European Commission announces e-commerce sector inquiry

Everything Online is the focus of the European Commission’s latest sector inquiry announced on 26 March 2015.  This inquiry focuses on the e-commerce sector and is aimed at identifying key technical or contractual barriers to cross-border trade imposed by companies themselves (as opposed to “other” barriers  such as differences in language, national legislation and consumer preferences).  These “other” barriers may be tackled by the Commission in its wider push to complete the Single Digital Market (see here).  

The Commission’s interest in technical barriers in e-commerce can be traced as far back as 15 years ago, when it began separate investigations into Visa and MasterCard.  The Commission found that via each of the Visa or MasterCard organisations, participating banks had collectively set multilateral cross-border credit and debit card fees (which were too high).  The MasterCard investigation and subsequent appeals has only just been concluded (for the recent MasterCard Court of Justice judgment see here and for the European Commission decision and press releases see here).  These investigations identified a need for regulation of multilateral interchange fees

However in 2013 Commissioner, Almunia signalled that the Commission shared wider concerns about the online sector, in particular e-commerce (see our blog post here).  Since then, recent regulatory investigations have focussed on the following areas: 

The Commission is particularly alive to Most Favoured Nation clauses in contracts or “MFN” which have a number of different guises but which are essentially agreements between a supplier and a specific distributor/retailer stipulating that the supplier will offer the best available terms to the distributor/retailer.  The Commission and national competition authorities have conducted investigations into MFN clauses in a number of sectors, including online motor insurance and online sports good retail, but  the most high profile investigations have been the e-books investigation (see our guest blog post from Avantika Chowdhury of Oxera here) and hotel online booking investigations (see our post here – by way of update we note that has just this week agreed to drop its “price, availability and booking conditions parity provisions” in commitments agreed with French, Italian and Swedish regulators; however, certain ‘narrow MFSs’ are retained).

Geo-blocking, online music streaming, online search engines
In parallel to its e-commerce sector initiative, the European Commission is also understood to have initiated some new related investigations:

  • An investigation into online retailers of video games for personal computers: the concern is understood to be the possibility that such retailers are taking technical measures to prevent consumers from accessing websites in other Member States by re-routing customers to the retailers’ websites in their home country.  This is not the first time the Commission has investigated such behaviour – it looked into similar practices by Apple iTunes in 2007, leading to a voluntary change in Apple’s business practices. 
  • An investigation into online music distribution: the Commission is understood to be investigating agreements between Apple (again) and online music labels/digital music companies over concerns that their agreements may be foreclosing competitors from the market.
Experience in the field of MFNs belies a growing feeling that the EU legislation governing vertical agreements is out-dated and doesn’t properly deal with the actual way in which online business operates.  For example, the current legislation does not provide enough detail on how MFNs should be categorised  are they hard-core restrictions incapable of exemption or lesser restrictions which may be exemptible?  If they are capable of exemption, under what circumstances? 

But it may not just be legislation relating to vertical agreements that needs to be re-cast.  While each new investigation tackles case-specific antitrust concerns, the results will all feed into the e-commerce sector inquiry, building a picture of the e-commerce landscape and the barriers to cross-border trade.  These may ultimately develop into a new vertical agreements regulation, changes to copyright (national TV rights, for example, seem to be in the scopes of the geo-blocking initiative) or even completely new sector-specific legislation  WATCH THIS SPACE!

Elisabetta Rotondo

New DG Connect Guidelines on interoperability information – shedding some light on the vexed question of IP valuation

Last year, I had the opportunity to contribute in a small way to an interesting project organised by DG Connect under the wider umbrella of the Digital Agenda for Europe initiative.  The project related to valuing and licensing interoperability information – and while competition law is of course not the central consideration in this context, it is a relevant factor underlying some of the issues involved.  
The project led to the creation of a specimen licence and the publication of guidelines (details below).  The latter offer an interesting perspective on the valuation of different types of IP which may constitute interface information.
In the competition law context, valuation issues in relation to IP most often come up in the standard essential patent context.  This project was explicitly aimed at non-standardised technology.  However, some of the guidance – while of course not binding, even for interoperability information – could be said to be transposable to the standards context also.  For example, the suggestion that, where patents are concerned, a judicial finding of validity may warrant higher royalty rates than patents which have not been tested is a principle which has its proponents (and opponents) in the FRAND context.  
Equally, other guidance is clearly not applicable – for example, the suggestion that royalty rates may vary depending on the relationship between the licensee’s product and the licensor’s own products.  In the standards context, licensors are of course subject to a FRAND obligation which limits their ability to discriminate on subjective factors of this kind.  Even for interoperability information, licensors should be cautious if they may be in a dominant position – as Microsoft of course found to its cost.  
The Guidelines can be downloaded (free of charge) from the European Commission online book store, here.  For completeness, the specimen licence can also be found on the Europa book store, at this link.

Sophie Lawrance

UK Supreme Court ruling on standard of review for CAT appeals in 08x numbers case

A rare foray by the UK Supreme Court into telecoms regulation provides a fascinating insight into the standard of review applicable by the Competition Appeal Tribunal (CAT) of regulatory decisions. The judgment also provides a useful statement of principle as to the relevant evidence a regulator can take into account in reaching a decision.  

In BT v Telefónica O2 and Ors the Supreme Court considered regulatory principles applied by Ofcom, in using its statutory adjudication powers under the Framework Directive (2002/19/EC) to resolve a dispute between BT and four mobile network operators on the pricing applied to termination charges for non-geographic numbers. Such numbers allow premium rates to be charged to consumers. 

In summary, a dispute came for adjudication before Ofcom when BT exercised a contractual variation right to implement a new interconnection pricing scheme. Under this scheme, prices would change according to the price the originating mobile network charged the customer. The networks complained to Ofcom that the proposed change was anticompetitive. 

Following the completion of its statutory adjudication procedure, Ofcom agreed - it found BT had failed to demonstrate the change would benefit consumers.  BT appealed Ofcom’s decision to the CAT, which conducted an appeal ‘on the merits’ and rejected Ofcom’s evaluation of the pricing structure as anticompetitive. The mobile operators appealed the CAT’s judgment to the Court of Appeal, which reversed the CAT decision.  Finally, BT appealed this judgment to the Supreme Court. 

The Supreme Court’s unanimous judgment (given by Lord Sumption) considers the EU Common Regulatory Framework for telecoms, of which the Framework Directive forms part, in depth. It provides useful comment on the nature of the regulator’s assessment and the role of the Courts in evaluating such assessments on appeal.  The judgment also contained several broad statements of principle worth highlighting:

  • Lord Sumption emphasised that freedom of contract is the primary subject of regulation. At paragraph 34 he stated: “The terms of the interconnection agreement are the necessary starting point for this process. If there is no contractual right to vary the charges, it is difficult to see how Ofcom can approve a variation unless it is necessary to achieve end-to-end connectivity (for example to enable operators to recover their efficient costs) or to achieve the Article 8 objectives. If there is a contractual right to a variation, but the proposed variation is not consistent with the Article 8 objectives, Ofcom may reject the variation.” 
  • At paragraph 42 Lord Sumption ruled that the burden of proof was on Ofcom to show consumer harm arose if it wished to reject a contractual variation proposed by BT: “the sole basis on which Ofcom rejected the new charges was that the welfare test having been inconclusive, it had not been demonstrated that BT’s new schedule of charges would produce consumer benefits. In my opinion, this was wrong in principle, [...]. BT were contractually entitled to vary their charges unless the proposed variations were inconsistent with the Article 8 objectives, including the objective of ensuring consumer benefit in accordance with Article 8.2(a).”  At paragraph 46 he also endorsed the CAT’s finding of fact that: “the effect of not allowing BT to introduce innovative charging structures was itself anticompetitive because innovative pricing structures are an effective mode of competing.”
The Supreme Court's approach is refreshing.  As a matter of principle it is surely correct that courts and regulators should intervene in markets only where good evidence supports such intervention.  The burden of proof is correctly placed on the regulator (or complainant). It cannot be right that a regulated firm (or, for that matter, a dominant firm) should be required positively to demonstrate consumer benefit in order to be permitted to make an innovative change. 

David George and John Townsend

Enacted: Consumer Rights Act 2015

On 26 March the Consumer Rights Act 2015 was enacted.  The Act will bring about substantive change in a number of areas.  Of most interest to competition law buffs is Section 81 of the Act which gives effect to Schedule 8 which, in turn, amends the Competition Act 1998 and the Enterprise Act 2002.  These changes, when they come into force, will significantly bolster the importance of the Competition Appeal Tribunal – at long last turning it into the primary venue for competition cases in the UK. The changes will also usher in the possibility of opt-out collective actions and create a ‘fast track’ for smaller injunction disputes in England, Wales and Northern Ireland (about which we have blogged previously here and here).

Pursuant to Section 100(5) of the Act, these changes will “come into force on such day as the Secretary of State may appoint”.  So competition lawyers will have to continue biting their nails in excited anticipation – watch this space.

David George

Sticky switching opens the way to over-stickering

Lord Justice Floyd has had occasion recently to remind us of the re-packaging/re-labelling rules in a recent Court of Appeal judgment in European Pharma Ltd and Doncaster Pharmaceuticals Group Ltd and Madaus GmbH. The Court of Appeal, overturning the first instance judgment, held that it was legal for a parallel importer (Doncaster) to export pharma products containing the active ingredient Trospium Chloride from France and Germany where they were marketed under the trade mark Céris and UriVesc respectively and import them into the UK by affixing the products with the UK trade mark ‘REGURIN’.
 Article 7(1) Trade Mark Directive provides for EU-wide exhaustion where the parallel importer uses a trade mark from the country of export and re-affixes it onto a product to be imported to another Member State. However, this case was different. Here the parallel importer was re-labelling a product with the trademark of the country of import. In this instance, re-affirming previous case law in Pharmacia & Upjohn v Paranova, the court determined that trade mark owners may take steps to prevent such over-stickering unless doing so creates an impediment to free movement of goods between Member States. That would be the case where over-stickering is necessary to obtain effective access to the market and is not simply for the importer’s commercial advantage.

Trade mark holders will be concerned that in this case the very points evidencing the success of the REGURIN brand were those relied upon as showing that it was necessary for the parallel trader to over-sticker. The strength of the UK brand therefore prevented the trademark owner from exercising its UK trademark rights to stop what is, on its face, an infringement.  The facts relied on as evidence of “necessity” were the fact that doctors and pharmacists were resistant to switching away from prescribing by reference to 'REGURIN' rather than the generic INN and the impracticability for Doncaster to set up a new brand and persuade doctors to prescribe to it. This is because parallel importers are dependent on purchases from third parties and therefore cannot guarantee supply. As a result of this resistance to using non-branded products, the court found that it was indeed necessary to over-sticker the products entering the UK with the UK TM REGURIN in order for Doncaster to be able to compete effectively. An attempt to prevent this would be an impediment to the free movement rules. Furthermore, Doncaster did not obtain a commercial advantage from over-stickering as it would never be able to sell more cheaply than a generic. 

This case will STICK in the minds of trade mark holders who, as a result of this judgment may find their ability to benefit from their trade marks curtailed after expiry of the patent. However trade mark holders may find some solace in the fact that before using their trademarks, parallel importers will still have to prove that over-stickering is necessary to gain effective access to the market and will have to comply with the five conditions protecting the guarantee of origin of the trade mark owner’s mark as set out in Bristol Myers Squibb v Paranova.

Guidance from the Court of Justice – the ‘hot topic’ of patent licences and litigation

Readers of this blog on the competition law/IP interface will already be familiar in at least broad outline with Advocate General Wathelet’s Opinion in Huawei v. ZTE.  Parties presently engaged in SEP litigation in the EU are currently waiting (feverishly, in some cases) for the Court of Justice ruling (there is still no date for this, at the time of writing).  Pending such further elucidation, readers who would like a more in depth review may be interested in my article on the Opinion, published in Competition Law Insight last month.
Another future ruling which will be of great interest to the bloggers on the CLIP board (and hopefully to their readers also) will be given in response to a request from the Paris Cour d’Appel in Genentech v. Hoechst.  Unlike Huawei v. ZTE in which the referring Düsseldorf Court raised 5 multi-part questions, the Paris Court has posed an apparently simpler, single, question – namely, does Article 101 preclude the enforcement of an obligation to pay patent royalties for a sole licence to certain patents which have since been revoked?  
Although the Paris referral relates to a very different industry to the SEP case, this reference is in fact complementary to the issues at play in Huawei v. ZTE.  One of the points discussed in AG Wathelet’s Opinion in Huawei is the idea that licences should be concluded promptly, but without requiring the licensee to enter into a no-challenge arrangement – thus accepting that challenges to the licensed IP may continue after the licence has been concluded.  Of course, in many SEP licences, which often include very large numbers of individual patent rights, there is little chance of the licensee revoking all or even a significant proportion of the licensed rights.  But in some cases, developments after the grant of the contract may result in the licensee having a licence which is less valuable than it bargained for.  The outcome in Genentech v. Hoechst may indicate how licensors and licensees can, or should, provide for this eventuality.  It may also indicate whether the EU approach is more or less in line with the US where post-expiry royalties are viewed as contrary to the antitrust rules, as we reported here.

German Federal Cartel Office (FCO) decision in HRS (online hotel booking)

Following Avantika's excellent post on “most favoured nation” or “MFN” clauses, we’ve decided to make an article on the same subject our “CLIP of the month” (look to the top right…).  In this, Dr Volker Soyez takes a step back and looks at the December 2013 prohibition decision by the German Federal Cartel Office issued against Hotel Reservation Service (“HRS”) an online hotel booking platform. I’m not quite sure that the FCO’s decision is quite ‘the beginning of the end of MFN clauses’, but he’s quite right to note that competition authorities are no longer turning a blind eye to such provisions. 

Here are a few points to whet your appetite for the article itself. 

  • MFNs should not be classified as hard-core restrictions
The article questions the suggestion that MFNs could in some circumstances be regarded as akin to RPM (an idea mooted by the FCO in its December 2013 decision).

  • It will be an uphill struggle to satisfy Article 101(3) TFEU... but context is key.
Dr Soyez notes that avoiding free-riding could be a legitimate criterion for individual exemption but only in exceptional circumstances - he highlights the damning words of the FCO: the comprehensive elimination of competition created by the MFN would never be necessary and proportionate to protect HRS’s investments especially where HRS had other less restrictive methods at its disposal for recouping such fees. 

  • An MFN imposed by a dominant undertakings is likely to be a “no no”
The article comments that it may be tough for a dominant company to justify MFNs and highlights that the FCO found HRS to have abused its dominant position. 

This (and other comment) sets in stark relief that context is key for the assessment of MFNs: the greater the impact on the market (whether because of industry - wide practice or because of significant market power), the greater the likelihood of an MFN being regarded as anti-competitive.  

The avoidance of free - riding is a key stated reason for MFNS in online trading. However, Article 101(3) is a demanding standard and it remains to be seen whether free riding can provide a defence satisfying that standard. As ever, the most difficult aspect of the high standard for exemption seems likely to be the “indispensability” criterion and particularly showing that the MFN was an indispensable means of recouping sunk costs.

Fast track CAT injunctions - have your say on the draft rules

6 February saw a new consultation on a draft set of new rules of procedure for the Competition Appeal Tribunal ('CAT').  

One potentially very significant aspect of the proposed changes is the proposal to empower the CAT to grant injunctions and set up a 'SME-friendly' fast track procedure.  The fast track is intended to give smaller companies a swift, cheap and cost-capped route to obtain injunctive relief for breaches of competition law.  These proposals could affect IP-heavy industries as there is often scope to argue that the 'legal monopoly' afforded by copyright, patent, SPC (etc.) has been 'leveraged' to the detriment of competition.  At present, the cost of bringing such claims before the High Court is prohibitive for small parties without third party funding and cases rarely reach trial.  Given the claimant-friendly nature of the fast track, this could all change soon.

As I noted when I previously blogged on the earlier incarnation of these proposals, a key battleground will be the first case management conference ('CMC') where the CAT decides whether or not to fast track a case.  This CMC will take place after the close of pleadings (potentially within three months of the claim being filed) and the claimant should have already specified at the same time as lodging its claim the reasons why it believes the claim should be fast tracked (in compliance with draft rule 30(4)(c)).  

Importantly, under draft rule 57(1)(a) a case must come to trial "as soon as practicable and in any event within six months" of the CAT ordering the fast track procedure. This might mean a substantive hearing within 9 months of the claim being filed.  Under draft rule 57(3)(b) it must be possible to determine the issues within a trial of three days or less.  

Draft rule 57(3) contains other factors relevant in deciding whether the case is suitable for fast tracking, including: (a) the novelty or complexity of the case; (b) the scope of documentary disclosure required; and (c) the evidence (factual and expert) needed at trial. Of course these factors could be thought of as largely subsidiary to the first two elements mentioned earlier: it's not going to be possible to try in just three sitting days a complex, novel case requiring extensive disclosure and heavy fact and expert evidence within a six month timetable.

The government hopes that the fast track will learn from the highly successful Intellectual Property Enterprise Court ('IPEC').  However, at this stage the differences seem almost as great as the similarities. For a start, there is no obligation for an IPEC case to reach trial  within six months "in any event". Although a quick trial is a sensible aspiration, draft rule 57(1)(a) seems overly rigid and might lead to unnecessary costs. Second, the proposed 'cost-capping' regime is much less transparent than in IPEC.  Recoverable costs for larger IPEC cases are capped at £50,000 for liability issues and £25,000 for quantum disputes on a blanket basis.  The proposed fast track allows the CAT flexibility to set a cap (which is to be welcomed) but whether a cap will apply, and the level of the cap, is not determined until the first CMC. This means a claimant may incur significant costs (and adverse costs exposure) before it even knows whether the case will be fast tracked.  The government originally proposed that a claimant should have an option to 'walk away' without costs exposure to the defendant if the cap were set at a level it was not prepared to accept (see para 4.25 of this paper) but this appears to have been dropped.  Finally, there is no capping on the amount of recoverable damages in the fast track in contrast to the IPEC where damages for larger cases are capped at £500,000.  The system therefore lacks a natural cut off between fast track and ordinary CAT cases which may mean too many claimants try to squeeze into the fast track.

The consultation closes on Friday, 3 April.  Be sure to have your say if you might be affected by these proposals.  My article in the Competition Law Journal might be of interest to those who like to see a more detailed commentary on this topic.

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The published Lundbeck decision - first impressions (with some facts, a little law and three remarkable points)

Over a year and a half after it was decided (a delay which this blog has bemoaned in the past), the Commission last month published the full (non-confidential) text of the decision on the patent settlement agreements entered into by Lundbeck and a number of generic companies.

This is a long and dense decision. There is much to consider.  It is clear that, for patentees and alleged infringers in the pharmaceutical sector who wish to settle (or suspend) litigation, there are many mantraps for the future.  Those mantraps could even have a collateral impact on those in other sectors, or engaged in other activities, where IP or settlements, are concerned. 

Were it not for the risk of boring our readers, we could doubtless write a number of articles about this decision, which is one of the most important recent Commission decisions on the IP / competition interface.  But in this first post, I will stick to an important point on the facts, a summary of the legal test that is applied to patent settlement agreements, and to some discussion of three points of particular interest.

A point on the facts

Before looking at the legal test, it is worth noting that the agreements considered in the Lundbeck decision are not ‘classical’ settlement agreements.  Instead of constituting a full and final settlement of the litigation, each of the infringing agreements simply suspended the litigation, and the generic’s entry, for a fixed period of time.  

Based on this decision alone, it cannot therefore be excluded that a different approach would, or should, be taken to settlements which conclusively dispose of a dispute.  Indeed, the decision notes briefly that certain other settlement agreements entered into by Lundbeck were not challenged by the Commission.  It would have been helpful to have more detail about what distinguished these (apparently) non-infringing agreements from the infringing agreements identified in the decision.  The limited information which is provided suggests that these agreements closely matched the criteria in the Patent Settlement Monitoring reports (we discussed the latest report here) - i.e., they represented a complete capitulation by one of the parties (in this case, Lundbeck), and/or didn’t involve any ‘pay-for-delay’ element.

Summary of the legal test

The agreements entered into by Lundbeck and the would-be generic entrants are treated as object infringements.  The Commission notes that such infringements are serious, but not necessarily obvious.  Bearing in mind the recent CJEU Cartes Bancaires judgment which arguably reined in the scope for novel object infringements to be found, we expect this to be a key focus of the appeals. (Details of the grounds on which Lundbeck is appealing are available here - a plea based on inappropriate use of the object category is indeed included.)

The Commission’s analysis of the agreements is structured as follows:
  • The analysis is predicated in each case on the idea that Lundbeck and the would-be generic entrants are potential competitors (a particularly significant aspect of the case, which is discussed further below).
  • Restrictions upon the generic company’s conduct are identified in each of the agreements - these sometimes, but not always, include a ‘non-infringement’ provision, which the Commission describes as a ‘non-compete’.
  • A ‘value transfer’ in favour of the generic company is identified (the decision sets out to demonstrate that the value of such transfers corresponds roughly to what the generic expected to make on the market, but this does not appear to be a necessary element of the infringement).
  • The decision seeks to demonstrate that the value transfer in each case "induced" the generic to abandon independent efforts to enter.
A couple of further elements are briefly discussed in connection with the legal test.  These are worth noting, but appear to carry less weight than the elements mentioned above:
  • The question of whether the settlement exceeds the exclusionary scope of the patent in suit is not determinative of whether there has been an infringement - however, if an agreement does exceed the scope, the restrictions on competition are “all the more clear”.
  • The parties’ intentions are investigated but are said not to be probative: on a cynical view, this suggests that evidence intention is relevant where it supports the Commission’s interpretation of the agreements, whereas exculpatory intentions (in particular where they concern the maintenance of an IP right) are liable to be downplayed.
  • In connection with ‘inducement’, the decision sets out to demonstrate that the generic obtained at least around the same, in financial terms, as it would have made on the market - however, this does not seem to be an essential ingredient.  
The central legal test applied by the Commission is actually reasonably clear (which is to be welcomed, after a long period without such detailed guidance) - but it remains highly fact-specific.  Even though the agreements entered into by Lundbeck were considered to be anti-competitive ‘by object’, the decision notes that:
  • patent settlements which limit the commercial freedom of one of the parties do not "necessarily" infringe Art 101; 
  • similarly , it is "not necessarily" the case that all patent settlements containing a payment will be problematic - although the higher the payment, the more likely that it "may" constitute an exclusion payment. 
Finding the bright lines will be a challenge for companies wishing to settle patent litigation in cases where the parties seek a genuine compromise, as opposed to a wholesale capitulation by one of the parties.

Three remarkable points

1. Look no patents!

By far the most remarkable point for anyone who spends time with patents (or patent lawyers!) is the almost complete absence of patents from the legal test.  While the factual background sections of the decision look at what the parties thought the outcome of litigation might be, the legal assessment treats the agreements purely as contracts to delay one party’s entry (and the analogy with cartel agreements is explicitly made).  No consideration is given to the relative merits of the case or the outcome of the litigation on either an ex ante or an ex post basis.  

This case is made on the basis that it is an object infringement, without any alternative basis upon effects. Query how effects could be identified without taking a position what the ultimate outcome of the patent litigation would have been, if it had persisted.

2. Everyone’s a competitor 

Secondly, the position on potential competition is radical, compared to the case law in the pharmaceutical sector and beyond (cf., for example, the approach taken in a relatively recent pharma merger case which considered the question of potential competition by reference to the concept of whether entry was sustainable). 

Lundbeck shares with Samsung and Motorola a stated assumption of patent validity.  In the standard essential patent cases, this was a credible position, and one which was reflected in the legal analysis.  In this case, however, credibility is strained by the finding that Lundbeck and the would-be generic entrants are potential competitors, i.e. the generic entrants had real and concrete possibilities to enter and remain on the market.  While it cannot be excluded that generics will attempt to enter ‘at risk’, a legal theory which considers only this possibility is irremediably one-sided, since it necessarily assumes that the patent in question would ultimately have been invalidated**.   This surely contradicts the stated assumption of patent validity - and has the potential to have significant spill-over effects, e.g., in relation to the Commission’s policy on licensing agreements where it may now be more difficult to argue that any given agreement should be reviewed under the standard applicable to non-competitors.

3. A question of policy - but which policy and whose?

This decision is rich in statements which betray something of the Commission’s views on patent policy.  It is hard to pick out just one such statement, but perhaps the following (from recital 67) is among the most interesting:

“During the period of patent exclusivity, from the moment the patent holder […] has obtained a marketing authorisation for a medicinal product until the expiry of the SPC (or of the patent if no SPC was granted), corresponding in practice to a maximum period of fifteen years, the patent holder may be able to charge a price for the medicine resulting from the invention that is higher, often far higher, than its marginal cost of production. This allows the originator company to recoup the significant investment it makes in research and development of new medicines (not just the particular product that is being successfully marketed, but also numerous projects that never reach the marketing stage). The end of this period reflects the assessment by the legislator that this is the point in time where the cost to society of continued patent protection, in the form of extra profits to the originator company from its exclusive position, starts exceeding the benefits to society.”

The patents which were the subject of Lundbeck’s settlement agreements were not the patent covering the original pharmaceutical compound, which had expired, but rather a series of different ‘process’ patents covering manufacturing methods.  The key concern alluded to in this paragraph is that the patents claimed by Lundbeck did not protect a new product. Yet this is not part of the legal test for patent protection. 

The Commission argues that the legislature only intended to accord medicines a standard period of patent protection, as extended by SPCs. But this ignores the fact that the legislature has made patent protection available to other, 'secondary' inventions: indeed, incremental innovation makes up the vast bulk of patent applications.  Such innovations are likely to become all the more important as fewer new compounds are developed, and there is greater reliance on the development of combination products and second medical uses for existing drugs (an issue on which we commented recently).  

Leaving aside the wider policy implications, this aspect of the Commission’s policy suggests that parties settling litigation on an original compound patent may be less likely to encounter competition law obstacles than those seeking to enforce ‘secondary’ patents in a way which defers (even theoretical) generic entry.  Only time will tell how accurate this assumption will prove to be - but for now,  a cautionary note to finish – even if the Commission observes the primary/secondary patent distinction, it cannot be guaranteed that all NCAs will adopt a similar course.

** Of course, the patent might alternatively have been held to be non-infringed.  The decision does not attempt to assess which of these outcomes was more likely.  Rather, it relies on the idea that, post-expiry of the compound patent, the market is ‘in principle’ open to generic competition.  Statistics drawn from the sector inquiry report about the high rate of invalidity of ‘process’ patents appears to have played into this conclusion.

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Companies ShrIEEEk at new SSO bylaws

BOLD FRAND statements seem to be the order of the year.  The IEEE Board of Governors has just approved its new standards policy relating to patents.  The IEEE is the US standards body responsible, for the creation of, among other things (the Wi-Fi standard and the 802.11 WLAN standard). 

Its new policy is not dissimilar in some respects to the position in the recent Chinese MIIT paper (see our blog here) in that they both: 
  • remove the availability of injunctive relief in situations where the licensee has been willing to abide by the outcome of an independent adjudication to determine certain issues for example what a reasonable royalty would be; and 
  • make a FRAND commitment binding on assignees and transferees of SEPs.
Both papers are also fairly BOLD in approaching the thorny and much debated issue of how a reasonable royalty is to be assessed:
  • Both suggest that a reasonable royalty should be calculated and paid by reference, among other things, to the value that the functionality of the invention contributes to the value of the “smallest saleable patent compliant unit” rather than the whole market value of the product in which the particular technology is included.
  • Both the MIIT and the IEEE propose to have regard to the total aggregate royalties that may apply if other essential patent holders require similar terms.
  • Both policies expressly exclude from the assessment of reasonableness any value resulting from the inclusion of the relevant technology in the standard.  According to the IEEE, the calculation should not reflect the “cost or inability of implementers to switch from the Essential Patent Claim’s technology included in the standard.”  See IEEE FAQs here.
The IEEE’s adoption of its new patent policy has been cleared by the United States Department of Justice in a business review letter.  Notably, however, the DOJ was careful not to take a view on whether the IEEE’s policy choices meet the IEEE’s requirements.  The DOJ commented that there is unlikely to be a one size fits all policy for all standard setting organisations and  that variation may be beneficial.  In approving the IEEE policy the DOJ noted that:
  • clarifying the meaning of the RAND commitment before completion of the standard, should give participants in the standard-setting process greater knowledge of their obligations and rights, which may promote ex ante competition for inclusion in the standard; 
  • this up-front approach could aid ex ante and ex post licensing negotiations assuring patent holders that they should be compensated for the value of the technology, otherwise they may become reluctant to contribute to standards or invest in future R&D; and
  • clarifying the RAND commitment may also help to reduce the instances of hold-up, help ensure access to the relevant technology comprised in the standard and remove some anti-competitive practices.
The DOJ agreed that SEP holders would be less likely to engage in patent “hold-up” –if injunctions were not available against “willing licensees.  This was not surprising given previous DOJ remarks and US judicial comment which has in recent years supported the view that it is difficult for a SEP holder who has made a FRAND commitment to obtain an injunction. 

Critics complain that the willing licensee test is too pro - licensee as licensees can delay paying royalties while awaiting the outcome of an independent adjudication.  It is argued that this problem is acute where the patentee holder has a portfolio of patents, each of which may be subject to the same hold-out.  The DOJ suggests that courts might reduce this concern by requiring potential licensees to place some money in escrow pending determination of any dispute.

Inevitably, efforts to adopt a new policy dealing with such a commercially sensitive and heated topic have led to significant disagreements within the IEEE.  The outcome has seen much comment (both positive and negative) from elsewhere.  Claims of bias within the IEEE have been made and concerns raised that the committee responsible for the proposals underlying the new policy had included only companies holding a narrow range of opinions.  If correct and if this were an EU standards setting organisation then this could potentially give rise to competition law concerns (see the European Commission’s horizontal guidelines here).  However, the DOJ rejected these claims, saying that there were ample opportunities to consider the views of all parties.  

Views are deeply divided as to the merits of the new policy.  While Cisco hails the policy a victory for licensees, the same policy has met with trenchant criticism and opposition by numerous prominent commercial entities.  Orange has openly expressed its disappointment with the change in policy, Qualcomm is said to be “reconsidering its participation” in IEEE standards development and Ericsson and the Innovation Alliance have all been outspoken in their disagreement with the approach.  Those who have been following similar debates in ETSI will be unsurprised by the degree of upset and the issues that are said to be of concern.

In sum, the IEEE policy espouses a more transparent up-front approach.  It reflects to some extent views from overseas such as the MIIT in China, and yet has met with wariness from the European Commission.  The European standards setting organisation ETSI has for some time been reviewing its own policy.  History suggests that ETSI will not follow the IEEE in seeking to  identify the best approach to the nirvana of a reasonable royalty rate, choosing the less contentious course,  as has been the general trend by competition authorities in the EU, of deferring such questions to the determination of a court or arbitrator on a case by case basis.