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.     

European Commission sets up SEP Licensing Expert Group

Introduction

The Commission’s November 2017 Communication on SEPs (on which we reported here) referred to the Commission’s intention to set up an expert group to gather industry practice and expertise on FRAND licensing that could be used to support the Commission’s policy making (the “Expert Group”).  On 5 July 2018 the Commission adopted a decision establishing the Expert Group. As well as setting out what the Expert Group’s tasks will be and noting that the Commission may consult the Expert Group on any matter relating to licensing and valuation of SEPs, the decision explains how the members of the Expert Group will be selected and how observer organisations can play a role. Further information is available on the Commission website.

Membership and selection process

The Expert Group will comprise up to 15 members with substantial experience in licensing and / or the valuation of SEPs (other experts with specific expertise may also be invited to work with the Group on an ad hoc basis). At least two thirds of the members will be appointed in a personal capacity and must act independently and in the public interest. 

The remaining members may be appointed to represent a common interest shared by stakeholders (the member and interest represented will be listed in a Transparency Register). The application form gives the following list of interests that can be represented:
 
a) Academia/Research
b) Civil society 
c) Employees/Workers
d) Finance
e) Industry
f) Professionals
g) SMEs
h) Other (to be specified) 

Applicants will also be required to indicate the policy areas in which the stakeholders they represent operate. The categories of interest are surprisingly broad. Within ‘Industry’ for example, there are likely to be a wide range of (conflicting) views presented.  We have previously discussed some of the areas of fierce debate within industry on topics such as use-based licensing, licensing to all and the appropriate royalty base– see here and here

The deadline for applications is 20 August 2018. Members shall be appointed by DG GROW, after consultation of the other Commission services concerned, for a term of two years. Given its responsibility for IP and standardisation, DG GROW is the directorate taking the lead here: the Expert Group will act at its request and will be chaired by a representative of DG GROW.

Observers

Organisations directly involved in licensing or valuing SEPs may (by invitation) be granted observer status. If appointed, the organisation will be able to nominate an experienced representative to participate in Expert Group meetings, although the representative will not have voting rights or be able to participate in the recommendations or advice produced by the Group. The names of observer organisations and their representatives will be listed in the Transparency Register.

Thoughts

We have previously noted that rival CEN-CENELEC workshops have been set-up to produce Codes of Conduct on best practices for SEP licensing, and that these Codes are likely to adopt very different positions on the most contentious unresolved issues in SEP licensing (here). Recommendations produced by the Commission-backed Expert Group should take into account a wider range of views, and are likely to be more persuasive.

It will therefore come as no surprise that lobbying groups have been quick to set out their views on the sorts of members that should be appointed to the Expert Group. For example, IP Europe “urge[s] the European Commission to ensure broad representation on the expert group from leading European innovators of wireless open standard technologies” (here), whereas ACT | The App Association emphasises the importance of including “the perspective of innovators from all along the value chain” (here). 

Whoever DG GROW decides to appoint (and there is no deadline currently set for when the list of appointed members will be published), it will need to ensure that the Expert Group is capable of grappling with the many complicated issues currently arising in FRAND licensing disputes, as well as new issues that will do doubt arise as the Internet of Things continues to evolve.   

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 CJEU guidance in MEO on price discrimination in licensing may also impact FRAND / SEP licences

Introduction

AG Wahl began his Opinion in MEO v Autoridade da Concorrência by noting that it presented the CJEU with an opportunity to clarify the law on differential pricing. Under Article 102(c) TFEU it can be an abuse for a dominant undertaking to apply “dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage”. Discrimination has always been a tricky issue under Article 102 (it is one of relatively few competition issues to have received a thorough discussion by the English Court of Appeal - see British Horseracing Board, paragraphs 265-278)  and it has never been entirely clear to what extent the EU authorities consider that the practice of price differentiation necessarily results in a finding of competitive disadvantage, or how much disadvantage is required to infringe Article 102. 

Price differentiation is a topical issue. The increasing use of pricing algorithms offers the potential for companies to engage in ‘personalised’ pricing on a mass scale, offering different prices to different consumers based on an algorithmic assessment of the highest price each individual is likely to pay. But they may also facilitate anti-competitive price coordination and so could give rise to concerns (see here and here).

Similarly, as the Internet of Things and 5G lead to new market entrants requiring SEP licences, it will be important for licensors to consider how to charge different licensees different prices without infringing the non-discrimination limb of FRAND.

Can it be assumed that price differentiation is likely to distort competition? Should a competition authority have to demonstrate that the competitiveness of any business placed at a disadvantage by differential pricing has suffered? The CJEU decision in MEO offers some useful guidance on these questions.

Facts

MEO is a mobile / telecoms service offered by Portugal Telecom. As part of this service MEO provides television content, and therefore pays royalties to the Portuguese collecting society that manages the rights of artists and performers, GDA.  In 2014 MEO made a complaint to the Portuguese Competition Authority that GDA had abused its dominant position by (amongst other things) applying different terms and conditions (including price) to MEO compared to another entity also providing television content, NOS. The Portuguese Competition Authority found that GDA had applied different tariffs to different customers between 2009 and 2013. However, it concluded that this price differentiation had no restrictive effects on MEO, and so took no action against GDA. MEO appealed this decision to the Portuguese Regulation and Supervision Court, which referred a number of questions regarding differential pricing to the CJEU.

CJEU decision

The CJEU referred to its previous decisions in Intel and Post Danmark II in setting out three key principles that applied:

  1. Proof of actual, quantifiable deterioration of a particular customer’s competitive position is not required for a finding of competitive disadvantage.

  2. All the relevant circumstances must be examined to determine whether price discrimination produces or is capable of producing a competitive disadvantage

  3. The mere presence of an immediate disadvantage affecting operators who are charged more does not mean that competition is distorted or capable of being distorted.

The CJEU also noted that when assessing particular prices charged by a dominant undertaking, the authorities may assess the undertaking’s negotiating power, the conditions and arrangements for charging any tariffs, their duration and amount, and the existence of any strategy aimed at excluding companies from a downstream market. The CJEU also reaffirmed that there is no de minimis threshold for the purposes of determining whether there is an abuse of a dominant position, albeit this will feed into the analysis of potential effect (paragraph 29). 

Impact

This decision offers helpful clarifications on how Article 102(c) should be interpreted. Although relatively narrow in scope, it has broad implications, particularly in the FRAND context; price discrimination between licensees is a controversial topic that has received relatively little judicial or regulator attention to date.  

As we describe in this article, in its Communication on SEPs, the Commission appeared to endorse a specific non-discrimination obligation in FRAND, stating that SEP holders cannot discriminate between implementers that are ‘similarly situated’. However, it did not specifically say that there is a requirement for distortion of competition between those similarly situated licensees (as for example the High Court had held in Unwired Planet, though this issue is being appealed), or whether harm to an individual firm rather than harm to competition might be sufficient (as a US court recently decided in TCL v Ericsson).

The CJEU’s MEO decision suggests that price discrimination will only be abusive if it leads to a distortion of competition (paragraph 27). So it seems there is scope for licensors to charge similarly situated licensees different royalty rates without breaching their FRAND obligations, as long as they do not distort competition by doing so.

Race to publish rival SEP & FRAND Codes of Conduct: new CEN-CENELEC working groups established

In October last year we reported on the difficulties that the Commission was facing in drafting its Communication on SEPs, in particular relating to the issues of use-based licensing or chipset licensing (see here).  We also noted that certain industry participants, such as Nokia and Ericsson, had confirmed their intention to establish an industry-wide code on best practices for SEP licensing.

In the subsequent months there have been some significant developments. The Commission’s Communication has been published (here, analysed in an article we wrote for the CIPA Journal here), although there was a notable absence of any specific reference to use-based or chipset licensing. The Nokia-backed proposal for a Code of Conduct has also crystallised into the form of a CEN-CENELEC workshop that kicked off in October 2017 (WS-SEP). 

Perhaps alive to the risk of that workshop producing a Code of Conduct that favoured SEP holders, a rival CEN-CENELEC workshop was set up by ACT (The App Association) and the FSA (Fair Standards Alliance) in February 2018 (WS-SEP2). Although slower off the mark, this second workshop is operating to a faster timetable; both workshops aim to produce a final text of their Code of Conduct by June 2018.

The detailed project plans for each workshop reveal exactly the sorts of differences in approach that one might expect. Both workshops intend their participants to discuss a range of FRAND issues in order to identify best practices from which a Code of Conduct can be developed. However, there are some clear differences in emphasis from each workshop.

WS-SEP focuses on the goal of concluding licence agreements and resolving licensing disputes quickly and efficiently. As part of this, it proposes the establishment of an ‘IoT SEP Licensing Gateway’, describing this as a “process and structure to engage in licensing discussions and resolution in a streamlined or more systematic way”.

On the other hand, WS-SEP2 envisages a broader range of topics being covered, making specific reference to the issues of patent hold-up and licensing without mandatory bundling on a portfolio only basis.

The differences in approach are perhaps most clearly seen in the sections of each workshops’ project plan which deal with what we have previously described as use-based and chipset licensing (here) – topical issues that the Commission did not address directly in its SEP Communication. 

Both workshops recognise the importance of developing guidance on the value of a standardised technology. However, while WS-SEP2 states that “a patent owner cannot seek to exaggerate the value of its patent by focusing on value created by downstream innovators and devices”, WS-SEP warns that “the price of a car does not reflect the value of connectivity in a car, equally the price of a chip may not reflect the value that connectivity, enabled by a chip brings to an end product”.

And though WS-SEP2 intends its guidance to cover “[t]he long history of FRAND licensing at all levels of the supply chain”, by contrast, WS-SEP takes a much narrower approach, proposing discussion on “[t]he appropriate licensing points to efficiently provide access-for-all”. 

The Commission’s decision to avoid taking a stance on either of these issues in its Communication, the value at stake in the light of the IoT and the impact that use-based and chipset licensing could have on royalties paid in new licences meant that these areas were always likely to become a battleground.  

We will be very interested to see the final products of both workshops. However, if the end result is two conflicting Codes of Conduct, they may have little impact on resolving the most contentious FRAND issues. 

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

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

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

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

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

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

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

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

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

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

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

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

Licensing commitments sufficient for Qualcomm to secure NXP takeover green light

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

The technologies involved

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

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

Competition concerns and remedies

NFC

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

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

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

Interoperability

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

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

MIFARE

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

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

Final thoughts

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

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

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

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

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

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. 

Third-party platform bans justified for genuinely luxury brands

The Court of Justice of the European Union (‘CJEU’) has today ruled that third-party platform bans may be justified in the selective distribution of luxury goods. The CJEU’s decision in the Coty Germany reference proceedings broadly follows the opinion of Advocate General Wahl which was handed down earlier this year (see here, and further background here). 

The Court makes a number of rulings which will be of interest to brand owners:

  • Selective distribution may be justified for luxury goods to protect the ‘allure and prestige’. This clears up the uncertainty which arose following the Pierre Fabre judgment which seemed to suggest that the preservation of a luxury image could not justify a restriction of competition. The CJEU has confirmed that the judgment in that case should be confined to the particular facts at issue.
  • Third party platform bans may be justified in the selective distribution of luxury goods. The CJEU has ruled that, in the context of selective distribution, a supplier of luxury goods can, in principle, prohibit authorised distributors from using ‘in a discernible manner’ third-party platforms such as Amazon. Any third-party platform ban must have the objective of preserving the luxury image of the goods, be applied uniformly and not in a discriminatory fashion, and be proportionate to the objective pursued.

This ruling certainly gives some more leeway for brand owners of luxury goods, but should not be seen as an absolute green light for third-party platform bans. In particular, such restrictions must be justified by the goods in question (i.e. they must have a genuine ‘aura of luxury’) and must be a proportionate means of preserving the luxury image. This will be for national courts and authorities to interpret, and we can expect a fairly high threshold. The German Competition Authority, the Bundeskartellamt, has already said that it considers the CJEU’s decision to be limited to genuinely prestigious products. That said, the ruling does make clear that third-party platform bans do not amount to a hardcore restriction of competition, and thus it will be open to brand owners to seek to justify their use on a case-by-case basis.