New Commission interventions target geo-blocking via technical measures and blocking of innovation

Within the past week, the European Commission has issued two new statements of objections on topics of interest for this blog.

The first concerns geo-blocking by computer games companies, including Valve, which operates the ‘Steam’ platform for video game distribution, as well as 5 games publishers.  This case focuses on geo-blocking – bilateral contractual agreements which aimed at, or had the effect of, preventing consumers from making cross-border purchases.  According to the Commission’s press release, two forms of restriction are under consideration:

  • Explicit contractual prohibitions on selling cross-border;
  • Use of activation keys that operate only in a given country – i.e., a technical measure of preventing both active and passive sales in different countries.
This case is in line with the renewed focus on vertical agreements which has been evident in particular since the conclusion of the E-commerce sector inquiry, and follows other recent decisions in relation to Nike, Guess and others.  This is the first case to focus on geo-blocking achieved through technical measures, something that is likely to feature in discussions around reform of the Vertical Agreements block exemption (consultation page here).

The other case is in some ways a more traditional allegation of collusion between competitors.  However, as we discussed in our earlier post on ‘the cartelization of innovation’, the investigation into VW, Audi and BMW has some very unusual characteristics.  Since our last article, the Commission has focussed its case on alleged collusion in relation the development of fuel cleaning technologies: the allegation is that the companies colluded “to limit the development and roll-out of emission cleaning technology for new diesel and petrol passenger cars sold in the EEA” (see Commission press release dated 5 April 2019).  

The Commission points to two particular developments which it claims were delayed: (i) selective catalytic reduction systems for diesel cars and (ii) ‘OTTO’ particle filters for petrol cars.  The exact scope of the conduct under consideration remains somewhat unclear, but it appears that it was addressed at preventing or delaying the new technology from being brought to market.  As we speculated in our earlier article, this may have arisen in the context of exchanges around best practices and agreements approving informal technical or emissions standards for earlier technology.  What is fairly clear is that this case is likely to involve close consideration of the line between acceptable coordination for competitive ends and anti-competitive limitation of innovation.

FRAND in the UK (March 2019 edition): PanOptis takes on Apple; Vestel issues antitrust litigation against HEVC patent pool; injunction granted against ZyXEL

The dust has not quite yet settled on the Unwired Planet litigation saga; Huawei has applied for permission to appeal to the Supreme Court (see our report on the Court of Appeal judgment here).  Huawei and ZTE have also applied for permission to appeal the Court of Appeal’s rejection of their jurisdiction challenge in Conversant.  If the Supreme Court grants permission in both cases, it may well hear them together.  

Although potential further litigation may be required before we know for certain whether parties can have global licences determined in the UK, that has not prevented the emergence of cases raising new FRAND issues. 

PanOptis v Apple

As regular readers may recall, PanOptis purchased the Unwired Planet portfolio shortly before the original Unwired Planet trial.  PanOptis has now brought a claim against Apple before the High Court, asserting 7 different SEPs and seeking either: a declaration that offers it has made to Apple are FRAND; or that the Court settles the terms of a FRAND licence.  PanOptis requests an injunction if Apple does not take a licence on FRAND terms.  

This claim is similar to the Conversant FRAND case also currently before the High Court.  As in that case, the claimant’s offer is based upon the methodology set out by Birss J in Unwired Planet (as to which, see here).  

However, one distinguishing feature of the PanOptis case is the use of a ‘double-barrel’ strategy: the day before PanOptis issued its High Court claim, it also filed a claim against Apple in the Eastern District of Texas.  In the Texas claim PanOptis also asserts 7 SEPs against Apple, and seeks a declaration that PanOptis has negotiated in good faith and has complied with FRAND.  However, unlike in its  claim in London, PanOptis does not allege in the US that Apple has failed to comply with its FRAND obligations and does not request an injunction.  PanOptis also suggests that its US FRAND claim, ‘to the extent necessary to avoid any duplication or inconsistency, should be subordinate to the UK FRAND Proceedings’.

Despite that caveat, it is difficult to see how the two cases can avoid duplication and some potential inconsistency regarding FRAND matters.  Even on its own case, both the English Court and the Court in Texas will be required to assess whether PanOptis has complied with its FRAND obligations.  And, although PanOptis is not seeking an injunction in the US, it is seeking damages “at least in the form of reasonable royalties”.  This seems in  direct tension with the claim for a global licence from the English Court, unless, perhaps, it is argued that different legal principles apply to assessing ‘reasonable royalties’ for the purposes of assessing back damages and ‘FRAND terms’ for a future licence.  It seems likely that Apple will challenge jurisdiction in the US or the UK (or even both).  If it does not, the overlapping issues are likely to multiply.  This concern could be substantially mitigated if the courts revert to the traditional approach of setting national licences.    

Vestel v HEVC Advance* 

This recently-filed case is the reverse of the ‘typical’ FRAND claim brought by an SEP holder. The Courts have to date accepted that cases such as Unwired Planet and Conversant are anchored to the UK through the claim of infringement of a UK patent and for appropriate relief.  By contrast, Vestel has issued a claim against a patent pool and a representative SEP holder from that pool, alleging that they have abused a dominant position. So far as can be established from the papers on the Court file, there is no associated patent cause of action (e.g. for revocation or a declaration of non-essentiality). This marks the case out as different to another brought by a prospective licensee against an SEP holder, Apple v Qualcomm, issued in the High Court in 2017, which did involve invalidity and exhaustion claims (see here and here).   

HEVC is a standard for video compression published by the International Telecoms Union and widely used for high definition broadcasts.  HEVC Advance operates a patent pool on behalf of 19 members (one of which is Philips) that contains at least 256 SEP families comprised of over 2,430 declared SEPs.

Vestel claims that offers made by both HEVC Advance and the representative licensor constitute excessive pricing, contrary to Article 102 TFEU.  Its primary basis for this claim is that another patent pool covering the same standard, MPEG LA, is said to contain a higher number of declared SEPs while offering licences at a lower royalty rate than HEVC.  Vestel also claims that some 1,581 SEPs in the HEVC pool are also in the MEPG pool, to which Vestel has already taken a licence.  Vestel has made a counter-offer to HEVC Advance which it says takes into account the lower rates in the MPEG LA pool and the overlapping patents.  

Vestel also alleges a number of further abuses of dominance, including discrimination, failure to provide sufficient information and the seeking of injunctive relief (although no such relief has been sought in the UK courts).  These issues are advanced under competition law, rather than on a contractual FRAND basis as in Unwired Planet.  We have previously discussed whether CJEU case law on price discrimination is relevant to FRAND licensing (see here), and it will be interesting to see what approach the High Court takes, particularly given any trial may take place after Brexit.  It also seeks a declaration of FRAND terms, and reserves the right to claim damages if the defendants do not agree to enter into a licence on the FRAND terms determined by the Court.  

The competition/abuse of dominance claim goes well beyond the competition allegations raised in defence by Huawei in Unwired Planet (see here).  Vestel is alleging it is an abuse for a SEP holder merely to threaten to seek an injunction, even at a stage before the SEP holder has commenced litigation.  The allegation of a procedural abuse of failing to provide information would also – if made out – be an expansion to the law and would raise interesting issues of policy and of balancing the interests of third parties (existing licensees) against those of prospective licensees.  SEP licences usually contain strict confidentiality clauses, and so SEP holders may find themselves between Scylla and Charybdis: risking breach of confidence actions by licensees if licence agreements are made available to prospective licensees, and risking abuse of dominance allegations like this one if they do not.  

This case therefore raises a number of novel issues to be heard.  As Vestel is a Turkish company, while HEVC Advance is based in Delaware, it is possible that this case too will require complex questions of jurisdiction to be answered before it proceeds.  

TQ Delta v ZyXEL

This case, concerning patents claimed to be essential to the ADSL standard, is already established in the jurisdiction.  To date, the case has involved a fair degree of procedural wrangling, despite the optimistic pronouncement of the Court in a judgment from February this year that: “In relation to global licences for FRAND/RAND cases, the principles have been very clearly set by the Court of Appeal, in particular in Lord Kitchin's judgment in Unwired Planet v Huawei. As a result, hearings ought to be relatively straightforward and relatively simple.

One of the patents in suit has now been found to be valid and essential.  However, it is also due to expire shortly before the FRAND trial.  This unusual set of circumstances forms part of the backdrop that led to an unprecedented decision last month to injunct ZyXEL before its FRAND defence (which is due to come to trial in September) could be heard.  This decision was taken at the point of handing down of the patent judgment, and was based in part on a lack of clarity from ZyXEL as to whether it would take any licence ultimately determined by the English Court.  The judge reasoned that ZyXEL should not be allowed to take the benefit of the shield of the RAND undertaking if it was not prepared to accept the RAND licence.  This was so even though issues contested by ZyXEL as potentially non-FRAND (namely the global scope of the licence) remain in issue in potential UKSC proceedings in Unwired Planet, while at least one other issue (whether the Court can determine a RAND licence for ZyXEL’s parent company, which is not a party to the litigation) has to date not been dealt with to date by the English courts.  Despite this, the Judge made a determination that ZyXEL was guilty of ‘hold-out’, noting also that it had not taken a licence to any other ADSL standard essential patents.

Depending on ZyXEL’s willingness to sacrifice the UK market, this judgment may run the risk of coercing it into taking a licence at rates requested by TQ Delta, in circumstances where these may not be FRAND – something that the European Commission has sought to avoid in its Motorola and Samsung decisions.  On the other hand, once the patent has expired, it remains to be seen whether the RAND trial will have any relevance for either party.

It is likely that this judgment will be subject to an appeal by ZyXEL – it will need to seek permission from the Court of Appeal, as the first instance judge has refused permission. 


* Bristows is instructed for a party in this matter.

Just (Don’t) Do It – Commission fines Nike €12.5 million for restricting cross-border sales

On 25 March the European Commission handed out a €12.5 million (£10.7 million) fine to sportswear company Nike, following findings that Nike had banned traders from selling licensed merchandise across borders within the EEA. The Commission found that Nike had imposed a range of restrictions on retailers, which artificially inflated prices and prevented football fans getting their hands on their favourite teams’ merchandise. 

Background

Nike is best known for designing and selling clothing and accessories bearing its ‘Swoosh’ logo around the world. However, it also trades in ‘licensed merchandise’ – products which feature no Nike logos, only the brand of a football club or federation with whom Nike has partnered. Third-party retailers in different territories then take IPR licences from Nike in order to be able to manufacture and distribute the licenced merchandise.  

In June 2017 the Commission began its investigation into Nike’s licensing and distribution practices, in part prompted by its e-commerce sector inquiry, which had concluded in May that year. 

The Commission’s findings

After a two-year investigation, the Commission determined that Nike’s practices had breached EU competition rules in a number of ways: 

  • Imposing direct measures on licensees prohibiting out-of-territory sales or imposing double royalties on out-of-territory sales;
  • Enforcing indirect measures to implement out-of-territory restrictions, including threatening to end contracts with licensees if they did not comply; 
  • Forcing parties with whom Nike had entered into master-licences to enforce cross-border restrictions via their sub-licences; and
  • Prohibiting licensees from supplying merchandise to customers who might go on to sell it outside the allocated territories. Nike intervened to prevent retailers from purchasing products from licensees in other EEA territories. 

The Commission found that these anti-competitive practices had been in place for a period of 13 years (from 2004 to 2017), and had affected products such as mugs, bags and stationery featuring the brands of FC Barcelona, Manchester United, Juventus and AS Roma, as well as the French Football Federation.  


Nike’s cooperation

In its press release, the Commission notes that Nike cooperated with the investigation beyond its legal obligation to do so. Nike provided the Commission with information which led to the scope of the investigation being widened, therefore including additional merchandise of clubs which might not otherwise have been considered. The Commission also noted that when challenged, Nike acknowledged that its actions had infringed EU competition rules.  As a result of its cooperation, Nike’s fine was reduced by 40%.  Like the consumer electronics RPM decisions (July 2018) and the Guess decision (December 2018), this decision again demonstrates the importance that the Commission attaches to co-operation and an acknowledgement of wrongdoing from the party under investigation.

Comment

This decision follows a string of investigations triggered by the Commission’s recent e-commerce sector inquiry, and provides further evidence that the Commission will not tolerate vertical agreements which jeopardise the integrity of the Single Market to the detriment of consumers. When trying to consolidate their position on consumer goods markets in the EEA, brand owners need to be careful that their agreements with retailers do not impose illegitimate territorial restrictions. 

We may see further Commission decisions in this area in the coming months. When it opened its investigation against Nike in 2017, the Commission simultaneously started investigations into the licensing and distribution practices of both Sanrio and Universal Studios.  Those investigations are yet to be concluded.