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

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

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

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

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

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

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

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

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

PanOptis v Apple

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

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

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

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

Vestel v HEVC Advance* 

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

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

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

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

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

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

TQ Delta v ZyXEL

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

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

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

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


* Bristows is instructed for a party in this matter.

Final credits roll on the Hollywood movies pay-TV saga

The curtain has come down on the long running Hollywood movie/pay-TV licencing saga (see here). 

Plot synopsis

This epic has seen Sky and major Hollywood movie studios do battle with the Commission over exclusive territorial restrictions in copyright licences (see here). 

Midway through, Paramount offered Commitments to the Commission, removing these restrictions in its pay-TV licence agreements (here). The ending was never in doubt once French Film Producer Canal+ lost its challenge before the CJEU (here).

In the final act, the Commission (cast as sheriff of the Digital Single Market), has accepted formal Commitments from Disney, NBCUniversal, Sony Pictures, Warner Bros. and Sky to remove all restrictions on unsolicited (or “passive”) sales.  

Characters and chronology

US film studios typically license films to a single pay-TV broadcaster in each Member State.

In July 2015 the Commission sent a Statement of Objections finding that clauses in film licences for pay-TV between Disney, Fox, NBCUniversal, Paramount Pictures, Sony Pictures, Warner Bros. and Sky UK breached EU competition law. 

These clauses required Sky UK to block access to the studios' films through its online pay-TV services and/or through its satellite pay-TV services to consumers outside its licensed territory (UK and Ireland) (so-called "geo-blocking"); and required some of the studios to ensure that broadcasters outside the UK and Ireland are prevented from making their pay-TV services available in the UK and Ireland.

Crucially, these clauses restrict the ability of broadcasters to accept unsolicited requests (so-called "passive sales") for their pay-TV services from consumers located outside their licensed territory. 

Last stand – the Commitments 

In July 2016 the Commission accepted a series of Commitments from Paramount (see here) to remove all restrictions on passive sales, and in March 2019 the Commission accepted similar Commitments from Disney, NBCUniversal, Sony Pictures, Warner Bros. These specify that: 

  • When licensing its film output for pay-TV to a broadcaster in the EEA, each committing studio will not (re)introduce contractual obligations that prevent such pay-TV broadcasters from providing cross-border passive sales to consumers that are located in the EEA but outside of the broadcasters' licensed territory (no "Broadcaster Obligation");
  • When licensing its film output for pay-TV to a broadcaster in the EEA, each committing studio will not (re)introduce contractual obligations that require the studios to prevent other pay-TV broadcasters located in the EEA from providing passive sales to consumers located in the licensed territory (no "Studio Obligation");
  • Each committing studio will not seek to enforce or bring an action before a court or tribunal for the violation of a Broadcaster Obligation and/or Studio Obligation, as applicable, in an existing agreement licensing its output for pay-TV.
  • Each committing studio will not enforce or honour any Broadcaster Obligation and/or Studio Obligation in an existing agreement licensing its output for pay-TV.

Similarly, Sky will: 

  • neither (re)introduce Broadcaster Obligations nor Studio Obligations in agreements licensing the output for pay-TV of Disney, Fox, NBCUniversal, Paramount Pictures, Sony Pictures and Warner Bros.; and
  • not seek to enforce Studio Obligations or honour Broadcaster Obligations in agreements licensing the output for pay-TV of Disney, Fox, NBCUniversal, Paramount Pictures, Sony Pictures and Warner Bros.

The commitments will apply throughout the EEA for five years and cover online and satellite pay-TV and video on demand services.

The critics’ review

The Commitments have allowed the Commission to reprise its role of as the sheriff of the Digital Single Market and scourge of geo-blocking.  

However, while the Commission is able require the elimination of contractual territorial sales restrictions it cannot alter the fact that copyright law is national, rather than harmonised at the EU level, as illustrated by the copyright carve-out in the Geo-blocking Regulation (see here). 

Therefore, it seems likely that anything other than a pan-EU licence will leave the broadcaster exposed to the risk of infringement proceedings if it sells into countries not covered by the licence. 

Chancellor’s Spring Statement: Digital Advertising Market Study

Presenting his Spring Statement this afternoon, Chancellor Philip Hammond welcomed the Furman review, an independent review of competition in the digital economy. Following its recommendation he has written to the CMA asking it to carry out a market study of the digital advertising market (see here). The Chancellor also announced that the government will respond to calls in the review (and, indeed, from elsewhere) to update the UK’s competition rules for the digital age. This focus on digital and the tech sector is in line with recent  announcements in the UK and other jurisdictions (here and here).

The Furman review found that the major digital platforms have become increasingly dominant and there has been little scrutiny and no blocking of platform acquisitions (Google/YouTube, Facebook/WhatsApp) (see here).

The review recommended:

  • Setting up a digital markets unit (the Unit) tasked with fostering greater competition and consumer choice in digital markets (likely to be based in the CMA). 
  • A digital platform code of conduct, based on a set of core principles, which would apply to conduct by digital platforms that have been designated as having a ‘strategic market’ status.
  • The Unit should pursue personal data mobility and systems with open standards where these will deliver greater competition and innovation.
  • The Unit should be able to impose measures where a company holds a strategic market status and have enduring market power over a strategic bottleneck market (this is akin to ‘significant market power’ test applied to telecoms).
  • Updating merger policy and legislation to ensure that it can be more forward-looking and take better account of technological developments.
  • Clarify the standards for blocking or imposing conditions on a merger. 
  • The CMA undertake a market study into the digital advertising market encompassing the entire value chain, using its investigatory powers to examine whether competition is working effectively and whether consumer harms are arising.

Reflections

The recommendations of the Furman review and the request for a market study into the Digital Advertising Market Study are major developments for the digital economy. The shape of the proposals reflects existing telecoms regulation, particularly the suggestion that conditions might be imposed on incumbents’ ‘significant market power’. As mentioned above, the UK is not the only European jurisdiction grappling with these issues. For example, the EU is still in the process of implementing recommendations and developing policies in pursuit of the ‘Digital Single Market’  (see our previous posts here, herehere and here). The possible review of EU merger thresholds to deal with and review the possible competition consequences of so-called ‘killer acquisitions’ has also been discussed widely in Brussels. The recommendations in the Furman report, and the Chancellor’s embrace of the need for CMA involvement, bring into focus the wider question of how the UK will navigate the imperative of a pan-European approach to the digital economy with the political turbulence created by Brexit…

Canal+ finds copyright is no match for the EU single market

The EU General Court (GC) has rejected an appeal brought by Groupe Canal+ (a French pay-TV broadcaster) against commitments proposed by Paramount, and accepted by the Commission, to address competition concerns related to cross-border access to pay-TV content (see here – only available in French). 

The GC found that: (i) the commitments proposed by Paramount addressed the Commission’s competition concerns in relation to its content distribution licence with Sky UK; and (ii) that the competition-infringing provisions could not be justified on the basis of copyright protection.

The key competition law issue arose from provisions in the Paramount/Sky UK licence which guaranteed Sky UK absolute territorial exclusivity in the UK and also prevented Sky UK from making its pay-TV services available to consumers in other parts of the EEA in response to unsolicited requests (i.e. a restriction of “passive sales”, the bête noire of competition law).

Background 

In 2014 the Commission began investigating certain clauses in licensing agreements between the six major Hollywood studios (Paramount Pictures, Disney, NBCUniversal, Sony, Twentieth Century Fox and Warner Bros) and pay-TV broadcasters which prohibited the broadcasters from providing content via satellite or online streaming outside their specific EEA member states.

In 2015 the Commission sent a statement of objection to Sky UK and the six Hollywood major studios which considered that bilateral licences that prevented Sky UK from offering access to its pay-TV services to EEA customers outside the UK and Ireland breached competition law (see here). 

In 2016 Paramount gave commitments to the Commission in order to close the investigation.  Paramount committed to stop using clauses preventing broadcasters from responding to unsolicited requests from consumers based elsewhere in the EEA and agreed not to enforce any existing restrictions. These commitments were accepted by the Commission on the basis that they would last for five years (see here).  The Commission Decision accepting the commitments laid out the basis for the infringement; however, as is typical for the commitments process, it did so rather briefly.

Canal+ also had a contract with Paramount and appealed the commitments decision before the GC on the basis that: (i) territorial exclusivity is essential for the production of European cinema, which is mainly financed by TV channels; and (ii) territorial exclusivity is necessary to protect intellectual property rights.

The GC’s findings 

The GC rejected the Canal+ appeal in its entirety. 

It considered that the Commission’s commitments decision established competition concerns under Article 101(1) TFEU and that these were sufficiently addressed by the Decision.  The GC noted that the commitments did not prohibit the granting of exclusive broadcast licences to pay-TV broadcasters; rather, it prohibited only absolute territorial exclusivity.

The GC rejected the argument that territorial exclusivity is necessary to protect intellectual property rights. In particular, it found that copyright owners are free to demand a premium in exchange for a pan-EEA licence. However, if a premium is paid to guarantee absolute territorial exclusivity this is irreconcilable with the imperative of the EU single market. 

Arguments that the relevant clauses promote cultural production and diversity and that their abolition would endanger the cultural production of the EU were also rejected.

Finally, the GC rejected the Canal+ argument that the commitments violate the interests of third parties (such as Canal+) as third parties could still sue Paramount for breach of contract.

Comment

The case is a further illustration of the Commission’s determination to tackle measures that undermine the EU single market, such as absolute territorial protection. Consequently, the use of copyright arguments to justify partitioning the single market will be given short shrift. 

The approach of the GC may also encourage the Commission to press ahead with the pending case against the remainder of the Hollywood studios – despite evidence of considerable concerns (including among politicians) about the impact of any decision on the economics of European TV/cinema.

Having said that, it is unclear what the actual impact of the commitments given by Paramount will be: given the national nature of copyright, anything other than a pan-EU licence will leave the broadcaster exposed to the risk of infringement proceedings if it sells into countries not covered by the licence. 

US District Court confirms that Qualcomm must offer RAND SEP licences to rival chipset manufacturers

In California, Judge Koh has granted partial summary judgment in favour of the FTC against Qualcomm, making an order that Qualcomm must license its SEPs to rival chipset manufacturers (such as Intel). 

We explained the background to this judgment and its significance in a previous post. Although the ruling is limited to Qualcomm’s position vis-à-vis competing manufacturers without commenting on the position of other SEP holders, it indicates that FRAND requires ‘licensing to all’ (at least in respect of the rules of ATIS and TIA, which, like ETSI, are members of the Third Generation Partnership Project, the collaboration of standard setting organisations behind the development of standards such as 4G LTE and 3G UMTS). The result could be a shift in the focus point for licensing SEPs in cellular standards from the manufacturers of end devices (handsets) to the manufacturers of chipsets.

The issue

Qualcomm had declared its SEPs as essential to two US standard setting organisations (SSOs), the Alliance for Telecommunications Industry Solutions (ATIS), and the Telecommunications Industry Association (TIA). In return, each SSO required Qualcomm to license its SEPs on RAND terms (note that the exact wording of the ATIS IPR policy and TIA IPR policy differ slightly, although this made no substantive difference in these proceedings).

The FTC alleged that both of these policies required Qualcomm to license its SEPs to all applicants, including competing chipset manufacturers. Qualcomm argued that the IPR policies contain limitations and that Qualcomm is not required to license its SEPs to applicants, like chipset manufacturers, that only produce components of devices. The FTC applied for partial summary judgment on this point (the trial on the wider issue of whether Qualcomm’s actions have harmed competition is scheduled for January 2019).

The decision

Judge Koh preferred the FTC’s interpretation, taking into account the following points:

  • Non-discrimination: Judge Koh reasoned that “if a SEP holder could discriminate against modem chip suppliers, a SEP holder could embed its technology into a cellular standard and then prevent other modem chip suppliers from selling modem chips to cellular handset producers”. She suggested that such discrimination could enable a SEP holder to achieve a monopoly, in direct contradiction of the stated purpose of the TIA IPR policy.
  • Industry practice: as part of its argument, Qualcomm claimed that chipset manufacturers never receive SEP licences. However, Qualcomm itself had received licences to manufacture and sell components, and had received exhaustive licences from over 120 companies, indicating that it could not be contrary to industry practice for chipset manufacturers to obtain SEP licences. 
  • Prior litigation:  when defending a patent infringement case against Ericsson, Qualcomm had previously claimed that the TIA policy required Ericsson to license any patents ‘required to develop products compliant’ with a given standard. Qualcomm suggested that this requirement would enable all industry participants to develop, manufacture and sell compliant products, and importantly, that chipsets were ‘compliant’ products covered by the policy.
  • Implementing the standard: Judge Koh also dismissed Qualcomm’s arguments that chipset manufacturers do not practise its patents. She noted that neither the ATIS not TIA policy restricts a SEP holder’s FRAND obligations to applicants that themselves practice or implement a whole standard. She emphasised that Qualcomm’s own documents demonstrate that a modem chip is a core component of a cellular handset, and that such chipset implements key cellular technologies.

Judge Koh also referred to a Ninth Circuit precedent (Microsoft II) as establishing that that Qualcomm’s RAND commitments include an obligation to license to all comers, including competing chipset manufacturers. She noted that in Microsoft II the Ninth Circuit had been interpreting a SSO IPR policy with almost identical language to the TIA and ATIS IPR policies.

For all of those reasons, Judge Koh agreed that the test for partial summary judgment (that ‘the meaning of the contract is unambiguous’) was met, and that both IPR policies required Qualcomm to license its SEPs to chipset manufacturers.

Conclusion

Although it was only a hearing for partial summary judgment, this case aired a significant number of the issues and arguments involved in the ‘licensing to all’ debate. These were all dealt with thoroughly by Judge Koh, though Qualcomm is expected to appeal. 

Judge Koh’s reliance on Qualcomm’s previous conduct highlights a frequent problem for large SEP holders that act as both licensor and licensee; it is difficult for such companies to eliminate conflicting positions in different cases.  However, not every judge will place the same weight on such considerations: in Unwired Planet, Birss J dismissed the relevance of past statements made by Ericsson and other SEP holders as to the appropriate total royalty burden (although in TCL Judge Selna took the opposite approach).   

In any event, this ruling is unlikely to be the last word on the matter. The case primarily focussed on contractual interpretation, rather than on antitrust as such. Establishing a contractual requirement for Qualcomm to offer licences to competing chipset manufacturers is one thing. Whether Qualcomm and any chipset manufacturers can agree the terms of a (F)RAND licence is quite another, particularly given that the order relates only to the ATIS and TIA IPR policies and so has a direct impact only on licences to those of Qualcomm’s SEPs which have been declared to ATIS/TIA, rather than necessarily on its global portfolio.  It remains to be seen whether Qualcomm will elect to carry this finding across to SEPs declared to other standards bodies, such as ETSI, and whether chipset manufacturers will in fact benefit from an exhaustive licence from Qualcomm.

Unwired Planet v Huawei: Court of Appeal upholds Birss J’s judgment

The keenly awaited appeal judgment in Unwired Planet v Huawei was handed down yesterday. In its unanimous judgment, the Court of Appeal dismissed Huawei’s appeal, confirming Mr Justice Birss’s first instance decision (see previous commentary here and here) on FRAND licensing of standard-essential patents (‘SEPs’). We summarise the key findings below. 

1. Global licensing may be FRAND

The Court of Appeal held that a global licence can in principle be FRAND, and that if such a licence is refused by an implementer, the SEP holder should be entitled to the usual relief available for patent infringement, including an injunction. Agreeing with Birss J that Unwired Planet’s portfolio is substantial in size and scope and that Huawei’s business is global in nature, the Court decided that a global licence is what reasonable companies would have agreed on the facts of this case.

The Court of Appeal disagreed with Birss J on one point.  In the Court’s analysis, Birss J’s finding that there is only one set of FRAND licence terms in any given scenario was at odds with the complexities of patent licensing – and concepts such as fairness and reasonableness did not sit easily with Birss J’s rigid approach. This did not affect the Court’s overall conclusion on the global licensing issue, however. 

Implications

The Court of Appeal’s strong endorsement of Birss J’s approach means that the UK is likely to remain an attractive forum for SEP holders seeking to resolve global licensing disputes.  Nevertheless, the judgment still leaves scope for new issues to be raised: the Unwired Planet saga turned very much on its own facts and on Birss J’s assessment of those facts. The judgment does not mean that every future court-determined SEP licence will necessarily be global: this will depend on the nature of the portfolio to be licensed and the implementer’s sales and manufacturing footprint.  The law in this area is likely to continue to develop as new issues are raised (for example, an appeal of a jurisdiction challenge is currently pending before the Court of Appeal in another FRAND licensing case) and as other jurisdictions continue to develop their FRAND jurisprudence. 

2. Unwired Planet’s offer was non-discriminatory

The Court of Appeal agreed with Birss J that the ‘ND’ limb of the FRAND obligation only requires a SEP holder to offer a rate which reflects the proper valuation of the portfolio to all potential licensees. However, a SEP holder is not prevented from charging less than that benchmark rate if it chooses to do so. Indeed, the Court acknowledged that price discrimination is inherently neither pro- nor anti-competitive, stating that “an effects-based approach to non-discrimination is appropriate”. In cases where discrimination below the FRAND benchmark rate does cause competitive harm, this can be addressed by the application of competition law.

The approach of the Court of Appeal is in line with European competition law, which only identifies anti-competitive discrimination where there is a risk of competitive harm.  Arguably, the ruling at first instance went further, and required actual harm to be proved (the Court of Appeal did not address this point). 

Implications

SEP holders are likely to welcome this flexibility, which may also be beneficial for implementers who are looking to take advantage of a bespoke deal.  But in the context of litigation, implementers may be concerned that the ND obligation now lacks teeth. Nevertheless, prior licences of a particular portfolio are likely to remain of critical importance in any comparator licence analysis under the “fair and reasonable” limb of FRAND (unless they can be sufficiently differentiated, such that they are deemed not to be comparable), so the Court of Appeal’s judgment doesn’t give SEP owners a free hand to license at differential rates.

3. The Huawei v ZTE negotiation framework is not a set of prescriptive rules

The Court of Appeal has taken a pragmatic view, holding that just one part of the Huawei v ZTE framework is mandatory: the obligation on the SEP owner to contact and notify the implementer before starting litigation. The remainder of the framework is said to provide a ‘safe harbour’ – the licensor may stray from it, but in doing so faces risks of infringing Article 102 and being unable to obtain an injunction.

Implications

Whilst the Court has endorsed Birss J’s relatively flexible approach to applying the Huawei v ZTE framework, parties should nonetheless think carefully before straying too far from the scheme established by the CJEU.  Non-compliant conduct may remain high-risk if litigation occurs in the courts of other EU member states.

What next for FRAND?

The High Court’s judgment has been upheld and so the ‘FRAND injunction’ issued by Birss J will now take effect, unless a further suspension is ordered while an appeal to the Supreme Court takes place.  Huawei has already indicated that it may seek permission to appeal.

It remains to be seen to what extent the courts of other countries, including emerging FRAND centres such as China, will sit back and allow the UK courts to play ringmaster on FRAND/SEP issues. Recent guidelines issued by the courts of Guangdong (an important tech centre in China) suggest that global FRAND disputes may also find a home in other jurisdictions.

In any event, FRAND in the UK will continue to be influenced by developments in other countries, whether that is the approach of the US courts (as seen in cases like TCL v Ericsson), or the policies of the European Commission (which published a Communication on SEPs in November 2017), or guidance issued by other authorities such as the Japanese Patent Office (which issued a guide to SEP licensing negotiations in June this year).


SEP holders’ guidelines on IoT / 5G FRAND licensing

The Commission’s SEP Communication was designed to offer guidance on FRAND and SEP licensing. However, as we have noted before, it did not take a position on certain controversial issues such as use-based licences, or whether the FRAND obligation requires licences to be offered to any company that asks for one.  These issues will become increasingly important as the Internet of Things (IoT) continues to develop and more companies at different levels of the supply and distribution chain enter the SEP licensing arena for the first time.  

Earlier this year we reported on the establishment of two CEN-CENELEC workshops, one primarily backed by SEP holders, one primarily backed by implementers, that both seek to produce guidance on industry best practice for SEP licensing. We noted that each workshop was likely to take a different view on these kinds of issues. 

The first workshop, backed by Nokia and IP Europe, has now produced a first draft of its Guidance for licensing SEPs in 5G and the IoT. The draft is available for public review and comments until 13 December 2018. It sets out six principles that should apply in SEP licensing: 

  1. Owners of patent rights which are essential for using standardised technologies (SEPs) should allow access to that patented technology for implementing and using the standard. 
  2. Both the SEP owner and the potential licensee should act in good faith with respect to each other with the aim of concluding a FRAND licence agreement in a timely and efficient manner.
  3. Each party should provide to the other party, consistent with the protection of confidentiality, information that is reasonably necessary to enable the timely conclusion of a FRAND licence.
  4. “Fair and reasonable” compensation should be based upon the value of the patented standardised technology to its users.
  5. A SEP owner should not discriminate between similarly situated competitors.
  6. If the parties are unable to conclude a FRAND licence agreement within a reasonable timeframe they should seek to agree to third party determination of a FRAND licence either by a court or through binding arbitration. 

Taken at face value, these principles may sound uncontroversial.  However, implementers may feel that the devil is in the detail.  One point which is likely to provoke dissent is the question of who is entitled to benefit from SEP licences.  The document observes that there is usually one point or level in the supply chain where a SEP owner will choose to license its technology for a given product or service.  It is suggested that some consensus around this will simplify licensing, reduce costs for all parties and help maintain a level playing field between licensees. In other words, it indicates that ‘licensing to all’ is not required. 

The basis on which royalties are to be calculated is also likely to prove controversial.  In suggesting that compensation “should be based upon the value of the patented standardised technology to its users”, the document does not make clear whether this should include value attributable to the technology’s inclusion in a standard (the EC Communication and previous guidance in the Horizontal Guidelines suggests that such value should in principle not be included).  Other indicators which the Guidelines suggest may be considered include consumer demand, measurable benefits of the patented standardised technology, and the price difference between substantially identical products with and without the standardised technology.  This text suggests that there is indeed an intention to move away from the ‘incremental value’ rule, an issue which has recently been raised as part of the wider, significant debate about the role of antitrust in FRAND in the United States. (See for example, this letter by 77 former government enforcement officials and professors of law, economics, and business to Assistant Attorney General Delrahim, in which they criticise a number of speeches the AAG has made. They suggest that patent hold-up is a serious antitrust concern partly because “implementers are vulnerable to paying supra-competitive royalties based on the entire value of the product, not on the value of the patented technology”; the AAG’s response, supported by a number of other experts, is here.)

The second workshop is yet to publish the first draft of its alternative proposal. However, based on previous positions adopted by the Fair Standards Association (FSA) and ACT | The App Association, it seems likely that it will:

  • Stipulate that a patent owner cannot seek to increase the value of its patents by focusing on value created by downstream innovators and devices.
  • Call for an obligation on SEP holders to license only relevant patents – which may not necessarily be an SEP holder’s entire SEP portfolio.
  • Require licensing to any and all that seek a license.

In short, it is likely to take the opposing view to the first workshop on the key unresolved issues in the interpretation of FRAND.  

If the final products of each workshop are completely opposed to one another, they will not be particularly helpful as guidance to new potential licensees. It may require judicial or regulator intervention to resolve these issues before the full rollout of the IoT and 5G.  It remains to be seen where the first real determination of these kinds of questions will take place. One possibility is the FTC v Qualcomm case in California (discussed here), where the FTC is seeking a declaration that Qualcomm must be prepared to license competing chipset manufacturers. That could provide a persuasive authority on whether FRAND requires licences to be offered to all, although other jurisdictions may of course take a different view.

CLIP of the month: Strengthening Buyer Power as a Solution to Platform Market Power?

Each month we publish a ‘CLIP of the month’, a publication that we have found to be controversial or thought provoking (if you haven’t noticed this feature before, see above, look to the right of your screen, just below the header!).

This month’s CLIP (available here) comes from two of the CMA’s economists, writing on the dynamics of platform-to-business relationships, and the options for market solutions in the face of calls for greater regulation.  According to the authors, the key is finding a market-based counter-balance to the power held by platforms. The authors theorise that this could come from the collective bargaining power of the platform’s users. 

It is welcome to see individuals from within the competition authorities considering the alternatives to regulation, which could prove difficult in such a fast moving area.  It is also notable that the UK may seek to move in a different direction from many of the EU member states which appear to favour greater regulation.  However, such market-based alternatives may themselves face competition law challenges, given the risks that exist around collective bargaining and exchange of information between competitors.  At least some of these risks are recognised by the authors (and it is worth reading an economist’s perspective on this from David Parker of Frontier Economics, here).   However, without some kind of safe harbour for such discussion across all relevant territories, the competition law risks are likely to remain a significant disincentive to such collective action.  There may also be a problem of timing.  In the case of existing businesses, the incentive and ability to challenge platform market power may be at their highest before true platform market power emerges.  

The role and (potentially) regulation of platforms is likely to remain a key area of debate in competition policy for the foreseeable future.

Summer FRAND developments: some big antitrust news to come

Back in May this year, the Court of Appeal sat for five days to hear Huawei’s appeal of Birss J’s judgment in Unwired Planet.  The bench included two of the Court’s most experienced patents judges in Lord Justices Kitchin and Floyd (and Kitchin LJ has now been appointed to the Supreme Court, see here). Although rumours circulated that the Court of Appeal’s judgment might be forthcoming before the summer vacation, nothing materialised, and the expectation now is that the judgment will be published at the start of the Michaelmas term, which begins on 1 October. (A reminder of the issues being appealed can be found here.)

That judgment will be hugely significant for the conduct of FRAND negotiations, licensing and litigation both in the UK and elsewhere. This is not least because there are now several FRAND cases before the High Court, including Apple v Qualcomm, Conversant v ZTE & Huawei, Philips v ASUS & HTC and TQ Delta v Zyxel (the latter on ASDL, rather than ETSI telecoms standards). All of these are likely to be affected by the Court of Appeal’s decision.

However, the upcoming judgment isn’t the only relevant FRAND news. FRAND is a global concern, and recently there have been other FRAND developments around the world that are worth noting.

Delay to German Supreme Court ruling in Sisvel v Haier 

Back in 2015, the Düsseldorf Regional Court granted Sisvel an injunction against Haier for infringement of two its SEPs. However, on appeal, the OLG Düsseldorf held that Sisvel had failed to offer Haier FRAND terms as per Huawei v ZTE because Sisvel’s offer was discriminatory (there was a significant difference between Sisvel’s treatment of Haier and its competitors). Sisvel appealed to Germany’s Supreme Court, the Bundesgerichtshof.

In parallel, Haier had brought proceedings challenging the validity of the two Sisvel SEPs. One has now expired, and the other was declared invalid at first instance. Sisvel has appealed this decision.

The Supreme Court has now suspended its decision on the FRAND side of the case until the patent proceedings are completed, to avoid the risk of conflicting judgments (the decision is here, in German).  

It seems likely that if the invalidity decision is upheld, the Supreme Court will decline to make a final determination on the FRAND issues. Given the limited case law available on the discrimination aspect of FRAND (see here for some discussion of this), as well as the lack of consensus on the approach to FRAND in the German regional courts, this will mean that uncertainty continues at least as regards the German position for the foreseeable future.

Haier fails to convince US Court to take up digital TV case

Meanwhile, over in the USA, Haier had sought to turn the tables on other holders of declared SEPs, having brought a case in the Northern District of New York alleging a conspiracy by the holders of SEPs reading onto the ATSC standard.  Haier claimed that a patent pool established by companies including LG and Panasonic and administered by MPEG LA was artificially inflating prices above a FRAND level, and that licensors were refusing to license individually.

The Court rejected the claim on limitation grounds earlier this month (September 2018) and did not engage with the substance of the allegations (see here). 

FTC moves for summary judgment on Qualcomm’s obligation to license competitors 

In the Northern District of California, the FTC is engaged in proceedings against Qualcomm, alleging that Qualcomm has excluded competitors and harmed competition by withholding its baseband processors unless a customer accepts a licence on terms favourable to Qualcomm (including disproportionately high royalties). The trial is scheduled for early January 2019.

However, at the end of August, the FTC filed a motion for partial summary judgment regarding a key aspect of the case. It has asked for a declaration that under its FRAND obligations, Qualcomm must license its SEPs to its chipset competitors such as Intel.

Whether FRAND requires SEP holders to grant a licence to any company that asks for one (known as licensing to all) is a hotly debated topic.  The answer is potentially of wide significance, because it could fundamentally affect the licensing model that has applied in the sector for the past 20 years. For example, if all chipset manufacturers were licensed (potentially at royalties based on the chipset price rather than on the price of a smartphone) the manufacturers of smartphones may not require licences at all (depending on laws relating to pass-through and exhaustion) which would have a major impact on how SEP licensing currently operates.  Alternatively, the price of chipsets themselves might need to rise significantly to account for the increased IPR costs.  Or manufacturers may start to seek to tailor licences to different uses, splitting value along different parts of the supply and distribution chain. 

Examples of any judicial authority considering this topic are rare. The Commission dodged the issue in preparing its 2017 Communication on SEP Licensing (see here), although the Korea Fair Trade Commission has found Qualcomm’s refusal to license its SEPs to competing chipset manufacturers abusive (the decision is here, but note that Qualcomm is appealing). Although the California Court’s judgment will relate to the ATIS and TIA standards interpreted on the basis of US law (rather than ETSI FRAND interpreted on the basis of French law), it is still likely to be influential in Europe.