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