Competition LawCOMPETITION LAW

Housekeeping

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Reading The following reading is essential: Alison Jones, Brenda Sufrin, EU Competition Law: Text, Cases, and Materials (6th Edition), Chapter 12 Richard Whish, David Bailey, Competition Law (8th Edition), Chapter 19

Associated legislative material: Commission Regulation (EU) No 316/2014 of 21 March 2014 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of technology transfer agreements (TTBER) Official Journal L93, 28.03.2014, p.17-23 Communication from the Commission — Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements, Official Journal C89, 28.03.2014, p.3-50

The following cases are essential:

C- 258/78 Nungesser v Commission (the Maize Seeds case) (Must read)C-170/13 Huawei Technologies Co. Ltd (Must read) C-418/01 IMS Health GmbH & Co OHG v NDC Health GmbH & Co KG (Must read) C-7/97 Oscar Bronner GmbH Co KG v Mediaprint (Must read) C-457/10 AstraZeneca v Commission (Casebook) COMP/39226 Lundbeck (Casebook) C-241/91 RTE & ITP v Commission (the Magill case) (Must read)

Learning Objectives

• To understand that intellectual property law and competition law are two different areas of law;

• To be able to identify when competition law is applicable to cases involving IPRs;• To understand and be able to identify the competition law exemptions related to

IPRS• Appreciate the influence of IPRs on dominance assessment and the use of IPRs

as a dominant undertaking.

Intellectual Property REFRESHER

Intellectual Property Rights

Intellectual property refers to creations of the mind: inventions; literary and artistic works; and symbols, names and images used in commerce.

• Intellectual property is divided into two categories:

Industrial Property includes patents for inventions, trademarks, industrial designsand geographical indications.

Copyright covers literary works (such asnovels, poems and plays), films, music,artistic works (e.g., drawings, paintings,photographs and sculptures)and architectural design.

Intellectual Property Rights

IPRS General Points

Patents A patent is an exclusive right granted for an invention – a product or process that provides a new way of doing something, or that offers a new technical solution to a problem. A patent provides patent owners with protection for their inventions. Protection is granted for a limited period, generally 20 years.

Trademarks Trademark protection ensures that the owners of marks have the exclusive right to use them toidentify goods or services, or to authorize others to use them in return for payment. The period ofprotection varies, but a trademark can be renewed indefinitely upon payment of the correspondingfees.

Copyright The creators of works protected by copyright, and their heirs and successors (generally referred to as“right holders”), have certain basic rights under copyright law. They hold the exclusive right to use orauthorize others to use the work on agreed terms. Protection begins with the creation and fixation of the work, and lasting for not less than 50 years after the creator’s death.

Patents and Competition Law

The essential characteristic of intellectual property rights is that they confer upontheir owners an exclusive right to behave in a particular way.

A patent does not necessarily make the patentee a monopolist in an economicsense: there may be other products that compete with the subject-matter of thepatent; however the patent does afford a degree of immunity from the activities ofrival firms. (W&B Chpt.19)

Trademarks and Competition Law

The owner of a registered trade mark can prevent anyone else applying that nameto goods or services where this would be confusing to consumers.

Because intellectual property rights confer exclusive rights upon their owners onthe one hand, whereas competition law strives to keep markets open on the other,it is easy to suppose that there is an inherent tension between these two areas oflaw and policy. However it has increasingly been recognised that this is simplisticand wrong. (W&B Chpt. 19)

Competition and Intellectual Property Law

Paragraph 7 of the European Commission’s Guidelines on the application of Article101 of the Treaty of the Functioning of the European Union to technology transferagreements says:

“Indeed, both bodies of law share the same basic objective of promotingconsumer welfare and an efficient allocation of resources. Innovationconstitutes an essential and dynamic component of an open and competitivemarket economy.”

Consumer benefit (IPR)

IPR Consumer benefit

Copyright The multibillion dollar film, recording, publishing and software industries – which bringpleasure to millions of people worldwide – would not exist without copyright protection.

Patent Without the rewards provided by the patent system, researchers and inventors would havelittle incentive to continue producing better and more efficient products for consumers.

Trademark Consumers would have no means to confidently buy products or services without reliable,international trademark protection and enforcement mechanisms to discourage counterfeitingand piracy.

Competition Law

Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition:

Over the past several decades, antitrust enforcers and the courts have come to recognize that intellectual propertylaws and antitrust laws share the same fundamental goals of enhancing consumer welfare and promotinginnovation. This recognition signaled a significant shift from the view that prevailed earlier in the twentieth century,when the goals of antitrust and intellectual property law were viewed as incompatible: intellectual property law’sgrant of exclusivity was seen as creating monopolies that were in tension with antitrust law’s attack on monopolypower. Such generalizations are relegated to the past. Modern understanding of these two disciplines is thatintellectual property and antitrust laws work in tandem to bring new and better technologies, products, andservices to consumers at lower prices.

Innovation

In a climate of increasing global competition, Europe needs to innovate in orderto remain prosperous. At the EU level, this objective is reflected in a wide rangeof policy initiatives, such as those grouped under the banner of the EuropeanCommission's flagship “Europe 2020” programme, billed as the EuropeanUnion's “growth strategy for the coming decade”.

Innovation & Competition

Competition law has a significant role to play, since companies that compete strongly areprobably more inclined to innovate to gain or preserve a lead over their rivals rather thanto rely on abusive business practices to harm competitors or deter innovative potentialnew entrants;

Competition law can facilitate and promote innovation, through exemptions andclearances;

Effective enforcement of competition can prevent abusive business practices thatpotentially harm competitors or deter innovative potential new entrants.

IP GrowthThe growth in the field of IP iscausing a shift in the way inwhich competition engagesand deals with IP issues. Newquestions are being askedthat were otherwise not raisedpreviously.

The use of IPRs

• The filing of IPR can be viewed as a free gift to the market.

• The manner of exploitation of the IPR can be viewed as a ‘sharing’ of technology, i.e.through licensing.

• Remember that patents, for example, can be used in a number of ‘Fields’ meaningthat it can open up the market, or restrict it.

• The introduction of new products can be seen to attract competition where inventionssuccessfully create demand.

• When could competition have a concern?

Windsurfing International Inc. v Commission

Windsurfing International Inc, a US-based company which develops and sells sailboards,brought an action for annulment before the Court of Justice against a Commissiondecision which found that a number of clauses in licensing agreements, concluded priorto 1981 with certain German undertakings, infringed Article 101 TFEU.

The use of IPRsThe first of the clauses at issue imposed on licensees the obligation to exploit Windsurfing International Inc’s invention only forthe purpose of mounting its patented rig on certain types of board specified in the agreement, and the obligation to submit for thelicensor’s approval any new board types on which the licensees intended to use the rigs. It is clear from their wording that theagreements defined the licensed product as a complete sailboard with specified characteristics and subject any modification to aboard to the licensor’s approval. This limitation restricts the types of sailboards which could be manufactured by the licensees.The Commission noted on this point that ‘the fact that an undertaking which has granted licences to other undertakings is theproprietor of an industrial property right does not entitle it to control the market in the products under licence. Restrictions on thefield of use of the products may be acceptable but only if they relate to different products belonging to different markets.

‘It must therefore be held that Windsurfing International’s real interest lay in ensuring that there was sufficient productdifferentiation between its licensees’ sailboards to cover the widest possible spectrum of market demand … The protectionafforded by the patent may only be claimed in the case of copies of products manufactured by the licensor himself. In so far asthe clause at issue enabled Windsurfing International to detect and prevent the slavish imitation of boards by licensees, therecan be no doubt that the clause constituted a restriction on the freedom of competition.’ (paras 49, 52)

Intellectual Property ARTICLE 101 TFEU

Article 101 TFEULicensing concerns the grant by the holder of an intellectual properly right (the licensor) of a right to a third party (the licensee) touse such IP. Agreements may concern patents, copyrights, trademarks or brand licensing. They allow the licensee to make useof the protected rights, while protecting the interests of the licensor. By their nature, these agreements may include limitations onthe use of the licensed materials, either in time, application or territory. When these limitations restrict competition they maytrigger the application of Article 101 TFEU.

Article 101 TFEU may apply, for example, when the exclusive licence includes assignment with absolute territorial protection(258/78, IV/32.736, C-403/08). However, at times, territorial restrictions which limit the grant of other licences may fall outsideArticle 101 TFEU (258/78, 27/87, 262/81). Article 101 TFEU may apply to non-territorial restrictions (193/83) and in exceptionalcircumstances to open exclusive licences (IV/31.043). Agreements which restrict competition under Article 101 TFEU may beexempted under Article 101(3) TFEU (IV/31.734, IV/171). (Ariel Ezrachi 2014)

Nungesser v Commission (the Maize Seeds case)

An action for the annulment of a Commission decision (Case IV/28.824, Breeders’ Rights – Maize Seed) inwhich the Commission found an exclusive licence of breeders’ rights to infringe Article 101(1) TFEU andrejected Mr Eisele’s application for an exemption under Article 101(3) TFEU. The agreement in questionconcerned a ‘maize seed production and sales licensing contract’ which was signed between the InstitutNational de Recherche Agronomique (INRA) and Mr Kurt Eisele. Under the agreement Mr Kurt Eisele (andNungesser KG) acquired exclusive rights to sell INRA’s varieties of maize in Germany. The agreementstipulated that Mr Eisele was obliged to import at least two-thirds of the German market’s requirements fromFrance through the French organisation responsible for centralising and coordinating exports (SSBM, laterFRASEMA); the balance, that is to say no more than one-third, may be produced by Mr Eisele himself, orproduced under his responsibility, on payment of royalties; Mr Eisele undertook to enforce INRA’s proprietaryright in its varieties, notably by protecting them against trademark infringement and passing-off .

Nungesser v Commission (the Maize Seeds case)‘The first set of circumstances is described as follows: “By licensing a single undertaking to exploit his breeders’ rights in a giventerritory, the licensor deprives himself for the entire duration of the contract of the ability to issue licences to other undertakings inthe same territory …” “By undertaking not to produce or market the product himself in the territory covered by the contract thelicensor likewise eliminates himself, as well as FRASEMA and its members, as suppliers in that territory”.’ (para 49) TheCommission found the exclusive nature of the licence to be contrary to Article 101 TFEU insofar as it imposes an obligation uponINRA to refrain from having the relevant seeds produced or sold by other licensees in Germany or producing or selling therelevant seeds in Germany themselves. (para 50)

‘Having regard to the specific nature of the products in question, the court concludes that, in a case such as the present, thegrant of an open exclusive licence, that is to say a licence which does not affect the position of third parties such as parallelimporters and licensees for other territories, is not in itself incompatible with [Article 101(1) TFEU].’ (para 58) With respect to theexclusive licence, which confers absolute territorial protection, it must be examined whether such agreement may benefit froman exemption from the prohibition contained in Article 101(1) TFEU. As the seeds in the case are intended to be used by a largenumber of farmers, an absolute territorial protection goes beyond what is indispensable for the improvement of production ordistribution or the promotion of technical progress. It thus constituted a sufficient reason for refusing to grant an exemption underArticle 101(3) TFEU. (paras 76–9)

The 2014 TTBER and the Technology Transfer Guidelines

The 2014 TTBER was adopted, with accompanying Guidelines, in March 2014and came into force on 1 May 2014. The TTBER and the Guidelines must beconsidered as a whole. Although the TTBER provides an important safe harbourfor technology transfer agreements, the Guidelines go further, doing three things.First, they set out a framework of general principles concerning Article 101 andIPRs. Secondly, they explain the provisions and application of the TTBER.Thirdly, they explain the application of Article 101(1) and Article 101(3) toagreements outside the scope of the TTBER. (Jones and Sufrin, Chpt. 12)

The 2014 TTBERThe TTBER comprises 19 recitals and 11 Articles.

Article 1 contains definitions of the most important terms in the Regulation.

Article 2 contains the exemption for bilateral technology transfer agreements which fall within it.

Article 3 provides that technology transfer agreements can only benefit from the ‘safe harbour’ of the block exemption if specified market share thresholds are not exceeded.

Articles 4 and 5 contains lists of hardcore and excluded restrictions. The presence of a hardcore restriction removes the entire agreement from the protection of the block exemption. In contrast, excluded restraints are not exempted by the TTBER but do not automatically remove the remainder of the agreement from the protection of the block exemption.

Articles 6 and 7 deal with withdrawal and disapplication of the TTBER.

Article 8 contains provisions about the calculation of the market share thresholds and provides for some marginal relief where market share increases during the lifetime of the agreement.

Article 9 provides that this Regulation shall not apply to licensing agreements which fall within the scope of other block exemption regulations relating to R&D or specialisation agreements.

Intellectual Property ARTICLE 101 TFEU

IPR in Dominance Assessment

• The ownership of an intellectual property right may nevertheless be animportant contributory factor in establishing dominance;

• Does the type of IPR matter?• A consideration of the existence and exercise of IPR often plays an important

role in defining the relevant market in which products are sold and indetermining whether a particular undertaking occupies a dominant position inthat market.

Commission Notice

Guidance on the Commission's enforcement priorities in applying Article [102] TFEU to abusive exclusionary conduct by dominant undertakings:

• Barriers to expansion or entry can take various forms…such as… privilegedaccess to essential inputs or natural resources, important technologies [para17].

Barriers to Expansion and Entry

IP is especially important in this part of the assessment.• Intellectual property right confers the power to exclude with respect to the specific

product, process, or work in question, is this not a immediate barrier to expansion andentry?

• The issue is whether the ownership of intellectual property rights is such as to enablethe owner to impede effective competition on a relevant market.

• There will often be sufficient actual or potential close substitutes for such a product,process, or work to prevent the exercise of market power to act as a barrier.

Tactical IPR Strategies

In Intel the Commission noted that Intel’s main competitor AMD manufactured itsx86 CPUs on the basis of a cross-licence agreement with Intel. That agreementfollowed on from a number of patent infringement cases brought by Intel againstAMD and a global settlement between the two companies in 1995.

The Commission commented that ‘the extensive litigation history highlightsthe significant intellectual property-related barriers that any new entrant tothe x86 CPU market would have to overcome’: para 858.

Indispensability as Abuse?

• One of the justifications for a competition law interference is on the grounds of indispensability.

• The requirement of indispensability or, in the terminology of the Article 102Enforcement Priorities Guidance, ‘objective necessity’, functions as a filter toidentify cases that are clearly not problematic.

• Some see this filter, i.e. if there is no indispensability then an abuse may notoccur as been an acceptable indicator, although there has been a strongreaction to this.

Magill

Where three broadcasters held a factual and, to the extent that the informationwas protected by copyright, legal monopoly over their own television listings.Each dominant undertaking published its own weekly television guide andprevented others from publishing weekly listings. Without the right to reproducethe programme schedule of each broadcaster, it was impossible for third partiesor each dominant undertaking to publish a comprehensive weekly televisionguide. The concept of indispensability implicitly adopted by the Court was thelegal impossibility of replicating the input.

Oscar Bronner

The ECJ defined indispensability as the absence of a potential realisticalternative to the upstream input as a result of technical, legal, or economicobstacles capable of making it impossible or unreasonably difficult for anundertaking with a market share comparable to that of the dominant undertakingto replicate the input either on its own or together with other undertakings. It isnot sufficient that such alternative inputs as there may be are less ‘advantageous’than the input owned by the dominant undertaking or that the undertakingrequesting access cannot replicate the input because of its smaller size.

Indispensability Test

(i) that the relevant input was indispensable for carrying on the business inquestion;(ii) that the refusal prevented the appearance of a new product for which therewas a potential consumer demand;(iii) the fact that the refusal was not justified by objective conditions; and(iv) that the refusal was likely to exclude all competition in the secondary market.

IMS Health

The Court held that indispensability was not limited to the legal or technical impossibilityof replicating the input but included cases in which to replicate the input is ‘noteconomically viable for production on a scale comparable to that of the undertaking whichcontrols the existing product or service’. That case concerned a copyrighted grid whichdivided the territory of Germany into 1, 860 areas or bricks (the ‘1860 brick structure’).Pharmaceutical companies received data disaggregated at the level of each brick andorganized their supplies based on that structure. As a result, the 1860 brick structure wasa de facto industry standard.

IMS Health - Dilution

• In its judgment, the Court repeated the summary of the conditions for anabusive refusal to license that it had given in the Oscar Bronner case. However,it also significantly diluted the requirement that the refusal to license be likely toexclude all competition in the secondary market, since it held that it wasenough to find this in relation to a "potential or even hypothetical market”.

• Another noteworthy aspect of IMS Health is that it is not obvious that the caseinvolved a truly new product at all, suggesting a dilution of the "new product"requirement.

Microsoft

The question was how to assess whether a certain degree of interoperabilitybetween the Microsoft client PC operating system Windows and third party workgroup server operating systems was ‘indispensable’ for undertakings operatingon the work group server operating system market. The General Court held thatany degree of interoperability which did not allow Microsoft’s rivals on the workgroup server operating system market to compete ‘viably’ on the market wouldfall short of the standard required under Article 102 because it would not alloweffective competition to take place on the market.

Microsoft

• Perhaps the most interesting aspect of the Microsoft case is that it provided amajor opportunity for the General Court to consider in detail the tensionbetween enforcement of competition law and protection of intellectual propertyrights as policy tools to encourage innovation.

Microsoft

• Firstly, the court had to consider whether Microsoft's refusal to provideinteroperability information prevented the emergence of a new product, asrequired by the existing case law on refusals to license intellectual propertyrights.

• Secondly, Microsoft argued that in any event its refusal was objectively justifieddue to the need to protect its incentives to innovate.

The New Product Test [Microsoft]

• A crucial question was whether Microsoft’s refusal to disclose interoperability information couldbe said to prevent the emergence of a “new product”.

• Microsoft argued that the Commission had failed to identify any such product, merely claimingthat its competitors “could use the disclosures to [develop] the advanced features of their ownproducts”, and that there was in fact no evidence that Sun would use the information to developanything other than a work group server operating system.

• The Commission replied that a new product is: a product which does not limit itself essentially toduplicating the products already offered on the market by the owner of the copyright. It issufficient, therefore, that the product concerned contains substantial elements that result from thelicensee’s own efforts.

The New Product Test Post Microsoft

• The court upheld a decision that it found to be based on the expectation thatcompetitors would produce products “distinguished from [Windows] systemswith respect to parameters which consumers consider important”.

• Microsoft thus marked a shift “from a rather clear notion of a new product thatthe company requesting the licence would develop to a rather abstract notion ofpreventing technological development”.

Objective Justification

• The objective justification for Microsoft's refusal to disclose its intellectualproperty rights is self-evident: those rights are meant to protect the outcome ofbillions of dollars of R&D investments in software features, functions andtechnologies. This is the essence of intellectual property right protection.Disclosure would negate that protection and eliminate future incentives toinvest in the creation of more intellectual property.

Objective Justification - Not

It has been established [...] that Microsoft's refusal to supply risks eliminating competitionin the relevant market [...] that this is due to the fact that the refused input is indispensableto carry on business in that market and that Microsoft's refusal has a negative impact ontechnical development to the prejudice of consumers. In view of these exceptionalcircumstances, Microsoft's refusal cannot be objectively justified merely by the fact itconstitutes a refusal to license intellectual property. It is therefore necessary to assesswhether Microsoft's arguments regarding its incentives to innovate outweigh theseexceptional circumstances.

Ramifications of Microsoft

• The General Court made clear that it was not a necessary condition that the refusal tolicense prevented the emergence of a new product, which had previously beenunderstood by some commentators as a significant limiting factor.

• The requirement for elimination of all competition in the secondary market, alreadydiluted in IMS Health, was further weakened in that the court held that it was not“necessary to demonstrate that all competition on the market would be eliminated” butmerely that the refusal “is liable to, or is likely to, eliminate all effective competition”.

Life After Microsoft for Innovation

• Dominant companies and the doctrine of special responsibility combinedseemingly indicates that IP is not as complete as previously thought. Moreover,when discussing high-tech industry the responsibility is heightened.

• After Microsoft Commissioner Kroes stated [Microsoft] set an importantprecedent in terms of the obligations of dominant companies to allowcompetition, in particular in high tech industries.

New Trends of Enforcement

• Interoperability;• Network effects;• High-tech;• Secondary markets ITC;• Standardisation.

MathWorks

• MathWorks had refused to provide software licenses and accompanyinginteroperability information for its two main products MATLAB and Simulink,thereby preventing a competitor from lawfully reverse-engineering in order toachieve interoperability with those products.

• Commissioner Almunia used the initiation of this investigation as an opportunityto emphasise that "software interoperability [...] remains central to ourenforcement practice".

Standardisation

• Samsung;• Rambus;• Google (Merger);• Etc.

Part of the Greater Innovation Policy

• Commission's Directorate General for the Information Society (under thedirection of former Competition Commissioner Kroes) published aquestionnaire seeking views on the need for "measures leading significantmarket players to license interoperability information not covered bystandards".

C-170/13 – Huawei v ZTE [opinion]

• The referring court considers that a SEP holder is dominant, the AG prefers to call it arebuttable presumption:

• Given that a finding that an undertaking has a dominant position imposes on theundertaking concerned a special responsibility not to allow its conduct to impairgenuine competition, that finding cannot be based on hypotheses. If the fact thatanyone who uses a standard set by a standardisation body must necessarily make useof the teaching of an SEP, thus requiring a licence from the owner of that patent, couldgive rise to a rebuttable presumption that the owner of that patent holds a dominantposition, it must, in my view, be possible to rebut that presumption with specific,detailed evidence.

Innovation Objectives

• If innovation is an objective of 102TFEU do we need a wider test for it?• Is the current test appropriate for innovation? Did Microsoft have a point in their

objective justification argument?

Counterfactual Innovation a Solution?

• Should the Commission compare the effects of IP holders actions with an alternative future scenario of innovation?

• Paragraph 21 of the Guidance Paper states that:“This assessment will usually be made by comparing the actual or likely futuresituation in the relevant market (with the dominant undertaking’s conduct inplace) with an appropriate counterfactual, such as the simple absence of theconduct in question or with another realistic alternative scenario, having regard toestablished business practices”.

Reluctance

• In Telekomunikacja Polska (“TP”) was fined €127 million for its alleged refusalto grant alternative operators access to TP’s copper network. As in manyprevious “form-based” cases, most of the decision focuses on the analysis ofTP’s conduct. The decision also contains a section analysing foreclosureeffects and consumer harm; this section is, however, very short (20 pages in a250-page decision) and does not explicitly address the question of thecounterfactual.

Counterfactual Innovation

• Counterfactuals can be used to demonstrate the lack of anti-competitive effects of agiven dominant firm’s conduct by demonstrating that the dominant firm’s position on themarket for innovation may be different to that on which the dominant firm operates. Thiscould be done by comparing the short- to mid-term innovation in the innovation marketwith one or several other undertakings engaging in innovation. Absent a difference insuch innovation activities, it could credibly be argued that the dominant firm’s time torecover innovation costs is limited and any requirement to licence as in IMS orMicrosoft would credibly defeat the purpose of innovation. Apply to Microsoft as anexample.

Concluding Thoughts

• It seems possible that Microsoft may remain the high-water mark for antitrustintervention in the field of intellectual property rights for some time. Despite itssuccess in that case, the Commission's preference since then appears to havebeen to settle investigations into the use of intellectual property rights, whetherinformally, as with Microsoft's interoperability undertaking and or on the basis offormal commitments.