a further suspension is ordered while an appeal to the Supreme Court takes place.  Huawei has already indicated that it may seek permission to appeal.

It remains to be seen to what extent the courts of other countries, including emerging FRAND centres such as China, will sit back and allow the UK courts to play ringmaster on FRAND/SEP issues. Recent guidelines issued by the courts of Guangdong (an important tech centre in China) suggest that global FRAND disputes may also find a home in other jurisdictions.

In any event, FRAND in the UK will continue to be influenced by developments in other countries, whether that is the approach of the US courts (as seen in cases like TCL v Ericsson), or the policies of the European Commission (which published a Communication on SEPs in November 2017), or guidance issued by other authorities such as the Japanese Patent Office (which issued a guide to SEP licensing negotiations in June this year).


SEP holders’ guidelines on IoT / 5G FRAND licensing

The Commission’s SEP Communication was designed to offer guidance on FRAND and SEP licensing. However, as we have noted before, it did not take a position on certain controversial issues such as use-based licences, or whether the FRAND obligation requires licences to be offered to any company that asks for one.  These issues will become increasingly important as the Internet of Things (IoT) continues to develop and more companies at different levels of the supply and distribution chain enter the SEP licensing arena for the first time.  

Earlier this year we reported on the establishment of two CEN-CENELEC workshops, one primarily backed by SEP holders, one primarily backed by implementers, that both seek to produce guidance on industry best practice for SEP licensing. We noted that each workshop was likely to take a different view on these kinds of issues. 

The first workshop, backed by Nokia and IP Europe, has now produced a first draft of its Guidance for licensing SEPs in 5G and the IoT. The draft is available for public review and comments until 13 December 2018. It sets out six principles that should apply in SEP licensing: 

  1. Owners of patent rights which are essential for using standardised technologies (SEPs) should allow access to that patented technology for implementing and using the standard. 
  2. Both the SEP owner and the potential licensee should act in good faith with respect to each other with the aim of concluding a FRAND licence agreement in a timely and efficient manner.
  3. Each party should provide to the other party, consistent with the protection of confidentiality, information that is reasonably necessary to enable the timely conclusion of a FRAND licence.
  4. “Fair and reasonable” compensation should be based upon the value of the patented standardised technology to its users.
  5. A SEP owner should not discriminate between similarly situated competitors.
  6. If the parties are unable to conclude a FRAND licence agreement within a reasonable timeframe they should seek to agree to third party determination of a FRAND licence either by a court or through binding arbitration. 

Taken at face value, these principles may sound uncontroversial.  However, implementers may feel that the devil is in the detail.  One point which is likely to provoke dissent is the question of who is entitled to benefit from SEP licences.  The document observes that there is usually one point or level in the supply chain where a SEP owner will choose to license its technology for a given product or service.  It is suggested that some consensus around this will simplify licensing, reduce costs for all parties and help maintain a level playing field between licensees. In other words, it indicates that ‘licensing to all’ is not required. 

The basis on which royalties are to be calculated is also likely to prove controversial.  In suggesting that compensation “should be based upon the value of the patented standardised technology to its users”, the document does not make clear whether this should include value attributable to the technology’s inclusion in a standard (the EC Communication and previous guidance in the Horizontal Guidelines suggests that such value should in principle not be included).  Other indicators which the Guidelines suggest may be considered include consumer demand, measurable benefits of the patented standardised technology, and the price difference between substantially identical products with and without the standardised technology.  This text suggests that there is indeed an intention to move away from the ‘incremental value’ rule, an issue which has recently been raised as part of the wider, significant debate about the role of antitrust in FRAND in the United States. (See for example, this letter by 77 former government enforcement officials and professors of law, economics, and business to Assistant Attorney General Delrahim, in which they criticise a number of speeches the AAG has made. They suggest that patent hold-up is a serious antitrust concern partly because “implementers are vulnerable to paying supra-competitive royalties based on the entire value of the product, not on the value of the patented technology”; the AAG’s response, supported by a number of other experts, is here.)

The second workshop is yet to publish the first draft of its alternative proposal. However, based on previous positions adopted by the Fair Standards Association (FSA) and ACT | The App Association, it seems likely that it will:

  • Stipulate that a patent owner cannot seek to increase the value of its patents by focusing on value created by downstream innovators and devices.
  • Call for an obligation on SEP holders to license only relevant patents – which may not necessarily be an SEP holder’s entire SEP portfolio.
  • Require licensing to any and all that seek a license.

In short, it is likely to take the opposing view to the first workshop on the key unresolved issues in the interpretation of FRAND.  

If the final products of each workshop are completely opposed to one another, they will not be particularly helpful as guidance to new potential licensees. It may require judicial or regulator intervention to resolve these issues before the full rollout of the IoT and 5G.  It remains to be seen where the first real determination of these kinds of questions will take place. One possibility is the FTC v Qualcomm case in California (discussed here), where the FTC is seeking a declaration that Qualcomm must be prepared to license competing chipset manufacturers. That could provide a persuasive authority on whether FRAND requires licences to be offered to all, although other jurisdictions may of course take a different view.

Global FRAND issues unpicked in Japan Patent Office’s new licensing guidance

We have previously reported on FRAND guidance from other jurisdictions outside of Europe, such as those published in South Korea a couple of years ago (see here), as well as on EU initiatives, such as last year’s Commission Communication (see our comments here).

Earlier this year, the Japan Patent Office (“JPO”) published a “Guide to Licensing Negotiations Involving Standard Essential Patents”, which aims to shed light on key topics concerning FRAND licensing. It provides a useful summary of licensing negotiations and royalty calculations for standard essential patents (“SEPs”), including taking into account the possible implications of the rise of the Internet of Things on future FRAND-based negotiations.

The Guide focusses on the “two aspects of FRAND”: the negotiation process itself, and the terms of the resulting licence agreement. 

For the first aspect, it gives advice on how to negotiate in good faith, from the perspectives of both the patent holders and the implementers of patented technology. It also sets out actions that it suggests are likely to increase the efficiency of FRAND licensing negotiations, including around timing and issues such as the level of the supply chain at which negotiations should take place. Generally, the Guidelines limit themselves to outlining the issues, and are far from prescriptive.  However, the footnotes provide useful examples of cases from around the world that demonstrate how courts have dealt with particular aspects of these negotiations, including Unwired Planet v Huawei ([2017] EWHC 711 (Pat)) and Huawei v ZTE (Case C-170/13 [2015] CJEU), which we have reported on previously (see, for example, here and here).  Indeed, the licensing negotiation methods proposed are closely aligned to the perspective of the Court of Justice.

For the second aspect of FRAND, namely the terms of the licence, the Guide focusses predominantly on different ways of calculating a FRAND royalty, including the “top-down” and “bottom-up” approaches for calculating the royalty rate. It also sets out the advantages and disadvantages of using the smallest saleable patent practising unit compared to the entire market value as the royalty base, a subject that has sparked debate in recent years with the emergence of new technology such as smart phones and connected vehicles. 

Of particular note is the fact that the JPO’s Trial and Appeal Department now provides non-binding advisory opinions in relation to the technical scope of a patented invention. Also, since April 2018 the JPO has been offering opinions to parties in disagreement over the essentiality of a patent. This appears to be in line with an increased emphasis in Japan on arbitration and alternative dispute resolution: in June 2018, it was announced that Asia’s first international arbitration centre specialising in patent disputes would be opening in Tokyo later in the year (see here). 

From the European perspective, the global reach of the Japanese guide is of note: drawing on case law from around the world, it suggests that different national approaches to FRAND can be unified.  For the authors, it is too soon to assume that there is a consistent global approach of FRAND.  Recent announcements from US policy-makers, for example, suggest that the approach to the balance to be struck between licensor and licensee may be changing in a way which differs from that seen in Europe (compare and contrast, for example, Assistant AG Delrahim’s rejection of the role of antitrust in FRAND violations which appears likely to favour licensors, evident desire for balance between licensor and licensee interests in most of the European Commission’s recent statements.

Nevertheless, for those with an interest in FRAND issues, the JPO Guide is well worth reading for an overview of the key considerations for parties engaged in SEP licensing negotiations. The JPO has stated that it aims to keep the Guide updated regularly, with contributions from experts from around the world.  

Request to re-open Glaxo ‘dual pricing’ case rejected by General Court: The end of the road for challenges to dual pricing?

Entering into agreements that erect barriers to parallel exports between EU markets is generally a high-risk endeavour, which is likely to attract the attention of the competition authorities.  Nevertheless, in the pharmaceutical industry the financial stakes can be high – medicines are often sold at very different prices in different Member States, due to the different applicable health policies.  

Relatively low mandated prices in Spain have led a number of companies to devise sales structures which reduced the flow of parallel exports out of the country – in particular, through the use of so-called dual pricing schemes.  Under such schemes, prices charged to wholesalers differ depending on whether the medicines were resold in Spain or exported to other Member States; in some cases this is achieved by selling all products at the export price, and granting rebates to wholesalers where the products do not in fact leave the country.  While not explicitly prohibiting parallel trade, such practices are likely to reduce the financial incentive for wholesalers to export.

GSK introduced such a scheme in 1998, and applied to the European Commission for an individual exemption (under a procedure which has since been repealed).  This application, and a subsequent complaint by the industry body for parallel traders (the EAEPC), has led to what must be one of the longest-running competition cases.  Initially found by the Commission to be restrictive of competition by object, GSK succeeded before the European Courts in showing that the Commission had given insufficient consideration to whether the practice warranted an exemption.  The case was therefore remitted to the Commission for further consideration.  In January 2010, GSK formally withdrew its original application for an individual exemption.  However, that was not the end of the matter, as the EAEPC’s complaint remained live. By this time, however, GSK had changed its practices, so the Commission rejected the complaint and closed its file.  EAEPC persisted, and lodged an appeal.

The General Court Judgment

It is this appeal that has given rise to the most recent development. On 26 September 2018, the General Court (GC) approved the Commission’s stance, effectively putting an end to this case (appeals to the Court of Justice are rare in rejection cases). 
 
The GC judgment demonstrates that while there was still some sympathy for EAEPC’s appeal, the Court was unable to identify any continued Union interest. The Court agreed with the applicant that the previous judgments have generated legal interest in relation to the “analysis of … dual-pricing systems in the light of Article 101 TFEU”.  However, that was not sufficient reason to require the Commission to continue examining the applicant’s complaint. 

The Court held that a “specific and genuine interest” is required to justify use of the Commission resources. Likewise, EAEPC’s contention that GSK’s practices and the Commission’s “inaction” in the late 1990s led to the adoption of dual pricing by other manufacturers such as Pfizer, Janssen-Cilag and Lilly was not accepted as good reason for requiring the Commission to act now. 

The future of dual pricing schemes? 

The relevance of the GC decision for other dual pricing schemes should not be overstated: the rejection of EAEPC’s complaint turns on its particular facts.  Indeed, the fate of another Commission investigation into Spanish dual pricing practices more generally (referred to in the Commission rejection decision and the GC judgment) is unclear (the Commission website shows no record for the case number cited by the GC).  

However, developments have also continued in Spain.  Within the past six months, the Spanish Supreme Court has rejected an appeal by the EAEPC against a lower court rejection of a complaint against Janssen-Cilag’s drug supply scheme, finding that the scheme did not breach competition law.  More recently, the Spanish competition authority closed an investigation into alleged collusion between pharmaceutical manufacturers in relation to the introduction of such schemes in the mid-2000s.  The authority found that the companies’ schemes were the result of changes in pharmaceutical legislation, not of anti-competitive agreements.

Despite the successes for the originator companies, it remains the case that agreements which seek to limit parallel trade within the EU are high risk of being found to restrict competition by object and, as the Glaxo Greece case has shown (see our recent report, here), unilateral conduct may also be caught.  

Of course, from a UK perspective, a no-deal Brexit may make prohibiting parallel exports possible again, but it is unlikely to be possible under any likely successor to the Chequers proposal.  In any event, agreements affecting exports within the European Union will continue to be caught.

CLIP of the month: Strengthening Buyer Power as a Solution to Platform Market Power?

Each month we publish a ‘CLIP of the month’, a publication that we have found to be controversial or thought provoking (if you haven’t noticed this feature before, see above, look to the right of your screen, just below the header!).

This month’s CLIP (available here) comes from two of the CMA’s economists, writing on the dynamics of platform-to-business relationships, and the options for market solutions in the face of calls for greater regulation.  According to the authors, the key is finding a market-based counter-balance to the power held by platforms. The authors theorise that this could come from the collective bargaining power of the platform’s users. 

It is welcome to see individuals from within the competition authorities considering the alternatives to regulation, which could prove difficult in such a fast moving area.  It is also notable that the UK may seek to move in a different direction from many of the EU member states which appear to favour greater regulation.  However, such market-based alternatives may themselves face competition law challenges, given the risks that exist around collective bargaining and exchange of information between competitors.  At least some of these risks are recognised by the authors (and it is worth reading an economist’s perspective on this from David Parker of Frontier Economics, here).   However, without some kind of safe harbour for such discussion across all relevant territories, the competition law risks are likely to remain a significant disincentive to such collective action.  There may also be a problem of timing.  In the case of existing businesses, the incentive and ability to challenge platform market power may be at their highest before true platform market power emerges.  

The role and (potentially) regulation of platforms is likely to remain a key area of debate in competition policy for the foreseeable future.