European Union: Standards: Is Failure to License on FRAND Terms a Breach of EU Competition Rules?

Last Updated: 11 June 2012
Article by Kiran S. Desai and Manu Mohan

Originally published Spring/Summer 2012

Keywords: License, FRAND, EU, Competition Rules, intellectual property,

EU competition law as it relates to licensing of intellectual property rights (IPRs) that are incorporated into technical standards has concentrated to date on the application of Article 102 of the Treaty on the Functioning of the European Union (TFEU), which prohibits an abuse of a dominant position. Focus has centered on the refusal of an IPR owner either to license the rights or to license the rights on Fair, Reasonable and Non-Discriminatory (FRAND) terms. However, this article will deal with licensing under the EU rules relating to anticompetitive agreements, namely Article 101 TFEU.

Background

Standards play an important role, particularly in the telecommunications sector. It is not possible to manufacture telecommunications equipment—including infrastructure equipment, end-user terminal equipment and modems that comply with these standards—without infringing "essential IPR." According to the European Telecommunications Standards Institute (ETSI),1 the term "essential" as applied to IPR "... means that it is not possible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operate EQUIPMENT or METHODS which comply with a STANDARD without infringing that IPR. For the avoidance of doubt in exceptional cases where a STANDARD can only be implemented by technical solutions, all of which are infringements of IPRs, all such IPRs shall be considered ESSENTIAL."2

In simpler terms, an essential IPR is an IPR that has been included within a standard and where it would be impossible to implement the standard without making use of this IPR. The only way to avoid the violation of this essential IPR is to request a license from the IPR owner.3

Before the adoption of a standard by standard setting organisations (SSOs), patents from different suppliers may be in competition with each other for inclusion in the standard. Patents only become essential after a specific standard has been adopted and there is a "lock-in" to the standard. After the adoption of a standard, switching to an alternative technology is difficult, particularly if technology adopters have invested in manufacturing assets that are specifically designed to meet the standard. The situation is compounded if there are no other alternate technologies that are accepted as standard.

View of the European Commission

Although it has been recognised that standards are important, especially in the context of interoperability,4 there is a concern that implementation of standards can lead to competition issues.5 It has been recognised by antitrust authorities that upon inclusion of an IPR in a standard, the owner of an IPR necessary to implement the standard may have the power to extract higher royalties or other licensing terms that reflect the absence of competitive alternatives.6

The European Commission (the Commission) has considered standardisation agreements, and the Commission's view is set-out in its guidelines on the applicability of Article 101 TFEU to horizontal co-operation agreements (the Guidance).7 The Guidance provides that standard-setting may have an effect on four possible markets:

The product or service market to which the standard or standards relate;

  • The technology market, where the rights to intellectual property are marketed separately from the products to which they relate;
  • The market for standard setting if there exists different standard-setting bodies or agreements; and

  • If relevant, the market for testing and certification.8

The Guidance further provides that standard setting agreements that risk creating market power need to satisfy certain conditions to fall outside the scope of Article 101(1) TFEU.9 One of those conditions is that standardisation agreements need to provide access to the standard on FRAND terms. The Guidance further provides that in order to ensure effective access to the standard, the IPR policy of the SSO should require the participants wishing to have their IPR included in the standard to provide an irrevocable commitment in writing to offer to license their essential IPR to all third parties on FRAND terms. This is known as a "FRAND commitment." Paragraphs 280, 283 and 285 of the Guidance, respectively, state that:

280. Where participation in standard-setting is unrestricted and the procedure for adopting the standard in question is transparent, standardisation agreements which contain no obligation to comply with the standard and provide access to the standard on fair, reasonable and non-discriminatory terms will normally not restrict competition within the meaning of Article 101(1).

283. Furthermore, the standard-setting organisation's rules would need to ensure effective access to the standard on fair, reasonable and non discriminatory terms.

285. In order to ensure effective access to the standard, the IPR policy would need to require participants wishing to have their IPR included in the standard to provide an irrevocable commitment in writing to offer to license their essential IPR to all third parties on fair, reasonable and non-discriminatory terms ('FRAND commitment'). That commitment should be given prior to the adoption of the standard. At the same time, the IPR policy should allow IPR holders to exclude specified technology from the standard-setting process and thereby from the commitment to offer to license, providing that exclusion takes place at an early stage in the development of the standard. To ensure the effectiveness of the FRAND commitment, there would also need to be a requirement on all participating IPR holders who provide such a commitment to ensure that any company to which the IPR owner transfers its IPR (including the right to license that IPR) is bound by that commitment, for example through a contractual clause between buyer and seller.

The guidelines on the application of Article 101 TFEU to technology transfer agreements (the Technology Transfer Guidelines) also provide that technologies that support a standard will normally be required to be licensed to third parties on FRAND terms.10 The European Parliament has also stressed the need to ensure that licenses for essential IPRs contained in standards are provided on FRAND conditions.11

Competition Concerns

FRAND commitments are intended to prevent IPR holders from making the implementation of a standard difficult by refusing to license, or by requesting unfair or unreasonable fees (excessive fees) after the industry has been locked into the standard, or by charging discriminatory royalty fees.12 Thus, there is the potential for a hold-up by the owner of patented technology after its technology has been chosen by the SSO as a standard and after others have incurred sunk costs that effectively increase the relative costs of switching to an alternative standard.

The word "opportunism" is also used in the relevant economic literature to describe an IPR holder who, for example, waits until commitments are made and then seeks to extract a high royalty or to direct matters so that it will have an essential patent without making a firm commitment ex-ante on the terms on which its IPR will be licensed. A patent-holder may commit to offer its IPR under FRAND licensing terms ex-ante. Later, however, it might act to hold up technology adopters by requesting licensing terms that are not in line with its FRAND commitment after the adoption of the standard.13

A patent essential to the implementation of a standard may have a much higher value once the standard has been adopted. This creates an incentive for the patent holder to attempt to extract the ex-post, rather than the ex-ante, value of its technology. For this reason, it "... can be difficult in practice for a commitment to licence on fair, reasonable and non-discriminatory terms to constrain the charged price."14

Is Exemption Available if There Are Competition Concerns?

Can an individual party or all parties to a standards agreement argue that exemption is available pursuant to Article 101(3) TFEU? The argument would be that a standard-setting agreement brings benefits and so standard-setting agreements that contain restrictions of competition may be exempted under Article 101(3) if they "... promote economic interpenetration in the common market or encourage the development of new markets and improved supply conditions."15 However, it should be noted that "[t]he exemption is conditioned inter alia upon a finding that the agreements contain no restrictions of competition that are not indispensable to achieve the reasonable objectives of the standard, such as unnecessary restrictions on innovation and that access to the standard must be made available to new entrants on the market wishing to comply with the standard."16

This view, together with the Guidance, suggests that the absence of a FRAND commitment in a standard-setting agreement means that it is not able to qualify for exemption under Article 101(3) TFEU. This point of view may only be valid when there is no alternate standard available. There is one Commission decision that, by analogy, supports this view. The case involved the joint acquisition and exercise of certain patents with a view to controlling the market in stereo television sets.17 In this case the Commission considered that where the exercise of patent rights has the object and effect of excluding from the relevant market firms not belonging to a group, it would constitute a restriction of competition within the meaning of Article 101 TFEU. Following the Commission's investigations, IGR declared its willingness to grant licenses on reasonable terms to all other manufacturers. With respect to this case, the then-Director in the Competition Directorate General, in a speech published soon after the case, noted his personal opinion as follows:

  • [U]nder [Article 101], IGR and its members would not have been permitted to shut Salora out of the Germany [sic] market while exploiting it themselves. If necessary, the Commission would have ordered compulsory licensing by IGR.
  • [A]lthough in general there is no duty to supply under [Article 101], there is a duty when a discriminatory refusal has sufficiently serious anticompetitive effect.18

It is noteworthy that despite the absence of a FRAND commitment, the Commission did open an investigation in IGR Television/Salora and considered that there would be a marked effect on the structure of the market and considerable harm to consumer's interests.

Conclusion

The discussion above relates to standard-setting agreements and the parties to them, showing that the Commission has precedent and guidance on the application of Article 101. There is an open point as to the extent of applicability of Article 101 to the individual licence between a patent owner that is party to a standard agreement and a third-party licensee. To date, the Commission has not considered this issue in any decisions, and the Guidance does not address the point. It remains to be seen whether review of the Technology Transfer Guidelines and the related block exemption will address this issue.

There are several challenges for the Commission in considering the application of Article 101 TFEU to the individual license. For example, the sanctions (void and unenforceable agreements) that would apply to an anticompetitive license may discriminate between the licensor whose agreement is challenged and another licensor who may not have complied with the FRAND commitment but who is not the subject of a complaint. At the same time, however, that other licensor is likely to have benefitted from the reduction in competition downstream.

It is, we suggest, these challenges that have drawn the Commission to focus on the possible application of Article 102 TFEU when considering individual license agreements.  Even then, the Commission has largely used informal methods to resolve FRAND abuse of dominance allegations, strongly indicating the desire on the part of the Commission to use a light regulatory touch.

Footnotes

1 The European Telecommunications Standards Institute produces globally applicable standards for Information and Communications Technologies, including fixed, mobile, radio, converged, broadcast and Internet technologies and is one of the standard setting organisations recognised under Directive 98/34 EC of the European Parliament of the Council dated 22 June 1998.

2 ETSI Directives, Version 28, May 2011 available at: http://portal.etsi.org/directives/home.asp.

3 ETSI Guide on IPRs, 27 November 2008, clause 1.5.

4 See "Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, A Digital Agenda for Europe," dated 19 May 2010.

5 "Intellectual Property rights in standard setting from a competition law perspective," Grazyna Piesiewicz and Ruben Schellingerhout, (Directorate General for Competition), Competition Policy Newsletter, 2007, No. 3, p. 36.

6 See "Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition," Issued by the U.S. Department of Justice and the Federal Trade Commission, April 2007.

7 "Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements," text with EEA relevance, OJ C 11, 14.1.2011, p. 1–72.

8 Horizontal Guidelines, para 261.

9 Horizontal Guidelines, para 278.

10 Guidelines on the application of Article 101 to technology transfer agreements - OJ C 101, 27.4.2004, p. 2–42, paragraph 167.

11 European Parliament Resolution of 21 October 2010.

12 Horizontal Guidelines, paragraph 287.

13 See "Economics at DG Competition, 2009-2010," Damien Neven, Miguel de la Mano; and Federal Trade Commission and Department of Justice Antitrust Division Roundtables, November 6, 2002.

14 Ibid., fn. 5.

15 Ibid., fn. 5 quoting paragraph 169 of a Commission notice that preceded the Guidance (see fn. 7).

16 Ibid., fn. 5.

17 IGR Television/Salora, Eleventh Report on Competition Policy, pp. 63-64.

18 John Temple Lang, European Community Antitrust Law-Innovation Markets and High Technology Industries (New York: Fordham Corporate Law Institute, Volume 20, Issue 3 1996).

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2012. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.