This paper – which you can find here – asks: what does (EU) competition law have to do with FRAND? It is, as far as I’m concerned, a rather good question.
- The paper begins by sketching a basic model of standards-related IP licensing negotiations and related litigation. Competition issues tend to arise when two parties are negotiating over the licensing of a SEP and the SEP holder is under an obligation to grant licenses on fair, reasonable and non-discriminatory (FRAND) terms. This negotiation is framed by the parties’ ability to start judicial proceedings under IP Law: SEP holders can ask for injunctions in order to enforce their rights, while potential licensees can challenge the validity, infringement or essentiality of a SEP.
A number of outcomes are possible in this context: (i) the parties may negotiate on the terms; (ii) the SEP holder may rely on its market power to holdup the licensee in order to obtain exorbitant royalties; (iii) the potential licensee does not want to pay a royalty, and hence does not want to conclude a deal (this is called holdout); and (iv) the SEP holder may want to exclude the licensee from the market, particularly if the SEP holder is also present in the downstream market.
In short: “Any legal system therefore faces a daunting task in trying to police the use of injunctive relief in SEP-related licensing disputes”. In (ii) and (iv), it seems illegitimate for the SEP holder to enforce its IP right against the potential licensee, whereas in (iii) the SEP holder should instead arguably be incentivised to enforce its right. Since any negotiation scenario will usually be more complex than these four simple possibilities, the authors conclude that this is an extremely complex to regulate.
- Part B reviews the judicial treatment of intellectual property law regarding SEPs in a number of European jurisdictions. It begins by reviewing the EU regime for the protection of IP rights. Then, it moves to the birthplace of “injunctive relief” – the UK – and reviews how this equitable remedy is applied in the IP context. Following this, the paper looks at the regulatory settings and SEP judgments adopted in Italy, France, the Netherlands and (more importantly) Germany. The conclusions of this overview are, in short, that: “there is no uniform treatment of applications for injunctive in SEP-related cases across the EU.”
- Part C is very important for our purposes because it explains how EU competition law was brought to bear on these disputes, culminating (for now) in the Huawei v. ZTE ruling of the Court of Justice of the European Union. In the Orange Book case, the German Supreme Court held that “competition law could apply to prevent the claimant – the SEP holder – from obtaining injunctive relief, on the grounds that obtaining an injunction against the implementer would constitute an abuse of a dominant position”. The authors argue that, given the disparity of approaches regarding SEPs between countries, (EU) competition law provided an alternative able to provide a common framework allowing for the harmonization of rules on SEPs across Europe. This was picked up by the European Commission in its Motorola infringement decision and Samsung commitment decision (for practices against that great absentee of competition enforcement in Europe, Apple).
In short, and unlike under German law – according to which an IP right holder can pursue injunctive relief except in exceptional circumstances – “under Motorola and Samsung it is the SEP holder that must be pro-active if it is to retain some hope of escaping Article 102 TFEU and availing itself of injunctive relief”. In light of this tension between Commission decisions and the case law of the German Supreme court, the Dusseldorf Supreme Court made a preliminary reference to the European Court of Justice (“ECJ”) in Huawei v ZET (memorise this name, it will show up a lot from now on). The Court agreed with the Commission’s argument that a standard-setting context and previous FRAND commitments by the SEP holder amount to exceptional circumstances that mean that the exercise of IP rights can infringe competition law – and, hence, there is no conflict between the Commission and the German approaches.
However, the Court was mindful that, in situations where parties have not been able to reach an agreement, patent holders must be able to protect their rights. Hence, the Court attempted to delineate more precisely the conditions under which the SEP holder can apply for injunctive relief without breaching Article 102 TFEU. These conditions include: (a) alerting the implementer in writing of the infringement complained of, identifying the relevant SEP and how it is alleged to be infringed; (b) if the implementer expresses a willingness to conclude a licensing agreement on FRAND terms, the SEP holder must provide a specific, written offer for a licence on FRAND terms; (c) if the implementer does not accept the offer, a counter offer that corresponds to FRAND terms must be made promptly and in writing to the SEP holder; (d) where an agreement has not been reached on the details of the FRAND terms following the counter-offer by the implementer, the parties may, by agreement, request that the amount of the royalty be determined by an independent third party; (e) the implementer cannot be criticised for challenging, in parallel to negotiations for a grant of licence, the validity of the SEP or the essential nature of the SEP or for reserving the right to do so in the future.
- Part D looks at the post-Huawei world.In effect, while the conditions set out in this judgment are detailed, the reality of FRAND negotiations is much more complex than what these conditions imply. Further, each condition can (and does) require additional clarification. Lastly, once these conditions were set, negotiating parties could use them as a way to obtain leverage over the other party. The authors provide multiple examples of this takin place.
Another issue, not addressed in Huawei, is how to treat de facto essential patents. In the cases reviewed above, the SEP holder was already under an obligation to provide a license on FRAND terms (see the discussion at the start about standardisation processes, and how the case law relies on classifying “previous FRAND commitments by the SEP holder” as an exceptional situation that allows competition law to be considered). Yet, a patent can be de facto essential (or ‘commercially essential’) even if it has not been formally declared as essential to a particular standard. As it stands, the law may incentivise patent owners to strategically withhold their participation in standard developing organisations, so as to retain a full panoply of remedies and greater latitude during negotiations. Even the European Commission has admitted that Huawei v ZET may have done more harm than good. In its recent Roadmap on Standard Essential Patents for a European Digitalised Economy (published on 10 April – see https://ec.europa.eu/info/law/better-regulation/initiative/20114/attachment/090166e5b19fda73_bg) , the Commission very politely points out that the decision failed to “give more precise views or guidance on more technical questions that are nevertheless highly relevant in practice, such as the required level of technical specifications to sustain the essentiality claim or the timing and basis for a FRAND counteroffer (…) how to deal with portfolio licensing and related damages claims, or the impact of alternative dispute resolution mechanisms.” As a result, the decision has created a “context of enforcement uncertainty [which] leaves room for aggressive licensing practices, which exploit and thrive in such a situation of legal uncertainty [leading to] to high litigation costs and long procedures involving several judicial instances. (…) On the other hand, uncertainty in the enforcement framework also undermines the capacity of SEP holders to exert their IP rights due to delaying tactics by the potential infringer of the patent.”
- For our purposes, there is additional, crucial issue with the decision: what is its the theory of harm? According to the authors (and I think they are correct in this), both Commission decisions and Huawei v ZET are about an exclusionary abuse (in all cases, the SEP holder competed with the implementers in the downstream market). However, the ECJ’s reasoning is much broader than this, seemingly implying that it would be an abuse to refuse to license a SEP on FRAND terms to any third party. National courts have shown a lack of agreement about the theory of harm – while the only case that explicitly addressed this (in Karlsruhe) thought that competition law is only engaged if the refusal to license is exclusionary, a number of courts have implicitly adopted the wider interpretation of the case law. Furthermore, for de facto essential patents, it is unclear what the theory of harm, if any, may apply – arguably, traditional Art 102 TFEU doctrines such as the essential facilities doctrine will have to be relied on.
- Part E completes the analysis with a critical examination of the current state of the law. In short, the authors hold that the EU approach achieves a good balance between IP and competition: “patent owners may decide to strategically withhold their participation in SDOs, so as to retain a full panoply of remedies. At the same time, ‘outsiders’ would monitor SDO work in order to position their patent portfolios strategically in anticipation of the standard.” They also argue that the relevant theory of harm should be exclusionary, since extending the law further faces the same difficulties that exploitative abuses face in general, i.e. there is no clear test for exploitation.
I think the paper provides a good answer to what role competition law has to play in the context of FRAND negotiations (i.e. prevent exclusion and holdup, while also minimising holdout issues). I would nonetheless have liked to see a more detailed discussion of the applicable theories of harm (which would have required a discussion of whether the relevant conducts protect / damage consumer welfare and/or the competitive process, going well beyond the discussion pursued regarding the interaction between IP and competition in Europe).
On the other hand, I’m not at all sympathetic to the authors view that it is not problematic that the case law on FRAND has departed from solid competition law foundations merely because competition law is an optimal institutional response to defects in its IP framework – competition law is flexible, but it is not a “get out of jail card”. Case law without adequate normative foundations will distort the law, reduce legal certainty and erode the ultimate legitimacy of the European institutions in the competition arena.
Lastly, I am also not convinced that FRAND should only apply to exclusionary abuses, as the authors suggest – if the standard is essential, then limiting competition in the downstream market could limit consumer welfare regardless of whether the SEP is active in the downstream market or not. If one argues against this on the basis that it is difficult to apply a test for exploitative abuses, the counterargument is that this difficulty arises regardless of whether the SEP holder is active in the downstream market or not. This is because the question of whether there is an abuse or not depends on the infringement of a standard requiring parties to behave in a FRAND way, including offering FRAND rates. Only after identifying this standard, and determining whether it has been breached, would one be able to assess whether the practice was exclusionary or merely exploitative.
Despite these criticisms, I agree with the authors that “The concept of FRAND does not specify a set of terms and conditions, in particular as regards royalty, but rather a range of acceptable outcomes” and that “FRAND is better seen as a guide for parties to deal with one another, as a set of disciplines on negotiations and a boundary for a range of possible outcomes”.