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.

CLIP of the month: What is the best response to higher prices in the pharma sector?

Pricing issues in the pharmaceutical industry continue to keep European competition authorities busy. From the UK excessive pricing case involving Pfizer and Flynn (which has been remitted to the CMA following appeal – see here and here), and the Italian Aspen case (see here and here), to the European Commission’s continuing Aspen investigation (see here). Indeed, excessive pricing in the pharma sector was one of the topics discussed last week at the 130th Meeting of the Competition Committee of the OECD. The briefing paper for that session is our CLIP of the month.

The OECD paper provides a useful overview of recent competition law enforcement relating to excessive pricing in the pharma market, noting that such cases generally meet the stringent requirements developed in academic literature for the bringing of such cases: the presence of significant market power and high and durable barriers to entry, in scenarios where intervention will not adversely affect innovation, and where alternative regulatory intervention is not possible/inappropriate. In particular, the paper notes that each of the recent cases in Europe relates to:

  • medicines that have long been off-patent meaning that there were not R&D and investment recoupment justifications for high prices, nor concerns with interfering with innovation;
  • medicines which are essential to patients, and for which there was no prospect of timely market entry of alternative products (either because of supply constraints, the regulatory framework, or the limited size of the market); and
  • price increases which were sudden and significant, in respect of products that had long been in the market.

The OECD paper also notes that regulatory intervention in those cases was perceived to be unable to provide an appropriate, or at least timely, response to the price increase. Indeed, in light of the specific market and regulatory conditions, the stringent requirements for excessive pricing cases are more likely to be satisfied in the pharma sector. However, the OECD paper recognises that such cases are unavoidably fact-specific, operate ex post, are subject to high error risks and costs, and rarely set out bright-line guidance on how to set accurate prices. It therefore suggests that competition authorities should consider deploying other tools at their disposal including market studies, regulation, and joint initiatives with sectoral regulators. 

This is not the first we have seen of calls for broader methods for dealing with higher prices in the pharma market. Last year we reported on a recommendation by the Dutch Council for Public Health and Society for the government to use compulsory licences when a medicine is priced too high, or above a “socially acceptable price” (see here). However, there have not yet been any reports on the Dutch government’s response to that recommendation. 

In the UK at least, it seems that the CMA will not be abandoning its traditional competition tools for dealing with excessive pricing. In its contribution to the OECD meeting it states that new specific regulatory regimes are not always preferable to antitrust enforcement, as legislation takes time to implement and is generally fails to address the historic harm caused by higher prices. The CMA also emphasises that excessive pricing cases are important as a matter of policy, given that “[e]nsuring consumers are not exploited by unfairly high prices is at the heart of antitrust enforcement”. 

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).


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.  

FRAND in the UK (May 2018 edition): Unwired Planet appeal; Apple v Qualcomm

This week has seen the English Court of Appeal hear Huawei’s appeal of the FRAND and remedies judgments issued last year by the High Court in the Unwired Planet litigation (see our reports here and here, and a more detailed analysis here).

Huawei’s appeal spans three main arguments:
 
  • The High Court should not have determined FRAND terms, including rates, for territories other than the UK: it was mistaken in holding that there can only be one set of FRAND terms in any given set of circumstances and erred in finding that this meant that the only FRAND licence was global.  
  • The Judge was mistaken to decide that the non-discrimination (ND) limb of FRAND allows a standard essential patent (SEP) holder to charge similarly situated licensees substantially different royalty rates for the same SEPs.
  • The Court should have found that Huawei had a defence to Unwired Planet’s injunction claim under Article 102 TFEU, and by application of the CJEU’s ruling in Huawei v ZTE: the Court was wrong to hold that the steps laid down by the CJEU in Huawei v ZTE were discretionary factors rather than mandatory conditions.
 
As well as seeking to rebut these points, and uphold the first instance decision, Unwired Planet is disputing:
 
  • The first instance finding that Unwired Planet held a dominant position (despite an acknowledged 100% market share in the market for the licensing of SEPs owned by Unwired, and the admitted indispensability of the infringed SEPs).
  • The decision that its unusually worded injunction claim was in fact a claim for a prohibitory injunction in the sense contemplated by the ruling of the Court of Justice in Huawei v ZTE.  (Unwired had claimed an injunction “save insofar as the Defendants … are entitled to and take a licence to the Declared Essential Patents on FRAND terms (in accordance with the Claimant’s undertakings and the ETSI IPR Policy) and insofar as the Claimant is and remains required to grant such a licence”.)
 
Meanwhile, the English court has this week adjudicated on the summary judgment claim in Apple v. Qualcomm.  (See here for our summary of the original scope of the case; Apple supplemented its claims against Qualcomm shortly before the March hearing to add a follow-on case based on the European Commission abuse decision – as to which, see here.)
 
Unlike in the recent Conversant v. Huawei & ZTE decisions, which confirmed that the English court had jurisdiction to hear a global FRAND claim at the remedies stage of a patent infringement action (although also granted permission to appeal that decision), in Apple v. Qualcomm, the High Court declined to allow Apple to bring its case alleging breach of Qualcomm’s FRAND undertaking.  The difficulty stems primarily from the attempt to use the UK Qualcomm subsidiary – which does not own relevant patents, and did not give FRAND undertakings – as an anchor defendant for a claim based on FRAND declarations given by its ultimate parent company, Qualcomm Inc.  The Judge, Morgan J, held that the reference in clause 6.1 of the ETSI IPR Policy to “the owner” of SEPs did not mean that affiliates of the owner should be required to comply with the ETSI FRAND undertaking.  Such an obligation would apply only if such affiliates themselves also owned IP to which the undertaking directly applied (e.g. other patents within the same family).  The Judge did not consider his ruling to be in any way inconsistent with Birss J’s ruling in Unwired Planet.  He therefore granted Qualcomm ‘reverse summary judgment’ against Apple’s claim, preventing Apple from continuing to advance this case (subject to the outcome of any permitted appeal).  
 
Apple had also brought a number of related claims, including for patent revocation/non-infringement and exhaustion.  These have been allowed to proceed (but arguably do not address the central dispute between the parties).  However, other issues relating to Qualcomm’s licensing practices were held not to meet the jurisdictional gateways, and not to be sufficiently closely related to the patent claims.  Apple’s competition law damages case, including a claim that Qualcomm charged “supra-FRAND royalties” also hangs in the balance – while the Judge was not concerned about similar US proceedings, he has expressed concerns about whether loss was actually suffered by the claimants in the jurisdiction, and has permitted Qualcomm to adduce evidence on this point, to which Apple may respond.
 
The judgment of Morgan J shows that the English court is alive to the need to allow only appropriate cases to proceed, but also contains valuable guidance on how future claimants can improve their chances of passing through the relevant jurisdictional gateways. 
 
We will report in due course on the outcome of the Unwired Planet appeal – judgment is expected before the Court’s August break. 

The competition law issues of the CRISPR patent pool

CRISPR-Cas9 is heralded as a revolutionary gene editing technology that is regularly hitting the headlines for both its scientific promise and fiercely fought patent wars. Our colleagues have written extensively on these aspects (see here and here), but in this blog, we focus on the competition law issues which surround the growing trend for the creation of patent pools in the life sciences sector.

The creation of the CRISPR patent pool was announced last spring by MPEG LA, an organisation well-known for creating patent pools for consumer electronics. Thus far, only the Broad Institute has publically revealed that it has submitted patents for evaluation.

Patent pools can be subject to anti-trust scrutiny. Both the European and US competition authorities have provided guidance on this issue – see section 4.4 of the European Commission’s Technology Transfer Guidelines and section 5.5 of the US DOJ’s IP Licensing Antitrust Guidelines. These guidelines recognise the pro-competitive benefits of patent pools which can help integrate complementary technologies, reduce transaction costs, and limit cumulative royalties. In this case, there appears to be a clear pro-competitive benefit in offering a single licence for CRISPR technology as there currently exists a complex web of relevant patents that is growing by around 100 new patent families each month. 

Having said that, the competition authorities on both sides of the Atlantic also identify a number of competition law risks – namely, the risk of collusion, price fixing or foreclosure of alternative technologies. Indeed, the European Commission has previously investigated a patent pool for non-invasive prenatal testing (see our commentary here). The authorities’ guidance suggests principles which can reduce this risk. In particular, the European Commission suggests that:

  • Participation (as a licensor or licensee) should be open to all.
  • Only complementary technology should be included (inclusion of substitute technology is likely to infringe competition law). 
  • Independent experts should be involved in the creation and operation of the patent pool.
  • Safeguards against the exchange of sensitive information should be in place.

For the CRISPR pool, MPEG LA has made an open call for patents, and will evaluate each patent before it is accepted. Its involvement, as a separate licensing body, should play an important role in safeguarding against the exchange of sensitive information. Looking ahead, MPEG LA may reduce the competition law risk by reviewing the pooled patents regularly, and considering licensing parts of the pool separately. In the life sciences sector, strands of research can head off in entirely new directions such that only half of the pool may remain relevant. 

There are also commercial concerns for the CRISPR pool to overcome. Whilst technology and telecommunications pools are common, life science pools, such as the Golden Rice and Medicines Patent Pool, are rare and often not profit driven. One reason for this may be the prevalence of exclusive patent licensing in the sector, as well as the relative lack of interplay between technologies in traditional small molecule medicines. 

This leaves MPEG LA with a tricky tightrope to walk. Having the Broad Institute on board is a promising start, but UC Berkeley, holding the patent to the underlying technology, must also join for the pool to be commercially successful. Beyond these two key players, the selection of patents to include will require some tricky choices: too few patents and the pool fails to achieve its aim of reducing transaction costs and may deter some investment by potential licensees altogether; too many and patent holders may be concerned about the returns they will achieve, and be wary of making the necessary large investments in further research.

We’ll be looking out for any further developments and will post them to the CLIP Board as and when they occur.

Excessive pricing spreads to Denmark - a cautionary tale about exclusive licensing

Following cases in Italy, the UK and before the European Commission, the Danish authorities have reached an abuse of dominance finding against CD Pharma (CDP). 

CDP was found to have imposed price increases of up to 2,000% on supplies of Syntocinon, without any justification in terms of increased costs. The product, used in connection with childbirth, is long off patent. 

Two points mark this case out from other excessive pricing investigations.

First, this is as much a cautionary tale about exclusive licensing as it is about excessive pricing. In acquiring an exclusive licence to what appears to be a ‘must stock’ product for hospitals CDP acquired a dominant position, leading to the risk of abuse. 

While exclusive licensing between non-competitors generally does not raise competition concerns, it is notable that Commission guidance refers specifically to the justification for exclusive licensing as the bringing of a new product to market. In the case of an old product which does not require further development, the basic justification for the exclusivity appears to be missing. In this case, if competitor Orifarm had been able to approach the manufacturer of Syntocinon rather than having to purchase from CDP as the local distributor, there would have been a greater chance of price competition on the Danish market. 

Second, the Danish authority is alive to the wider (umbrella) harm caused by the pricing strategy which extend beyond the period of direct infringement. The press release refers to the risk of permanent price increases - in particular where products are procured through periodic tender processes. This could be a significant point in any attempt by the Danish authorities to seek damages in  respect of the abuse. 


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).

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

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

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

Key differences at a glance 


Analysis

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

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

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

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

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

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

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

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

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


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

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

Commission Communication on SEP Licensing – where has the Roadmap led?

Following around a year of lobbying and intensive debate, the Commission has today (29 November 2017) published its Communication on ‘The EU Approach to Standard Essential Patent Licensing’.  

As we reported back in April when the Commission published its initial ‘Roadmap’ for this area, the Communication is intended to address some of the uncertainties in SEP licensing left unresolved following Huawei v ZTE (see e.g. here), and to drive progress for the EU-wide adoption of 5G.  

And as we predicted a couple of months ago, the intensity of the debate surrounding the key issues in SEP licensing means that the Communication is far from overly prescriptive. 

The Communication will take a little while to digest in full, but for now the headline points are:

  • The current declaration system needs modernising to ensure greater transparency about which SEPs are actually essential and – in an era of great patent liquidity – who owns them. A new EU body may become involved in this.  And if this all seems rather aspirational, to be noted that the Commission is aware of the (not inconsiderable) costs implications, and suggests that changes may only be possible prospectively, e.g. for 5G…
  • There remains significant flexibility in how FRAND values are established, but a couple of preferences emerge from the guidance
    • ‘In principle’, FRAND values should not include any value attributable to the inclusion of the technology in the standard.  This is in line with previous statements in the Commission’s Horizontal Guidelines, and diverges from the approach in Unwired Planet, where both parties accepted that some such value could be taken by the patentee (see para 97).  However, where technology “has little market value outside the standard” (hardly an infrequent situation), other techniques may be needed, such as comparisons between types of contribution.
    • Aggregate royalty rates are important, and should be taken into account.  The Commission proposes that FRAND value should reflect the  “present value added” by the SEP, bearing in mind that this can change over time, and that it should not include value attributable to market success of the product.
  • Non-discrimination between similarly situated licensees remains fundamental, and evidence of non-discrimination forms part of the information that SEP holders should provide to licensees.  
  • Chipset licensing remains possible – but is not mandated.  One of the key areas of dispute in industry was whether the FRAND obligation required SEP holders to license all comers, including component manufacturers, or whether they can decide to license end manufacturers (thus giving a higher potential royalty base) to the exclusion of those higher up the value chain.  The report does not come off the fence on this issue, save to say that business models may vary from sector-to-sector.  Cases such as Apple v. Qualcomm will therefore have to continue to fight this issue out from first principles.
  • Use-based licensing is not mandated – but nor is it wholly out of the question.  This is another area of significant dispute in industry, with a deep split between rights holders and potential licensees (see the Fair Standards Alliance’s response to the Communication here…).  The concept behind use-based licensing is that it allows SEP holders to charge different rates for different uses (e.g. compare a smart car, a smartphone and a smart thermostat).   The Communication does conclude that FRAND is not a one-size-fits-all concept, and may differ from sector-to-sector and over time.  However, it also emphasises the need not to discriminate between similarly–situated parties.  
  • Safeguards against the inappropriate use of injunctions are still needed to prevent both exploitation (using threats to extract unfairly high licence terms) and exclusion.  Companion papers giving guidance on ‘certain aspects’ of the IP Enforcement Directive (here) and on ‘A balanced IP enforcement system’ (here) have also been published.
  • The Communication confirms that non-practising entities should be subject to the same rules (including on transparency and injunctions) as other SEP holders.  As with many of the points in this paper, there is no big surprise here.
And overall?  The Communication will be pored over by industry, and – while not binding in any strict legal sense – will no doubt feature in arguments on both sides of the FRAND debate.  There are certainly some common-sense points in here, as well as some regulatory aspiration.  But if this is a roadmap, it is certainly not the end of the road – and we will continue to watch as the debate unfolds in the UK, Europe and beyond.