Partial annulment of Servier decision by the General Court – some good news for pharma innovators at last

The General Court has today handed down its judgment in the long-running Servier patent settlement case.  

It remains a rare event that the European Courts annul Commission decisions under Article 101 and, in particular, Article 102.  In this case, the General Court has partially annulled the 900 page decision.  In doing so, it has – subject to the outcome of further appeals – considerably reduced the range of competition law risks facing pharmaceutical companies.

Of particular note for innovators is the complete annulment of the fine for abuse of dominance.  The General Court has found that the Commission has failed to substantiate the alleged relevant market, and thus wrongly found that Servier held a dominant position in the EU.  

In the Decision, the Commission had held that perindopril, a treatment for hypertension, was a relevant market in itself.  This was despite it being one of a large class of drugs (‘ACE inhibitors’) with an essentially identical mode of action, and in relation to which clinical guidance existed which treated the products as substitutable.  The General Court has held that the Commission was wrong to rely on Servier’s promotional materials to claim that differences existed between the different members of the class of drugs, under-estimated the amount of switching which took place between different ACE inhibitors (in some cases driven by cost considerations on the part of organisations such as Clinical Commissioning Groups in the UK) and attributed too much importance to price in its analysis.  In its decision, the Commission had carried out a so-called ‘natural events’ analysis, which found that the only significant impact on sales volumes was sustained when perindopril generics entered the market.  The General Court has held that this paid insufficient attention to clinical decision-making, something the Commission had explicitly ruled out when considering what was relevant for market definition.

Although the particular market definition in this case is of limited relevance to third parties, the Commission’s failure to demonstrate that perindopril competed only with generics of the same drug has significantly wider implications for competition authorities’ ability to bring future abuse of dominance cases which rely on artificial differentiations between drugs with an equivalent mode of action.  Subject to the outcome of any appeal by the Commission to the Court of Justice, the position should now revert back to that established in AstraZeneca, which focuses on prescribers’ considerations as to the different therapeutic uses of the different drugs.  While a first in class product may still give rise to a dominant position in a period before further similar products come to market, a later drug is likely sit within the same relevant market, and will therefore be less likely to gain a dominant position (subject to market share growth, and specific factors which may indicate that a separate market in fact exists in a given case).  

As well as annulling the Article 102 portion of the case in its entirety, the General Court has also annulled the fine in relation to one of the anti-competitive agreements identified by the Commission, which was alleged to consist of a withdrawal from litigation in the UK in return for the grant of a licence in another Member State.  This annulment will also be welcome news to the pharmaceutical industry, as it may permit greater flexibility for companies wishing to enter into licensing agreements in tandem with settlements.  Provided any licensing agreement remains an arm’s length arrangement, at commercial rates, the risk that this will be categorised as an ‘inducement’ to settle the litigation now appears lower.

We conclude with a welcome recognition from the General Court of the value of patent protection and of patent settlements: “…intellectual property rights are protected by the Charter of Fundamental Rights, to which the Treaty of Lisbon has conferred the same legal value as the Treaties. …As regards patents, … when granted by a public authority, a patent is presumed to be valid and an undertaking’s ownership of that right is presumed to be lawful. The General Court emphasises, lastly, the importance of settlement agreements, since the parties to a dispute should be authorised, indeed encouraged, to conclude settlement agreements rather than pursuing litigation. The General Court concludes that the adoption of settlement agreements in the field of patents is not necessarily contrary to competition law.

Case T 691/14, judgment of 12 December 2018, press release here, full judgment (currently available only in French) here.

MasterCard and Visa MIFfed as the Court of Appeal considers two-sided markets; SCOTUS itself is two-sided (Part 2 – the USA)

Following on from yesterday’s blog on the MasterCard / Visa decision, we’ve also taken a look at how the US is approaching antitrust issues in two-sided markets, with SCOTUS giving its first Opinion on these in the AmEx litigation (originally brought with the DoJ, but continued by only eleven states following the administration change). 

AmEx is a closed loop network, with AmEx holding relationships with Cardholders and Merchants.  In a 5-4 decision considering anti-steering provisions that prohibited merchants from avoiding fees by discouraging AmEx use at the point of sale, SCOTUS found no violation of the Sherman Antitrust Act (upholding the U.S. 2nd Cir. Court of Appeals).  SCOTUS was asked to determine whether the parties had met the burdens in a three step rule of reason analysis (plaintiff must prove anticompetitive effects; defendant must show a procompetitive justification; plaintiff must show that efficiencies could have been achieved through less restrictive means).  

The plaintiffs sought to argue that a market definition wasn’t necessary because they had offered evidence that showed adverse effects on competition.  The majority disagreed with this, and noted that the cases relied on by the plaintiffs for this proposition were horizontal restraint cases. Here, vertical arrangements were at issue, and given that they’re not always anti-competitive, the market definition was relevant.  

The majority held that the relevant market included both sides of the transaction, and it had to be shown that both sides of the transaction were harmed by the provision.  The Court stated that “a market should be treated as one sided when the impacts of indirect network effects and relative pricing in that market are minor”, and divided two-sided markets into two categories:

  1. Two-sided transaction platforms that facilitate a single, simultaneous transaction and are best understood as supplying that transaction as the product (such as those between AmEx Cardholders and Merchants); and

  2. Platforms where the two sides aren’t selling directly to each other (such as newspapers, where users are indifferent to the amount of advertising).

Further, with the first category, evaluating both sides would be necessary to assess competition; only other two-sided platforms can compete for transactions.  Non-transaction platforms often do compete with companies that do not operate on both sides.  Unfortunately for the plaintiffs, their evidence was insufficient as they had only focused on the increase to merchant fees.  This division will perhaps create some debate as to which category a platform falls into, and arguments around how strong indirect network effects are. 

The majority stated that in order to show that the provisions were anticompetitive, plaintiffs should have demonstrated that they increased the cost of credit card transactions above a competitive level, reduced the number of transactions, or otherwise stifled competition.  In fact, the majority found that the provisions were pro-competitive, as they helped maintain a competitor to MasterCard and Visa. 

The dissenting opinion, which included some persuasive points, wanted the US to follow other jurisdictions and take action against high fees charged by credit-card companies to Merchants, viewing the provisions as clearly anticompetitive.  It referred to findings by the District Court, and stated that a market definition was unnecessary because of direct evidence of anticompetitive effects (primarily that AmEx was able to keep increasing fees without losing any large Merchants), but the correct relevant market should have been only the one side – the services are complementary, not substitutes – and that the other side of the market should have come in at the second step of the rule of reason analysis.  This perhaps puts the dissenting justices more in line with the CoA’s approach.   

Dissenting, Justice Breyer further countered the view that the provisions were pro-competitive by stating that “if American Express’ merchant fees are so high that merchants successfully induce their customers to use other cards, American Express can remedy that problem by lowering those fees or by spending more on cardholder rewards so that cardholders decline such requests”.  

Back in the UK, the Merricks collective claim is attempting to show that harm was caused to consumers –not on the flip side of the market, but by Merchants passing on the cost of the MIFs to customers.  Although the CAT refused to allow the action, the appeal is due to be heard later this year.  Whilst there is quite a hurdle to jump in how to ensure consumers receive compensatory amounts rather than token sums of money, if the class is certified, the analysis of effects on consumers and the links between the different markets could make for interesting reading. 

(On a collective action side note…  After two years of build-up, it’s good to see that the first trucks collective claim has started rolling towards certification, and interestingly, is using a special purpose vehicle more typical of litigation in the Netherlands than the UK.)

MasterCard and Visa MIFfed as the Court of Appeal considers two-sided markets; SCOTUS itself is two-sided (Part 1 – the UK)

Whilst the Court of Appeal’s judgment in MasterCard / Visa, and the SCOTUS Opinion in AmEx may seem a little outside our usual area of focus, they are nevertheless decisions that relate to the operation of two-sided markets.  With multi-sided platforms in innovative technological markets, such as Google, Facebook and Uber, increasingly drawing antitrust attention, (see here, and here) there may be some helpful guidance to be drawn from long established industries such as banking and finance. 

This post comes in two parts, with today focusing on the MasterCard / Visa judgment, and tomorrow focusing on the AmEx litigation. 

The Court of Appeal judgment 

Both MasterCard and Visa operate four-party payment schemes:

  • Cardholders contract with an Issuer for a card to buy goods from Merchants;
  • Merchants contract with Acquirers to obtain payment from the Cardholders;
  • Issuers (mostly banks) contract with Acquirers (also mostly banks) to settle transactions.

The Issuers compete for the business of the Cardholders, and the Acquirers compete for the business of the Merchants; but each side is dependent on the other.  The MasterCard / Visa schemes operate as open loop networks, and those participating are subject to various rules – including a requirement to pay fees, including multi-lateral interchange fees (‘MIF’s), that are charged by the Issuer to the Acquirer, and ultimately paid by Merchants in each card transaction.  The MIFs could have been negotiated individually between the Issuer and the Acquirer, but in practice default MIFs set by MasterCard / Visa were used.   

This raised an interesting Article 101(1) question: do the schemes’ default MIFs amount to a restriction of competition by effect?  The European Commission thought so in issuing a 2007 decision against MasterCard in respect of cross-border card transactions, a decision which spawned a multitude of follow-on and standalone actions for damages against both MasterCard and (by analogy given the similarities between their systems) and VISA.  The CAT initially found for the Claimant in one damages action, but the High Court subsequently found for the Defendants in separate actions (MasterCard and Visa).  The Court of Appeal was tasked with addressing these inconsistent outcomes.

The systems themselves operate across three separate markets (an inter-systems market, an issuing market, and an acquiring market), and it was common ground that the relevant market was the acquiring market.  However, arguments raised by the parties (particularly the ‘death spiral’ argument, where MasterCard claimed that if it lowered its MIFs, Issuers would have switched to Visa and the MasterCard scheme would have collapsed) concerned effects on the inter-system market, and the issuing market.  The CoA held that the first question is whether the MIFs restricted competition in the acquiring market. The second question is then whether the MIFs were objectively justified, and at that point, it is legitimate to consider both sides of the two-sided market and the inter-system market. 

The CoA ultimately found that the fees were unlawful, and all three cases are to be remitted to the CAT for an assessment of damages, and a determination as to whether any objective justification applies.  Tomorrow, we’ll set out how the US Supreme Court came to the conclusion that provisions which affected Merchants’ transaction costs were not anti-competitive, with analysis turning on a definition of the market that has implications for all platforms.     

CAT judgment in Pfizer/Flynn: Was the CMA ‘unfair’ in its assessment of Pfizer and Flynn’s prices?

The principal issue is excessive pricing; … the reason for our conclusion is that the judge erred in holding that the economic value of the pre-race data was its competitive price based on cost +. This method of ascertaining the economic value of this product is too narrow in that it does not take account, or sufficient account, of the value of the pre-race data … and in that it ties the costs allowable in cost+ too closely to the costs of producing the pre-race data.

Thus concluded the Court of Appeal some 10 years ago in overturning a High Court judgment identifying an abuse of dominance through excessive pricing, in that case of pre-race data about British horse races.

The chequered history of excessive pricing cases has repeated itself in 2018, with the Competition Appeal Tribunal’s 7 June judgment in the appeals by Pfizer and Flynn of the CMA’s excessive pricing Decision in relation to phenytoin sodium capsules (we’ve previously covered this here, here, and here).   In a blow to the CMA’s ground-breaking case, the CAT has taken issue with the CMA’s analysis of abuse. As a result, it is considering whether to remit this part of the Decision (and consequential findings, such as the penalties imposed) back to the CMA, and essentially let the CMA try again.  

The CAT has succinctly summarised its main conclusions here.  The findings on market definition and dominance have been upheld, but the controversial findings on abuse have been set aside.  This post guides readers through the key points.

What was the CMA actually arguing?

In its Decision, the CMA sought to apply the Court of Justice’s United Brands ‘two-limb’ test for excessive and unfair pricing, and it was on this that the grounds of appeal focussed.  

During the appeal hearing, however, the CMA seemed to place greater emphasis on the comparison of prices before and after the Pfizer-Flynn agreement, perhaps in reliance on AG Wahl’s opinion in the AKKA/LAA case that competition authorities should have flexibility to determine their own framework for assessing prices.  While the CAT acknowledged that significant price increases over time may be a useful indicator of a potential competition problem, and a reason for starting an investigation, this “should not be confused with the test for unfair pricing itself” (439).  This therefore does not seem to be an easy route for the CMA to take on remittal.

The CAT’s analysis of the United Brands test

Taking the CAT’s approach to the two limbs of the United Brands test separately:  

(i) Whether the difference between the costs actually incurred and the price actually charged is excessive 

The CAT did not conclude that facts established by the CMA could not give rise to a finding of excessive prices.  Rather, it was the CMA’s narrow approach to the assessment of excessive pricing which could not support such a conclusion.  The CMA’s use of only a Cost Plus methodology resulted in a price that would have existed under conditions of “idealised competition”, rather than in the ‘real world’.  If the Cost Plus figure was not the normal competitive price, then it was not the right price for the purposes of the United Brands test.  Instead, the CAT should have looked at wider evidence to establish a benchmark price (or range) based on circumstances of “normal and sufficiently effective” competition.  If the Decision is remitted back to the CMA, it may use Cost Plus as part of the methodology, but it will also need to put those theoretical figures in their full market and commercial context.   

As to the benchmark figures themselves, which used the PPRS derived 6% return on sales, the CAT seemed to accept the PPRS was a potentially relevant indicator, but found the CMA placed too much reliance on it – particularly as Department of Health evidence expressed doubts as to its relevance.  The CAT cautioned that the PPRS was intended to apply in different circumstances to those in this case.  

(ii) Whether a price has been imposed which is either unfair in itself or when compared to competing products

The second limb of the United Brands test appears to give regulators two options: the issue here was whether these were genuine alternatives (as the CMA had only considered the first, ‘unfair in itself’), or whether the CMA should have considered both.  The CAT found that, although the CMA did not need to succeed under both to show a price was unfair, it did need to consider whether the alternative would show a price is one that undermines the basis of a finding of unfairness, in particular where a party under investigation has raised the issue.  While the CAT does not refer to the recent Intel judgment of the CJEU, there is a flavour of its ruling here.  

The CMA had determined that there were no products which could provide a ‘meaningful comparison’, but the CAT found that the CMA’s argument to support this was at fault, and it should have considered the suitability of comparators in more depth.  In particular, tablets produced by Teva were around twice the price of the Pfizer-Flynn Capsules; but this price came from an agreement with the Department of Health which reflected the economic value of the Teva tablets.  Even though those tablets were accepted by the CAT to be outside the relevant market as defined, they appeared to be sufficiently comparable to be worthy of more in-depth consideration.  The contrast drawn between the narrow function of market definition and the wider consideration of competitive constraints relevant in considering abuse is an important and sensible contribution to Article 102 case law generally.

The CAT found that the question of the ‘economic value’ of the Pfizer-Flynn Capsules (which the CMA had considered separately) was best addressed in the context of the ‘Unfairness Limb’.   The CMA had found that the economic value did not exceed the Cost Plus price it had calculated, and considered that there were no non-cost factors which served to increase it.  However, the CAT expressed concern that the evident economic value derived from the benefit patients received had been rejected.  Although the CAT acknowledged that patients did only have limited choices, the CAT found that the CMA should still have attempted a qualitative assessment of this benefit.  Assigning a monetary value to this benefit and assessing by how much it should be reduced due to patients’ limited choices is likely to be difficult.    

Findings of abuse set aside

The CAT decided that further assessment of competitive conditions using information beyond the scope of the Decision would be required.  For that reason, the CAT could not make its own findings as to whether there was an abuse by either company.  Instead, it has provisionally proposed to remit the abuse section Decision back to the CMA, but will now fix a further hearing for the parties to address it on this point.  

Given the policy issues surrounding price increases in the pharmaceutical sector, remitting the Decision for more a comprehensive analysis with the benefit of further clarity in a novel area (from the CAT and the CJEU in AKKA/LAA) is probably the best outcome for all concerned – although the recent closure of the regulatory ‘loophole’ that allowed unregulated price-rises perhaps reduces the long-term benefit.  This ‘have another go’ approach was also the outcome in the CAT’s first hearing for a collective proceedings order – another novel area where policy objectives would have been frustrated by an outright refusal.    

There have been immediate knock-on effects: the CMA has indicated that other active investigations it has in the area may now be severely delayed.  The end of the CMA’s investigation into hydrocortisone seemed to be in sight, and it will be interesting to see how the CMA proceeds with that, as well as the Pfizer / Flynn case.  

The CAT’s difficulties in applying the United Brands test are also likely to be of interest to the Commission, given that it has opened an excessive pricing investigation (into Aspen Pharma) – its first of that type in the pharmaceutical industry.

But while the CMA will clearly have its work cut out (assuming the CAT goes ahead with the remittal), it should not be assumed that this judgment is the end of the story for excessive pricing cases in the UK.  

Depression delayed: CMA’s paroxetine pay-for-delay case heads to Luxembourg

On 8 March 2018, the Competition Appeal Tribunal (CAT) gave an initial judgment (see here) in the appeals brought by GlaxoSmithKline (GSK) and a number of generic manufacturers against the Competition and Markets Authority’s (CMA) 2016 Paroxetine decision (see here and here).   As explained further below, the CAT has (in a move which perhaps goes against the prevailing zeitgeist) not reached final conclusions on the appeals, but has rather referred a number of questions to the Court of Justice in Luxembourg.

Background

The infringements identified by the CMA in its Paroxetine decision arose out of three patent settlement agreements made in 2001 and 2002 between GSK and various generic manufacturers of paroxetine.  

Paroxetine is an anti-depressant (selective serotonin reuptake inhibitor “SSRI”), marketed by GSK under the brand name “Seroxat”, which during the infringement period was one of its highest selling products, accounting for £71.6 million (10% of revenue) in 2001.

The CMA’s investigation into paroxetine was the first UK case to grapple with the contentious area of patent settlement agreements which limit generic companies’ ability to bring their own product to market.  The investigation was formally launched by the OFT in 2011 on the basis of information obtained by the European Commission through its pharmaceutical sector inquiry (2009). 

Following a significant further period of investigation, the CMA in 2016 issued a decision fining GSK, Alpharma and Generics (UK) a total of £44.99 million for agreeing to delay the entry of generic paroxetine in breach of Chapter I and/or Article 101 TFEU.  GSK received the largest penalty, being fined £37,606,275 for its parallel infringement of the Chapter II prohibition:

  • The CMA found that between 2001 and 2004 GSK agreed to make payments and other value transfers of over £50 million to generic suppliers of paroxetine; this amounted to a restriction of competition by object and/or effect. 

  • The CMA also found that GSK’s conduct induced generic providers to delay their efforts to independently enter the UK paroxetine market, abusing its dominant position in breach of Chapter II of the Competition Act.

The CAT Judgment 

The essential element of the CAT’s March 2018 judgment is the reference of five issues to the CJEU for a preliminary ruling.  As things stand, the exact text of the questions has not been formulated (and will no doubt be the subject of fierce debate among the parties).  However, the issues referred will relate to the following areas: 

  1. Potential competition: whether the existence of an interim injunction against generic manufacturers was an insurmountable barrier for entering the market.

    The provisional view of the Tribunal was to find that it was not (since, for example, it could have been discharged). However, it decided to refer a question to the CJEU as the question was similar to one raised in Lundbeck’s appeal (see here). This reference raises issues not dissimilar to those at play in the recent Roche judgment of the CJEU, which considered whether potentially unlawful products could be viewed as potential competitors (see here).

  2. Restriction of competition by object: when the strength of a patent is uncertain, does a transfer of value from the originator to a generic of an amount substantially greater than avoided litigation costs, under a settlement agreement in which the generic company agrees not to enter the market with its generic product and not to challenge the originator’s patent, constitute a restriction by object?

    The CAT emphasised a number of points in connection with this question, including a notable recognition that (a) the uncertainty over patent strength means that a possible outcome of the litigation was that the generic challengers would be held to infringe a valid patent; and (b) an outcome of litigation which upheld the patent should not be viewed as a less competitive outcome than the situation where the patent was overturned.

    A second related question was also identified, which seeks to establish whether a settlement comprising a value transfer which also provides some benefits to consumers (in the form of limited supplies of authorised generic products) should also be viewed as restrictive by object. Again, the preliminary view of the Tribunal was that such limited competitive benefits are not sufficient to draw into question the overall categorisation of the agreement as a by object infringement. If that is correct, it is necessarily a conclusion which will have to be considered in detail for any specific patent settlement agreement, and suggests that a blanket ‘by object’ approach will not be warranted.

  3. Restrictions by effect: in order to show a restriction by effect is it necessary to establish that the counterfactual would have been more competitive? The Appellants argued that the CMA’s Decision did not sufficiently consider the potentially pro-competitive effects of GSK’s agreements with generic manufacturers, for example the savings to the NHS compared to the situation where no authorised generics were on the market.

    The CAT also started to grapple with an issue which has been underplayed in the European decisions to date, namely the relevance of the outcome of the underlying patent litigation. If one realistic outcome of that litigation was success for GSK, the approach proposed by the CMA would be to reduce the test for identifying effects to “the probability of a possibility”. On the other hand, the CAT did not seem to acknowledge the risk of creating a situation where an agreement is considered restrictive of competition by object yet does not possess the requisite degree of probability for an effects finding that is not made out. This is surely an issue that will have to be fully played out before this, and similar cases, are finally resolved. (Damages litigation in relation to patent settlement agreements is likely to bring this issue to the fore, even if the CJEU elects to side-step the question.)

  4. The correct approach to defining the relevant product market: is the relevant product market paroxetine or all SSRIs? While the Tribunal supported the CMA’s finding of dominance on the basis of a market limited to paroxetine, it criticised its reasoning. It considered the CMA to have taken an overly narrow approach to market definition, based on the impact of generic entry on the price of paroxetine - following the Commission’s ‘natural events’ approach used in its AstraZeneca Decision (2005) (see here). However, the CAT supported the view that from the time when there were potential generic entrants, the market was limited to paroxetine and its generics. It recognised that this preliminary view, which suggests a significant change in the relevant market over time (despite no suggestion that the view of prescribing professionals was subject to a similar change) was a departure from existing case law. In the authors’ view, this approach will lead to legal uncertainty and, more importantly, inappropriately substitutes an analysis based on perceived competitive constraints for an assessment based principally on objective demand factors. As the CAT itself notes, this approach would suggest successful drugs will almost always be found to constitute a distinct market at least from the time when generic entry becomes likely. As the Tribunal notes, this approach would amount to a material change to the “IP bargain” which “might adversely affect the economic purpose of patent legislation”.

    Nevertheless, in making the reference on this point, the CAT has flagged some significant issues which should weigh in the CJEU’s eventual analysis.

  5. Abuse: are potential benefits to the NHS relevant to the assessment of whether GSK had abused a dominant position by entering into the agreements?

    The final question on abuse is limited to an allusion back to the questions referred in relation to the object and effect of anti-competitive agreements. The central issue is again the question of whether the limited pro-competitive benefits derived from the presence of the generic companies as distributors of an authorised generic product are sufficient to undermine the main finding as anti-competitive effects.

Although the judgment is provisional in nature, there is much to absorb. We will report further when the agreed text of the questions to be referred has been published.

The BKA’s Facebook investigation: new frontier or regulatory overreach?

At the end of 2017, the German competition authority (BKA) provisionally concluded that certain Facebook polices in relation to users’ data are an abuse of its dominant position in the German market for social networks.  It published an accompanying position paper

The BKA’s provisional dominance finding takes into account Facebook’s 30 million monthly users in Germany (with 23 million using Facebook on a daily basis), as well as the allegedly high barriers to entry for new social networking platforms (a point to which we return below).  

It considers the terms and conditions Facebook imposes on its users to be abusive, requiring them to choose between accepting “the whole Facebook package”, including an extensive disclosure of personal data, or not using Facebook at all. 
 
Specifically, the BKA takes issue with the requirement for users to accept Facebook’s right to collect data from third party websites: data which is made available to Facebook by operators that have embedded the Facebook ‘like’ or ‘login’ options.  Data is collected by Facebook even where users do not click on such options, and is then associated with the user’s Facebook account.  According to Cliqz, Facebook’s reach may stretch to over 25% of all websites. 

The BKA considers that users could not meaningfully consent to Facebook’s data processing requirements, as they have no alternative but to consent if they wish to access Facebook’s platform.  The BKA characterises this as "exploitative business terms”. 

As we have previously noted, the investigation is a test case on the interplay between big data, consumer protection and competition law (here and here). But is this investigation an opening salvo in a new frontier for competition enforcement, or more of a modish dalliance with the hipster zeitgeist?

It certainly concerns an unusual alleged form of abuse, since it does not appear to depend in any meaningful sense on Facebook’s dominance (save perhaps in the extent of the data collection).  Nor does it readily seem to fulfil the classical requirement of an abuse which uses “methods different from those governing normal competition [which …] has the effect of hindering the maintenance of the degree of competition existing in the market or the growth of that competition” (Case 85/76, Hoffmann La Roche).

It is not uncommon for investigations which challenge the boundaries of antitrust to be relatively clear about the potential harm to competitors, but much less clear about the harm to consumers or the competitive process.  This case is rather the converse – with its most controversial aspect perhaps being the BKA’s theory of consumer harm, which is based on users’ loss of control of their data: “Facebook offers its service for free.  Its users therefore do not suffer a direct financial loss from the fact that Facebook uses exploitative business terms.  The damage for the users lies in a loss of control: they are no longer able to control how their personal data are used”.  This theory necessarily assumes that users are sufficiently tied into the platform to be unwilling or unable to ‘click away’ and select an alternative messaging service.  Indeed, in Facebook’s public statement about the recent development in the BKA’s investigation, it strongly emphasised its lack of market power, which is both a pre-condition for any abuse finding and in this case is closely tied to the nature of the abuse itself.

The BKA’s position paper seeks to redress this apparent focus on consumers, noting the high economic value of the data gathered by Facebook, and its relevance for targeted advertising which in turn makes Facebook more attractive to advertisers, a concept referred to as “identity-based network effects”.  The interest in online advertising is of course not limited to the BKA, but is an increasingly hot topic in competition policy generally – see for example the ongoing French competition authority sector inquiry (see here and here). 

It is also questionable how the case can be reconciled with the Court of Justice’s more orthodox position in Case 238/05 Asnef-Equifax (here): “any possible issues relating to the sensitivity of personal data are not, as such, a matter for competition law”.  The BKA’s answer will have to be that its investigation does not relate to the sensitivity of personal data “as such”, but rather to Facebook’s use of the data.

In terms of next steps, Facebook can defend its positon and/or offer solutions.  A final decision in expected in the summer.

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).

Economical with the truth? When providing misleading information to authorities might be an object infringement

One of the more intriguing Opinions to be given by an Advocate General recently came out in late September (Case C-179/16, F. Hoffmann-La Roche and Others v Autorità Garante della Concorrenza e del Mercato (AGCM), Opinion of Advocate General Saugmandsgaard Øe delivered on 21 September 2017). 

 It is full of interesting observations on market definition in the pharma sector; the distinction between object and effect; how to look at the question of competition between licensors and licensees under the Technology Transfer Regulation; and how to assess whether a restriction of competition exists. We will be writing about these (and more) a bit later, but thought that in the meantime those of you who are particularly interested in Life Sciences might want to take a look at our sister blog On The Pulse. A short article has been posted there which briefly summarises the Advocate General’s views on whether there is a duty on pharma companies under Article 101 not to agree to provide information which is objectively misleading to the regulatory authorities. In this instance the information found to be misleading related to the relative safety of two products, one of which was authorised to treat ophthalmic conditions and one of which was not, but which was being prescribed off-label – so quite unusual circumstances (although perhaps a situation that could be expected to arise more in future, as second, third and fourth medical uses become the norm).

You may remember that a similar legal issue has already been discussed under Article 102 in the AstraZeneca case (see here and here) where dominant companies were found to be subject to a duty to act transparently when dealing with the patent authorities. The extent of the duty was somewhat modified by the CJEU, but the obligation to provide all relevant information, and to clarify information which subsequently turns out to be incorrect, still exists. It will be interesting to see whether the CJEU follows the Advocate General in his approach to identifying a similar duty under Article 101, and whether the Advocate General’s expansive reading of when information may be misleading is approved by the Court.

Pat Treacy

Licensing of Latvian collecting society prompts CJEU to provide greater clarity on how to determine excessive pricing

Last week the CJEU released its judgment on excessive pricing that could prove of interest to many of our readers.

In 2013 a dispute arose between the Latvian Competition Council and the AKKA/LAA, the Latvian equivalent of the PRS, responsible for licensing the public performance of musical works and collecting the resulting royalties. AKKA/LAA, a monopoly organisation, was fined for excessive pricing (and thus an abuse of a dominant position under Article 102 TFEU) but took this ruling to the courts. In finding that the collecting society had engaged in excessive pricing, the Latvian competition authority had made direct comparisons with prices in the neighbouring states of Estonia and Lithuania and found that the rates applied in Latvia were two to three times higher than those applied in the other two Baltic States. The authority also made a comparison to the rest of the EU on a purchasing power parity (PPP) basis. On a reference to the CJEU, the Court was asked to rule on several important questions relating to this assessment.

First, the CJEU dealt with how to make valid comparisons in assessing the imposition of unfair prices. The Court ruled that such comparisons are valid, provided that the relevant Member States are selected according to ‘objective, appropriate and verifiable criteria’ and that the comparison is made on a ‘consistent basis’. Such criteria could include factors as concrete as GDP per capita, or as loose as ‘cultural and historical heritage’. Notably, the Court held that a comparison cannot be considered to be insufficiently representative merely because it takes a limited number of Member States into account. Whilst such a clear statement on the legal position is welcome, recent case law has shown that agreeing objective criteria by which to select comparables is not trivial. For example, in the Unwired Planet litigation (see here), in attempting to agree a FRAND rate for a licence in the telecommunications sector, there was much debate over which licences were the most comparable. 

Second, the CJEU dealt with the circumstances in which prices would be considered excessive. The Court ruled that there is no minimum threshold, but instead that Article 102 will bite where a difference in price is ‘both significant and persistent on the facts’. Looking at the growing number of actions against pharmaceutical companies for excessive pricing, most notably the Commission investigation into Aspen (reported on in August), a key question remains as to what amounts to a significantly and persistently higher price. An obvious starting point, now validated by this ruling, is a comparison with other Member States, but with so many different national healthcare and regulatory systems in place in the EU this may not be straightforward.  

Overall, this decision provides some welcome guidance, but there still remains plenty to ponder!

The CJEU’s Intel judgment – First thoughts and some predictions

Today’s Intel judgment from the Court of Justice does not strictly concern the Competition Law/IP interface.  However, it is a case which has considerable interest for potentially dominant companies, as well as a strong technology thread. 

At the basis of today’s judgment is the European Commission fine of €1.05bn, imposed on Intel back in 2009, and upheld by the General Court in 2014, for abusing a dominant position by granting exclusivity rebates to customers.  
 
In brief, the CJEU has today held that the General Court did not sufficiently analyse all of Intel’s arguments that its conduct did not foreclose competitors. The General Court’s failure to analyse the results of the ‘as efficient competitor’ (AEC) test was a particular focus of the criticism. The CJEU has therefore remitted the case to the lower court for further consideration on the central abuse of dominance question.  

Much ink will no doubt be spilled in analysing this judgment, but for now, the points below seem to be key:

  • Relevance of ‘as efficient’ competitors. The Court emphasises that Article 102 applies when conduct foreclosure of “as efficient competitors”; in other words, the provision is not intended as a tool for protecting entities which lack the ability to compete effectively and which are therefore likely to be less attractive to consumers.  
Strictly speaking, the CJEU’s remittal to the GC only requires it to look again at the AEC test because the Commission had in fact carried out such a test, and the GC had not responded to all of Intel’s arguments about it (143-144).  However, the fact that the Court embraces a reference to “competitors considered to be as efficient as [the dominant company]” within its general legal framework (133, 136) suggests that it will not be easy for competition authorities (or indeed private action claimants) to walk away from this test. This is mirrored in the Court’s description of the abuse finding which must be reached before an assessment of objective justification can take place (140).

  • Form vs. effects. On a first read, the judgment is a shot in the arm for effects- rather than form-based analysis (136-140).  On this reading, the mere fact that an exclusivity rebate exists is not enough in itself to establish anti-competitive foreclosure. The extent of dominance plays a role here, as well as the market coverage and duration of the practice (both the market coverage and duration were considered by the Advocate General to be ‘inconclusive’ in themselves).  
However, there are a couple of stings in the tail.  First, to avoid a formalist approach, a company under investigation must adduce evidence during the initial investigation to show that its conduct was not in fact capable of affecting competition (138).  Past cases (e.g. AstraZeneca) suggest that this evidence should be contemporaneous with the conduct.  Second, evidence of a strategy to exclude will be considered relevant (139).  While case law establishes that a company’s intention is less relevant than the objective effects of the conduct, it seems to us that clear evidence of an anti-competitive strategy will make it much more difficult to support an argument that the conduct was incapable of affecting competition. 

It’s perhaps too early to predict what impact this judgment will have on future cases – not least because a further referral back to the CJEU in this case remains possible.  However, a couple of possible consequences are:

  • Reduced options for formalistic short-cuts in establishing infringement – arguably this is of greater relevance in the private litigation context, given that competition authorities have tended to carry out extensive analysis of effects as a fall-back (or have closed cases where such evidence cannot be established, as with the CMA’s recent decision on impulse ice creams).
  • Again in the private litigation context, the practice of splitting questions of dominance and abuse into separate trials may not be the best solution for conduct of this kind, given that the degree of dominance may affect whether the conduct is in fact anti-competitive or not.
As for Intel’s fate when it comes back before the GC, all bets are off.  But given the CJEU’s indication of the significance of evidence of an anti-competitive strategy, we wouldn’t like to bet against a further confirmation of the Commission’s original conclusions…