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

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

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

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

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

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

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

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

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

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

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

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

Licensing commitments sufficient for Qualcomm to secure NXP takeover green light

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

The technologies involved

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

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

Competition concerns and remedies

NFC

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

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

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

Interoperability

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

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

MIFARE

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

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

Final thoughts

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

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

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

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

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

French competition authority fines pharma company for its anti-generic ‘commando’ sales tactics

On 20 December 2017, the French competition authority, the Autorité de la Concurrence (ADLC) announced that it had fined Janssen-Cilag and its parent company Johnson & Johnson €25 million for having delayed the entry and subsequent development of generic alternatives to the drug Durogesic.  The ADLC focused on two distinct types of behaviour:  repeated attempts to persuade the French regulatory body, the Agence française de sécurité sanitaire des produits de santé (AFSSAPS), which were characterised as frivolous and without merit; and a sustained marketing campaign by Janssen-Cilag aimed at undermining the efficacy of the generics before medical practitioners.  

Background.  Durogesic is a powerful opioid analgesic, marketed in France by Janssen-Cilag, a subsidiary of Johnson & Johnson.  It is prescribed in cases of severe pain, including those suffering from cancer and is administered in the form of a skin patch.

Interventions with medical authorities. Following authorisation in Germany of its generic formulation, Ratiopharm sought to obtain mutual recognition across the European Union to enable distribution of its new medicine.  The European Commission gave its approval in October 2007, requiring member states to comply within 30 days.  However, Janssen-Cilag wrote on several occasions to AFSSAPS, requesting meetings and calling into question both the European Commission’s decision and its legal status in France.  Seeking to argue that the generics were not identical to Durogesic, Janssen-Cilag went so far as to question the efficacy and quality of the generic medicine, despite its bioequivalence having already been established.  Janssen-Cilag also raised potential public health concerns, questioning the impact that substitutions could cause to some patients.  This campaign was successful in delaying entry as AFSSAPS initially refused to recognise the generic drug, with authorisation following only one year later in 2008.

Targeted marketing campaign.  Following authorisation, Janssen-Cilag engaged in a marketing exercise which the ADLC found was aimed at casting aspersions on the efficacy and quality of the generic versions with doctors and pharmacists.  Its sales representatives were told to emphasise that generic alternatives did not have the same composition, nor quantity of active ingredient fentanyl as its Durogesic patch.  This involved Janssen-Cilag training a specialist team of 300 sales representatives known as “commandos” and sending out numerous newsletters direct to medical practitioners, supported by statements in the trade press.  In particular, Janssen-Cilag distorted the warning messages that had been issued by AFSSAPS, providing an incomplete and essentially alarmist message.  The campaign also resulted in screensavers installed on doctors’ computers giving a special warning, complete with warning triangles.  The campaign was so successful that a very low flat-rate reimbursement price was imposed by the French public authorities, fixing the price of the generic and the originator at the same low level.

Impact.  The ADLC considered these practices to be very serious, delaying the entry of the generic in France by several months, whereas the ‘smear’ campaign was successful in ensuring a low penetration rate of the generic alternatives even after their launch.  The ADLC report that 12,800 pharmacies, accounting for just over half of all French pharmacies, were subject to direct discussions.  Janssen-Cilag itself conducted a survey to evaluate the effects of its campaign which concluded that 83% of pharmacists had memorised the risks associated with switching between fentanyl products.  In addition, 12,000 French doctors have the screensaver installed on their computers.

Comment.  This is not the first time that the ADLC has fined pharmaceutical companies for defamatory practices, with both Sanofi-Aventis and Schering-Plough being fined in 2013 for similar activities (see here).  The question of misleading statements about product safety has also recently been addressed at EU level in the context of anti-competitive agreements, with Advocate General Saugmandsgaard concluding that an agreement to present scientific information in a misleading or unbalanced fashion is likely to restrict competition by object (more details here – and watch this space for the CJEU ruling due in a couple of weeks).

Nor is it the first time that Janssen has got into hot water over the marketing of Fentanyl – the marketing of this drug in the Netherlands was central to the European Commission’s 2013 decision in which fines totalling €10.7M were issued (the parties did not appeal this finding).

However, whilst there can be little surprise in the ADLC seeking to sanction the behaviour of Janssen-Cilag in the post-launch phase (particularly given the misleading nature of the communications to medical practitioners), its success in delaying entry onto the market in the first place seems to be as much the fault of AFSSAPS as a consequence of Janssen-Cilag’s regulatory interventions.  The case appears very different from the conduct sanctioned in AstraZeneca, where patent authorities had no reason to doubt the factual information provided.  Although the ADLC refers in this case to ‘legally unjustified’ arguments being presented, it also makes clear that the European Commission’s approval was binding on the French authority, something which should have been clear to AFSSAPS.


Online sales bans in the sports equipment sector: the CMA’s Ping decision

In August last year, the UK Competition and Markets Authority (CMA) announced that it had imposed a fine of £1.45 million on Ping Europe Limited (Ping) for breaching the EU and UK competition rules.  The CMA found that Ping had infringed the Chapter 1 prohibition of the Competition Act 1998 and Article 101 of the Treaty on the Functioning of the European Union (TFEU) by entering into agreements with two UK retailers which banned the sale of its golf clubs online.  The CMA chose to apply Rule 10(2) of its procedural rules and addressed the decision only to Ping.  A non-confidential version of the decision was published in December 2017, revealing the UK competition authority’s detailed reasoning for the first time.  

Background. Ping is a manufacturer of golf clubs, golf accessories and clothing.  It operates a selective distribution system in the UK, supplying only retailers which meet certain qualitative criteria. Ping considered that ‘dynamic face-to-face custom fitting’1 was the best way to enhance golf-club choice and quality for consumers, and that such custom fitting could not take place over the internet.  As a result, Ping instigated an ‘internet policy’ which banned its authorised retailers from selling any of its golf clubs online.

The CMA’s competition assessment.  Relying on the CJEU’s judgment in Pierre Fabre, the CMA held Ping’s online sales ban restricted competition ‘by object’.  In the UK authority’s analysis, the ban reduced retailers’ ability to reach customers outside their local geographic areas and to win customers’ business by offering better prices online.  The CMA also relied on Advocate General Wahl’s Opinion in Coty (the CMA’s decision pre-dated the CJEU’s Coty judgment, which we commented on here).  AG Wahl had contrasted the contractual clause at issue in that case (which prevented authorised retailers from selling on third-party online platforms) with more serious restrictions, such as the outright internet sales ban that gave rise to the Pierre Fabre ruling.

Ping had argued that its online sales ban was objectively justified under the competition rules for three main reasons:

  1. The aim of the ban was to promote face-to-face custom fitting, which fosters inter-brand competition by enhancing product quality and consumer choice;
  2. The ban was necessary to protect Ping’s brand image.  Selling non-custom-fitted clubs would result in an inferior product being placed in consumers’ hands, which would damage Ping’s reputation;
  3. The ban enabled Ping to resolve a ‘free rider’ problem by ensuring that authorised retailers had appropriate incentives to invest in custom fitting. It would be commercially unsustainable for retailers to make investments in appropriate facilities if a potential customer could obtain a custom fitting in a bricks-and-mortar store and then buy the clubs online.

Noting that other high-end golf club manufacturers such as Callaway and Titleist did not restrict online sales of custom-fit clubs, the CMA dismissed Ping’s submissions on objective justification.  Whilst the CMA accepted that the promotion of custom fitting was a “genuine commercial aim”, it thought Ping could have achieved this through alternative, less restrictive means.  According to the CMA, the “main alternative” available to Ping was to permit authorised retailers to sell online if they could “demonstrate [their] ability to promote custom fitting in the online sales channel”.2

Ping’s appeal to the CAT.  Ping has appealed against the CMA’s decision.  In its press release responding to the decision, Ping stated: “Our Internet Policy is an important pro-competitive aspect of our long-standing commitment to custom fitting”.  It also argues in its Grounds of Appeal that the CMA was wrong to find that the online sales ban was disproportionate: the CMA’s proposed alternative measures would, in Ping’s view, be impractical and less effective at maximising rates of custom fitting.  The appeal is due to be heard by the UK Competition Appeal Tribunal (CAT) in May this year.

Comment.  The Ping decision is the latest in a line of recent cases in which suppliers have sought to restrict retailers’ ability to sell products over the internet.  As we noted here, the German Bundeskartellamt has taken a particularly dim view of online sales restrictions in a number of decisions concerning brand owners’ selective distribution systems.  The publication of the Ping decision also comes hot on the heels of the CJEU’s preliminary ruling in the Coty case, in which it was held that manufacturers of luxury goods can, in principle, prevent their authorised retailers from selling via third-party online platforms such as Amazon and eBay, provided that certain conditions are fulfilled (see here).

Also of note was the CMA’s decision to set out in an ‘Alternatives Paper’ its provisional considerations of ‘realistic alternatives’ to achieve the legitimate aims identified by Ping.  Whilst the CMA states that the evidential burden of establishing whether the online sales ban was justified was Ping’s and despite the CMA’s assertion that it was not required to do so, it is interesting that the CMA was willing to engage in its own alternatives assessment.

It remains to be seen what the CAT will make of Ping’s justifications for its online sales ban.  In the meantime, however, the CMA’s decision again highlights the competition law risks of imposing an outright ban on internet sales.  Like other national competition authorities, the CMA has frequently emphasised the importance of the online sales channel in intensifying intra-brand price competition.  As Senior Director for Antitrust Enforcement Ann Pope put it in the CMA’s press release of August 2017: “The internet is an increasingly important distribution channel and retailers’ ability to sell online, and reach as wide a customer base as possible, should not be unduly restricted.

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1 Dynamic face-to-face custom fitting generally involves: an initial interview; a static fitting in which the golfer’s basic measurements are taken; the fitter identifying potential club shafts for the golfer; a dynamic fitting, including a swing-test assessment of how the golfer is hitting the ball; purchasing advice; and grip fitting.

2 In particular, Ping could (according to the CMA) require its retailers to display on their websites a prominent notice recommending that customers take advantage of custom fitting; and it could determine that only retailers with an appropriate website providing a range of Ping custom fit club options would satisfy its selective distribution requirements.

USA v. UK – a united approach to FRAND? Comparing the new judgment in TCL v. Ericsson with Unwired Planet v. Huawei

On 21 December 2017, Judge Selna of the US District Court for the Central District of California released a judgment which is likely to be the most significant US FRAND decision yet. In a case brought to end the global dispute between two giants, TCL (the seventh largest manufacturer of mobile phones worldwide) and Ericsson (holder of one of the largest mobile telecommunications SEP portfolios), Judge Selna set a FRAND royalty rate for Ericsson’s 4G, 3G and 2G patents as part of a five year global licence agreement.

The judgment is of comparable length and complexity to last year’s UK Unwired Planet decision (which we discussed here and here). The approach taken by Judge Selna shares a number of similarities with that of Birss J in Unwired Planet, making use of a top-down methodology and comparable licences. However there are also a number of key differences that, if applied in future judgments, could have a significant impact on how FRAND rates are calculated.

Key differences at a glance 


Analysis

Due to the wealth of detail contained in the TCL judgment, we have picked out just a few key points in this article. For a more detailed analysis, we recommend a post by Professor Contreras (here).

Ericsson’s offers: Judge Selna concluded that Ericsson’s offers were not FRAND, but that (as in Unwired Planet) offering a rate higher than that ultimately determined as FRAND was not a breach of FRAND obligations. Interestingly, Judge Selna also explicitly stated that royalty floors proposed in Ericsson’s offers, aimed at ensuring minimum levels of revenue despite the low prices of TCL’s products, were discriminatory and non-compliant with FRAND. 

Top-down Approach: Both judgments made use of a top-down analysis, but in slightly different ways. In TCL, the focus was on the aggregate royalty burden, established by reference to statements about aggregate rates made by Ericsson and a number of other significant IP holders at around the time the standard was adopted. Whereas Birss J considered such statements to be unenforceable statements of intent, Judge Selna noted the role that they played in ensuring adoption of a particular standard (resulting in global use of LTE rather than WiMax for example), and considered it appropriate to tie the aggregate royalty rate for the standard to those rates. 

Having determined the industry total number of essential patents (a considerably lower number than the total number of declared patents, due to the problem of over-declaration, also considered in detail in Unwired Planet), the Judge then established Ericsson’s share of the total royalty rate.  This was cross-checked with an analysis of comparable licences to ensure a FRAND rate – in principle this was particularly important for 4G, where the ex ante statements pointed to a range of aggregate royalty rates (of between 6 and 10%) – but in practice, it was the 3G top down rate which was adjusted as a result of the comparator licences review. In Unwired Planet the opposite approach was taken, determining a rate using comparable licences, and cross-checking against the implied aggregate royalty. 

Expired Patents: When determining Ericsson’s share of the relevant standards, any of its patents which had expired prior to the date of closing arguments were excluded from its share. However, expired patents were left in the number of total SEPs used as the denominator. The judge argued that removing them would unfairly reward those patentees who still had patents remaining in the standard rather than the public.  While the exclusion of such patents was in part motivated by specific considerations of US law (the prohibition on paying royalties on expired rights), there also appears to be a sound economic basis for ensuring that patentees holding later-expiring patents are not over-rewarded for their rights. This is also arguably in line with the recent Commission Communication on SEPs (discussed here) which suggests that the value of technologies declines over time.

Non-Discrimination: In assessing the non-discrimination aspect of FRAND, both judges agreed that licensors cannot discriminate against similarly situated licensees. Judge Selna looked in some detail at what ‘similarly situated’ means and concluded that the basis for comparison must be all firms reasonably well-established in the world market. This excludes ‘local kings’ – firms that sell most of their products in a single country – but includes industry giants such as Samsung and Apple, despite their greater market share and brand recognition. This approach is good news for licensees whose products retail at lower price points, as it means they should benefit from the same level of rates they do.  Judge Selna explicitly dismissed the relevance of competition law (in this case the US Sherman Act) for this assessment – whereas Birss J. applied Article 102 in determining that – if his primary conclusion about benchmark rates was incorrect – Huawei would still need to show harm to competition resulting from any discrimination between it and other similarly situated licensees. (Coincidentally, the same approach to discrimination has recently been endorsed in the IP – albeit not the SEP – context by Advocate General Wahl in Case C-525/16 MEO – Comunicaçoes e Multimédia.)

Multi-mode: The issue of multimode devices was dealt with differently in the two cases. In Unwired Planet, Birss J computed separate multimode rates based on a set of ratios. In TCL, it was implicit that the rates were single mode, but they appear to apply to multimode products.  Notably, the top-down figures established by the Judge were held to be implicitly multimode rates.

Geographical Regions: Judge Selna considered Ericsson’s patent portfolio strongest in the USA, so applied a discounted rate elsewhere. He divided the world into three regions – USA, Europe and the Rest of the World and established a precise discount rate for each region and each standard. This was clearly a fact-specific exercise, and would depend on the particular; while the Judge indicated that it could have been helpful to break the regions down further, he also noted that any royalty regime should be reasonably straightforward.  
 
Compare this to Birss J in Unwired Planet where the world was divided into only two regions – major markets (for countries where Unwired Planet held 3 or more patents) and other markets.  One striking similarity between the two judgments was that both treated China (where the licensees in each case manufactured their products) as a floor for global royalties, allowing the licensors to claim rates on all global sales, even if there is no local patent protection.  In the case of the TCL judgment, this meant that for 3G, Ericsson’s lower patent holdings in Europe compared to China led to the Rest of World rate applying in Europe as well.

FRAND Rates: The aggregate patent numbers and final rates as determined in both cases are set out below:


It’s worth noting that once Unwired Planet’s and Ericsson’s respective shares of the total relevant SEPs are taken into account, the rates in TCL are more favourable to the licensee than those in Unwired Planet. The comparison between the cases is all the more interesting, given the provenance of the Unwired Planet portfolio which was drawn from Ericsson’s.  In Birss J’s judgment, the Unwired Planet portfolio was considered to be representative of a subset of Ericsson’s, while Ericsson’s 4G benchmark royalty rate was held to be 0.80%.  Given that Judge Selna calculated total industry patent numbers of close to double those found by Birss J, the fact that the Ericsson per patent rate in TCL was almost half that found in Unwired Planet is mathematically unsurprising, and points to considerable convergence on other parts of the analysis.

While the TCL judgment may be welcomed by implementers, an appeal is to be expected.  Meanwhile the appeal in Unwired Planet is due to come before the English Court of Appeal in May 2018, so there is no doubt there will be further developments in this field in the near future. Whether the outcomes of those appeals will further align both sides of the Atlantic or draw them further apart is something that we will have to wait to find out. 

In a froth: Trademark licensing fails to disguise anti-competitive market sharing arrangement

The CMA has today issued a £1.71m fine against two laundry companies for market sharing.  Micronclean Limited was fined £510,118 and Berendsen Cleanroom Services Limited was liable for £1,197,956. The companies both specialise in laundering clothes worn in ‘cleanrooms’.  These are highly sterile environments, with meticulous rules on the cleanliness of equipment and clothing, which are vital in the manufacture of pharmaceuticals and medical devices.

The two companies had established a joint venture agreement in the 1980s where both traded under the ‘Micronclean’ brand.  However it was only in 2012 that they started the market sharing arrangement, attempting to mask it as a reciprocal trademark licence arrangement.

This arrangement had two problematic elements.  First an artificial line was drawn between London and Anglesey; customers south of that line were reserved for Berendsen, whilst those to the north were allocated to Micronclean.  Second, over and above the territorial restrictions, companies decided to reserve specific customers to themselves and agreed not to compete for them.

Geographic market sharing and customer allocation is illegal (other than where legitimate exclusivity arrangements are concluded as part of a broadly pro-competitive agreement such as technology licensing). In this instance, the CMA did consider whether the arrangement, when taken as part of the wider joint venture agreement, could be justified.  Unfortunately for Micronclean and Berendsen the CMA concluded that it could not.  In particular the CMA found that the companies were competitors and two of the biggest players on the market. This left customers, including the NHS, with few options in choosing service providers. 

The existence of the trade mark agreement did nothing to change that fundamental position. Trade mark licences do not generally fall within the scope of the Technology Transfer Block Exemption.  In any event, the EU Commission’s Guidelines on Technology Transfer, which provides broad guidance on the analytical approach to the competitive effects of IP licensing, make clear that sales restrictions agreed between competitors in a licensing arrangement are likely to be regarded as market sharing, particularly where the licence is a cross licence (or “reciprocal” in the language of the block exemption) – and so it proved here.

This case serves as a reminder that anti-competitive practices which take place under the guise of an IP licence will not avoid scrutiny by the competition authorities.  In this instance the arrangement came to light in the context of two related merger reviews in the industry undertaken by the CMA – also a reminder of the importance of due diligence and early review of competition issues in the context of corporate transactions. As Ann Pope, Senior Director at the CMA added to the press release: “Companies must regularly check their trading arrangements, including long-running joint ventures and collaborative agreements, to make sure they’re not breaking the law.

Third-party platform bans justified for genuinely luxury brands

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

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

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

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

Commission Communication on SEP Licensing – where has the Roadmap led?

Following around a year of lobbying and intensive debate, the Commission has today (29 November 2017) published its Communication on ‘The EU Approach to Standard Essential Patent Licensing’.  

As we reported back in April when the Commission published its initial ‘Roadmap’ for this area, the Communication is intended to address some of the uncertainties in SEP licensing left unresolved following Huawei v ZTE (see e.g. here), and to drive progress for the EU-wide adoption of 5G.  

And as we predicted a couple of months ago, the intensity of the debate surrounding the key issues in SEP licensing means that the Communication is far from overly prescriptive. 

The Communication will take a little while to digest in full, but for now the headline points are:

  • The current declaration system needs modernising to ensure greater transparency about which SEPs are actually essential and – in an era of great patent liquidity – who owns them. A new EU body may become involved in this.  And if this all seems rather aspirational, to be noted that the Commission is aware of the (not inconsiderable) costs implications, and suggests that changes may only be possible prospectively, e.g. for 5G…
  • There remains significant flexibility in how FRAND values are established, but a couple of preferences emerge from the guidance
    • ‘In principle’, FRAND values should not include any value attributable to the inclusion of the technology in the standard.  This is in line with previous statements in the Commission’s Horizontal Guidelines, and diverges from the approach in Unwired Planet, where both parties accepted that some such value could be taken by the patentee (see para 97).  However, where technology “has little market value outside the standard” (hardly an infrequent situation), other techniques may be needed, such as comparisons between types of contribution.
    • Aggregate royalty rates are important, and should be taken into account.  The Commission proposes that FRAND value should reflect the  “present value added” by the SEP, bearing in mind that this can change over time, and that it should not include value attributable to market success of the product.
  • Non-discrimination between similarly situated licensees remains fundamental, and evidence of non-discrimination forms part of the information that SEP holders should provide to licensees.  
  • Chipset licensing remains possible – but is not mandated.  One of the key areas of dispute in industry was whether the FRAND obligation required SEP holders to license all comers, including component manufacturers, or whether they can decide to license end manufacturers (thus giving a higher potential royalty base) to the exclusion of those higher up the value chain.  The report does not come off the fence on this issue, save to say that business models may vary from sector-to-sector.  Cases such as Apple v. Qualcomm will therefore have to continue to fight this issue out from first principles.
  • Use-based licensing is not mandated – but nor is it wholly out of the question.  This is another area of significant dispute in industry, with a deep split between rights holders and potential licensees (see the Fair Standards Alliance’s response to the Communication here…).  The concept behind use-based licensing is that it allows SEP holders to charge different rates for different uses (e.g. compare a smart car, a smartphone and a smart thermostat).   The Communication does conclude that FRAND is not a one-size-fits-all concept, and may differ from sector-to-sector and over time.  However, it also emphasises the need not to discriminate between similarly–situated parties.  
  • Safeguards against the inappropriate use of injunctions are still needed to prevent both exploitation (using threats to extract unfairly high licence terms) and exclusion.  Companion papers giving guidance on ‘certain aspects’ of the IP Enforcement Directive (here) and on ‘A balanced IP enforcement system’ (here) have also been published.
  • The Communication confirms that non-practising entities should be subject to the same rules (including on transparency and injunctions) as other SEP holders.  As with many of the points in this paper, there is no big surprise here.
And overall?  The Communication will be pored over by industry, and – while not binding in any strict legal sense – will no doubt feature in arguments on both sides of the FRAND debate.  There are certainly some common-sense points in here, as well as some regulatory aspiration.  But if this is a roadmap, it is certainly not the end of the road – and we will continue to watch as the debate unfolds in the UK, Europe and beyond.

Deciding on terms of privacy policies – what are the risks of anti-competitive collusion?

Big data is the talk of the town in competition circles.  But it is perhaps a more mundane concern which could pose greater risks for a larger number of companies.  An article by a couple of regular CLIP Board contributors published earlier this year in Privacy Law International notes the increasing tendency to regard privacy as a parameter of competition, and explores the risks of collusive conduct being identified in relation to the terms of privacy policies. Is there a risk of a future information exchange case around the treatment of data privacy?  Could a concerted practice be found where companies benchmark their privacy policies against each other? Would this be as serious a concern as exchanges relating to future pricing intentions? 

Read on for our views on all of these questions here

Dutch Health Council’s proposal of compulsory licensing as solution to high pharma prices

Shortly before becoming the new home of the EMA, the Netherlands piqued the interest of the pharma industry with a controversial move on drug pricing.  The move consisted of a recommendation by the Dutch Council for Public Health and Society (“RVS”) that the government should use compulsory licences when a medicine is priced too high, or in RVS’s words, does not have a “socially acceptable price”. In this article, we touch upon the significance of such a proposition in the regulatory sphere, as in our regulatory colleagues’ eyes this could result in a violation of the established IP regulatory rights enacted in EU legislation.  However, for now our focus is on the significance of the move from a competition law standpoint.

Readers of this blog will be more used to thinking about price reduction measures and compulsory licensing issues through the lens of competition law.  However, the RVS bases its recommendation in part on Article 8 of the TRIPs Agreement, which allows measures that protect public health or prevent the (anti-competitive) abuse of intellectual property rights resulting in the unreasonable restraint of trade or of international transfer of technology.  Further provisions relevant to compulsory licensing are covered in Article 31 of TRIPs, which provides for certain rights to use the subject matter of a patent without the rights holder’s authorisation, provided rights holders are remunerated for the licence based on the “economic value of the authorisation”. 

In recent years, considerable attention has been given by competition authorities to possible instances of excessive pricing.  To date, those cases (such as Pfizer/Flynn, currently on appeal before the UK’s Competition Appeal Tribunal, or the latest Statements of Objections issued by the Competition and Markets Authority (“CMA”) to Actavis and Concordia) have focussed on prices of legacy generic products. By contrast, the RVS’s proposal is firmly focussed on cost containment measures for new, patent-protected, medicines, but is not limited to potential blockbusters.  

The RVS’s criticism of current prices and consequently its recommendations extend to orphan drugs (medicines for very rare diseases affecting less than five out of 10,000 people in the EU population), which by definition benefit only a very small part of the population. The relatively high cost of R&D and production for orphan drugs, juxtaposed against the narrower reach/ patient pool and thus lower profit margin, has resulted in the EMA providing additional incentives for the development and commercialisation of those products. The Dutch authority’s recommendations therefore appear somewhat contrary to the spirit of the EMA’s policies aiming at encouraging investment by innovators in these areas, but is perhaps motivated by concerns expressed by some around the increasing use of orphan drug status (the concept of ‘orphanizing’, alluded to here). 

There is an absence of any definition of or set of criteria to determine what might constitute ‘high’ or ‘socially unacceptable’ pricing. The RVS proposal is not a new concept and in fact the subject of high or ‘excessive’ pricing in the pharma industry has occupied European stakeholders and has been the subject of investigations on a national and European level over the past few years. In June 2015, in response to a European Parliament  member’s (MEP) suggestion of compulsory licensing as a means to lower drug prices, the Commission stated that this is a matter to be dealt with at national level and that neither the Commission nor the EMA are competent to take such action.

The UK’s approach to compulsory licensing differs significantly from the Dutch proposal. Compulsory licensing is a rare breed in the UK, as it is only a measure to be taken for an abuse of monopoly stemming from patent rights – and it is very often the case that the relevant authorities prefer alternative means. Where new drugs are concerned, the question of cost effectiveness of medical treatments lies primarily in the hands of NICE.  As noted above, the CMA has been particularly active over the past year in pursuing practices which result in elevated prices for generic pharmaceuticals  But rather than automatically holding that very high prices are inherently anticompetitive, the CMA appears to draw a distinction between abusive ‘excessive pricing’, which is artificially and unjustifiably inflated pricing or increased pricing once a gap in competition on the market is identified, and high pricing which properly reflects the cost of development and production of a new drug. 

Our (not excessively priced) two pennies’ worth on this proposal is that imposing a compulsory licensing system for drugs which are not priced in a ‘socially acceptable way’ is, at best, a vague proposition which is likely to alarm and be met with adamant opposition by the industry. With much uncertainty as to what may constitute ‘excessive pricing’ or the ‘appropriate remuneration’ for the rights holder, there will be great scope for dispute. From a regulatory perspective, the fact that this measure might make it possible for governments to bypass rights such as the regulatory data protection (RDP) is a concerning prospect.  More generally, this proposal strikes at the heart of the delicate balance between long-run innovation incentives in a high risk/high reward sector, and short-term costs considerations around access to existing medicines.  The struggle between both sides of this debate looks set to continue.