16 October 2018
We have previously reported on FRAND guidance from other jurisdictions outside of Europe, such as those published in South Korea a couple of years ago (see here), as well as on EU initiatives, such as last year’s Commission Communication (see our comments here). Earlier this year, the Japan Patent Office (“JPO”) published a “Guide to Licensing Negotiations Involving Standard Essential Patents”, which aims to shed light on key topics concerning FRAND licensing. It provides a useful summary of licensing negotiations and royalty calculations for standard essential patents (“SEPs”), including taking into account the possible implications of the rise of the Internet of Things on future FRAND-based negotiations.
The Guide focusses on the “two aspects of FRAND”: the negotiation process itself, and the terms of the resulting licence agreement.
For the first aspect, it gives advice on how to negotiate in good faith, from the perspectives of both the patent holders and the implementers of patented technology. It also sets out actions that it suggests are likely to increase the efficiency of FRAND licensing negotiations, including around timing and issues such as the level of the supply chain at which negotiations should take place. Generally, the Guidelines limit themselves to outlining the issues, and are far from prescriptive. However, the footnotes provide useful examples of cases from around the world that demonstrate how courts have dealt with particular aspects of these negotiations, including Unwired Planet v Huawei ( EWHC 711 (Pat)) and Huawei v ZTE (Case C-170/13  CJEU), which we have reported on previously (see, for example, here and here). Indeed, the licensing negotiation methods proposed are closely aligned to the perspective of the Court of Justice.
For the second aspect of FRAND, namely the terms of the licence, the Guide focusses predominantly on different ways of calculating a FRAND royalty, including the “top-down” and “bottom-up” approaches for calculating the royalty rate. It also sets out the advantages and disadvantages of using the smallest saleable patent practising unit compared to the entire market value as the royalty base, a subject that has sparked debate in recent years with the emergence of new technology such as smart phones and connected vehicles.
Of particular note is the fact that the JPO’s Trial and Appeal Department now provides non-binding advisory opinions in relation to the technical scope of a patented invention. Also, since April 2018 the JPO has been offering opinions to parties in disagreement over the essentiality of a patent. This appears to be in line with an increased emphasis in Japan on arbitration and alternative dispute resolution: in June 2018, it was announced that Asia’s first international arbitration centre specialising in patent disputes would be opening in Tokyo later in the year (see here).
From the European perspective, the global reach of the Japanese guide is of note: drawing on case law from around the world, it suggests that different national approaches to FRAND can be unified. For the authors, it is too soon to assume that there is a consistent global approach of FRAND. Recent announcements from US policy-makers, for example, suggest that the approach to the balance to be struck between licensor and licensee may be changing in a way which differs from that seen in Europe (compare and contrast, for example, Assistant AG Delrahim’s rejection of the role of antitrust in FRAND violations which appears likely to favour licensors, evident desire for balance between licensor and licensee interests in most of the European Commission’s recent statements.
Nevertheless, for those with an interest in FRAND issues, the JPO Guide is well worth reading for an overview of the key considerations for parties engaged in SEP licensing negotiations. The JPO has stated that it aims to keep the Guide updated regularly, with contributions from experts from around the world.
16 February 2018
CRISPR-Cas9 is heralded as a revolutionary gene editing technology that is regularly hitting the headlines for both its scientific promise and fiercely fought patent wars. Our colleagues have written extensively on these aspects (see here and here), but in this blog, we focus on the competition law issues which surround the growing trend for the creation of patent pools in the life sciences sector. The creation of the CRISPR patent pool was announced last spring by MPEG LA, an organisation well-known for creating patent pools for consumer electronics. Thus far, only the Broad Institute has publically revealed that it has submitted patents for evaluation. Patent pools can be subject to anti-trust scrutiny. Both the European and US competition authorities have provided guidance on this issue – see section 4.4 of the European Commission’s Technology Transfer Guidelines and section 5.5 of the US DOJ’s IP Licensing Antitrust Guidelines. These guidelines recognise the pro-competitive benefits of patent pools which can help integrate complementary technologies, reduce transaction costs, and limit cumulative royalties. In this case, there appears to be a clear pro-competitive benefit in offering a single licence for CRISPR technology as there currently exists a complex web of relevant patents that is growing by around 100 new patent families each month. Having said that, the competition authorities on both sides of the Atlantic also identify a number of competition law risks – namely, the risk of collusion, price fixing or foreclosure of alternative technologies. Indeed, the European Commission has previously investigated a patent pool for non-invasive prenatal testing (see our commentary here). The authorities’ guidance suggests principles which can reduce this risk. In particular, the European Commission suggests that:
- Participation (as a licensor or licensee) should be open to all.
- Only complementary technology should be included (inclusion of substitute technology is likely to infringe competition law).
- Independent experts should be involved in the creation and operation of the patent pool.
- Safeguards against the exchange of sensitive information should be in place.
For the CRISPR pool, MPEG LA has made an open call for patents, and will evaluate each patent before it is accepted. Its involvement, as a separate licensing body, should play an important role in safeguarding against the exchange of sensitive information. Looking ahead, MPEG LA may reduce the competition law risk by reviewing the pooled patents regularly, and considering licensing parts of the pool separately. In the life sciences sector, strands of research can head off in entirely new directions such that only half of the pool may remain relevant.
There are also commercial concerns for the CRISPR pool to overcome. Whilst technology and telecommunications pools are common, life science pools, such as the Golden Rice and Medicines Patent Pool, are rare and often not profit driven. One reason for this may be the prevalence of exclusive patent licensing in the sector, as well as the relative lack of interplay between technologies in traditional small molecule medicines.
This leaves MPEG LA with a tricky tightrope to walk. Having the Broad Institute on board is a promising start, but UC Berkeley, holding the patent to the underlying technology, must also join for the pool to be commercially successful. Beyond these two key players, the selection of patents to include will require some tricky choices: too few patents and the pool fails to achieve its aim of reducing transaction costs and may deter some investment by potential licensees altogether; too many and patent holders may be concerned about the returns they will achieve, and be wary of making the necessary large investments in further research.
We’ll be looking out for any further developments and will post them to the CLIP Board as and when they occur.
23 January 2017
On 18 January, the FTC announced that Mallinckrodt ARD Inc. (formerly Questcor Pharmaceuticals, Inc.) and its parent company have agreed to pay $100 million to settle FTC charges that they violated antitrust laws when Questcor acquired the rights to a drug that threatened its monopoly in the U.S. market for adrenocorticotropic hormone (ACTH) drugs. The announcement was made concurrently with the release of the FTC's complaint. Antitrust (as opposed to merger) cases about acquisitions of competing technology are not an everyday occurrence. However, this complaint has something of the flavour of the EU Commission’s Tetra Pak 1 decision. In that case, the EU Commission objected to Tetra Pak’s acquisition (through a merger) of exclusive rights to what was at the time the only viable competing technology to Tetra Pak’s dominant aseptic packaging system. The Commission (and subsequently the EU courts) held that this would prevent competitors from entering the market and therefore amounted to an abuse of a dominant position.
The FTC’s Mallinckrodt complaint alleges that while benefitting from an existing monopoly over the only U.S. ACTH drug, Acthar, Questcor illegally acquired the U.S. rights to develop a competing drug, Synacthen (a synthetic ACTH drug which is pharmacologically very similar to Acthar). This acquisition stifled competition by preventing any other company from using the Synacthen assets to develop a synthetic ACTH drug, preserving Questcor’s monopoly and allowing it to maintain extremely high prices for Acthar.
To judge by the FTC’s complaint, the case appears to contain some pretty stark facts which may have contributed to the immediate settlement of the proceedings by Mallinckrodt. Those facts also bring the case squarely into line with the US and EU competition regulators’ current concern over excessive pricing in pharma.
First up is the finding that Questcor had a 100% share of the U.S. ACTH market and that it took advantage of that monopoly to repeatedly raise the prices of Acthar from $40 a vial in 2001 to more than $34,000 per vial today – an 85,000% increase. The complaint details that in August 2007 Questcor increased the price of Acthar more than 1,300% overnight from $1,650 to $23,269 per vial and that it has taken significant and profitable increases on eight occasions since 2011 pushing the price up another 46% to its current $34,034 per vial. Acthar is a speciality drug used to treat infantile spasms, a rare seizure disorder affecting infants, as well as being a drug of last resort (owing to its cost) for a variety of other serious medical conditions. According to the FTC, Acthar treatment for an infant with infantile spasms can cost more than $100,000. In Europe, Canada and other parts of the world doctors treat these conditions with Synacthen which is available at a fraction of the price of Acthar in the U.S. (Synacthen is not available in the U.S. as it does not have FDA approval.) The FTC relies on the supra-competitive prices charged in the U.S. for Acthar as evidence of Questcor’s monopoly power as well as its 100% market share and the existence of substantial barriers to entry.
It is also part of the FTC’s case that Questcor disrupted the bidding process for Synacthen when the rights came up for acquisition. According to the complaint, Questcor first sought to acquire Synacthen in 2009, and continued to monitor the competitive threat posed by Synacthen thereafter. When the U.S. rights to Synacthen were eventually marketed in 2011, dozens of companies expressed an interest in acquiring them with three firms proceeding through several rounds of detailed negotiations. All three firms planned to commercialise Synacthen and to use it to compete directly with Acthar including by pricing Synacthen well below Acthar. In October 2012, Questcor submitted an offer for Synacthen and subsequently acquired the rights to Synacthen for the U.S. and thirty-five other countries and did not subsequently bring the product to market in the US.
In addition to the $100 million payout, the proposed court order requires that Questcor grant a licence to develop Synacthen to treat infantile spasms and nephrotic syndrome to a licensee approved by the FTC, a pretty far-reaching remedy.
This case is the latest in a string of cases on both sides of the Atlantic relating to escalating pharma prices (as discussed in our previous blog posts here and here). While companies retain significant scope to price products as they see fit, it reaffirms that pharma companies should be wary of implementing very significant price increases in the absence of good objective reasons for doing so. This is particularly so where the increase is facilitated by commercial strategies such as acquiring IP rights to existing/potentially competitive products. In the EU, it is also worth remembering that – as established by Tetra Pak I (on appeal to the General Court) – an agreement which falls within a block exemption can at the same time constitute an infringement of Article 102. So companies and their advisors should remember to wear Article 101 and 102 hats when reviewing agreements.
22 August 2016
Just over a week ago, the US Federal Trade Commission and the Department of Justice’s Antitrust Division published a proposed update to the current US Antitrust Guidelines for the Licensing of Intellectual Property (the IP Licensing Guidelines). Issued in 1995, the IP Licensing Guidelines are the US equivalent of the European Commission’s Technology Transfer Guidelines, and set out the US agencies’ antitrust enforcement policy on the licensing of patents, copyright, trade secrets and know-how. Whereas the Technology Transfer Guidelines were introduced in 2004 and updated in 2014 (our contemporaneous comments on the changes can be found here), the IP Licensing Guidelines have been in effect for rather longer. The FTC and DOJ have asked for comments on the proposed update from interested parties – including lawyers, economists, consumer groups and the business community – by 26 September 2016. According to this FTC press release, the US agencies’ aim is to “modernize the IP Licensing Guidelines without changing the agencies’ enforcement approach with respect to intellectual property licensing…”. The proposed update thus retains the basic analytical framework of the 1995 guidelines. As FTC Chairwoman Edith Ramirez puts it, the updated guidelines “reaffirm our view that US antitrust law leaves licensing decisions to IP owners, licensees, private negotiations and market forces unless there is evidence that the arrangement likely harms competition”. The proposed revisions do, however, take into account developments in US case law that have occurred in the last 20 years or so. One of the most significant such developments was the US Supreme Court’s decision in Leegin Creative Leather Products v PSKS (2007) that resale price maintenance (RPM) agreements should be assessed under the rule of reason, rather than being treated as per se illegal. The proposed amendments to the guidelines reflect this change in thinking. Although the Leegin case arose in a sale of goods context, the US agencies take the view that the Supreme Court’s analysis of vertical pricing restrictions applies equally to price maintenance in IP licences. The rule-of-reason treatment of RPM by the US courts and agencies stands in contrast to the stricter EU approach: RPM is treated as a ‘hardcore restriction’ in the Commission’s Technology Transfer Block Exemption. Another area in which the US and EU agencies take divergent approaches is in relation to the treatment of obligations to pay royalties after the expiry of the licensed IP right. The revised US guidelines refer to the recent Supreme Court case of Kimble v Marvel (2015), in which it was confirmed that post-expiry patent royalties are unenforceable. In contrast, the Commission’s Technology Transfer Guidelines state (at paragraph 187) that “the parties can normally agree to extend royalty obligations beyond the period of validity of the licensed intellectual property rights without falling foul of Article 101(1) of the Treaty”.
Yet in other respects, US and EU attitudes to the relationship between IP licensing and competition law are very similar. Both view IP licensing as typically pro-competitive and good for innovation. The draft revised text of section 2.3 of the US guidelines states: “Licensing can allow an innovator to capture returns from its investment […] through royalty payments from those that practice its invention, thus providing an incentive to invest in innovative efforts”. This echoes the view expressed by the Commission in paragraph 9 of its Technology Transfer Guidelines: “[…] licensing as such is pro-competitive as it leads to dissemination of technology and promotes innovation by the licensor and licensee(s)”. In addition, the function of the antitrust “safety zone” outlined in section 4.3 of the US guidelines is akin to that of the “safe harbour” established by the Commission’s Technology Transfer Block Exemption: both seek to provide a degree of certainty for licensors and licensees alike and use market share thresholds.
In the final analysis, the proposed revisions to the US guidelines are arguably most striking for what they omit to deal with. They do not address, for example, any issues relating to the licensing of standard essential patents (SEPs) or (other than in a single, brief paragraph) settlement agreements. This is perhaps surprising given that both the FTC and the DOJ have paid considerable attention to such issues in recent years. While the Commission’s Technology Transfer Guidelines also do not address these subjects exhaustively, they are in this respect arguably more helpful to practitioners and businesses than the US equivalent. Where licensing agreements relate to both EU and US markets, however, it remains important for those involved to have regard to both sets of guidance.
25 July 2016
The European Commission has accepted legally binding commitments from the International Swaps and Derivatives Association Inc. (ISDA), a trade organisation in the market for over-the-counter derivatives, and Markit, a financial information service provider, to license their IP on fair, reasonable and non-discriminatory (FRAND) terms (see here). This forms part of an EU-wide initiative to make financial markets more efficient, resilient and transparent.
The Commission opened an investigation into the credit default swaps (CDS) market in March 2011. A CDS is a contract designed to transfer the credit risk linked to a debt obligation – it can be traded ‘over the counter’ or ‘on an exchange’. The vast majority of CDS trading takes place over the counter, despite limited price transparency and high transaction costs.
The Commission was concerned that the parties had blocked or delayed the emergence of exchange traded products, which could be more effective, safer and cheaper. In particular, it found that:
- ISDA had refused to license (or restricted the use of) its proprietary rights in the ‘Final Price’ which determines the payment to be made following the default of a debt obligation; and
- Markit had refused to license its CDS indices which are essential to support new exchange products.
To address these concerns, the Commission has accepted legally binding commitments from ISDA and Markit to license their IP rights on FRAND terms. They have also committed to exclude CDS dealers from taking individual licensing decisions, as well as influencing such decisions.
It remains to be seen how the parties will go about setting FRAND terms particularly as they operate outside of the usual FRAND arena of telecoms where there is the most legal precedent and a more developed legal framework. Notably, the commitments are subject to mandatory third-party arbitration in case of dispute. This goes further than the Court of Justice’s only decision on FRAND which requires the parties’ agreement for any arbitration (Huawei v ZTE in relation to standard essential patents – see here). This decision is in a different context, but it is a useful reminder that remedies provided for by way of commitments may end up going further than what is required by law, despite there being no actual finding of infringement.
3 March 2016
Following up on Sophie’s recent blog, it was my pleasure to be the Bristows’ attendee at the second of this week’s FRAND/standardisation conferences, along with IP partner Alan Johnson. The conference, organised by the Competition Law Forum, was well attended with a high quality panel of speakers. Among the attendees, it was very good to catch up with a couple of Bristows alumni, including David George, until recently a prolific CLIP Board blogger and now at the CAT as a referendaire – perhaps we’ll be able to persuade him to contribute a few guest blogs in future.
On substance, as with the LCII conference on Monday, there was quite a bit of debate about the implications of recent judicial and SSO pronouncements for hold-up theories as well as the usual disagreement about where innovation in markets reliant on standardised technology really takes place and how best to incentivise it.
An interesting point made by a couple of people was the need to recognise that those engaged in innovation through the standardisation process, and those who use standardised technology and innovate in other ways to develop products that will attract users, rely on each other to make money. Often a company will innovate in both fields, sometimes contributions are more in one aspect of innovation than the other, but the commercial success of the technology and the resultant financial rewards depend on efforts in both fields. On hold-up and hold-out, a number of the usual arguments were articulated. In summary, some argued that hold-up had always been theoretical, with no empirical evidence to show it had ever been a practical problem, and that following the Judgment in Huawei v ZTE (see our earlier posts here and here) it was no longer possible at all. As on Monday, however, others were not so sure. Those who saw remaining hold-up concerns pointed to distinctions between the clear obligations imposed on those who gave FRAND declarations under the new IEEE IP policy (no injunctions unless an implementer refuses to accept a third party adjudicated rate) described here and the less certain position under
Huawei v ZTE which focuses on procedure and imposes obligations on both parties.
The basic approach under Huawei v ZTE was not widely criticised, but it was noted that a number of aspects of the procedure provided in the CJEU judgment were not entirely clear, leaving scope for debate and uncertainty about when the procedural requirements had been fulfilled. Given the possibility of different approaches by the courts in different member states when interpreting those requirements, some risk of injunction was still argued to exist (even for a party which had sought to comply with the CJEU’s process) implying that risks of hold up continued in the absence of some clear boundary - as under the IEEE policy. Others felt that the ability to seek an injunction was a basic right, that a threat to seek an injunction was not an abuse and that there was no need for ‘unnecessary and revolutionary changes’ such as those in the new IEEE IP policy. Such views underpinned challenges to the adoption of the policy as described here. As is almost always the case at such conferences, following recent case law in the US (see here and here) and the adoption of the IEEE policy, the linked questions of the place in the value chain at which licensing should/must take place (component manufacturer or end device manufacturer) and the appropriate royalty base (end device or smallest saleable patent practising unit (“SSPPU”) were hotly debated. Recent US cases were discussed and some expressed scepticism about importing the SSPPU concept to Europe – although the Commission’s Rambus settlement was mentioned as an example of an approach of that type. Commissioner Vestager’s comments (reported here) on the need to offer licences to all comers were also discussed.
It was noted that a reason that these questions are so hotly contested is because they go to the fundamental question (mentioned above) of how great a share of the profits from the success of a standardised system should go to those who develop the underlying standardised technology and how great a share should go to those who design and manufacture products which consumers want to buy and to continue buying/upgrading. Not surprisingly, no resolution was reached. As ever, and as noted by Sophie in her comments on Monday’s conference, identifying what is FRAND when granting or taking a licence remains a difficult question - and central to all these debates.
The economists present appeared to agree, broadly, with the Commission’s position in the horizontal guidelines that, while incentives to innovate should not be undermined, nevertheless in principle patented innovations incorporated in a standard should not be rewarded in a way which captures value beyond the value of the particular innovation. The economists present also appeared to agree that this was a difficult approach to apply in practice! Regular readers of this blog will recall that the recently created Fair Standards Alliance enshrines this as one of its key principles for FRAND licensing (see here). Finally, one company (and as this was a conference under Chatham house rules, I can’t reveal which one!) introduced an initiative to try and resolve some of the problems of SEP licensing in the forthcoming Internet of Things by creating a multiparty licensing platform to reduce transaction costs when licensing standardised technology. Guidance on the competition law treatment of patent pools can be found in the Technology Transfer Guidelines as discussed briefly here, and such initiatives have been tried in the past (including for 3G, where a pool arrangement was approved by DG Comp, when such things were still possible). It will be interesting to see how this one fares and we shall be looking out for more information…
1 March 2016
The context for the first of two standards-related conferences this week was the launch of the Liege Competition and innovation Institute (or LC2I to its friends). Perhaps unsurprisingly, given the sponsor, the day had something of a pro-licensor flavour, even though recent legal developments, at least in the US (see here)), have been rather more pro-implementer. The majority of panellists seemed to consider the concept of "hold-up" - the idea that SEP holders can extract over-compensation for their rights by virtue of their inclusion in an industry standard - to be something of a mythical beast, that one can describe, but never actually encounter. But agreement was not absolute. Renate Hesse of the United States Department of Justice emphasised that an understanding of FRAND was necessarily founded on the potential for hold-up, even if empirical data tends to suggest that, on the whole, the industry is not in fact being 'held up'. Coming at the matter from a different angle, Professor Larouche (University of Tilburg) also noted the missing theory of harm from last year's Huawei judgment (something that was also discussed at the time, including on this blog) and pointed out that it is not only potential exclusion which can harm competition, but also exploitation, in the form of overly high royalties. This is surely correct: however rare (or frequent) such "over-priced" licences are in practice, the FRAND concept surely implies a measure of restraint in royalty demands and is not limited, as one of the panellists suggested, to being a purely qualitative / procedural concept.
If anything, it was FRAND itself which was the "unicorn in the room": the focus of the FRAND debate has shifted over the past few years away from the question of what FRAND means, in terms of value, to more tractable - albeit still highly controversial - issues. I would expect this trend to continue. With most SSO IPR policy reviews now having completed without consensus for change (or, in the IEEE's case, with change imposed despite the lack of consensus), the most likely focus now seems to be on measures to improve declaration processes, and to reduce possible over-declaration. This may prove a more fertile ground for agreement, although aligning incentives, legality and cost-effectiveness is unlikely to be straightforward.
In the meantime, we look forward to part 2 of the week of standards conferences at the BIICL this Wednesday.
1 October 2015
Last night we had the pleasure of giving a seminar at our offices on competition law developments in the pharma sector. We looked at investigations into patent settlements, and in particular the ‘pay for delay’ cases. We also reflected at how the recently published Lundbeck and Servier decisions may impact upon other important areas for pharmaceutical companies, such as licensing transactions. We concluded by drawing some ‘bright lines’ to try to assist in navigating what can sometimes appear to be a very grey area, providing practical guidance where we could. After a thorough review of a complex, and sometimes daunting, area of competition law we enjoyed a well deserved drink with many familiar faces, and some new ones too...
For those of you who couldn’t make the seminar a webinar version is available here and the slides here.
4 September 2015
If you are interested in competition law developments in the pharma sector, it’s still not too late to register for a seminar that a couple of us will be giving on Wednesday 30 September. We will be looking in some detail at the latest patent settlement cases, with a view to trying to find some much-needed legal certainty. We will also be talking about how the Commission’s conclusions in its Lundbeck and Servier decisions may apply to other areas such as licensing transactions, as well as considering the impact of the competition authorities’ increasingly narrow approach to market definition.
Registration is via Bristows’ main website – here.
A podcast of the seminar, together with the slides, will be available after the event
Pat Treacy and Sophie Lawrance