European Union: European Commission Initiates Proceedings Against Samsung For Abuse Of Dominance By Failing To License Its Essential Patents On FRAND Terms

Last Updated: 14 March 2012
Article by Elisabetta Rotondo

On 30 January the European Commission ("Commission") initiated formal antitrust proceedings1 against Samsung for abuse of dominance in relation to certain of its standard essential patents in the European mobile device market contrary to Article 102 of the Treaty on the Functioning of the European Union ("TFEU").2

What is the background to this investigation?

In 1998 the third generation (3G) mobile and wireless telecommunications system standards were adopted in Europe. At this point many patent holders, including Samsung, committed irrevocably to the European Telecommunications Standards Institute ("ETSI") to ensure access to their standardised technology by licensing their standard-essential patents relating to European mobile telephony standards on fair reasonable and non-discriminatory ("FRAND") terms to anyone who requests a licence unless there is an objective justification for not doing so.

However in 2011, Samsung sought injunctions in a number of Member States against competing mobile device makers alleging that they had infringed certain of its patent rights which it had identified as being essential to implement European mobile telephony standards.3

The Commission will investigate whether Samsung has abused its dominant position and breached its commitment to the ETSI to license standard essential patents of its Universal Mobile Telecommunication Service ("UMTS") on FRAND terms by seeking injunctions against competing mobile device makers in a number of Member States in relation to its UMTS standard essential patents.

What does "initiating proceedings" mean?4

The Commission will usually initiate proceedings after completing an initial investigation of the alleged infringement and determining that further investigation is necessary. Initiation of proceedings is a procedural step in an investigation which must be taken prior to issuing a statement of objections or a preliminary assessment under the commitments procedure. Proceedings must be initiated before the Commission can adopt a decision.

Opening proceedings means the European Commission asserts jurisdiction over an investigation. Once proceedings have been initiated, national competition authorities can no longer investigate the same potential infringement under Article 101/102 TFEU (they can however still investigate under their national competition law) and national courts must refrain from passing judgments which may conflict with any decision of the European Commission.

While opening proceedings does not prejudge the outcome of the investigation, nor restrict the scope or the addressees, it does signal that the European Commission considers the facts and issues serious enough to warrant further investigation and is a step nearer the issuance of a decision. It also means that the Commission will deal with the case as a matter of priority. It should therefore be taken seriously by any party under investigation.

How does competition law apply to standardisation?

The European Commission is becoming increasingly active in policing the abuse of standards setting in high tech industries. In his speech on 10 February 2012,5 Joaquín Almunia, Vice President of the European Commission, recognised that standards-setting plays a crucial role in promoting interoperability, interconnection and seamless communication in relation to communication technologies. He recognised the pro-competitive benefits of standardisation agreements which encourage the development of new and improved products or markets; improve the conditions of supply; maintain and enhance quality; ensure interoperability and compatibility. As a result, they increase competition and reduce output and sales costs.

Standardisation agreements can however be anticompetitive where they create market power. They may also lead to the restriction of price competition, the limitation or control of production, markets, innovation or technical development. This can occur where there is a reduction in price competition, foreclosure of innovative technologies and exclusion of, or discrimination against certain companies by prevention of effective access to the standard.

The Commission's Horizontal Guidelines identify the following practices to ensure that the agreements fall outside the scope of the competition rules:

  • participation in standard-setting must be unrestricted;
  • there must be transparent procedures for adopting the particular standard;
  • there must not be any obligation to comply with the standard; and
  • access to the standard should be on fair reasonable and non-discriminatory terms.

When patents become incorporated into essential industry standards, this can confer significant market power on those patent holders as use of those patents becomes indispensable. Effectively, the industry becomes "locked-into" using those patents. Joaquín Almunia noted in his speech the recent upsurge in the use of strategic patents to confer market power on their holders.6

Where standardisation agreements confer such market power on an undertaking, if that undertaking is in a dominant position, then it is under a special responsibility not to allow its conduct to restrict competition on the market.

Once a company's patents are incorporated into essential standards, the Commission is clear that the patent holder should not be allowed to exploit this increased market power either i) by charging excessive royalties for use of those patents or ii) by foreclosing competitors from access to the essential standard patents through other means. To this end companies must give effective access to their essential patents on FRAND terms.7

The Commission's case against Samsung focuses on whether Samsung has abused its dominant position by not allowing its competitors access to its standards essential patents on FRAND Terms by imposing injunctions on them for patent abuse. The first three bullets listed above were ensured by Samsung's commitments to the ETSI when the third generation (3G) mobile and wireless telecommunications system standards were adopted in Europe in 1998 and as such are not of concern.

Comment

The Commission's decision to move to a more in-depth investigation of Samsung's litigious behaviour will be well–received by those companies subject to Samsung's standard essential patent suits. In addition, if the Commission issues an infringement decision, that decision will provide litigants with the possibility to bring follow-on actions for damages (provided they can show causation and loss). The Commission has also announced that it will be examining whether similar conduct by Motorola should be investigated.8

The Samsung case will be followed closely by lawyers and industry participants alike, all keen to learn whether the Commission will finally adopt a decision in relation to the application of Article 102 TFEU in the field of standard-setting. To date, previous investigations in this area have either been settled or closed without a decision:

  • In 2007 the European Commission opened proceedings into the alleged failure by Qualcomm, a US chipset manufacturer, to license its patents on FRAND terms. The European Commission investigated whether Qualcomm had charged excessive royalties for its patented technology after it became an essential part of the WCDMA industry standard for mobile telephony (which form part of Europe's 3G standard). The Commission closed its investigation in 2009 after Qualcomm agreed terms directly with the complainants who withdrew their complaints.
  • In 2007 the European Commission sent Rambus a statement of objections setting out its view that Rambus had infringed Article 102 TFEU by carrying out a "patent ambush": Rambus had failed to disclose to JEDEC (a US worldwide standards setting organisation for semiconductors) patents relating to its DRAM technology which were essential to the use of the standard until after the standard had been adopted. The Commission also alleged that Rambus had filed patents to cover technologies that Rambus expected to be covered by the JEDEC standard in order that it could then charge royalties for the use of technology which would become an industry accepted standard. The Commission closed its case in 2009 after Rambus committed to put a worldwide cap on its royalty rates for products compliant with the JEDEC standards for five years.
  • After acquiring Bosch's patent portfolio in 2007, IPCom held discussions with the European Commission which resulted in IPCom's agreement in 2009 to adopt the commitments originally provided by Bosch to grant irrevocable licenses to standard-essential patents set by ETSI and UMTS on FRAND terms.

The industry is also keen to see whether the Commission will use the Samsung investigation as an opportunity to explain its interpretation of what is fair, reasonable and non-discriminatory - a topic which has been the subject of much debate before the courts.

However few standards-setting organisations ("SSOs") provide an interpretation of FRAND terms when setting industry standards as they are under no obligation to do so. In addition, compliance by SSOs with Article 101 TFEU does not require them to verify whether the licensing terms of participants fulfil the FRAND commitment - it is up to the participants to self-assess their compatibility with FRAND terms.9

Despite the uncertainty as to its meaning, a FRAND commitment will often include the following terms in a licence:

  • Fair: licenses should be non-exclusive. Licensors should also license any party who requests a licence unless they have an objective justification for refusing to do so (this is the case under the ETSI standards).
  • Reasonable: royalties must not be excessive. What would be considered excessive depends on whether the fees bear a reasonable relationship to the economic value of the IPR10. How to assess this will depend on the context in which the technology is being licensed, and, it has been suggested, could be determined by comparison to a number of factors including:

a) the royalties charged by other companies for similar essential patents;
b) the company's ex-ante competitive licence rates for those patents;
c) industry experience and expectation as well as the contribution by the patent to the technology; and
d) precedents from previous patent cases: often courts rule that the infringer must pay a reasonable royalty for the exploitation of the patent. The level of this royalty may be informative in the standards-setting context.
  • Non-discriminatory: licences must be granted on similar terms to all parties who request one in return for a reasonable royalty unless there is an objectively justifiable reason for not supplying the licence or for imposing different terms on that particular licensee.

However Apple recently wrote to the ETSI arguing that FRAND principles are not being consistently adhered to. To address this issue, it suggested the creation of a FRAND licensing framework for cellular standards essential patents. In order to ensure the transparent and consistent licensing of patents on FRAND terms, Apple suggests the framework should be based on three elements: appropriate royalty rate, common royalty base and no injunction.11

  • Appropriate royalty: Apple suggests that a reasonable rate would be one which reflects the party's portfolio of cellular standards essential patents and patent applications compared with the total industry-wide pool of such patents.
  • Common royalty base: In addition, Apple suggests that a patent holder should apply its appropriate rate to a common royalty base which should be no higher than the industry average sales price for a basic communications device that is capable of both voice and data communication. In this regard the US Department of Justice and the Federal Trade Commission has stated that joint announcements by industry players of their intended maximum licensing terms would not be considered anticompetitive.12 Similarly the European Commission in its Horizontal Guidelines states that "standard-setting agreements providing for ex ante disclosures of most restrictive licensing terms, will not, in principle, restrict competition ... .Therefore, should a standard-setting organisation's IPR policy choose to provide for IP right holders to individually disclose their most restrictive licensing terms, including the maximum royalty rates they would charge, prior to the adoption of the standard, this will normally not lead to a restriction of competition within the meaning of Article 101(1)." 13
  • Not to impose injunctions on its competitors for breach of standard essential patents: Apple suggests that part of the FRAND commitment would be that licensors would not seek injunctive relief on standards essential patents. Cisco and Microsoft14 have backed this suggestion. An injunction can be very costly for a competitor who has invested in developing a technology but is then injuncted from using it. Patent holders can therefore use the threat of injunction to force competitors to pay high royalty rates for a licence of the standards essential patent.

However Apple's approach to banning injunctions is not supported by all industry members and it is unclear whether ETSI will take up the mantle of interpreting FRAND terms for the ICT sector or whether it will be for the European Commission to provide guidelines which span all industry sectors.

What are the European Commission's powers to sanction Samsung?

If the European Commission issues a decision finding Samsung in breach of Article 101 (1) TFEU, Samsung may be fined up to 10% of its worldwide turnover. Third parties who have suffered harm as a result of Samsung's abusive behaviour (for instance competing mobile device makers) may then bring an action for damages against Samsung.

What will happen next?

There is no deadline to complete the investigation and its duration depends on a number of substantive and procedural factors. Investigations can typically take a number of years to conclude. In the meantime, participants in standards setting procedures who are conferred market power by that process should be aware of, and take seriously, their responsibility to license their standard essential patents on FRAND terms.

Footnotes

1 The Commission's announcement is at: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/12/89&format=HTML&aged=0&language=EN&guiLanguage=en

2 Article 102 TFEU http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12008E102:EN:HTML

3  For example, Samsung has accused Apple of infringing its patented wireless technology in Australia, Japan, South Korea, England, Germany, Italy, France and the Netherlands.

4 The legal basis for opening proceedings is Article 11(6) of Council Regulation No 1/2003 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:001:0001:0025:EN:PDF and article 2(1) of Commission Regulation No 773/2004 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:123:0018:0024:EN:PDF

5 Speech/12/83 by Joaquín Almunia, Vice President of the European Commission responsible for Competition Policy, Quo Vadis Europa? New Frontiers of Antitrust 2012 – Revue Concurrences, Paris, 10 February 2012 http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/12/83&format=HTML&aged=0&language=EN&guiLanguage=en

6 Ibid

7 Ibid

8 Ibid

9 European Commission Notice: Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, Official Journal [2011] C 11/01, para 288.

10 European Commission Notice: Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, Official Journal [2011] C 11/01, para 289.

11 http://www.scribd.com/doc/80899178/11-11-11-Apple-Letter-to-ETSI-on-FRAND

12  U.S. Department of Justice & Federal Trade Commission, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (2007) http://www.justice.gov/atr/public/hearings/ip/222655.pdf.

13 European Commission Notice: Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, Official Journal [2011] C 11/01, para 299.

14  http://www.microsoft.com/about/legal/en/us/IntellectualProperty/iplicensing/ip2.aspx

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