University of Amsterdam, Faculty of Law Master Thesis Final Version
IP and Competition in Smartphone Patent Wars: Are the
Constituent Elements Sufficiently Clear to Establish Abuse of
Dominance?
by Evija Butane
European Competition Law and Regulation
Supervised by: Dhr. Dr. Mr. R. Wesseling 26th July 2016
2 Table of Contents
Introduction ... 4
1. The ICT Sector in the EU ... 7
1.1. Characteristics and Distinctive Features... 7
1.2. Complexity of the Legal Framework ... 8
2. Smartphone Patent Wars ... 10
2.1. Standard-Setting: Pro-Competitive v Anti-Competitive? ... 11
2.2. Patents and Standards: What Happens When They Are Essential? ... 12
2.3. FRAND terms: Compromise or a New Problem? ... 13
3. IP and Competition Law at Cross-Roads ... 17
3.1. Injunctive Relief by a Dominant Undertaking... 17
3.2. ‘Exceptional Circumstances’ Case-Law ... 19
4. The Current Legal Framework of Smartphone Patent Wars in the EU ... 23
4.1. The Commission’s Approach ... 23
4.1.1. Motorola and Samsung ... 23
4.1.2. Summary and Comment ... 26
4.2. The ECJ Approach ... 27
4.2.1. Facts of the Case ... 27
4.2.2. Recognizing the Rights at Stake ... 29
4.2.3. Reaching an Appropriate Balance? ... 30
4.2.4. Summary and Comment ... 31
4.3. Assessing the Differences between Approaches: Is There a Gap? ... 32
4.3.1. Difference No 1: The Theory of Anti-Competitive Harm ... 32
4.3.2. Difference No 2: Duty of Patent Holders v Patentees ... 33
4.3.3. Difference No 3: Defining ‘Willingness’ ... 34
4.4. Constituent Elements of an Abuse: Is There Sufficient Clarity to Reach a Definite Conclusion or Is the Gap Too Wide? ... 37
5. Conclusion: Repercussions on the Future Behaviour of Undertakings or Why Is It Important to Bring Clarity? ... 39
Bibliography ... 41
Primary sources: Legislation ... 41
Cases and Commission Decisions ... 41
3 Secondary Sources: Books ... 42 Journal Articles ... 42 Publications and Websites ... 44
4 Introduction
In recent years, the media has been exposed to the boom of the so-called ‘smartphone patent wars’- the litigation proceedings over Intellectual Property (IP) of undertakings engaged in production and sale of smartphones. ‘Smartphone Innovation Has Soared
because of Patents’1, ‘Smartphone Patents: the Never-Ending War’2- these are only a few examples of the headlines of the major newspapers worldwide. Indeed, many of the ICT (Information and Computer Technology) giants, such as Samsung, Apple, Microsoft, Huawei have been fighting fiercely in the courtrooms all over the world. For instance, in less than seven years, the top ten smartphone manufacturer litigators have initiated over 1,100 patent lawsuits as either plaintiffs or defendants, including 142 such lawsuits involving Apple alone3. Instinctively, such preponderance of court proceedings awakens curiosity about the legal and factual context of the issue.
The 21st century faced a shift from basic mobile phones, the functionality of which was limited to voice calls and text messaging, towards high-end smartphones.4 These mini-computers, capable of fulfilling a broad set of functions, such as texting, emailing, surfing the Internet, navigating and much more, have become indispensable to all categories of consumers. According to the International Data Corporation, in 2015 the smartphone market faced a 15% yearly growth, with 341.5 million shipments worldwide.5The technological complexity of these magic devices is immense; in fact, a typical smartphone has more computing power than Apollo 11- the first spacecraft that landed the humans on the moon.6
With reference to the legal framework, the ICT sector is highly dominated by IP law, which aims to protect innovative activity. Due to the countless technologies incorporated in the smartphone, patents are necessary for safeguarding against the unauthorized use by
1
S. Brachmann, ‘Smartphone Innovation Has Soared because of Patents’ (IP watchdog, 2015) <http://www.ipwatchdog.com/2015/03/17/smartphone-innovation-has-soared-because-of-patents/id=55667/> accessed 24 May 2016.
2
A. Jones, J.E. Vascellaro, ‘Smartphone Patents: The Never-Ending War’ (The Wall Street Journal, 2012) <http://www.wsj.com/articles/SB10001424052702303624004577339931560320116> accessed 24 May 2016.
3
‘Fighters in a Patent Wars’ (The New York Times, 2012) <http://www.nytimes.com/interactive/2012/10/08/business/Fighters-in-a-Patent-War.html> accessed 24 May 2016.
4
M. Frohlich, ‘The Smartphone Patent Wars Saga: Availability of Injunctive Relief for Standard Essential Patents’ (2014) 9 Journal of Intellectual Property Law& Practice 156.
5 ‘Smartphone OS Market Share, 2015 Q2’ (IDC Analyze the Future, 2015)
<http://www.idc.com/prodserv/smartphone-os-market-share.jsp> accessed 24 May 2016.
6
N. Gibbs, ‘Your Life is Fully Mobile’ (Time, 2012) <http://techland.time.com/2012/08/16/your-life-is-fully-mobile/> accessed 24 May 2016.
5 riders. It is worth noting that a quarter million patents might touch a single smartphone.7 However, IP rights in the ICT sector is only one side of the coin. The sector is also characterized by the abundance of technological standards which ensure the interoperability of smartphones with other devices. Standards themselves contain numerous norms which are patented, and undertakings holding those patents usually enjoy significant market power as no goods compliant to the standard can be produced without their permission. These Standard-Essential patents (SEPs) can induce undertakings to engage in opportunistic behaviour and abuse their market power, for instance, by enforcing their patents against those who are willing to use them and pay. At this point competition law becomes relevant as a guarantee of market protection. Such protection is ensured by the commitment of undertakings to licence their patents on fair, reasonable and non-discriminatory (FRAND) terms, and more generally, by Article 102 of the Treaty on the Functioning of the European Union (TFEU), which targets abusive behaviour of dominant undertakings.
Along these lines, smartphone patent wars set a perfect framework for analysis of the clash between the two fields of law. On the one hand, a maxim of equity dictates that the right is useless without an adequate remedy; thus, patent owners are enforcing their IP by asking judges to grant injunctions preventing the sale of unlicensed rival products. On the other hand, competition rules emphasize the existence of FRAND commitment and peculiarities of standard-setting activities, and are relied upon by patent implementers as a counterclaim. Hence, the injunctive relief by a SEP holder presents a sensitive issue which reflects the conflict of different interests at stake. In the EU, the European Commission’s decisions against Samsung8 and Motorola9 attempted to clarify the issue but it was not until July 2015, when the European Court of Justice (ECJ) gave its first ruling on this matter in
Huawei.10 On the other side of the ocean, the United States Department of Justice as well as Federal Trade Commission have been occupied with the similar matter on a number of occasions.11 Given the importance for patent holders to enforce their right, and at the same time, for patent implementers to get access to the indispensable patent in order to produce goods valued by consumers, the conflict calls for an adequate assessment and analysis. In
7
J. Yang, ‘The Use and Abuse of Patents in the Smartphone Wars: a Need for Change’ (2014) 5 Journal of Law, Technology & the Internet.
8
Samsung - Enforcement of UMTS standard essential patents (Case AT.39939) Commission Decision, C (2014) 2891 final.
9
Motorola- Enforcement of GPRS Standard Essential Patents (Case AT.39985) Commission Decision, C(2014) 2892 final
10
Case C-170/13, Huawei Technologies Co. Ltd v ZTE Corp. and ZTE Deutschland GmbH, EU:C:2015:477.
11
For example, Microsoft Corp. v. Motorola Inc 864 F. Supp. 2d 1023, Rambus Inc v FTC 522 F 3d 456 (DC Cir 2008).
6 particular, both patent holders and implementers should be aware of the threshold when the ostensibly legitimate behaviour breaches competition rules. To put it differently, the novelty of the issue necessitates the clear identification of the elements which render the injunctive relief abusive.
Along these lines, the present research aims to assess the current legal framework in the EU towards the issue of smartphone patent wars. To be more precise, it focuses on whether the stance taken by the Commission and the ECJ provides sufficient clarity to define the constituent elements of an abuse of dominance in SEPs cases or whether the difference in their approaches amounts to a gap which is too wide to reach definite conclusions. To answer the research question, the doctrinal method is used, whereby the existing case-law on the issue is critically analysed. The theoretical background of the thesis is based on the literature on IP law concerning injunctive relief by a SEP holder, licensing on FRAND terms and standard-setting.
The research is structured in the following way: the first section describes the unique characteristics and the legal framework of the ICT sector in the EU consisting of IP and Competition rules. The following section introduces the issue of smartphone patent wars and discusses the relevance of standard-setting, patent essentiality and FRAND commitments in detail. Section three presents two sets of circumstances when competition and IP rules meet- injunctive relief and refusal to supply. Next, the fourth section analyses the Commission’s decisions in Motorola and Samsung, as compared to the ruling of the ECJ in Huawei. The last two subsections assess the difference between the approaches with an aim to identify the gap, followed by an attempt to set out the constitutive elements of an abuse based on the existing legal framework. Finally, the fifth section draws conclusions concerning the current legal framework for smartphone patent wars in the EU and emphasises the need for more clarity due to negative repercussions for the future behaviour of undertakings.
7 1. The ICT Sector in the EU
1.1. Characteristics and Distinctive Features
ICT is an umbrella term that includes any communication device or application.12 On the EU level, the sector has been recognized by the Commission as one of the ‘key drivers for smart, sustainable and inclusive growth’.13In fact, it generates 25% of total business expenditure in Research and Development (R&D), while the investments in ICT account for 50% of all European productivity growth. For these reasons, Horizon 2020, the biggest EU Research and Innovation initiative programme securing Europe’s global competitiveness, prioritizes the ICT-related topics.14
The ICT industry is among the most innovative and competitive in the world.15 The innovation occurs either ‘incrementally’- by improving existing products or ‘drastically’ -by creating the new ones.16 Without doubt, these innovative activities require considerable investments into R&D, especially at the initial stages of production. In other words, companies active in the ICT sector incur costs, which they strive to recoup by succeeding in their businesses. Making profits leads to new investments, new investments lead to new products, new products lead to consumer satisfaction and hence, to more profits.
The rapid pace of innovation leads to extremely short life cycles of the products. This pressures companies to constantly innovate to remain in the game17, and often entails the ‘first mover advantages’ and ‘winner-takes-it-all effects’. The firm releasing a new product creates a new market in which it will often enjoy considerable market power—until other firms adapt to enter. Importantly, because the first mover will service the entire market demand, it will benefit from economies of scale and network effects that new entrants will not be able to replicate immediately.18
Another feature peculiar to ICT is the need for interoperability: hardware components must connect to other hardware components, software programs must be able to
12
M. Rouse, ‘ICT’ (SearchCIO, 2005) <http://searchcio.techtarget.com/definition/ICT-information-and-communications-technology-or-technologies> accessed 24 May 2016.
13 ‘ICT: Overview’ (European Commission, Competition, 2012)
<http://ec.europa.eu/competition/sectors/ICT/overview_en.html> accessed 24 May 2016.
14 ‘ICT Research &Innovation’ (European Commission, Horizon 2020)
<https://ec.europa.eu/programmes/horizon2020/en/area/ict-research-innovation> accessed 24 May 2016.
15
N. Fox, ‘Introduction’ in N. Fox (ed), Intellectual Property in Electronics and Software: a Global guide to
Rights and Their Applications (Globe Law and Business, 2013) 7.
16
M. Rato, N. Petit, ‘Abuse of Dominance in Technology-Enabled Markets: Established Standards Reconsidered?’ (2013) 9 European Competition Journal 1.
17
Ibid.
18
8 communicate with each other. It ensures competition between different components of the same technology as well as between competing technologies, thus guaranteeing the availability of choice to consumers. Absent interoperability, the products will not work as expected: phones will not connect to the wireless system, USB flash drives will be unsuitable for computers, sharing Microsoft Office programmes with other devices will no longer be possible. In other words, lack of interoperability will lead to dissatisfaction of consumers and render the industry useless. Another consequence of interoperability is the need for uniform standards throughout the industry.
1.2. Complexity of the Legal Framework
Although the list of unique ICT features can be continued, the above mentioned characteristics are enough to illustrate the complexity of the industry and the need for a sophisticated legal framework to adequately address the needs of the sector.
On the one hand, companies fear exploitation and free-riding and strive to be adequately compensated for their inventions. Hence, they turn to the field of IP law, which grants them exclusive rights by virtue of patents. In essence, patents guarantee two basic prerogatives: the right to prevent any third party from using the subject-matter of the patent and the right to set the conditions of a license in consideration for use of the patent and as a reward for the innovative contribution made.19 This possibility of receiving the exclusive property right provides safety and certainty for the companies and serves as a further incentive to innovate.
On the other hand, competition rules are also essential in this sector. After all, it needs to be ensured that standards are not used with a purpose to exclude competitors, and companies with significant market power do not exploit consumers by limiting their choice and charging unreasonably high prices. Accordingly, Article 101 TFEU prohibits anti-competitive agreements between undertakings, while Article 102 TFEU targets the abusive behavior of dominant undertakings.
At first sight, it seems that there is an inherent conflict: IP law facilitates the formation of legal barriers to entry, while competition rules attempt to maintain an open and fair competitive process.20 In light of potential harm that could arise from misuse of IP right,
19
Fox (n 15) 11.
20
M. Angelov, ‘The ‘Exceptional Circumstances’ Test: Implications for FRAND Commitments from the Essential Facilities Doctrine Under Article 102 TFEU’ (2014) 10 European Competition Journal 37.
9 the question arises when competition law should intervene or whether it should at all. Those who caution against antitrust enforcement in the IP rights arena argue that in fast-paced, high technology markets, it would hamper incentives to innovate.21 Others argue that antitrust intervention is necessary where patents are too broad or are used strategically- they can distort the equilibrium between IP and Competition by artificially increasing final prices due to unwarranted royalties.22
However, upon a closer look the two sets of rules can be seen as two extremes striving to achieve one goal- the promotion of consumer welfare. Competition law seeks to maximize consumer welfare by allocating goods and services at prices and quantities valued by the society. IP rights endeavor to achieve the same result by providing legal exclusivity as an incentive for the manufacturing of new products; in the short term, consumers are supplied with an additional choice, albeit at a higher price; and in the long term, when the patent expires, the industry as a whole can produce more and at lower cost.23
Therefore, it can be argued that the whole conflict boils down to the need for an adequate balance between the two sets of rules. Once it is found, both fields complement each other in promoting the consumer welfare. The absence of an appropriate balance however, leads to the clash, the manifestation of which can be found in the ‘smartphone patent wars’.
21
M. de la Mano, R. Nazzini, H.Zenger, ‘Article 102’ in J. Faull, A. Nikpay (eds), The EU Law of Competition (3rd edn, OUP 2014), para 4.696.
22
Ibid, para 4.701. 23
10 2. Smartphone Patent Wars
All the features applicable to the ICT sector as a whole can be reflected in one single device- a smartphone. The pace and pressure of innovation upon the manufacturers of smartphones is immense- every month consumers raise their expectations and anticipate new, better, faster, trendier and cheaper devices. Smartphones are so common in daily life that one often forgets that they represent highly complex multipart combinations of software, processors, modems, and electrical components.24
This complexity inevitably calls for interoperability between the various components; hence, industry standards have been created. In addition, most of the smartphone components are patented- sensors, batteries, ‘swipe to unlock’ image model, ‘tap to zoom and navigate’, emoticon input etc. Therefore, it is not surprising that a smartphone may incorporate as many as 250,000 patents.25
This heavy reliance on patents offers an extraordinary number of opportunities to initiate legal disputes over their infringement. Patents have been turned into a strategic tool to both attack and defend.26 Some companies attack competitors by preventing them from entering the market in order to monopolise it or sue them for damages. For others, patents serve as shields and useful bargaining tools. An attack triggers a counter attack, and when the violent means are no longer helpful, companies turn to negotiations.
In other words, legal disputes have been turned into wars over smartphone patents, where courtrooms are used as battlefields and legal instruments as weaponry. Some undertakings return with victory, others lose and have to bear the consequences. Yet, the benchmark for determining the winner is unclear. It is said that ‘all’s fair in love and war’, but perhaps the society in the 21st century deserves a more clear framework for resolving the disputes.
Within the broad phenomenon of patent wars, there is a special category where the attacks are most visible- they make it to the cover of the magazines and are widely discussed amongst the general public. These are the disputes over patents held by a powerful market
24
Frohlich (n 4).
25
J. R. Reidenberg, N. Russel, M. Price, A. Mohan, ‘Patents and Small Participants in the Smartphone Industry’
(CLIP Study, Fordham Law School, 2015), p.6 <
http://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=1639&context=faculty_scholarship > accessed 25 May 2016.
26
B.C. Rudy, S.L. Black, ‘Attack or Defend? The Role of Institutional Context on Patent Litigation Strategies’ (2015) Journal of Management, <http://jom.sagepub.com/content/early/2015/09/04/0149206315605168.full> accessed 25 May 2016.
11 actors who suddenly preclude them from being used by other competitors. The issue would be less complicated had those patents not been essential to the implementation of a particular standard, and not been promised to be shared by the patent holder. However, before answering the question of who shall triumph, it is necessary to understand the underlying elements of the dispute: standards, SEPs and FRAND commitments.
2.1. Standard-Setting: Pro-Competitive v Anti-Competitive?
GSM™, 3G, 4G, Wi-Fi, DECT™, smart cards, Wireless, DSL or DVD are examples of technical standards known to consumers worldwide. Since the interoperability in the ICT sector triggers the need to agree on common core elements, standards uniformly define quality requirements for all current and future products.27 Today virtually every interactive technology incorporated in an ICT device is governed by a standard.28
Standardization may arise under three distinct sets of circumstances: a particular product may evolve into a de facto standard as a result of widespread adoption by consumers; it can be specified by public authorities or agreed by private standard setting organizations (SSOs).29 It is the latter category that will be discussed, in particular, standards developed by the European Telecommunications Standards Institute (ETSI).
Standardization agreements as such are governed by the Article 101 TFEU and are outside the subject matter of the present thesis. However, since the issue of smartphone patent wars takes place in the standard-setting context, it is crucial to understand the effects standards produce on competition.
It is acknowledged by the Commission that standardization usually carries significant positive economic effects for both consumers and product manufacturers.30Amongst all, standards ensure interoperability and compatibility of the products, and promote follow-on innovation. When all products contain the same core technology, the competition in downstream is increased by reduced switching costs for consumers, leading to a lower overall price. In addition, standardization results in improved product quality- only the best
27
Commission, ‘Guidelines on the applicability of Article 101 TFEU to Horizontal Co-Operation Agreements’
(Communication) [2011] OJ C11/1 , para 57.
28
H. Hovenkamp, ‘Competition in Information Technologies: Standard-Essential Patents, Non-Practicing Entities and FRAND Bidding’ in B.E. Hawk (ed) Annual Proceedings of the Fordham Competition Law
Institute: International Antitrust Law & Policy (Huntington, NY: Juris Publishing Inc., 2013) 443.
29
D. Geradin, M. Rato, ‘Can Standard-Setting Lead to Exploitative Abuse? A Dissonant View on Patent Hold-up, Royalty Stacking and the Meaning of FRAND’ (2007) 3 European Competition Journal 101.
30
12 technologies proposed by members of SSO are selected for the collective creation of a standard.31
However, sometimes competition risks may arise. First, standardization agreements between competing undertakings require careful scrutiny under Article 101TFEU- they may facilitate collusion and reduce price competition.32 Second, standardization makes the industry ‘locked-in’ to a chosen standard - once a particular technology is selected and the standard is firmly set, the industry starts developing and producing goods which comply with that standard. That results in alternative competing technologies gradually losing their value and being excluded from the market.33 Thus, the implementers of the chosen standard become dependent on that standard- not only there might no longer be any alternative technologies available, but also, given the amount of investment made beforehand, the costs of switching away are substantial. The ‘locked-in’ situation also leads to the third competition law concern- the chosen standard may confer significant market power on its creator in upstream technology markets resulting in an incentive to abuse that power in light of Article 102 TFEU. This problem is further aggravated when one remembers the variety of IP rights surrounding the technological standards.
2.2. Patents and Standards: What Happens When They Are Essential?
Keeping in mind the significant value of standards for the society, theoretically they should be accessible to everyone and thus, free from all IP rights. However, in practice it is inevitable that any standard is based on certain innovations made by key developers,34 and accordingly, protected by patents. If the standard cannot be implemented without the use, and infringement of a particular patent, then one is faced with a SEP. Since SEPs cannot be designed around, manufacturers need to obtain a licence from the holder of those patents in order to legally implement the desired standard. Without doubt, there are a few conditions for a patent to become standard essential that will be explained in the subsequent sections.
There is nothing unnatural that patent holder desires to exclusively exploit his intellectual endeavour, while patent implementers strive to get access to it on the most favourable conditions possible. However, this conflict of interests often creates competition
31
‘Why We Need Standards?’ (ETSI) < http://www.etsi.org/standards/why-we-need-standards> accessed 25 May 2016.
32
Horizontal Cooperation Guidelines, para 265.
33
Ibid, para 266. 34
13 law problems, patent hold-up being the most well-known. SEPs confer significant market power to their owner, often- a complete monopoly, while the dependence of the industry on his patent provides a great possibility for opportunistic behavior. Accordingly, the patent holder becomes capable of using his bargaining power to block other companies from producing any products compliant with the standard or strives to extract more favourable licensing terms after the standardization, often exceeding the economic value of the patent.35 It can be seen as a both private industry and public policy problem. Privately, standard implementers want to be neither overcharged, nor attempt difficult ex ante negotiations.36 As a result, some companies are afraid to ‘step on a landmine’37 and refrain from introducing certain products leading to decreased innovation. Other companies, who decide to take the risk and get caught on a landmine, ‘lose their corporate legs’38
and have no other choice but to pay the excessive royalties. The excessive prices are passed to consumers in downstream raising public policy concerns.39
To sum up, inefficient acquisition of market power harms consumers- it subverts the competitive process, deceives buyers and keeps them in the dark about the terms on which a technology will be available.40 In order to avoid or at least minimize the possibility of such problem, SSOs adopt policies which require owner of IP rights to disclose their patents, and commit to license them on FRAND terms.
2.3. FRAND terms: Compromise or a New Problem?
ETSI policy rules provide that upon discovery of a particular SEP, the Director-General has to immediately request the SEP holder to give an irrevocable undertaking to licence his patent on FRAND terms and conditions.41It is a voluntary commitment by participants in standard development activities carrying a two-fold rationale. It ensures the availability of SEPs for adoption by members in the industry, at the same time guaranteeing
35
S. Barazza, ‘Licensing Standard Essential Patents, Part One: the Definition of F/RAND Commitments and the Determination of Royalty Rates’ (2014) 9 Journal of Intellectual Property Law & Practice 465.
36
J. Farrell, J. Hayes, C. Shapiro, T. Sullivan, ‘Standard Setting, Patents, and Hold-Up’ (2007) 74 Antitrust Law Journal 603.
37C. Shapiro, ‘Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting’ (2000) 1
Innovation Policy and the Economy 119.
38
Ibid.
39
Farrell, Hayes, Shapiro, Sullivan (n 36).
40
Ibid.
41
‘ETSI Rules of Procedure’, Annex 6 ‘ETSI Intellectual Property Rights Policy’ (2015), para 6.1 <http://www.etsi.org/images/files/IPR/etsi-ipr-policy.pdf> accessed 25 May 2016.
14 that holders of those patents are able to reap adequate rewards from their innovations.42 Seen as a compromise between competition and IP law, FRAND commitment balances the incentives of potential licensees and licensors to achieve efficient standardization and rate of innovation.43 The former seek protection from becoming exploited by a particular licensor while the latter cannot commit ex ante to offer specific conditions without adequate compensation.44 In this manner, FRAND commitment creates a win-win situation in which SEP owners, implementers of the standard, and end customers are all supposed to benefit.45
Unfortunately, FRAND commitments are not without problems. Although it is not disputed that FRAND licences must be available, there has been little consensus on what FRAND terms actually are.46 No SSO’s policy provides a clear definition; scholars describe it as a ‘tool for misuse’,47 and suggest different interpretations. Most of them recognize that the ‘non-discriminatory’ aspect of FRAND promise is straightforward.48
While it allows the SEP holder to apply different licensing terms, it prohibits him to discriminate between licensees that are in a similar position as regards their bargaining and market power.49
The ‘fair and reasonable’ part, however, is more complicated. Some scholars suggest that ‘the core function dictates the meaning’; thus, the terms should be interpreted with a reference to their aim.50 It has been accepted that the function of FRAND is to impose a constraint on what licensor can charge in order to enhance the value of the standard for all stakeholders.51 Several benchmarks have been created for the purpose of calculating the royalty which would be reasonable. For instance, the amount that the patent holder could have obtained before adoption of a standard, industry experience and expectations, proportionality test, or the value of the contribution made by SEP holder to the standard52.
42
Geradin, Rato, ‘Can Standard-Setting Lead to Exploitative Abuse?’ (n 29).
43
Mano, Nazzini, Zenger (n 24) para 4.767.
44
J.G. Sidak, ‘The Meaning of FRAND, Part II: Injunctions’ (2015) 11 Journal of Competition Law& Economics 201.
45
J. Ratliff, D.L. Rubinfeld, ‘The Use and Threat of Injunctions in the RAND Context’ (2013) 9 Journal of Competition Law& Economics 1.
46
Fox (n 15) 8-9.
47
R. Skitol, ‘Concerted Buying Power: Its Potential for Addressing the Patent Holdup Problem in Standard-Setting’ (2005) 73 Antitrust Law Journal 727, 728.
48
Geradin, Rato (n 29).
49
S. Barazza, ‘Licensing Standard Essential Patents, Part Two: the Availability of Injunctive Relief’ (2014) 9 Journal of Intellectual Property Law & Practice 552.
50
J. S. Miller, ‘Standard Setting, Patents, and Access Lock-In: RAND Licensing and the Theory of the Firm’ (2007) 40 Indiana Law Review 351.
51
P. Chappatte, ‘FRAND Commitments- The Case for Antitrust Intervention’ (2009) 5 European Competition Law Journal 319.
52
D. Swanson, W. Baumol, ‘Reasonable and Nondiscriminatory (RAND) Royalties, Standards Selection, and Control of Market Power’ (2005) 73 Antitrust Law Journal 1.
15 None of these tests are flawless- some fail to address the evolving nature of a standard, others are vague in themselves, or prioritize quantity over quality.
Different views claim that ‘FRAND royalty’ has no meaning at all, since fair and reasonable licensing terms should be determined in ‘arm’s-length-negotiations’,53
with a reference to the specific IP rights owner and the standard implementer, rather than in vacuum. In other words, FRAND commitment is a matter of contractual nature,54 and each case should be examined individually.
Others do not agree, and consider that FRAND disputes cannot be seen as a solely contractual issue: litigants also attempt to resolve such disputes by resorting to other areas of law, including IP and Competition, which take into account broader public interest considerations. Moreover, FRAND commitments only imply an agreement to negotiate with implementers- not to reach a particular end result.55
All in all, there are many different ways to understand the FRAND commitment; it can be argued that exactly the absence of a rigid definition allows to achieve one of the fundamental aims of standardization- the widest availability of technology embodied in the standard in the widest possible variety of circumstances.56 Therefore, FRAND for one license will not necessarily be FRAND for another license. It will depend on many individual factors and will naturally vary across players and technologies.57
Another problem lies in the voluntary character of FRAND. ETSI policy rules request, but do not oblige, the patent holder to licence its SEP. This distinguishes FRAND commitment from compulsory licensing- even if the undertaking holds a very important technological patent, under no circumstances can ETSI or other SSOs force him disclose it. In addition, ETSI policy rules do not define what an ‘essential’ patent means- the process is one of ‘self-certification’ which can only be challenged through a separate adjudication on the validity or infringement of the patent.58 Moreover there are no rules on dispute resolution- an effective sanctioning mechanism for SEP holders is absent.59 Although the failure to give a FRAND commitment will generally weigh against the inclusion of a particular technology 53 Geradin, Rato (n 29) 114. 54 Miller (n 50). 55
P. Larouche, N. Zingales, ‘Injunctive Relief in Disputes Related to Standard-Essential Patents: Time for the CJEU to Set Fair and Reasonable Presumptions’ (2014) 10 European Competition Journal 551
56
Geradin, Rato (n 29).
57
Mano, Nazzini, Zenger (n 21).
58
Larouche, Zingales (n 55).
59
ETSI members must attempt to resolve any dispute relating to the application of the IPR policy on a bilateral and amicable basis. ‘ETSI Guide on Intellectual Property Rights’ (2013), para 4.3 < http://www.etsi.org/images/files/IPR/etsi-guide-on-ipr.pdf> accessed 1 June 2016.
16 in a standard, non-inclusion will not be a viable option if a technology is considered as too important to be neglected: in such cases, SSO members will have no choice but to agree to include a non-FRAND encumbered patented technology.60
This can be directly linked to the third problem: the silence of ETSI on the issue of injunctive relief that exposes the reader to the essence of the smartphone patent wars.
60
17 3. IP and Competition Law at Cross-Roads
3.1. Injunctive Relief by a Dominant Undertaking
The issue of injunctive relief falls under the scope of Article 102 TFEU only if an undertaking holds a dominant position on the relevant market and abuses it. Pursuant to the case-law of the ECJ, dominance arises where a firm has the power to behave ‘independently of its competitors, customers and ultimately of the consumers’ allowing it to ‘prevent effective competition’.61 It is further stated that IP does not confer dominance per se,62 and similarly, the mere exercise of IP right is not an abuse.63 Due to the fact that access to court is recognized as a fundamental right and a general principle of law, 64 whenever the IP owner’s exclusive right is infringed, he is entitled to enforce it by virtue of seeking injunctions in form of a court order prohibiting the use of an infringed patent. Since there is no general duty under competition law to provide access to IP rights, seeking injunctive relief is not considered to be problematic.65 On the contrary, it is seen as a key remedy that allows the right holders to bring infringement of their rights to an end66 and is accepted in EU law by 2004/48 Enforcement Directive. However, the Directive does not provide exhaustive rules of enforcement for IP rights; it merely allows the courts to issue injunctions, 67 while leaving the procedure itself to the discretion of Member States.68
The situation becomes more complicated when FRAND commitment and SEPs are involved- these cases present a new paradigm for the conflict between IP and Competition.69 On the one hand, the SEPs holder should be still entitled to the remedy if his right is infringed. On the other hand, he usually holds a 100% market share in a market on which his patent reads, leading to the fact that the injunctions have an effect of excluding the patent infringer’s products from the market.70
Therefore the inevitable question arises whether this
61
Case 27-76, United Brands, EU:C:1978:22, para 65
62
Case C-241/91 P, RTE and ITP(Magill), EU:C:1995:98, para 46.
63
First stated by the ECJ in Case 238/87, Volvo v Veng, EU:C:1988:477, para 8.
64
Case T-111/96, ITT Promedia , EU:T:1998:183, para 60.
65
J. Vesala, K. Havu, ‘Is EU Competition Law Undermined by Injunctions against Essential Patent Infringers? National Court and the Principle of Sincere Cooperation’ (2014) 5 Journal of European Competition Law & Practice 451.
66
Ibid.
67
Council Directive 2004/48 on the Enforcement of Intellectual Property Rights [2004] OJ L 195/16, arts 9, 11.
68
Larouche, Zingales (n 55).
69
A. Heinemann, ‘Standard-essential patents in Standard Setting Organizations: Competition Law and the Realization of Licensing Commitments’ (2015) 10 Journal of Intellectual Property Law & Practice 947.
70
18 fact combined with the beforehand FRAND commitment precludes the SEPs holder from seeking injunctions from the court.
Due to the fact that neither the Enforcement Directive, nor ETSI Rules contain any provisions precluding its members from seeking injunctive relief when an infringer has rejected a FRAND licensing offer from the patent holder,71 the question has led to the heated debate between scholars. Generally, the views have been divided into three groups.
First, there are those who see FRAND commitment as an absolute prohibition of seeking injunctions. This is also known as a ‘waiver theory’, according to which the SEP holder irrevocably ‘waives’ his right to injunctions by virtue of FRAND licensing.72 Proponents justify this view by the fear of the patent hold-up. In other words, injunctions give the SEP owner an asymmetric bargaining power that enables him to extract licensing fees from implementers that exceed the genuine economic value of the patent.73 Without doubt,
anti-competitive effects arise: under the threat of injunctions, the licensee agrees to the unreasonable or restrictive terms leading to higher prices for consumers. Where injunctions in fact are awarded, consumers are hurt by the lack of downstream competition for the standardized products and by reduced consumer choice.74 Therefore, courts should deny injunctions to the SEP holder as he could render the standard impracticable by denying access to the patented technology. Some patent holders themselves accept the ‘waiver theory’. For instance, in a letter to ETSI, Apple agreed that ‘seeking an injunction would be a violation of the party’s commitment to FRAND licensing’. Similarly, Microsoft publicly stated that it ‘will not seek an injunction or exclusion order against any firm on the basis of those essential patents’.75
On the other extreme, members of the second group claim that the waiver of the right is grounded neither in statute nor case-law, and thus, cannot be implicitly assumed. In opposition to the ‘hold up theory’, the ‘reverse hold up’ theory is created which claims that ban on injunctions would open the door to opportunism by infringers.76 In absence of any threat of an injunction, the position of standard adopters is strengthened, as they would be able to refuse to pay or even to negotiate a FRAND royalty but still remain immune from 71 Ratliff, Rubinfeld, (n 45). 72 Miller (n 50). 73
M. A. Lemley, C. Shapiro, ‘Patent Holdup and Royalty Stacking’ (2007) 85 Texas Law Review 1991, 1991– 1992.
74
M. Dolmans, ‘Standards, IP, and Competition: How to Avoid False FRANDs’ in H.H. Hansen(ed),
Intellectual Property law and Policy (vol 11, Hart Publishing, 2010) 800.
75
Ratliff, Rubinfeld (n 45).
76
19 injunctions. This erodes the commercial value of SEPs, places SEP owners in a disadvantageous position, and potentially disincentivizes him to continue investing in the development of standards that benefit the public.77
Third, there is a middle ground consisting of scholars who recognize the strong points of both theories and try to strike a balance. They admit that the biggest problem lies in the lack of certainty concerning the timing of the imposition of the injunctive relief and the form that the relief would take. In particular, they highlight that the interaction between a SEP owner and an implementer of a standard can be seen as a ‘multiplayer dynamic game’, where the threat of an injunction, has both a hammer and a trigger. It is incorrect to speak only about the hammer without first specifying a particular trigger, for example, an action by the standard implementer that would cause the injunction.78 Hence, the compromise in form of conditional injunctions is proposed. Only if the licensee refuses to accept the court-certified FRAND terms can the injunctions be granted. If used correctly by the courts, the threat of the imposition of an injunction can help to move patent disputes towards resolution and achieve a reasonable balance between the interests of licensees, while at the same time supporting the creation and development of SSOs and rewarding the technological and marketing investments of innovators.79
Consequently, views expressed in the literature differ dramatically and further highlight the delicate nature of SEPs in licensing negotiations. For some, injunction is the normal consequence of IP protection, for others, it leads to abuse. It can be argued that the middle ground view- allowing injunctions upon certain conditions - fits the framework of the ICT sector in the 21st century the best and is also supported by the EU jurisprudence. The EU approach towards this novel issue will be analysed in the subsequent sections, but in the meanwhile it is advisable to review how the ECJ has previously dealt with the conflict of IP and competition rules in the context of ‘exceptional circumstances’ case-law.
3.2. ‘Exceptional Circumstances’ Case-Law
One way examine the issue of injunctive relief is to consider the ‘refusal to supply’, also known as ‘exceptional circumstances’ line of case-law under Article 102 TFEU. The act of seeking an injunction in the court reveals that the SEP holder has not concluded a licensing 77 Frohlich (n 4). 78 Sidak (n 44). 79 Ratliff, Rubinfeld (n 45).
20 agreement with the defendant,80 and the latter is denied access to the industry standard. Likewise, in the refusal to supply case-law, competitors are denied ability to license the IP indispensable for manufacturing goods on the secondary market. Accordingly, in both situations, access to a fundamentally important input is refused. This line of reasoning makes it possible to treat injunctive relief as an implied or ‘constructive’81
refusal to supply.
Generally dominant undertakings do not have an absolute duty to supply everyone who requests them; they can unilaterally decide with which third party they wish to deal.82 However, there are situations when the refusal can amount to an exclusionary abuse of dominance. The demarcation of the precise scope of these situations as well as a clear test for abuse is lacking in the Union jurisprudence. The case-law of the ECJ appears to treat refusals to supply any input in general differently from refusals to license an IP right- it has been established that the latter is abusive only in ‘exceptional circumstances’.83
The exact meaning of ‘exceptional circumstances’ was attempted to be clarified by the ECJ on a number of occasions. In Volvo/Veng, the ECJ ruled that a refusal by an initial IP proprietor to license does not constitute an abuse of a dominant position per se. However, other circumstances, limited to the facts of that case, could render the refusal abusive.84This judgment became the basis for the ‘exceptional circumstances test’ developed in Magill. 85
Magill concerned a refusal by Irish public broadcasting company to supply
information of listings of television programmes to a competing private publisher. This case established that the refusal to supply constitutes an abuse when it concerns an indispensable product for which there is no actual and potential substitute,86 and when it prevents the emergence of a new product for which there was potential consumer demand.87 It must be unjustified88 and have the effect of reserving the secondary market for the dominant undertaking.89 In this way, the ECJ created a limited obligation for an owner of IP to grant
80
Angelov (n 20).
81
N. Petit, ‘Injunctions for FRAND-Pledged SEPs: The Quest for an Appropriate Test of Abuse Under Article 102 TFEU’ (2013) 9 European Competition Journal 677.
82
Case C-2/01 P, Bayer, EU:C:2004:2, para 180, Case C-7/97, Bronner, EU:C:1998:569. Mano, Nazzini, Zenger (n 21) para 4.559.
83
Mano, Nazzini, Zenger (n 21) paras 4.581-4.582.
84
Volvo (n 63), para 9. K. Coates, L. Kjølbye, L. Peeperkorn, ‘Intellectual Property’ in J. Faull, A. Nikpay (eds), The EU Law of Competition (3rd edn, OUP 2014) paras10.233 -10.234.
85 Magill (n 62). 86 Ibid, para 52. 87 Ibid, para 54. 88 Ibid, para 55. 89 Ibid, para 56.
21 licences, where they are necessary to create a new product for which there is potential consumer demand.
The subsequent IMS Health90 case involved the refusal to grant a copyright license for the ‘1860 Brick structure’- the system for representing pharmaceutical sales data in Germany. It confirmed the Magill criteria but implied that they are not exhaustive. The Court further emphasized that the product emerging on the market by an undertaking requesting the license must be actually ‘new’ and not a mere ‘duplication of the goods or services already offered on the secondary market by the owner of the IP right’.91
A further clarification was offered in Microsoft,92 where the dominant multinational technology company refused to supply the interoperability information essential for developing competing products on the secondary market. The GC interpreted the ‘new product’ requirement quite broadly, stating that it is sufficient if the development of products with innovative features is limited.93 In addition, it confirmed and laid down the ‘exceptional circumstances’ test in a concise manner. In the literature, it is claimed that Microsoft decision ‘stretched’ the Magill criteria.94
Hence, it follows that when IP rights are involved, a refusal to licence is not in itself unlawful and there must be some additional element which justifies treating it as an abuse. That additional element cannot be the fact that IP would lead to an economic monopoly on the market if it is not shared- such effects are inherent in the scope of the grant of the IP right in the first place.95 Instead, keeping in mind the objectives of dynamic competition and innovation, certain adverse effects on consumer welfare are required. In the opinion of the ECJ, it is the prevention of the emergence of a new product for which there was consumer demand. As will be discussed in the next section, such balancing approach is also taken towards injunctions in standard-setting activities.
However, it should be kept in mind that there are inherent differences between the two. Magill and IMS Health were decided in concrete circumstances96 and the benchmark of assessment applied in those cases does not necessarily fit the framework of smartphone patent wars. The former are not characterized by technological standard-setting, do not
90
Case C-418/01, IMS health v NDC, EU:C:2004:257.
91
Ibid, para 49.
92
Case T-201/04, Microsoft v Commission, EU:T:2007:289.
93
Coates, Kjølbye, Peeperkorn (n 84) para 10.255.
94
A. Jones, B. Sufrin , EU Competition Law (5th edn, OUP, 2014) 538.
95
R. O’Donoghue, A.J. Padilla, The Law and Economics of Article 82 EC (Hart Publishing, 2006) 445.
96
R. Sikorski, ‘Enforcing Patent Pledges in EU Law’ (Patent Pledges Symposium, American University Washington College of Law, 2015) 6-7.
22 involve SEPs and are not subject to FRAND commitment. Views have been expressed that ‘exceptional circumstances’ standard can be applied to the issue of patent injunctions only where the injunctions are sought by vertically integrated firms who supply products implementing their technology. This is supported by Magill/IMS Health conditions which clarify that the greatest competition concerns are connected to the transfer of power- when the dominant firm refuses to licence in order to leverage its dominant position into a secondary, adjacent market. Injunctions sought by non-implementing entities (e.g. pure licensors with no productive activity in a secondary market) are, in contrast, immune from antitrust exposure under the Magill/IMS Health.97 Other commentators consider that tailoring general legal standards of refusal to supply case-law to fit different economic sectors is inappropriate. This is especially acute in technology-based markets because the general form-based legal conditions are unlikely to be relevant to the novel types of conduct prevalent in technology markets. The ‘headline-grabbing commercial disputes’ between Apple, Samsung, Microsoft, Motorola and alike, make it enough to understand that the existing standards of Article 102 TFEU are inadequate.98
Whether these arguments are accepted is not entirely clear; however, it can be argued that Magill/IMS Health precedent should not be mechanically applied to the injunctive relief for SEPs. It is crucial to properly grasp the nature of anti-competitive harm in cases where access to standards is denied. Although there are some similarities, the appropriate framework for dealing with these cases has to be firmly determined on the EU level.
97
Petit (n 81).
98
23 4. The Current Legal Framework of Smartphone Patent Wars in the EU
4.1. The Commission’s Approach
The Commission was the first institution to raise the issue of smartphone patent wars to the level of the EU. In 2012 it opened investigations into the behaviour of Motorola and Samsung, American and South Korean telecommunications companies. Both cases involved the elements described above: dominant undertakings holding patents, which they declared to be standard essential to ETSI and committed to license on FRAND terms, asked for injunctions against Apple, an American corporation that designs, manufactures and markets personal computers, mobile communication and media devices, sells software, services, networking solutions etc. On 29 April 2014 the Commission published its final decisions stating that both Motorola and Samsung abused their dominance in light of Article 102 TFEU. Although the Commission treated the cases and investigations separately, the substantive issues involved were substantially the same. Therefore, both proceedings will be analysed together.
4.1.1. Motorola and Samsung
At the heart of the Motorola dispute was the Cudak patent, concerning the transmission of data packets in a wireless communication system,99 essential to the GSM/GPRS standard, while Samsung’s patent was indispensable to the UMTS standard- a third generation (3G) mobile and wireless communication system100. Despite the FRAND commitment given to ETSI, both Motorola and Samsung started seeking injunctions against Apple for the infringement of their SEPs. While Motorola’s action was aimed at preventing the sale of Apple’s iPhones in Germany, Samsung filed the injunctions before several Member States, including France, Germany, Italy, the Netherlands and the UK.
Naturally, Apple was not happy about the injunctions since all of its mobile devices implement the GPRS and UMTS standards, and thus, rely on the patents held by Motorola and Samsung. In Motorola, the injunctions were granted and enforced, and the litigation was terminated only when the parties entered into a licensing agreement on terms disadvantageous to Apple. This led Apple to file the complaint before the Commission. In
Samsung, no injunctions were granted, but the issue still caught the attention of the
99
Motorola (n 9), paras 95-97.
100
24 Commission.101 In both cases the Commission found the abuse of dominance in light of Article 102 TFEU.
As a starting point, in Motorola, the Commission defined the licensing of GPRS technologies in the EEA as a separate relevant market102 due to the lack of alternatives. The combination of Motorola’s 100% market share, indispensability of GPRS standard for manufacturers of standard-compliant products, and the industry lock-in to that standard led the Commission to conclude that Motorola held a dominant position on that market.103 Similarly, the Commission confirmed dominance of Samsung on the market for licensing of the UMTS technologies.104
Regarding the abuse itself, the Commission started its analysis from the general premise that a patent holder, including a holder of SEPs, is generally entitled to seek and enforce injunctions as part of exercising his IP rights. Therefore, in itself, the seeking and enforcement of injunctions cannot constitute an abuse of dominant position.105 However, it may turn into an abuse of Article 102 TFEU subject to two factors: presence of exceptional circumstances and absence of objective justification.
The Commission had found that both cases at issue were indeed exceptional in two ways. First, it was the GPRS and the UMTS standard-setting context, in which Motorola and Samsung were active participants. The declaration of their patents to be standard essential made the industry locked-in to those standards, and hence, dependent on the use of their patents. Second, both undertakings gave beforehand commitments to ETSI to licence the patents on FRAND terms and conditions. In this way, they chose to monetize the standard essential technologies through licensing and agreed not to exclude the implementers of the GPRS and UMTS standards.106 Moreover, the companies themselves explicitly recognized that a FRAND commitment by a SEP holder would affect their right to seek injunctions.107
In such case, seeking of injunctions would only be justified to protect company’s commercial interests if the infringer of the patent constituted an unwilling licensee- a new concept, created by the Commission. In Motorola, Apple made six licensing offers all of which were rejected. The second licensing offer allowed Motorola to set royalties at its
101
European Commission, ‘Antitrust: Commission Sends Statement of Objections to Samsung on Potential Misuse of Mobile Phone Standard-Essential Patents’ (European Commission Press Release Database, 2012) <http://europa.eu/rapid/press-release_IP-12-1448_en.htm> accessed 30 May 2016.
102 Motorola (n 9), paras 213, 219. 103 Ibid, paras 225-229. 104 Samsung (n 8), paras 41-51. 105
Motorola (n 9), para 278, Samsung (n 8), para 55.
106
Motorola (n 9), para 294, Samsung (n 8), paras 59-61.
107
25 discretion subject only to the retrospective court review, which, in Commission’s view, was enough to indicate Apple’s willingness to enter into a licence agreement.108
This offer presented a turning point when Motorola’s pursuit of injunctive relief became abusive and could not be used in defence of protecting ‘its commercial interests against an unwilling licensee’. In Samsung, the Commission simply stated that ‘Apple could not be said to be unwilling to enter into a licencing agreement’109
without any further explanation.
In Motorola, the Commission justified its conclusion by relying on three anti-competitive effects. First, the injunction proceedings lead to a temporary ban on the online sales of Apple mobile products.110 Second, disadvantageous terms forced on Apple in the context of the Settlement Agreement, namely the so-called termination clause, disabled it from challenging the validity of the SEP and thus, limited Apple’s ability to influence the level of royalties it would have to pay to Motorola.111 That could potentially increase the costs of production, which later would be passed on to consumers in terms of higher prices. Contrary to Motorola’s claims, such Settlement Agreement was not a result of normal commercial negotiations -in absence of injunctions, Apple was unlikely to have agreed to such disadvantageous terms.112 Last but not least, Motorola’s behaviour was likely to undermine the confidence in the standard-setting process. A voluntary licensing commitment by Motorola created legitimate expectations for the implementers of the GPRS standard.113 Hence, injunctions would undermine the trust in the whole standard setting process. Same anti-competitive effects were pointed out by the Commission in Samsung.114
The only significant difference in the cases was of procedural nature which also explains the length of decisions. Motorola is an extensive prohibition decision adopted under Article 7 Regulation 1/2003115 ordering Motorola to end the infringement and eliminate any anti-competitive effects resulting from it.116 In contrast, Samsung is a commitment decision adopted under Article 9 Regulation 1/2003, which only briefly gives an account of the
108 Motorola (n 9), para 440. 109 Samsung (n 8) para 68. 110 Motorola (n 9) paras 320-321. 111 Ibid, para 336. 112
For instance, the termination clause or the explicit inclusion of the iPhone 4S in the list of infringing products covered by the Settlement Agreement.
113
Motorola (n 9) paras 415-417.
114
Samsung (n 8) para 62. 115
Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty (Text with EEA relevance) [2003] OJ L1/1.
116
26 Commission’ preliminary position on the matter117
and allows it to close the file subject to commitments offered by Samsung. These are set out in a separate document and, amongst all, include the promise of Samsung not to seek injunctive relief for a period of five years before any court for infringement of its SEPs against a potential licensee that agrees to a specific Licensing Framework for determination of FRAND terms.118 That Licensing Framework includes an invitation to negotiate by Samsung, a twelve-month negotiation period followed by a third party determination of FRAND terms if no agreement could be reached.
4.1.2. Summary and Comment
To sum up, according to the Commission, a dominant undertaking holding a SEP, which it had agreed to licence on FRAND terms, acts contrary to Article 102 TFEU when it seeks an injunctive relief against a willing licensee.
Starting as private licensing disputes between the companies, Motorola and Samsung became an EU-wide matter, in which the Commission attempted to strike a fair balance between different rights and freedoms protected by the Union legal order.119 On the one hand, it acknowledged the IP right and a right of access to tribunal by stating that generally an IP holder can seek injunctions. On the other hand, it aimed to ensure the freedom to conduct business for implementers by introducing the ‘exceptional circumstances’ condition, under which the freedom of patent holders to seek injunctions is curtailed.
In this manner, the Commission to a certain extent followed the logic of ‘exceptional circumstances’ case-law, and prioritized competition rules over IP rights. By referring to
Volvo, Magill and IMS Health, the Commission extended that case-law to the present
situation. It claimed that the list of ‘exceptional circumstances’ is open-ended,120
and thus, added two novel circumstances: standard-setting and FRAND.
Because of the complex background of the cases and the novelty of the question addressed, the Commission was at risk to adopt decisions too closely linked to the specific circumstances of the cases and fail to consider the broader picture. Risk was avoided through
117
R. Whish, ‘Motorola and Samsung: An Effective Use of Article 7 and Article 9 of Regulation 1/2003’ (2014) 5 Journal of European Competition & Practice 603.
118
Samsung - Enforcement of UMTS Standard Essential Patents (Case COMP/C-3/39.939) Final commitments (13 May 2014).
119
Motorola (n 9) para 510.
120
Commission finds justification for this statement in Microsoft (n 92) which was not denied by the GC. Larouche, Zingales (n 55).
27 an appropriate use of different antitrust enforcement instruments: a prohibition decision in
Motorola, and a commitment decision in Samsung.
All in all, the two decisions have to be seen as complementary, as one package, intended to provide clarity to the industry on what constitutes an appropriate framework to resolve SEPs disputes in accordance with EU competition rules.121 In other words, they attempt to provide a safe harbour for both IP holders who fear the infringement of their patents, and implementers who are willing to licence the patent on FRAND terms. While
Motorola lays down the constituent elements of an abuse: standard setting context, FRAND ex ante commitment, unwilling licensee; Samsung commitments show how an undertaking
needs to behave in practice in order to avoid abuse.
4.2. The ECJ Approach 4.2.1. Facts of the Case
In 2013, when the Commission had issued its first Statement of Objections (SO) to Samsung, the Düsseldorf Regional Court lodged a preliminary reference to the ECJ in the context of litigation between Huawei and ZTE, Chinese telecommunications companies engaged in the production and marketing of telecommunications appliances and network equipment. The case fits into the same framework of smartphone patent wars, and presented a perfect opportunity for the highest court of the EU to express its opinion on the contested issue.
In 2009 Huawei had notified its patent essential to the 4G Long Term Evolution (LTE) standard to ETSI and undertook to grant licences to third parties on FRAND terms.122 By using the LTE standard, everyone, including ZTE, could not help but infringe the patent held by Huawei. That induced the companies to engage in discussions related to the infringement and the possibility of concluding a licensing agreement. However, in absence of mutual consensus on the amount of the reasonable royalty, no licensing agreement on FRAND terms was concluded while ZTE continued to use the LTE standard and accordingly, infringe Huawei’s patent. As a result, Huawei turned to the Dusseldorf Court seeking an injunction prohibiting the infringement.123 In the eyes of ZTE, such conduct was abusive.
121
S. Lawrance, E. Bond, ‘The CJEU responds but questions remain’ (2015) 14 Competition Law Insight 8.
122
Huawei (n 10), para 22.
123
28 The Düsseldorf Regional court found itself at the crossroads- it was not sure how to deal with the issue of injunctions sought by a SEP holder. On the one hand, there was an ‘Orange-Book Standard’ endorsed by German case-law,124
according to which, the patent holder abuses dominance only if two conditions are met. First, the defendant must have made an unconditional offer to conclude a licensing agreement under terms that cannot be rejected by a patent holder without abusing its dominant position. Second, if the defendant is already making use of the subject-matter of the patent before the patent holder accepts its offer, it must meet the obligations which would be prescribed by the future licensing agreement.125 If to follow this approach, Huawei was not precluded from seeking injunctions because the two conditions were not met. ZTE did not pay the promised royalty and its offers were not ‘unconditional’ - they related only to the products giving rise to the infringement.126
On the other hand, the emerging view of the Commission, indicated in the course of
Samsung investigations, stated that seeking injunctions is unlawful where the patent is
standard essential, has been promised to be licensed on FRAND terms, and the infringer is willing to negotiate such licence.127 Following this logic, ZTE could rely on competition law and prove its willingness based on its written offers to Huawei that incorporated some proposals of the latter.128
Due to the absence of Commission’s definition of a ‘willing licensee’ , and differences between the facts of the present case and the Orange Book Standard, combined with the novelty of the circumstances, the Düsseldorf Regional court decided to refer the case to the ECJ. That bears two far-reaching consequences. First, already the referral itself shows how influential the Commission’s position on Member States was- the German Court was willing to disregard the ruling of its highest court even before the adoption of the formal decision by the Commission in a different case. Second, the ECJ judgment was highly anticipated - for the first time it was presented with an opportunity to analyse whether, and in what circumstances, seeking injunctions by the SEP holder against an undertaking which manufactures products in accordance with that standard constitutes an abuse of dominance.
124
Orange Book Standard, KZR 39/06, (Bundesgerichtshof—BGH, May 6, 2009).
125 Huawei (n 10), para 31. 126 Ibid, para 33. 127 Ibid, para 34. 128
