SEPs, 5G and the IoT: where will the Commission land on use-based licensing?

In April this year we reported that the Commission had released a Roadmap towards a ‘Communication on Standard Essential Patents for a European digitalised economy’,  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. Originally expected in May, the Communication is now said to be likely to be published before the end of the year. Part of the reason for the delay appears to be a dispute between several directorates within the Commission as to the appropriateness of use-based licensing for Internet of Things (IoT) enabled devices.

Recap: the IoT & 5G

The Internet of Things (IoT) will result in increasing inter-connectivity between devices. For example, smart kitchen appliances can already be turned on remotely. A new smart fridge might re-order milk automatically. On a grander scale, lighting systems in towns and cities might vary the level of illumination produced by streetlamps based on the time of day, season, or even weather conditions. 

Some of these new technologies will be very data hungry. They will all require the ability to connect to mobile networks and other devices. This is where standards come in. Standards like 3G and 4G enable fast mobile connectivity. 5G, currently in development, will enable even faster transfers of data. Each of these standards incorporates thousands of patents which have been declared essential to use of the standard (SEPs). The holder of an SEP must commit to license its SEPs on Fair, Reasonable and Non-Discriminatory (FRAND) terms. 

The negotiation of FRAND terms is often contentious (see for example our reports on the Unwired Planet case in the UK, here and here, Huawei v ZTE in the EU, and Ericsson v D-Link and CSIRO v Cisco in the US). Most FRAND litigation to date has focussed primarily on mobile phones or similar devices. As more types of product with connectivity are developed, licensing negotiations (and litigation following failed negotiations) risk becoming even more complicated. However, as there could be more than 29 billion IoT connected devices by 2020, with IoT systems creating an economic impact of more than $11 trillion per year by 2025 (source), the stakes are considerable.

The difficulties of drafting the Communication

A number of recent reports have indicated considerable debate within the Commission about the contents of the Communication. The centre of the dispute is use-based licensing: whether SEP holders should be able to charge different rates to different licensees depending on the nature of the final product that implements the technology. 

For example, it is argued that 5G is more valuable to a mobile phone, where connectivity is integral to its operation, than to a smart energy meter that might only connect once a day. It is therefore suggested that charging a higher royalty rate for a 5G enabled mobile phone than a 5G enabled meter is fair. This is the position supported by some big SEP holders such as Qualcomm, Nokia and Ericsson.

On the other hand, small developers claim that by focussing on the final product, SEP holders are trying to take a cut of the value created by other inventors who have come up with innovative new uses of a technology. Some vocal critics of current licensing practices take issue with the SEP holder practice of granting licences only to those who produce and sell the final product, such as Samsung, Apple or Huawei. Instead, they argue that SEP holders should be obliged to grant licences to all-comers, including companies higher up the supply chain, for example to those that produce the wireless chipsets incorporating the SEP technology. 

However, this option could also create its own challenges. If a number of companies in the supply chain have all taken licences to the same underlying SEPs, this could result in a form of ‘double-dipping’ – allowing SEP holders to recover higher royalties (depending on the extent to which the licence would otherwise ‘pass-through’ from the company highest in the chain to the end manufacturer). It could also result in an increase in the number and complexity of licensing negotiations. Those who support use based licensing argue that the simplest way of licensing SEPs of this sort is at the point where the final product incorporating the patented technology is complete, and that a single licence at that point is the neatest and most efficient licensing model. 

Underlying both positions is a concern about the price to be paid for standard essential technology. Those who develop that technology and contribute it to standards want to ensure a return on their investment and argue that good financial incentives are required to ensure continued innovation. Those who use the technology argue that they are happy to pay, but also need their incentives to continue bringing new data-dependent products to market not to be crimped by patentees charging royalties which exceed the value contributed by standardised technologies. Implicitly, both arguments assume that relying on royalties at an earlier point in the value chain will result in lower costs for product developers and lower returns for patentees.

Our understanding is that within the Commission itself, some directorates largely support the views of the SEP holders. They cite concerns about the need to preserve SEP holders’ incentives to innovate and support the use based model, which would enable SEP holders to calibrate the royalties sought finely by reference to different uses. On the other hand, DG Competition continues to be concerned about the position of implementers. It notes that they may face significant difficulties in acquiring licences directly, as well as the potential for unjustified price discrimination between users if companies higher in the supply chain are not able to obtain, and pass on the benefits of, licences to all comers. Over recent years, DG Competition has also frequently focussed on incentives for follow-on innovation both in TMT and in other sectors, which again tends to favour the position of implementers. 

Whatever the final text of the Communication, the intensity of the debate surrounding it means that it is unlikely to be overly prescriptive. Discussion on these issues is likely to continue over the coming years across an array of industry forums and within bodies such as ETSI, not least because of the global nature of the debate. It’s also worth noting that representatives from a number of technology companies such as Nokia, Ericsson and Orange have formed a committee to establish an industry-wide code on best practices for SEP licensing (here – subscription required). It will be interesting to see if that code supports or conflicts with the Commission’s approach.

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

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

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

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

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

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

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

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

Apple’s battle with Qualcomm spreads to the UK

On 19 May 2017 Apple issued a major claim against Qualcomm in the English Court. This is part of a widely reported global dispute between the two giants. The English action includes an Article 102 abuse of dominance claim as well as a FRAND licensing claim and was issued just a month after the English Court’s first FRAND valuation in Unwired Planet v Huawei (Bristows’ blog post here and here). The particulars of the claim are now available and make fascinating reading. 

On the FRAND licensing front, Apple seeks a declaration that Qualcomm has breached its obligations to ETSI, by failing to offer a FRAND licence for Standard Essential Patents (SEPs), seeking excessive and non-FRAND royalties. 

As far as competition law and Article 102 is concerned, Apple makes a number of arguments. 

It claims that Qualcomm is abusing its dominant position in the markets for LTE, CDMA and UMTS chipsets by refusing to license its SEPs to competing chipmakers. This means that if a chipset is purchased from a company other than Qualcomm, the purchaser must then obtain a licence from Qualcomm for use of Qualcomm’s standard-essential IP. Apple asserts that Qualcomm’s practices exclude chipset competitors from the market, as well as being in breach of its contractual FRAND obligations.

Apple also complains about various aspects of agreements between itself and Qualcomm. These expired in 2015, and in 2016 Apple began to purchase chipsets from Intel. This has doubtless affected the nature and timing of the litigation.

As mentioned above, Apple contends that Qualcomm’s royalties are excessively high. It then argues that to reduce the effective royalty rate it had to pay, it had no commercial alternative other than to conclude rebate agreements which involved granting Qualcomm exclusivity over Apple’s chipset supply. Apple maintains that one consequence of this arrangement has been to limit the emergence of other chipset manufacturers, who have been precluded from competing for Apple’s custom. Because of Apple’s importance as a purchaser of chipsets this is argued to have foreclosed a significant part of the potential demand. Qualcomm’s practice of forcing customers to take a licence and to agree to exclusionary terms is said to further reinforce the exclusionary effects. 

A particular feature of the rebate agreement which is criticised by Apple is that it was conditional on Apple agreeing not to pursue litigation or governmental complaints that the royalties were ‘non-FRAND’. 

Apple explains that Qualcomm’s royalties are charged in addition to the price of the chipset itself, and are based on the price of the end device being sold by the licensee, rather than on the price of the chipset in which it is argued that all the patented technology is practised. Apple takes the position that in order to be acceptable the royalty should be calculated by reference to the smallest saleable patent practising unit (SSPPU) – in this instance the chipset, rather than the phone. This is said to guard against situations where two phones that use the same Qualcomm technology could incur significantly different royalty obligations for use of the same SEPs based only on their different end sales prices. Those sales prices which differ because of completely different aspects of the phones, such as design or additional functionalities. This issue was not considered by Birss J in Unwired Planet v Huawei. The argument was raised in Vringo v ZTE, but was dropped before trial. 

Apple makes several arguments which are in tension with the recent Unwired Planet v Huawei Judgment. These include: that licensees can be acting in a FRAND manner even though they refuse to take a licence of an entire patent portfolio of declared SEPs, irrespective of validity or essentiality; that the FRAND royalty for an SEP should reflect the intrinsic value of the patent; and that the standard (of which that technology is a part) constitutes value that Qualcomm has not created and which it should not seek to capture through its FRAND licensing. 

Finally, in an attempt to demonstrate that Qualcomm’s royalty is not FRAND, Apple states that Qualcomm holds a quarter of the declared SEPs for the LTE standard and compares Qualcomm’s royalty with the (presumably lower) licence fee it pays other SEP holders, who combined hold one third of the relevant SEPs.

Ultimately, Apple claims that Qualcomm’s undertaking to ETSI is ineffective to constrain its dominance as an SEP owner. This may be a direct response to comments by Birss J in Unwired Planet v Huawei that an SEP holder may not always hold a dominant position, for example, because of the FRAND obligation and the risk that implementers may engage in patent hold-out. 

Conclusion

Developments in this case will be interesting when set against the recent judgment in Unwired Planet v Huawei, in which Birss J considered many of the issues raised by Apple. But Apple also makes arguments that go well beyond the issues considered in that case. For example, Apple’s arguments about exclusionary rebates may be affected by the Intel judgment, due to be handed down by the EU’s Court of Justice on 6 September 2017.  It also sits alongside parallel antitrust litigation in the US, including retaliatory actions by Qualcomm designed to exclude Apple’s handsets from import to the US. How this case, and the global dispute, evolves will be fascinating to follow – and not only for those with an interest in SEP and FRAND issues.

Luxury brands, third party platforms and EU competition law – guidance from AG Wahl

The Court of Justice of the European Union (‘CJEU’) has today handed down Advocate General Wahl’s opinion in the Coty Germany reference proceedings (see press release here, the full opinion should be published later today). The press release explains that the Opinion proposes that the European Court find that a supplier of luxury goods may prohibit its authorised retailers from selling its products on third-party platforms such as Amazon and EBay. For the background to the case see our earlier post here

The Opinion begins by restating that selective distribution systems for luxury and prestige products do not necessarily fall within the prohibition of anticompetitive agreements under Article 101(1) if they meet three well-established criteria:

  1. the resellers are chosen on the basis of objective criteria of a qualitative nature which are determined uniformly for all and applied in a non-discriminatory manner for all potential resellers; 
  2. the nature of the product in question, including the prestige image, requires selective distribution in order to preserve the quality of the product and to ensure that it is correctly used; and 
  3. the criteria established do not go beyond what is necessary.
AG Wahl then goes on to deal with the restriction which is at the centre of this dispute, namely a provision which prohibits the authorised sellers from using third party platforms for internet sales “in a discernible manner”. He states that – in the present state of development of e-commerce – such a restriction does not necessarily fall within Article 101(1) where three criteria are met. However, it seems to us that the criteria he lists is merely a restatement of the well-established criteria for lawful selective distribution set out above, i.e. that the criteria:  

  1. are dependent on the nature of the product; 
  2. are determined in a uniform fashion and applied without distinction; and 
  3. do not go beyond what is necessary.
The assessment of the facts will ultimately be left to the German Court.  However, AG Wahl does observe that the contested clause does not appear to be caught by Article 101(1). In fact, he suggests that the restriction is likely to improve competition by ensuring the products are sold in an environment that meets the qualitative criteria and guarding against the phenomena of “parasitism” (a more loaded term than the usual reference to ‘free-riding’). He points out that the restriction does not amount to an absolute prohibition on online sales (which is considered a serous restriction of competition) for two reasons. First, the restriction still allows authorised distributors to sell through their own websites and to make use of third party platforms “in a non-discernible manner”. Second, distributors’ own online stores are still the preferred distribution channel so such a restriction cannot be assimilated to an outright ban or substantial restriction on internet sales.  This analysis leaves a number of questions open, and certainly suggests that the analysis of such restrictions may change if the popularity of third party platforms continues to grow.  

Finally, the Opinion proposes that, in the event that a restriction on third party platforms does fall within Article 101(1), it may well be exempted under Article 101(3), including under the block exemption for vertical agreements. AG Wahl does not consider a third party platform ban to be a hardcore restriction which would automatically exclude the relevant distribution agreement from the benefit of the block exemption. 

Overall, the AG Opinion appears to be in line with the Commission’s recent final report in its e-commerce sector inquiry, which recognised that price is not the only relevant competition consideration when selling goods online: “While price is a key parameter of competition between retailers, quality, brand image and innovation are important in the competition between brands. Incentivising innovation and quality, and keeping control over the image and positioning of their brand are of major importance for most manufacturers to help them ensure the viability of their business in the mid to long term.”  The AG Opinion is a first step in showing how this balance may in future be struck – although crucially the Opinion is not binding on the CJEU who will now begin its deliberations in this case. The final word on these issues will be left to the European Court, and this will no doubt be keenly awaited by brand owners, online retailers and third party platforms alike.

Online auction commitments demonstrate digital markets are central to CMA’s priorities

The CMA has accepted commitments from ATG Media, the largest provider of online auction sites in the UK, to bring an end to practices which it considered hinders competition from rival bidding platforms (press release and decision here and here). 

ATG’s Live Online Bidding (LOB) platforms cover a wide range of markets, including: antiques and art; industrial and insolvency; and construction and agricultural equipment. 

LOB platforms are aggregators that host live auctions run by multiple auction houses. They aim to attract both individual bidders and auction houses to list live auctions. Traditionally live bidding was available only by attending in person or by telephone.

The CMA’s investigation began in November 2016 and focused on three practices:

  • obtaining exclusive deals with auction houses, so that they do not use other providers;
  • preventing auction houses getting a cheaper online bidding rate with other platforms through Most Favoured Nation clauses; and
  • preventing auction houses promoting or advertising rival live online bidding platforms in competition with ATG Media.
In order to bring the investigation to an end ATG has given the CMA legally binding commitments under the Competition Act 1998 to stop all three practices. 

The CMA’s Annual Plan 2017/18 (here) stresses the importance of digital markets in its enforcement priorities: “Online aspects of markets have become a major focus of our work, as many industries have become more digital in how they trade, raising important questions of policy and law.”

Online platforms (particularly those with market power) are likely to face increased scrutiny as competition authorities across the world focus ever more of their resources on the digital economy.   

Antitrust authorities are increasingly interested in pricing algorithms

A few months ago, we considered whether pricing algorithms might be the European Commission’s next antitrust target (here). The Commission had warned companies about the risks of using algorithms to collude, and indicated that pricing software formed part of its investigation into consumer electronics.

Since then, the Commission has published its Final Report on the E-commerce Sector Inquiry (“Final Report”, see our commentary here). This specifically identifies the wide-scale use of pricing software as something that may raise competition concerns, noting that the “availability of pricing information may trigger automatised price coordination” (13).  The Final Report also claims that comments from retailers point to manufacturers making use of retail price maintenance.  It suggests that pricing software may make it easier for manufacturers to retaliate against retailers that deviate from desired pricing, which may even limit the incentive for retailers to deviate from pricing recommendations in the first place.  The Final Report also considers that pricing algorithms could facilitate or strengthen collusion between retailers – the algorithms make it easier for retailers to detect any deviations from prices implemented under a collusive agreement (33).

At the start of this month the Commission announced an investigation into whether the clothing manufacturer and retailer Guess illegally restricts retailers from selling cross-border within the EU.  It seems likely that this investigation arose out of information the Commission received through the E-commerce Sector Inquiry. Bearing in mind the Commission’s comments on pricing algorithms in the Final Report, there is real potential for subsequent investigations into their use.   

OECD Roundtable

Further insights into the Commission’s current thinking can be drawn from the OECD Roundtable currently taking place on ‘Algorithms and collusion’ (see here).  The Commission's contribution paper identifies the potential harmful effects that pricing algorithms may have in both vertical and horizontal contexts, namely by facilitating collusion and making collusion easier to enforce.  It expands upon the concerns identified in the Final Report, offering by way of example a scenario where retailer A is adhering to retail price maintenance, and retailer B is monitoring and matching retailer A’s prices using pricing software (16).  This is said to show how artificially high prices caused by retail price maintenance can easily spread to other ‘innocent’ retailers through the use of pricing software.  

The paper notes that where firms are using algorithms to engage in explicit collusion, it is clear that the firms are still liable for their behaviour.  It suggests that to a large extent, pricing algorithms can be analysed under traditional EU competition law.  However, it also spends some time discussing the issue of tacit collusion, where there is no anti-competitive agreement involved and therefore the conduct of non-dominant companies acting independently falls outside the EU competition law framework.  Does algorithmic pricing make tacit collusion more pervasive and more effective?  If so, how should competition authorities respond? 

As the paper recognises, this is an area of on-going debate.  Nevertheless, it considers potential options such as whether the market itself may correct ‘algorithm-enabled tacit collusion’ through the development of ‘consumer algorithms’ that could track prices and even identify ‘maverick’ sellers not engaging in algorithmic pricing that consumers could purchase from.  It also explores whether changes to the law on tacit collusion might be effective, or whether the interpretation of ‘communication’ should be expanded in order to bring algorithm-enabled price matching within the scope of Article 101 TFEU.

The UK CMA's contribution to the Roundtable has less of a focus on pricing algorithms. It identifies a few potential theories of harm that may apply to the use of algorithms more broadly:

  • Facilitating the implementation or maintenance of a collusive agreement.
  • Facilitating behavioural discrimination (e.g. price discrimination where consumers are set individual prices based on algorithmic assessment of the highest price that consumer is likely to pay).
  • Reinforcing dominance or raising barriers to entry (relating to the typical requirement for large volumes of data to make an algorithm effective).
The CMA recognises that algorithms can give rise to many consumer benefits. However, it also notes that they could lead to competitive or consumer harm in novel, untested ways, and that it is challenging to detect and understand the exact effect of complex algorithms, particularly given that they rapidly evolve (whether through constant refinement from developers or via ‘self-learning’).

Despite this, the CMA appears to be more comfortable than the Commission in its ability to combat this sort of issue. It notes that “the flexible, principles-based UK competition law framework has to date shown itself able to accommodate technological change, and to be capable of flexible and effective use to tackle a wide range of novel competition harms” (43). It plans to invest in in-house technological expertise and new digital forensic tools in response to the challenges posed by the use of algorithms.

Conclusion

These two OECD contribution papers were prepared for a Roundtable discussion – they do not reflect the Commission’s or the CMA’s official stance on pricing algorithms.  However, they provide an interesting insight: these authorities are clearly paying a good deal of attention to the potential competition issues raised by algorithms.  Coupled with the increasing enforcement activity by the Commission in the e-commerce sector, pricing algorithms continue to be one of the trending topics in competition law in Europe. 

Unwired Planet v Huawei: a new FRAND injunction

Mr Justice Birss has once again broken new legal ground by granting what he has termed a ‘FRAND injunction in Unwired Planet v Huawei.

As a reminder, in April Mr Justice Birss handed down the first UK court decision determining a FRAND royalty rate (see here). A post-judgment hearing took place in May to establish whether or not Huawei should be subject to an injunction in the UK and the issue of permission to appeal.

The FRAND injunction

At the post-judgment hearing, Huawei had argued that the judge should not grant an injunction. As Huawei intended to appeal the decision, it said that it could not enter into the FRAND licence agreement at this stage, in case the Court of Appeal determined that different FRAND terms were appropriate. Huawei claimed that to grant an injunction now would effectively be punishing it for exercising its right to appeal. It also noted that if an injunction was granted, it would last until 2028 (when the patent found valid and infringed in the first patent trial expired), despite the FRAND licence agreement expiring in 2020. Therefore, Huawei would be forced to negotiate a new licence from an extremely weak position – it would automatically be injuncted if terms could not be agreed. 

Huawei requested that the judge accept undertakings in lieu of granting an injunction, offering to: (a) enter into the licence following its appeal, and (b) to comply with the terms of the licence as if it was in effect (including paying royalties) until its appeal was finished.

Mr Justice Birss essentially took the view that the offer of undertakings now was too little, too late. He decided that an injunction should be granted. However, he recognised the risk that this might affect negotiations or disputes about the terms of the licence in later years. To resolve this, he granted a new kind of injunction, which he called a “FRAND injunction”. This would be like a normal injunction, but with the following extra features:

  • A proviso that it would cease to have effect when the defendant enters into a FRAND licence; and
  • Express liberty to return to court to decide whether the injunction should take effect again at the end of the FRAND licence (if it ends before the relevant patents expire, or ceases to have effect for any other reason).
The injunction is to be stayed pending the result of the appeal, on terms that provide for appropriate royalty payments from Huawei to Unwired Planet in the meantime.

Permission to appeal 

Mr Justice Birss granted Huawei permission to appeal on three main issues:

  1. The global licence: including: (i) whether more than one set of terms can be FRAND, (ii) whether a UK only licence was FRAND, (iii) whether the court is able to determine FRAND terms, including rates, for territories other than the UK, and (iv) whether it is appropriate to grant an injunction excluding Huawei from the UK market unless it took a global licence.
  2. Hard-edged non-discrimination: Huawei have permission to appeal the finding that a distortion of competition is required for the non-discrimination aspect of FRAND to apply, but not whether or not there was a distortion of competition in this case.
  3. Huawei v ZTE (Article 102 TFEU): regarding the judge’s findings on abuse of dominance and injunctive relief.
This permits a fairly wide-ranging appeal, especially as regards the competition law elements of the latter two issues. The trial judgment appeared to downplay the importance of competition law in FRAND issues (see here for more information); the appeal may enable a renewed focus on it.

The FRAND licence 

In his main trial judgment, Mr Justice Birss settled the terms of the FRAND licence to be entered into by Unwired Planet and Huawei. This latest judgment annexes a copy of the final form of that licence. Given the shroud of secrecy that usually surrounds such patent licence agreements, this is a unique insight, reflective of the judge’s desire throughout the case to ensure as much transparency as possible.

Transparency is likely to be helpful as the law in this area continues to develop. With the advent of new technologies developed for 5G and the Internet of Things, new companies may need to enter the FRAND licensing field for the first time. Without being able to draw upon any previous experience of negotiating licences in this area, they will be at a disadvantage in negotiations. 

If other judgments follow Mr Justice Birss’ lead and annex copies of any FRAND agreement determined by the court, these would provide useful points of reference for negotiating parties. It might also reduce the requirements for third party disclosure (a costly, time-consuming exercise) in any subsequent litigation. Otherwise, such disclosure will be essential in FRAND cases involving relatively new entrants to the market – they are unlikely to have many licence agreements that can be used by the judge as comparables as part of the process for determining a FRAND rate.

Conclusion

Yet again, Mr Justice Birss provides plenty of food for thought. Assuming that Huawei does go ahead with its appeal, it will be fascinating to see how the Court of Appeal responds to these issues.

Pat Treacy and Matt Hunt



Transparency may undermine online competition: Commission’s Final Report on the E-commerce Sector Inquiry

On 10 May 2017 the European Commission published its Final Report on the E-commerce Sector Inquiry, together with accompanying Q&As, and, for those who want something rather longer, a Staff Working Document

The inquiry, launched over 2 years ago, and part of the wider Commission Digital Single Market Strategy (see our earlier comment here) has gathered evidence from nearly 1,900 companies connected with the online sale of consumer goods and digital content.
The Report’s main findings

  • Price transparency has increased through online trade, allowing consumers instantaneously to compare product and price information and switch from online to offline. The Commission acknowledges that this has created a significant ‘free riding’ issue, with consumers using the pre-sales services of ‘brick and mortar’ shops before purchasing products online. 

  • Increased price transparency has also resulted in greater price competition both online and offline.  It has allowed companies to monitor prices more easily, and the use of price-tracking software may facilitate resale price maintenance and strengthen collusion between retailers.

  • Manufacturers have reacted to these developments by seeking to increase their control of distribution networks though their own online retail channels, an increased use of ‘selective distribution’ arrangements (where manufacturers set the criteria that retailers must meet to become part of the distribution system) and the introduction of contractual restrictions to control online distribution.
How about changes to competition policy? 

The Report does not advocate any significant changes to European competition policy, but rather confirms the status quo. The key point of interest are as follows: 

  • Selective distribution – whilst the Commission has not recommended any review of the Vertical Block Exemption Regulation (‘VBER’) ahead of its scheduled expiry in 2022, the Commission notes that the use of selective systems aimed at excluding pure online retailers, for example by requiring retailers to operate at least one ‘brick and mortar’ shop, is only permissible where justified (for example in respect of complex or quality goods or to protect suitable brand image).

  • Pricing restrictions – dual pricing (i.e. differential pricing depending on whether sales are made online or through a bricks and mortar outlet) will generally be considered a ‘hardcore’ (or object) restriction of competition when applied to one and the same retailer, although it is capable of individual exemption under Article 101(3) TFEU, for example if the obligation is indispensable to address free-riding by offline stores.  

  • Restrictions on the use of marketplaces – the Report finds that an absolute ban on the use of an online marketplace should not be considered a hardcore restriction, although the Commission notes that a reference for a preliminary ruling is pending before the CJEU (C-230/16 - Coty Germany v Parfümerie Akzente).

  • Geo-blocking – a re-emphasis of the existing position on territorial and customer restrictions – active sales restrictions are allowed, whereas passive sales restrictions are generally unlawful. Within a selective distribution system, neither active nor passive sales to end users may be restricted. The Commission also make clear that companies are free to make their own unilateral decisions on where they choose to trade.

  • Content licensing – the significance of copyright licensing in digital content markets is noted, as is the potential concern that licensing terms may suppress innovative business practices.  

  • Big Data – possible competition concerns are identified relating to data collection and usage. In particular, the exchange of competitively sensitive data (e.g. in relation to prices and sales) may lead to competition problems where the same players are in direct competition, for example between online marketplaces and manufacturers with their own shop.  
What happens next?

The Commission has identified the need for more competition enforcement investigations, particularly in relation to restrictions of cross-border trade.  It is expected that more investigations will be opened in addition to those already in play in respect of holiday bookings, consumer electronics and online video games. In a more novel approach, the Commission’s press release also name-checks a number of retailers (in particular in fashion) who have already reformed their business practices “on their own initiative”.
  
The Commission also highlights the need for a consistent application of the EU competition rules across national competition authorities.  It remains to be seen whether the Commission will seek to use its enforcement investigations to address inconsistencies such as those evident in the more interventionist stance of some national authorities (e.g. the Bundeskartellamt) in respect of issues such as pricing restrictions.

Patent licensing: 5G & the Internet of Things

The next telecommunications standard, 5G, and the nascent Internet of Things (IoT), promise a world of high-speed interconnectivity. We’re already accustomed to people talking to smart devices to ask them to play music, or to order a taxi or takeaway. The technology for truly smart homes and even smart cities is following closely (see here for examples of how the IoT is already being used).

Standardisation will be essential to maximising the benefits of both the IoT and 5G. After all, there’s no point in having a smart thermostat that can be adjusted remotely if you can’t connect to it whilst out of the house because your phone is made by a different manufacturer. Standardisation will ensure that 5G/IoT devices and systems can connect and work together.

There will be thousands of patents essential to the operation of the standards developed. As the IoT grows and 5G is rolled out, the issue of how these patents are licensed will become increasingly important. Standard essential patents (SEPs) have to be licensed on a FRAND basis, but determining a FRAND royalty rate is a challenging task.

The Commission’s Roadmap

Following two studies on SEPs published at the end of last year (see here), on 10 April 2017, the Commission released a Roadmap that sets out its plan to publish a ‘Communication on Standard Essential Patents for a European digitalised economy’ later this year, possibly as early as May or June. The Communication (which will not have the binding force of a Directive or Regulation) is intended to complement the Commission’s Digital Single Market project, and to help work towards the goal of having 5G rolled out across the EU by 2025. 

The Roadmap identifies three main issues that the Commission will seek to address in its Communication to ensure a balanced, flexible framework for SEP licensing:

  • Opaque information about SEP exposure: the lack of effective tools for potential licensees too identify which patents they need to take licences for in order to implement relevant standardised technologies.
  • Unclear valuation of patented technologies: the difficulties in assessing the value of new technology (for both licensors and licensees), including the lack of any widely accepted methodology.
  • Risks of uncertainty in enforcement: the general framework provided by the CJEU in Huawei v ZTE is a starting point for agreeing a FRAND royalty rate, but it does not provide complete guidance. There are many technical issues that aren’t addressed, such as how portfolio licensing, related damages claims, and ADR mechanisms should be dealt with. (NB: some of these issues have been recently addressed in the UK case Unwired Planet v Huawei, see our initial thoughts on that case here.)

It is unclear if the Communication will address other issues with standardisation and SEP licensing, such as over-declaration, hold-up, hold-out, the appropriate royalty base (a particularly difficult challenge in the diverse world of the IoT) or whether a total aggregate royalty burden is appropriate.

Use-based licensing?

The Roadmap does not offer any specific details as to how the Commission intends to solve the issues it identifies. However, according to MLex (here – subscription required), an outline of the Commission’s Communication seen in February suggested that the Commission was considering a licensing model that would enable licensors to offer licensees different royalty rates depending on how the relevant technology is used. This could extend to allowing licensors to refuse to offer a licence if the final use of the technology cannot be identified and tracked.

This suggestion has caused concern amongst a number of companies. ACT | The App Association, an organisation sponsored by Apple, Facebook, Microsoft, PayPal & others which represents more than 5,000 small technology firms, has written to the Commission claiming that such a licensing model poses a substantial threat to innovation. It argues that in order for suppliers to obtain licences under this model, they might be required to monitor their customers’ business practices and potentially to charge different customers different prices depending on how they use the technology. It also claims that this model could appropriate the value created by new innovators. If a company succeeds in developing a new use for a particular sensor by incorporating it into a health app for example, it might find itself being charged higher royalties for this new use of the sensor.   

We have reported before on how new licensing models may be required to make best use of the IoT. Qualcomm, Ericsson and Royal KPN (among others) have backed a new licensing platform called Avanci. This is designed to remove the need for lengthy bi-lateral licence negotiations by making flat rate FRAND licences available for particular patent portfolios. However, it is now over six months since Avanci launched and there have been no reports yet of it successfully concluding any licence agreements.

The proper royalty base for patent licences has been a controversial topic for a number of years now. There has been considerable debate over whether licences should be based upon the price of the smallest component in which the patent is implemented, or the final price of the end product. This issue has been addressed by the courts on occasion, particularly in the US (see our post on CSIRO v Cisco here for example).

The new Communication is intended to provide best practice guidance on SEP licensing. If the Commission does opt for a use-based licensing model, this would be a controversial choice. However, whatever the Commission decides, given the number of conflicting interests and amounts of money at state, it is unlikely to satisfy everyone. 

Unwired Planet v Huawei: Is FRAND now a competition law free zone? Not so fast…

It has been two weeks since Mr Justice Birss handed down his latest judgment in Unwired Planet v Huawei (see here for a summary), which is almost long enough to get to grips with the 150 or so pages. There has already been a huge amount of discussion as to what this judgment means in practice and we have even overheard some suggest that, when it comes to FRAND in the future, we can simply ignore competition law altogether. This week we were invited by our friends at the renowned IP law blog, IPKat, to have our say on this. You can check out our thoughts on the IPKat blog here.