The CJEU guidance in MEO on price discrimination in licensing may also impact FRAND / SEP licences

Introduction

AG Wahl began his Opinion in MEO v Autoridade da Concorrência by noting that it presented the CJEU with an opportunity to clarify the law on differential pricing. Under Article 102(c) TFEU it can be an abuse for a dominant undertaking to apply “dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage”. Discrimination has always been a tricky issue under Article 102 (it is one of relatively few competition issues to have received a thorough discussion by the English Court of Appeal - see British Horseracing Board, paragraphs 265-278)  and it has never been entirely clear to what extent the EU authorities consider that the practice of price differentiation necessarily results in a finding of competitive disadvantage, or how much disadvantage is required to infringe Article 102. 

Price differentiation is a topical issue. The increasing use of pricing algorithms offers the potential for companies to engage in ‘personalised’ pricing on a mass scale, offering different prices to different consumers based on an algorithmic assessment of the highest price each individual is likely to pay. But they may also facilitate anti-competitive price coordination and so could give rise to concerns (see here and here).

Similarly, as the Internet of Things and 5G lead to new market entrants requiring SEP licences, it will be important for licensors to consider how to charge different licensees different prices without infringing the non-discrimination limb of FRAND.

Can it be assumed that price differentiation is likely to distort competition? Should a competition authority have to demonstrate that the competitiveness of any business placed at a disadvantage by differential pricing has suffered? The CJEU decision in MEO offers some useful guidance on these questions.

Facts

MEO is a mobile / telecoms service offered by Portugal Telecom. As part of this service MEO provides television content, and therefore pays royalties to the Portuguese collecting society that manages the rights of artists and performers, GDA.  In 2014 MEO made a complaint to the Portuguese Competition Authority that GDA had abused its dominant position by (amongst other things) applying different terms and conditions (including price) to MEO compared to another entity also providing television content, NOS. The Portuguese Competition Authority found that GDA had applied different tariffs to different customers between 2009 and 2013. However, it concluded that this price differentiation had no restrictive effects on MEO, and so took no action against GDA. MEO appealed this decision to the Portuguese Regulation and Supervision Court, which referred a number of questions regarding differential pricing to the CJEU.

CJEU decision

The CJEU referred to its previous decisions in Intel and Post Danmark II in setting out three key principles that applied:

  1. Proof of actual, quantifiable deterioration of a particular customer’s competitive position is not required for a finding of competitive disadvantage.

  2. All the relevant circumstances must be examined to determine whether price discrimination produces or is capable of producing a competitive disadvantage

  3. The mere presence of an immediate disadvantage affecting operators who are charged more does not mean that competition is distorted or capable of being distorted.

The CJEU also noted that when assessing particular prices charged by a dominant undertaking, the authorities may assess the undertaking’s negotiating power, the conditions and arrangements for charging any tariffs, their duration and amount, and the existence of any strategy aimed at excluding companies from a downstream market. The CJEU also reaffirmed that there is no de minimis threshold for the purposes of determining whether there is an abuse of a dominant position, albeit this will feed into the analysis of potential effect (paragraph 29). 

Impact

This decision offers helpful clarifications on how Article 102(c) should be interpreted. Although relatively narrow in scope, it has broad implications, particularly in the FRAND context; price discrimination between licensees is a controversial topic that has received relatively little judicial or regulator attention to date.  

As we describe in this article, in its Communication on SEPs, the Commission appeared to endorse a specific non-discrimination obligation in FRAND, stating that SEP holders cannot discriminate between implementers that are ‘similarly situated’. However, it did not specifically say that there is a requirement for distortion of competition between those similarly situated licensees (as for example the High Court had held in Unwired Planet, though this issue is being appealed), or whether harm to an individual firm rather than harm to competition might be sufficient (as a US court recently decided in TCL v Ericsson).

The CJEU’s MEO decision suggests that price discrimination will only be abusive if it leads to a distortion of competition (paragraph 27). So it seems there is scope for licensors to charge similarly situated licensees different royalty rates without breaching their FRAND obligations, as long as they do not distort competition by doing so.

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).

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. 

Product hopping: The competition law risks of launching new product formulations

‘Product hopping’, or ‘evergreening’, are expressions used (by competition authorities and industry respectively) to describe strategies employed by pharmaceutical companies to protect sales of a successful drug on the verge of losing patent protection. For example, a pharmaceutical company might introduce a new formulation of the drug before it faces significant competition from a generic alternative.

There is nothing inherently wrong with product hopping. The European Court of Justice has recognised that it is legitimate for pharmaceutical companies to adopt strategies seeking to minimise the erosion of their sales when faced with competition from generic products1. In addition, the development of a new and improved formulation of a drug can be extremely beneficial, both to the patients that might find it more effective, and to society as a whole for the jobs created in researching, manufacturing and marketing the new product.

However, there is a growing line of case law in the US and Europe that illustrate the competition law risks involved with product hopping. In all of these cases, the issue has not been the introduction of a new formulation. Instead, it has been other specific elements of the strategies employed by pharmaceutical companies to encourage consumers to switch to the new formulation that have caught the attention of the courts and regulators, particularly where this has prevented consumers from having a choice between a branded drug and generic version. 

Europe

Cases in Europe offer some clear examples of this. When withdrawing Losec capsules in favour of new Losec tablets, AstraZeneca deregistered its marketing authorisation for Losec capsules in several EU Member States. This prevented generics manufacturers from relying upon the clinical trials conducted for Losec capsules when applying for authorisation for a generic version, making it for more difficult for generics to enter the market. The deregistrations, in the absence of any objective justification, were found to be an abuse of a dominant position2.

In the UK, Reckitt Benckiser replaced its original Gaviscon product with a new version, Gaviscon Advance. This was done after the original patent had expired but before a generic name for the original product had been published, with the result that prescriptions could only be written for the new branded product. In finding that this was an abuse, the UK regulator held that it would have been commercially irrational to withdraw the original product had it not been for the anticipated benefits of delaying generic competition3.

In both cases, the introduction of the new product was not anti-competitive, however, the combination of that and the exploitation of the underlying regulatory framework was found to breach competition law.

USA

In the US, the focus has also been on actions by pharmaceutical companies that remove the consumer’s ability to choose. 

In State of New York v Actavis4, a US Appeal Court drew a distinction between a ‘soft switch’ and a ‘hard switch’. Actavis manufactured a successful twice-daily Alzheimer’s drug, Namenda IR. In 2013, it introduced a once-daily version, Namenda XR. The new drug contained the same active ingredient, memantine. Actavis began an aggressive marketing campaign to switch patients on to Namenda XR, and made use of rebates to offer it at a low price. This was the soft switch. Then, in August 2014, a year before it was due to lose patent protection on Namenda IR, Actavis discontinued it. The Court described this as a hard switch; the discontinuation left Namenda XR as the only option for patients before the entry of a generic version of Namenda IR. The court held that the hard switch crossed the line from persuasion to coercion, and was anti-competitive.

More recently, in early September 2017, the US District Court for the Eastern District of Pennsylvania denied Indivior’s motion to dismiss a claim brought against it by the State of Wisconsin (along with a number of other States) alleging anti-competitive behaviour relating to its marketing and sale of Suboxone5. In finding that Wisconsin had a plausible claim, the court noted that Indivior had near simultaneously introduced a new Suboxone film, removed its Suboxone tablets from the market, and engaged in a marketing campaign to disparage Suboxone tablets. This was done before the entry of generic competitors into the relevant market, leading to a restriction of the ability of consumers to choose between the branded products and a generic alternative.

Interestingly, although the plaintiffs characterise Indivior’s conduct as a hard switch, the generic alternative to Suboxone tablets had been on the market for almost two weeks before the tablets were withdrawn. Arguably, Suboxone tablet prescriptions could simply have been replaced with generic tablets at this point. However, realistically this could only occur for patients who needed to renew their prescriptions in that short period of time. In addition, the plaintiffs claim that even by the time generic tablets received FDA approval in February 2013, 85% of Suboxone prescriptions were already for film instead of tablets. If this case proceeds to trial, the focus may therefore be on the soft switch elements to Indivior’s strategy: the disparagement of tablets leading to the rapid take-up of film. In denying the motion to dismiss, the judge noted that summary judgment record might be different, suggesting that he wasn’t completely convinced by the merits of the plaintiffs’ case.

Will the case law develop further?

It’s possible that in the future we may see competition authorities or courts seeking to penalise conduct that is closer to a soft switch than hard switch. After all, in France in 2016, the Cour de Cassation upheld the €40.6m fine imposed on Sanofi-Aventis by the French Competition Authority in May 20136. Sanofi-Aventis was found to have denigrated generic competitors of its drug Plavix in its communications with doctors and pharmacists; it encouraged them to indicate on Plavix subscriptions that the drug was “non-substitutable”. This was not a hard switch – there was a generic alternative available, but the conduct had a similar effect to a hard switch; it partially foreclosed generic entry to the French clopidogrel market (leading to a softening of competition, as Sanofi lost market share to generics much more slowly than it otherwise would have). 

For now though, it remains the case that pharmaceutical companies can continue to take steps to extend the lifetime of their product ranges, as long as they are careful to ensure that any introduction of a new formulation is not supported by a strategy that limits the ability of generics of the earlier formulation to enter the market. Where companies avoid that potential pitfall, the introduction of new formulations benefits patients: and pharmaceutical companies’ promotion of those positive attributes epitomises legitimate competition on the merits.

______________________________________________
1 AstraZeneca v Commission, Case C-457/10 P, at 129.
2 AstraZeneca v Commission, Case C-457/10 P.
3 Decision of the Office of Fair Trading, predecessor to the Competition and Markets Authority, in Case CE/8931/08, decision of 12 April 2011 at 6.64.
4 State of New York v. Actavis, Case No. 14-4624 (2d Cir. 2015)
5 State of Wisconsin et al. v. Indivior Inc. et al., case number 2:16-cv-05073.

Apple’s battle with Qualcomm spreads to the UK

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

A FRAND torpedo? An update on Vodafone v Intellectual Ventures

Patentees commonly litigate in Germany. The validity of a patent is considered separately from (generally after) any infringement claims. Infringement proceedings, including injunctive relief, are not typically stayed pending a validity challenge. The availability of a relatively quick infringement decision and potential injunction against a licensee who has not complied with the Huawei v ZTE framework seem to make it an attractive option. 

To avoid the risks of an injunction in Germany, implementers actually or potentially subject to infringement proceedings there might think about asking a court in another jurisdiction to consider any FRAND dispute. This could enable them to argue that issues relevant to an injunction, such as whether the implementer is a ‘willing licensee’, are already subject to the jurisdiction of another Court, making it more difficult for the patentee to get an injunction. 

This is exactly what happened in Vodafone v Intellectual Ventures. As this blog reported here, when faced with infringement proceedings in Germany, Vodafone launched a FRAND countersuit in Ireland (with an ex parte application for permission to serve out of the jurisdiction). Earlier this year (unreported judgment [2017] IEHC 160), Intellectual Ventures responded by making an application to the Irish Court on the basis of Articles 29 and 30 of the Recast Brussels Regulation. It claimed that the German Court had been ‘first seised’ and so the Irish Court was required (or alternatively that it should exercise its discretion) to decline jurisdiction, or at least stay the proceedings. 

Despite identifying a number of overlaps relating to FRAND between the Irish and German proceedings, the Irish Court did not agree that Article 29 applied. The Irish proceedings did not involve the same cause of action or even the same parties (because of the involvement of an Intellectual Ventures subsidiary in the Irish case). However, given the degree of overlap between the two sets of proceedings, the Court considered that some form of discretionary relief under Article 30 was appropriate. It decided not to decline jurisdiction under Article 30, but agreed to stay the proceedings pending the final judgment of the Düsseldorf Court, expected in September, at which point, the various issues discussed might become clearer, e.g. the extent to which the German Court would cover FRAND.

The success of Vodafone’s tactic is therefore yet to be fully determined. It will be very interesting to see to what extent the German Court takes into account the Irish proceedings when issuing its infringement decision, and in deciding whether to grant an injunction. In the meantime, it seems that implementers wishing to secure a favourable FRAND jurisdiction would ideally act pre-emptively, before patent infringement proceedings are issued.

A final point worth noting arises from Unwired Planet v Huawei (see this blog’s posts here and here).  In that case the English High Court decided that it could settle the terms of a FRAND licence (dealing with incidental FRAND disputes along the way) and that a FRAND licence between companies operating on a world-wide basis would be global in scope. 

There are many issues relevant to determining jurisdiction and the operation of the Recast Brussels Regulation. However, with the English Court clearly prepared to determine FRAND licence terms and having held that a FRAND licence will be global, there is perhaps more potential now to argue successfully that if FRAND proceedings have been issued in one jurisdiction, a Court in another should be cautious about granting an injunction or coming to any other conclusion that might conflict with any FRAND findings of the first Court. Indeed, if the implementer has made it clear that it will accept the terms settled by a Court, it may be difficult to argue convincingly that it should be regarded as “unwilling” or dilatory.

Unwired Planet v Huawei: a new FRAND injunction

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

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

The FRAND injunction

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

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

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

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

Permission to appeal 

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

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

The FRAND licence 

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

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

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

Conclusion

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

Pat Treacy and Matt Hunt



Premier League scores in latest dispute with pub broadcasting football matches

The ever-increasing amount of money tied up in TV deals for Premier League football perhaps makes it unsurprising that The Football Association Premier League (“FAPL”) has been willing to litigate on a number of occasions against publicans using foreign satellite services to show football matches in pubs.

Following the CJEU’s decision in the joined cases FAPL v QC Leisure and Murphy (C-403/08 and C-429/08) and the subsequent High Court decision in FAPL v QC Leisure (here) the law in this area is relatively settled. Although FAPL can grant rights on a territorial basis, exclusive licences preventing the supply of foreign satellite decoder cards into other Member States are unlawful. Despite this, the FAPL on-screen graphics and logos incorporated into the live feeds of football matches are copyright protected works. FAPL is therefore able to bring actions for copyright infringement for any unauthorised uses of these. The success of such actions will depend on the terms of the agreement that a decoder card is supplied under.

As an aside, it may be possible for pubs to avoid infringement claims by only switching the screens on at kick-off, and attempting to cover up any FAPL logos and graphics. This would be challenging in practice however, given the frequency in which graphics pop up throughout the matches (for example when a player is booked or a replay is shown).

FAPL v Luxton

The Court of Appeal has recently added to the relevant pool of judicial opinion by rejecting an appeal by Mr Luxton, the proprietor of a pub in Swansea, against the summary judgment granted in favour of FAPL by the High Court in January 2014. Mr Luxton had used a domestic satellite decoder card originally sold by a Danish broadcaster to show Swansea City matches following Swansea’s promotion to the Premier League.  Mrs Justice Rose held that by using a domestic satellite decoder card rather than a commercial one, Mr Luxton was using FAPL’s copyright works without its consent. 

Mr Luxton raised two EU law defences which have now been considered by the Court of Appeal (see here).

The two defences raised

  1. That the proceedings brought by FAPL were an illicit attempt to prevent Mr Luxton from using a foreign decoder card, isolating the UK market from the continental market in breach of Articles 101 and/or 56 TFEU.
  2. The (alleged) illegal arrangements between FAPL and its exclusive licensees in Europe had prevented Mr Luxton from obtaining a commercial foreign card; FAPL should therefore be prevented from exercising its copyright in respect of the domestic foreign card.
The Court of Appeal’s decision

Floyd LJ gave the leading judgment, disposing of both defences relatively quickly. On the first, he noted that in bringing the action, FAPL was relying on the right of a copyright owner to prevent the unauthorised communication to the public of copyrighted works. This right could also be enforced against a person in the UK who used a domestic card issued by FAPL’s UK licensee (Sky) for commercial purposes. The fact that Mr Luxton was using a foreign domestic card did not make any difference; FAPL’s right was not one that depended on the use of the card in a particular territory. Enforcement of the right could not therefore be capable of reinforcing allegedly unlawful agreements to partition the market.  

Regarding the second defence, the judge did not consider Mr Luxton’s use of the domestic card to be a consequence of FAPL’s agreements and practices. Even if the effect of those practices was to starve the market of foreign commercial cards - that did not make the use of foreign domestic cards a natural consequence of FAPL’s actions. Though Mr Luxton thought he had purchased a commercial card rather than a domestic one, this could not change the outcome, as if his argument was correct a publican who deliberately sought out a foreign domestic card would be in the same position.
 
Comments on ‘Euro-defences’

The decision provided some interesting commentary on the overlap between IP and EU/competition law, noting that it “has long been recognised that in some circumstances an intellectual property right may become unenforceable because what lies behind it is an attempt to divide up the market in the EU contrary to the provisions on free movement”. A breach of the Treaty isn’t enough – there must be a sufficient connection between the exercise of the right and the unlawful agreement in question.

Floyd LJ cited Lord Sumption’s warning in Oracle that this sort of ‘Euro-defence’ “must be scrutinised with some care” due to the risk of litigation devaluing intellectual property rights by increasing the cost and delay associated with their enforcement. In that case of course, the Euro-defence was rejected on the grounds that the unlawful conduct relied on was collateral to the particular rights which the claimant was seeking to enforce.

Scope for Commission activity?

A further point of note is that the evidence adduced in this case showed the difficulty of actually obtaining a foreign commercial card.  FAPL accepted that there is an arguable case that foreign broadcasters are still behaving as if they are bound not to provide commercial cards outside their national territories, and that if Mr Luxton had used a commercial card, he would have had an arguable defence that it authorised him to communicate the copyright works to the public in the UK. (Whether this defence would succeed may be the subject of further litigation in the future). 

Cross-border access to digital services is a central part of the Commission’s Digital Single Market Strategy and this is evidently an area in which the Commission is willing to take action – see our thoughts on the Commission’s investigation into Paramount’s pay-TV licensing practices here. This is certainly a space worth keeping an eye on in the future, as if it continues to prove difficult to obtain foreign commercial cards, thereby defeating attempts to deliver digital services across borders, there may be grounds for action by the Commission.

Breaking news – General Court confirms Lundbeck decision and fine

The General Court of the EU has upheld the European Commission decision fining Lundbeck and a number of generic companies in relation to patent settlement agreements.  At the time of writing, the full text of the decisions has not been published.

What we do know

  • The Commission’s Lundbeck decision found a restriction of competition by object only.  The recent trend towards a more restrictive interpretation of the ‘object’ category (which we discussed in the context of patent settlements here) has not prevented this novel finding being upheld by the General Court.
  • Would-be generic entrants are therefore held to be potential competitors of the patentee (Lundbeck), despite the existence of patent protection held by Lundbeck.  The fact that they had possibilities for entering the market, including through an at-risk launch, is regarded as a form of potential competition.  (Having been brought up to respect the blocking power of patents, this is something I expect to find troubling for some time to come…)
  • The fine has been upheld in full – no credit has been given for the novelty of the decision.
It is still unclear how closely the General Court has followed the Commission’s reasoning – to judge by the press release, it appears likely that the legal analysis is closely aligned.  (See our discussion of the decision itself here.)  Other than for the parties themselves, the judgment will be of immediate interest for the parties to the Paroxetine litigation in the UK: as reported here, an appeal of the CMA’s decision in that matter is due to take place before the Competition Appeal Tribunal early next year.  This decision is likely to be welcome news to the CMA… Meanwhile, companies entering into agreements settling patent litigation will need to continue to pay very careful heed to the competition rules when deciding on the terms of market access for generic products.

The General Court’s press release is available here.

Sophie Lawrance

This summer’s (not so) light reading – the CMA’s published Paroxetine decision (GSK/generics)

Some 6 months after issuing its infringement decision against GSK and a number of generic companies, the CMA has released a non-confidential version.  This comes in at a weighty 717 pages.  

Other than the grounds of appeal (on which we reported in the final paragraphs of this post), this is the first chance for companies and their advisors who weren’t involved in the proceedings to see the approach the CMA has taken, and to compare it with the current Commission approach.  First impressions are that the CMA has closely aligned itself with the Commission’s patent settlement decisions, such as Lundbeck**. The CMA and the parties will therefore be particularly keen to see the General Court’s forthcoming judgment in that case – indeed, the case management directions set down by the Competition Appeal Tribunal in the appeal proceedings against the CMA’s decision require the parties to prepare submissions on the relevance of the GC’s judgment to the case.

For those who aren’t keen on such weighty holiday reading, but can’t stand the suspense, below are a few pointers to the parts of the CMA’s legal reasoning which may be worth dipping into:

  • Paragraphs 1.3  1.20: A high level summary of the decision for those who only have an appetite for some light reading.
  • Paragraphs 3.65 – 3.84: The CMA’s view of patents, expanded upon at paragraphs 6.19-6.22.  The Windsurfing case law on the ‘public interest’ in removing ‘invalid patents’ is key: patents are treated as ‘probabilistic’ (although the term isn’t used) and are not guaranteed to be valid. Like the Commission, the CMA treats legal challenges to patent validity as part of the competitive process, and argues that the market is ‘in principle’ open to generic entry after expiry of patent protection over an API.  
  • Paragraphs 4.17 – 4.26: Overview of the market definition section which finds that, while other antidepressants may be substitutable for paroxetine, consumption patterns suggest that the actual competitive constraint is limited.  For market definition geeks, the full analysis is at paragraphs 4.29 – 4.97.  It is notable that paroxetine’s position within the ATC features only briefly, with the focus being on actual competitive constraints, including a ‘natural events’ analysis to look at the relative impact of generic entry in relation to the candidate competitor molecules (such as citalopram – the subject of the Lundbeck decision), and entry by generics of paroxetine itself (see para 4.73 in particular).
  • Once the narrow market definition is established, there isn’t much suspense as to the dénouement of the dominance ‘chapter’ (paragraphs 4.98 – 4.127).  In this context, the section on why the PPRS does not constrain pharmaceutical companies’ dominance is again unsurprising, but perhaps worth a read (paragraphs 4.124 – 4.126).
  • Paragraphs 6.1 – 6.9 and 6.204 – 6.206 contain a summary and the conclusion of the ‘object assessment’ under Article 101/Chapter I: while generally Lundbeck-esque, the reference to “the effective transfer from GSK [to GUK/Alpharma] of profit margins” strikes me as a novel way of expressing an old idea.
  • Paragraphs 7.1 – 7.3, 7.61 – 7.62 and 7.114 – 7.115 contain the summary and conclusions of the effects assessment under Article 101/Chapter I.  Even though the agreements were actually operated in the market, the CMA has confined itself to looking at their ‘likely’ effects – presumably to try to account for the fact that the outcome of the discontinued litigation is unknowable. It also concludes that the agreements assisted GSK to “preserve its market power” (paragraphs 7.63 – 7.64 and 7.116 – 7.117).
  • Leading on from that conclusion, paragraphs 8.1 – 8.3 summarise the case on abuse of a dominant position.  Central to the abuse case is the concept of inducement by GSK.  The allegations span not only the agreements in respect of which fines are issued under Article 101, but also an agreement with IVAX (for those with time on their hands, Annex M seeks to explain the discrepancy). GSK raised a number of objective justification arguments, notably around its right legitimately to defend its patent rights and to defend the company’s commercial position.  Paragraphs 8.61 – 8.67 reject these arguments, in particular on the basis that the conduct was not ‘competition on the merits’ (as per AstraZeneca) and that the conduct “went beyond the legitimate exercise of its patent rights to oppose alleged infringements”.  
  • Finally, and again for the more technically minded, at paragraphs 10.43 – 10.53, the relevance of the Vertical Agreements Block Exemption is dismissed, on the basis that the agreements were between potential competitors rather than being true ‘vertical’ arrangements.  At paragraphs 10.54 – 10.97, the parties’ Article 101(3) exemption arguments are also dismissed (spoiler alert: the exemption criteria are not found to have been fulfilled).  One curiosity is the lack of an infringement decision in relation to the agreement between GSK and IVAX.  This was held to benefit from the (now repealed) UK-specific Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000 (now repealed).  In other words, that agreement is treated as vertical, unlike those between GSK and each of the other generic companies, even though the decision recites that IVAX did have plans to launch its own paroxetine generic.  The difference appears to be based on the context in which the agreements were reached: whereas the agreements with GUK and Alpharma related to the settlement (deferral) of litigation, that was not the case for the supply deal agreed with IVAX.  This is addressed at paragraphs 10.36 – 10.47 and in Annex M.
The paragraphs listed above focus on the legal analysis.  Those who prefer their reading less dry will want to look also at the descriptions of the agreements, and will note in particular that the ‘settlements’ considered in the decision did not finally resolve the litigation, but rather deferred it for the duration of the agreements entered into by GSK and the generic companies. Those who like tales of retribution will wish to read about the calculation of fines in section 11 – note that GSK received separate fines in relation to each of the agreements and the abuse of dominance.

The appeal hearing before the CAT is due to start next February, and to last for around a month.  By that time, the General Court will have issued its rulings in the various appeals against the Commission’s Lundbeck decision – which will doubtless be another weighty 
read for the Autumn.

** For more on Lundbeck, please see here (the abridged version) or here (the full analysis).