UK: Standard Setting - The European Commission's New Approach

Last Updated: 26 April 2011
Article by Dr. Gordon Christian and Simon Holmes

One of the major projects undertaken by the antitrust and mergers policy and scrutiny unit in DG Comp over the last 12 months was the review of the present rules on co-operation between competitors. Currently, guidance on such co-operation can be found in two block exemption regulations (on research and development agreements and on specialisation agreements respectively), as well as in the accompanying horizontal guidelines. Following several Commission cases and Community court judgments in this area, and faced with the imminent expiry of the block exemptions, in May 2010 the Commission published two updated block exemption regulations and draft horizontal co-operation guidelines. Following a consultation period that closed in June last year, the Commission adopted final versions of the block exemption regulations and the accompanying guidelines (Guidelines) in December 2010. The regulations came into force (with a two-year transitional period) on 1 January 2011, whereas the Guidelines came into force when published in the Official Journal recently.

This article is the second in a two-part series analysing the Guidelines (the first article – "Horizontal co-operation" – in CLI 27 July 2010 dealt with information exchange issues). This article will focus on the expanded chapter in the Guidelines on standard-setting issues.

Previous approach to standard-setting issues

It would be quite wrong to assume that, prior to the Guidelines, there was an entirely different approach to standard setting in the EU. Although the previous version of the guidelines from 2001 (2001 Guidance) dealt with standard setting in a much less detailed manner, it nevertheless contained the vast majority of the key principles also set out in the new Guidelines. In other words, the fact that participation in standard setting should be unrestricted and transparent; that there should be no obligation to comply with the standard; that standards should not be part of a wider anticompetitive agreement; and that standard-setting organisations should have non-discriminatory, open and transparent procedures was already provided for. In addition, access to standards for third parties on fair, reasonable and nondiscriminatory (FRAND) terms was already a requirement in the 2001 Guidance.

In the last few years, the Commission has applied these principles in a number of well-known cases on standard setting, including Rambus and Qualcomm.

Qualcomm. The Commission had opened an investigation into Qualcomm in October 2007 relating to Qualcomm's IP rights in WCMDA standards, which are part of 3G mobile telephone technology standards. The investigation focused on whether Qualcomm was dominant, and whether the licensing terms imposed by Qualcomm were FRAND.

The Commission's investigation followed complaints from a number of mobile phone and chipset manufacturers which claimed that Qualcomm's licence terms were not FRAND and that Qualcomm was exploiting the power it had gained as a result of owning a patent incorporated into a standard. Following a two-year investigation, the complainants withdrew their complaint and the Commission closed the case in November 2009 due to resource and priority concerns. Unfortunately, the Commission's press release closing the case gave virtually no detail on the Commission's analysis.

Rambus. The most important case on standard setting recently concerned Rambus. In contrast to the Qualcomm case, the Commission took this case forward to a statement of objections stage and then closed it by accepting commitments, thereby giving an important insight into the Commission's views in this area.

The Commission's experience in these cases will have undoubtedly influenced the recently published Guidelines as far as they deal with standard setting.

The Rambus case concerned the industry-wide standards set for dynamic random access memory chips (DRAMs – a type of electronic memory used in computers) that were set by the Joint Electron Device Engineering Council (the JEDEC). Rambus owned patents concerning technology that was necessary to meet the industry-wide standards, and therefore in practice all manufacturers of DRAMs had to obtain a licence from Rambus in respect of those patents.

The Commission's statement of objections suggested that Rambus had breached article 102 by charging unreasonable fees for the use of its patents. It was further said that Rambus had engaged in a patent ambush – in contravention of a specific JEDEC policy of requiring disclosure – by intentionally withholding information regarding the patents and related patent applications while the JEDEC was in the process of adopting the industry standards. As a result of Rambus' patents being necessary in the production of DRAMs to industry standards, this meant (in the Commission's view) that Rambus could charge higher royalties than would otherwise have been the case.

Rambus offered commitments to put a cap on its royalty rates for products compliant with the JEDEC standards for five years, which the Commission accepted and made legally binding in December 2009.

Guidelines' approach to standard-setting questions

Standardisation – a contentious issue. The Commission's consultation on the draft guidelines (as they then were) in May and June 2010 gave rise to considerable debate on a number of different issues, although the standardisation chapter and the information exchange chapter were among the most controversial. In total, the Commission received nearly 120 submissions on the Guidelines, with feedback ranging from broad agreement with the proposals (at times coupled with requests for clarification about certain points) to serious concerns about what the Commission was proposing. There were a number of "fronts" in the significant debate about the standardisation chapter. Unsurprisingly, one major front was the standoff between pure innovators and manufacturers. The former have a keen interest in maximising the revenue they gain from licensing their intellectual property rights (IPR) portfolios, and are therefore principally interested in watering down or eliminating any FRAND obligations relating to royalty rates. The latter, on the other hand, must pay royalties to gain access to any IPRs contained in standards with which their products need to comply, and therefore royalties represent a cost that manufacturers will seek to minimise by urging strong FRAND obligations. Several companies are, however, both innovators and manufacturers and aim to keep a balance (in different degrees) between these two objectives.

More surprisingly, though, were the press reports of serious differences of opinion even within the Commission, between DG Markt and DG Enterprise, (traditionally heavily involved in intellectual property) on the one hand, and DG Comp on the other hand, about how the Guidelines should deal with the standard-setting issue. Although the Commission seems to have reached a compromise position, in common with guidelines on any other issues, we will not know until the Guidelines are applied in practice as to whether the current version will enable the Commission to deal effectively with issues where the consultation has revealed deep-seated differences of opinion.

Standardisation – the Guidelines' approach. In common with the 2001 Guidance, the Guidelines acknowledge that standard-setting agreements generally have positive economic effects, and the Guidelines cite increased competition, lower costs, enhanced quality and interoperability as key benefits. However, in more detail than in the 2001 Guidance, the Guidelines sets out possible restrictive effects that standard-setting agreements can give rise to, including restricting price competition and limiting production, innovation or technical development. The Guidelines also refer to the creation of barriers to entry and foreclosure concerns, and refer to the "patent hold-up" issue that was at the heart of the recent Rambus case.

The Guidelines then make a distinction, within the restrictive effects category, between restrictions of competition by object and restrictions of competition by effect. In essence, given that the Commission would not need to prove anticompetitive effects in an objects case, the examples that the Commission gives of object restrictions will constitute "red lines" that no standard-setting organisation or its members will want to cross. The Commission refers to standard-setting agreements within a wider anticompetitive agreement, using standard-setting agreements as a cover to fix prices jointly and for the coordination of future licensing terms as restrictions classifiable as restrictions by object.

Arguably of more importance in practice will be the Guidelines' treatment of restrictions of competition by effect. In this context, what the Commission has sought to achieve in the Guidelines is a clear demarcation between a safe harbour (where competition concerns will not arise) and circumstances where no safe harbour is available and the standard-setting agreement must be analysed to establish whether it gives rise to restrictive effects.

The Guidelines provide for the following safe harbour: "Where participation in standard-setting, as well as the procedure for adopting the standard in question, is unrestricted and transparent, standardisation agreements which set no obligation to comply with the standard and provide access to the standard on [FRAND] terms do not restrict competition within the meaning of article 101(1)."

The Guidelines then seek to explain how drafters of standardsetting agreements can ensure that the agreement contains all necessary provisions for the safe harbour to apply. Necessary provisions will include rules to avoid patent ambushes and resulting excessive royalty rates for licensing the essential IPRs. The Guidelines explain that in this regard a standard-setting organisation must require good faith disclosure of any IPRs that may be essential for the implementation of a standard before that standard is agreed. Holders of essential IPRs will also need to provide a FRAND commitment, a written irrevocable commitment to license their essential IPRs relating to the standard to third parties on FRAND terms. The Guidelines recognise that there may be disputes as to whether particular licensing terms can be considered FRAND or not. The Guidelines suggest a number of methodologies, which have been retained in the Guidelines despite significant opposition from some quarters during the consultation. The key yardstick that the Guidelines refer to regarding the assessment of whether fees are FRAND or not is whether such fees bear a reasonable relationship to the economic value of the patents – something which, in practice, can be very difficult to assess.

Another highly controversial point in the Guidelines was the Commission's suggestion that ex ante disclosures of the most restrictive licensing terms (and likely maximum royalty rates) would be permissible (as long as such disclosures were not used as a price-fixing mechanism) to enable a view to be taken between potentially competing standards. Despite calls to remove this, the proposal has remained in the Guidelines.

Finally, the Guidelines provide further guidance on the assessment of possible efficiencies, on how to avoid restrictions that are not indispensable to the desired objectives of the standard-setting agreements and (similarly to the information exchange chapter) nine detailed examples illustrate the Commission's thinking on key principles.

Conclusion

The Commission has, in the drafting of the Guidelines, attempted to bridge significant divergences of opinion on key aspects of the rules governing standard-setting agreements, an area that is always likely to be controversial due to the interplay (some would say inevitable clash) between competition law and intellectual property law. Often, guidance on controversial topics risks papering over the cracks by using bland, lowest common denominator language which ends up being of little practical use.

However, in relation to standard setting, while of course not pleasing everyone, the Commission has produced more detailed rules which will give affected parties a much better idea of how to design and implement standard-setting agreements that comply with competition law.

Gordon Christian is an associate with - and Simon Holmes is a partner in - SJ Berwin LLP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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