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Standards and FRAND Terms in the Post Huawei World

By Giuseppe Colangelo

The judgment of the European Court of Justice (CJEU) in Huawei/ZTE (Case C-170/13)
marked a milestone in the patent war which has characterized standardization activities in the last decade. The CJEU identified the precise steps which standard essential patents (SEPs) owners and users have to follow in negotiating fair reasonable and non-discriminatory (FRAND) royalties. Compliance with this code of conduct will shield IPRs holders from the scrutiny of competition law and, at the same time, will protect implementers from the threat of an injunction and the consequent disruptive effect on sales and production.

In primis, the patent holder must inform the SEPs user about the alleged infringement and make a specific and written FRAND offer, provided the latter has shown willingness to obtain a license on fair and reasonable terms. The exact amount of the royalty and the way in which it has been calculated should be specified in the offer. In case of refusal, the implementer must promptly propose a counter-offer that complies with FRAND requirements. If such counter-offer is also rejected, the alleged infringer must provide appropriate security to continue using the patents, either by providing a bank guarantee or by placing the requisite amount on deposit. In addition, the parties have the option to request that the royalty level be set by an independent third party decision without delay. Patent owners will instead be granted an injunction if the implementer, while continuing to use the patent in question, have not diligently responded to the first licensing offer, in accordance with recognized commercial practices in the field and in good faith, which is a matter that must be established on the basis of objective factors and which implies that there are no delaying tactics. Furthermore, with regard to liability for past acts of use, the CJEU also explained that Article 102 TFEU does not prohibit the SEPs owner from bringing an action for the award of damages or the rendering of accounts. The above requirements and considerations do not, however, deprive the potential licensee of the right to challenge the validity and essentiality of the patent at issue.

Despite the CJEU’s efforts, many shadows still loom on the horizon of the EU standard-setting community. In such a complex context, the recent activity by certain national courts in filling the gaps left by the CJEU and shedding light on some of the thorniest questions is undoubtedly welcome, and deserves the utmost consideration. Among these decisions, the UK judgement Unwired Planet v. Huawei[1] recently delivered by Mr. Justice Birss is of utmost importance.

 

The UK dispute Unwired Planet v. Huawei

Unwired Planet, a U.S. based patent assertion entity that holds a worldwide patent portfolio which includes numerous SEPs to various telecommunications standards, claimed that Huawei was an unwilling licensee. Huawei counterclaimed that Unwired Planet was abusing its dominant position by offering to license its entire global portfolio (SEPs and non-SEPs) and by demanding royalty rates higher than FRAND ones.

On 5 April 2017, the High Court of England and Wales delivered its judgement.

Justice Birss addressed several important topics. First, Birss stated that only one set of licensing terms can be ultimately considered FRAND in a given set of circumstances. From this perspective, the judge disregarded the view of those authors, U.S. judges (e.g. Robart in Microsoft v. Motorola) and perhaps even the CJEU in Huawei, according to whom FRAND may well comprise a range of terms. Indeed, although the Huawei case did not deal with FRAND pricing, yet it acknowledged that parties can make divergent FRAND offers and counter-offers, thereby confirming that there is no unambiguous FRAND point and that several distributional FRAND prices exist.

Furthermore, as a consequence of the single FRAND rate, Birss found that, during the negotiation, the parties could make offers that would not be FRAND. An obligation focused only on making FRAND offers is considered unrealistic since a process of fair negotiation will usually involve some compromise between the parties’ rival offers: if the standard setting organization demands that offers made by a patentee must themselves consist of FRAND terms, then that would condemn patentees to always end up with negotiated rates below a FRAND rate. Therefore, according to the UK Court, it makes much more sense to interpret the FRAND obligation as applicable primarily to the finally agreed terms rather than to the offers.

It seems that Birss aimed to reduce the relevance of the Huawei decision (and of the competition law, in general) also relatively to another point. After recalling the purpose of a FRAND commitment and its alleged contractual nature, the UK judgment concluded that the contractual commitments submitted to the standard setting organization (ETSI) are stricter than antitrust provisions. Indeed, since competition law fines only excessive prices, a rate can be in line with antitrust rules even if it is higher than the FRAND benchmark. In sum, according to the English Court, FRAND commitments can be enforced under contract law without recourse to competition law.

Turning to the process of negotiating FRAND licenses, with respect to the type of behavior that can be considered FRAND, the Court stated that making extreme offers and taking an intransigent approach is not FRAND. In this regard, Huawei was considered unwilling because it insisted on having an offer for just a UK license (instead of a worldwide one).

Moreover, Birss provided useful insights about the determination of FRAND rates. An appropriate way to establish the FRAND royalty would be to determine a benchmark rate governed by the value of the patentee’s portfolio: counting patents and making reference to existing comparable licenses are key steps of the determination process. In the High Court’s words, a patentee who refuses to accept those terms would be in breach of its FRAND undertaking. With respect to the non-discrimination element, the Court rejected a “hard-edged” approach capable of applying to reduce a royalty rate (or adjust any license term in any way) which would otherwise have been regarded as FRAND. On the contrary, the Court endorsed a “general” approach, which requires that rates cannot differ based on the licensee but only on the value of the portfolio licensed.

The UK judgement demonstrates that after Huawei there are still several pending questions. It is not surprising that the European Commission has recently intervened to announce a Communication in order to fill the gaps by complementing existing jurisprudence through best practice recommendations.[2]

[1] [2017] E.W.H.C. 711 (Pat).

[2] European Commission, Roadmap towards a Communication on ‘Standard Essential Patents for a European digitalised economy’, 2017, 2, available at https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2017-1906931_en.

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The Competition Appeal Tribunal awards competition damages in UK’s first final judgment on a stand-alone action

By Valerio Cosimo Romano

On 14 July 2016, the UK Competition Appeal Tribunal (CAT) ordered MasterCard to pay Sainsbury’s £68.6m plus interest for infringing competition law in the setting of UK multilateral interchange fees (MIFs) for its credit and debit cards. This judgment is the first final one on stand-alone damages actions in the UK. In addition, it is the first UK case substantively dealing with the pass-on defence.

Interchange fees are transaction fees charged by the bank from which consumers receive their MasterCard (the “issuing bank”) to the bank which permits the merchant to accept a card (the “acquiring bank”). When a customer of the issuing bank makes a purchase, the issuing bank forwards the full transaction amount minus an interchange fee to the acquiring bank, which in turn retains a charge for its services and forwards the resulting amount to the merchant. The issuing and acquiring bank may either agree on the respective amount of the fees, or they can make use of a certain value set by MasterCard under its UK MIF scheme.

In a lengthy opinion, the CAT ruled that the setting of the UK MIF between 2006 and 2015 amounted to a breach of competition law. It found that it amounted to an agreement or agreements between undertakings with the effect of restricting competition on the affected markets, namely the acquiring market, the issuing market, and the market between payment systems. The Court held that, absent MasterCard’s scheme, bilaterally negotiated fees would have resulted in lower costs for merchants. In its defence, MasterCard claimed that the UK MIF scheme could benefit from the exemption for pro-competitive agreements provided for by Article 101(3) TFEU. However, the CAT found that none of the four cumulative conditions for obtaining an exemption under Article 101(3) TFEU had been met.

Further, MasterCard submitted to the Court an illegality defence against Sainsbury’s. In the defendant’s contentions, Sainsbury’s claim ought to be barred by the fact that Sainsbury’s Bank, a company linked with Sainsbury’s, had taken part in the setting of the UK MIF. The argument was rejected by the CAT, which ruled that Sainsbury’s and Sainsbury’s Bank were not part of a single economic unit and that, in any event, no significant responsibility could be imputed to Sainsbury’s Bank in relation to MasterCard the infringement of competition law.

Lastly, defendant argued that Sainsbury’s was not entitled to recover the full value of the claim as it had passed the increased fees to its customers by increasing the prices of its products.  The CAT dismissed this claim since no identifiable increase in retail price could be established, nor could MasterCard identify any class of claimant, downstream of Sainsbury’s, to whom the overcharge has been passed on.

This judgment will prove useful for other claimants bringing actions related to interchange fees and, more broadly, for those bringing stand-alone damages actions. It also provides a useful guideline on pass-on defence under English law.

UK’s CMA fines fridge suppliers for restricting online discounts

By Gabriele Accardo

On 26 April and 24 May 2016, the Competition and Market Authority (CMA) has fined fridge suppliers Ultra Finishing Limited (Ultra) and Foster Refrigerator (Foster) a division of ITW Ltd (full non-confidential decision available here), in connection with the restrictions imposed on their dealers to offer online discounts, in breach of competition rules. The CMA issued separate statements of objections to Ultra, and ITW, early in 2016.

Each was alleged to have introduced a “minimum advertised price” (MAP) for internet sales, which effectively limited the ability of retailers of their products to make online sales below a specified price level. The CMA alleged that both cases were a form of resale price maintenance (RPM) and infringements of competition law.

In particular, both companies operated a MAP policy and threatened dealers with sanctions including threatening to charge them higher cost prices for their respective products or stopping supply if they advertised below that minimum price.

The CMA found that such MAP policies constituted RPM because, by restricting the price at which goods were advertised online, they prevented dealers from deciding the resale price for those goods.

The CMA found that there is a clear link between the advertised price and the resale price when goods are purchased online.

Google wins fight against Streetmap

By Nikolaos Theodorakis

Google secured a legal victory on February 12, as a London court ruled that a clickable map display box on the company’s search page did not harm competition.[1] In essence, the court rejected Streetmap’s allegations that the thumbnail display resulted in granting preferential treatment for Google Maps.

A London High Court handed down the judgment following a two-week preliminary trial in November. Streetmap, a UK provider, accused Google that it abused its power via bundling Google Search with Google Maps. In fact, Streetmap alleged that its traffic drastically dropped following Google’s action to automatically display a clickable thumbnail map once someone searches for a specific address or venue. This practice began in 2007, and Streetmap associated it with a huge loss of traffic and, consequently, profit. It claimed that its market share significantly shrunk, and is not on the verge of collapsing, as a result of Google’s policy.

Streetmap argued that, by using the thumbnail display, Google did not compete on the quality of its map service and that it should have displayed third-party maps in its search results. Google counter-argued that it bears no obligation to incorporate other maps in its results. It argued that in fact, thumbnail maps benefit consumers and form an integral part of its search service. Such conduct improves the quality of its service and makes Google more appealing to customers. It also argued that thumbnail maps do not amount to bundling or unjustified discrimination.

Mr. Justice Roth ruled that Google’s introduction of the new-style Maps OneBox in 2007 was “not reasonably likely appreciably to affect competition in the market for online maps” and that Google’s conduct was “objectively justified”. The judge found that, assuming that Google held a dominant position, it did not commit an abuse. His argument was that “…on consideration of all the evidence that the introduction of the new-style Maps OneBox in June 2007 did not in itself have an appreciable effect in taking customers away from Streetmap.” Further, “if contrary to my primary finding, it was likely to have such an effect, Google’s conduct in that regard was objectively justified.”

The judge also held that Streetmap did not appear to regard the thumbnail maps as a threat to its ability to compete for several years. Since the party most closely involved in the market, and hence most at risk, did not pursue a case earlier, they are unlikely to be actually affected by Google’s policy. In other words, if Streetmap was actively affected by the thumbnail map practice, it would have reacted sooner.

In reaction to the decision, Google said that the court recognized that the company is trying to improve the quality of its services and that the decision altogether promotes innovation. Streetmap, on the other hand, argued that the subject matter of the case belongs to a new field of competition law that merits further legal exploration. Streetmap further suggested that the judge did not apply the appropriate tests to determine whether there has been an effect in the relevant markets and if Google rightfully did so.

In terms of future steps, Streetmap plans to turn to the Court of Appeal since the High Court judge dismissed its entire claim and declined permission to appeal the judgment. The company asked for 35 days to bring the case before the Court of Appeal and further challenge the case.

In particular, Streetmap wishes to appeal the judgment on two grounds: first, Streetmap claims that the decision is unfavorable for small businesses since it raises the threshold of information required to prove causal effect. If the standard of proof rises from probability to appreciable effect, then a complainant needs to have information that will, under normal circumstances, only be known to the dominant company. In other words, raising the burden of proof will make it more difficult to establish a violation. Second, Streetmap suggests that Google is not compliant vis-à-vis its legal obligations since it did not conduct a UK test when introducing Google Maps to examine what would the effects be on the market. Instead, it relied on the effects its service had on the U.S. market, which does not necessarily reflect the UK market reality.

This case settles Google’s obligations in connection with its dominant position in the mapping context, at least for now. On a relevant note, Google is facing two ongoing antitrust investigations with the European Commission: one into allegations that the company gives preference to its own services in search results, and the other into alleged restrictions on its mobile-operating system, Android.

[1] Link to the case available here: http://www.bailii.org/ew/cases/EWHC/Ch/2016/253.html

National Competition Authorities take position on regulatory measures for online transport platforms

By Gabriele Accardo

In May 2015, the European Commission committed to assess the role of online transportation platforms, such as Uber, as it launched a public consultation to better understand the social and economic role of platforms, market trends, the dynamics of platform development and the various business models underpinning the platforms. According to the Commission, knowledge gained through this exercise will also contribute to various legislative initiatives—including online platforms regulation—which the Commission plans to launch to boost the Digital Single Market.

Currently there is a heated discussion as to whether online platforms should be subject to regulation at all.

While the European Commission may still take some time to elaborate on the contributions to the public consultation and eventually to state whether and to what extent some form of regulation may be warranted, recently, two national competition authorities, namely the UK Competition and Market Authority (CMA) and the Italian Competition Authority (ICA), made their view public.

The Position of the ICA

On September 29, 2015, the ICA issued an opinion on the legality of activities carried out by companies like Uber, which are carried out by either professional (e.g. Uber Black) or non-professional (e.g. Uber Pop) drivers through digital platforms accessible by tablets and smartphones.

The ICA first noted that it is not clear yet whether acting as an intermediary between the owner of a vehicle and a person who needs to make a trip by managing IT resources, is merely a transport service or, must be considered to be an electronic intermediary service or an information society service, as defined by Article 1(2) of Directive 98/34/EC.

The ICA noted that the Court of Justice of the European Union shall rule on this specific issue, and that until then it cannot be ruled out that the activity falls within the second category (i.e. an electronic intermediary service), which is not regulated, and therefore totally legitimate.

That said the ICA made the following findings, taking into account the characteristics of the activities carried out by Uber.

First, the ICA recognized that even traditional taxi services are more and more adopting technologies similar to those embraced by Uber. Yet, the ICA stressed that services such as Uber ensure a greater ease of use of the mobility service, a better response to a public need for which there is no current offering, and the ensuing reduction of the costs for users of such services. Last but not least, to the extent that it discourages the use of private means of transportation, Uber-like services also contribute to the decongestion of urban traffic.

Second, with regards to the activity of UberBlack or UberVan, i.e. transport services carried out by professional drivers, the ICA considers the current regulation (Italian Law No. 21 of 1992 concerning the non-linear public transport of people) as restrictive of competition insofar as its provisions restrict the geographic scope of the activity of vehicles to the municipality that has granted them a license, and further require that after each trip, each car must return to the base.

Third, with regards to the services such as those provided by UberPop, consisting of acting as an intermediary between the owner (non-professional driver) of a vehicle and a person who needs to make a journey within a city, the ICA observed that the Court of Milan ordered the blocking of UberPop throughout the national territory allegedly because this services would breach the rules regulating the taxi industry and may be characterized as an act of unfair competition. In that respect, the Court held that UberPop’s activity cannot be carried out to the detriment of people’s safety, in terms of cars used for the service, the suitability of drivers, as well as insurance coverage.

Yet, the ICA held that, even so, any form of regulation of such new services, if at all necessary, should be the least invasive as possible. In that respect, the ICA eventually singled out measures such as a registry for online platform providing such services and the provision of certain requirements for drivers.

The Position of the CMA

The position held by the UK Competition and Market Authority is even firmer than that of its Italian counterpart.

Preliminarily, while it recognized that “private hire vehicles” need the protection of appropriate regulation, the CMA considered that consumers also benefit from effective competition exerting downward pressure on prices and upward pressure on service quality and standards.

The CMA takes the view that innovative services (which include app-based booking systems) may drive efficiencies through which it is possible to offer benefits such as lower prices and greater responsiveness to demand. The introduction of new services also has an inherent benefit in the form of greater choice for consumers.

From a general stand point, the CMA thus considers that competition should only be compromised or restricted by regulatory rules to the extent that doing so is absolutely necessary for consumer protection. Above all, regulation should not favor certain groups or business models over others and any measures that restrict the choices available to consumers should be minimized.

The CMA focused on a number of regulatory proposals (made by the Authority Transport for London or “TfL”) that might have the greatest impact on competition.

5-minute wait requirement. TfL proposes that operators must provide booking confirmation details to the passenger at least 5 minutes prior to the journey commencing.

According to CMA, this proposal reduces the competitiveness of alternative services than black cabs by artificially hampering the level of service that new services can provide.

Approval for changes to operating models. TfL proposes that operators will be required to seek TfL approval before changing their operating model. The CMA considers that ex ante regulation of business models is liable to reduce incentives for innovation (a key competitive parameter) and by extension to restrict competition.

Mandatory pre-booking facilities. In the CMA’s view, mandating ancillary functions (such as a facility to pre-book up to seven days in advance) can place undue burdens on some providers, leading to increased costs for private hire vehicles and thus distorting competition, as those unable or unwilling to provide these functions will be excluded from the market. The CMA notes that in instances where consumers find ancillary facilities useful, they are likely to be provided by a competitive market where different offerings proliferate.

Fixed landline telephone requirement.  Similarly, the CMA believes that TfL’s proposal whereby operators must have a fixed landline telephone number which must be available for passenger use at all times, could raise barriers to entry (entrants would have to provide both a number and staff to handle calls) as well as restricting innovation (including platform-based business models) and could therefore lead to reduced competition between private vehicle operators. Moreover, it is not clear that it is necessary to make this functionality mandatory, as consumers may not value having a landline number to contact to choose private hire vehicle operators that provide one.

Requirement to specify the fare in advance. Another proposal that the CMA rejects is mandating operators to specify the fare for each journey prior to the commencement of that journey.  According to the CMA, the supply of a precise and fixed fare at the time of booking would effectively prohibit innovative pricing models that could be more efficient than pre-calculated fares (e.g. by varying according to supply and demand). This would remove another parameter of competition among private hire vehicle operators.

Drivers to only work for one operator at a time. TfL further proposed a requirement that licensed private hire vehicle drivers can only work for one operator at a time, claiming that this is necessary to reduce the risk of drivers working excessive hours for a number of different operators.

The CMA notes that this proposal may not be suitable or necessary to meet the stated objective. First, TfL’s proposal seems to address only excessive hours among drivers working for multiple operators, and not the risk of excessive hours among drivers working for a single operator, or the danger of black cab drivers working excessive hours.

More interestingly, the CMA believes that ‘multi-homing’ (i.e. the ability of drivers to work for multiple platforms) can allow drivers to switch their supply to where it is needed in the market. Mandatory single-homing can create a strong network effect, as it gives drivers the incentive to only work for the platform with the most customers. The consequence could be fewer private hire vehicle operator platforms, or even a single dominant platform, with the potential for all the consumer harm that platform dominance might bring.

UK Court orders 6 main UK ISPs to take down infringing websites based on trademark infringement

By Béatrice Martinet Farano

On 17 October 2014, the UK High Court issued a landmark decision, ordering the 6 main UK ISPs (including Sky, British Telecom and Virgin Media) to block a series of websites which were apparently dedicated to the advertising and sale of products infringing the Richemont group’s (including Cartier’s) trademark rights.

While there have been a number of decisions in Europe issuing blocking orders against copyright infringing websites (see e.g. Newzbin and The Pirate Bay, Newsletter No 2/2012 p. 9-10 and FirstRow, Newsletter No 5-6 2013, p. 26), blocking orders based on trademark infringement remain extremely rare.

In this decision, the Court held that the threshold conditions to issue a blocking order under article 11 of the Enforcement Directive were met, and specifically that:

  1. The 6 ISPs were intermediaries whose services were being used to infringe IP rights (thereby adopting a broad definition of “intermediaries”);
  2. Richemont’s trademarks rights had been infringed by the targeted website, stressing among other facts that the currency (English pound available), language (English), and shipment availability in England, all pointed to the occurrence of a trademark infringement in the UK
  3. That the operator of the target website had used the ISPs services to infringe; and
  4. The ISPs had knowledge of such infringement (through cease and desist letters from the rights holders and through the application for the injunction).

The Court then balanced the opportunity of such order against the principles of necessity, effectiveness, dissuasiveness, cost effectiveness, obligation to avoid barriers to legitimate trade, fairness and equity, as well as the principle of proportionality (as discussed in L’Oreal v. eBay, see Newsletter 4-5 2011 p. 7-8) to conclude, in a lengthy analysis, that none of these principles raised a substantial bar to the principle of issuing blocking orders against websites dedicated to infringement.

While the decision did not discuss either the potential liability of these ISPs for trademark infringement (the decision makes clear from the first paragraph that “for the avoidance of doubt, there is no suggestion that the ISPs have infringed the trademark or are liable for infringement by the operators of the target website”), nor their obligations to take down content upon receipt of a notice and take down identifying an infringing website or content, this confirmation from a European court that blocking orders are now available to trademarks holders may have a decisive impact.

UK Court quashes decision accepting the commitments by OTAs and hotel chain in the online booking sector

By Gabriele Accardo

Last 26 September, following an appeal by meta-search site Skyscanner, the UK Competition Appeal Tribunal (“CAT”) quashed the decision of the Office of Fair Trading (the “OFT”) to accept commitments to remove certain discounting restrictions for online travel agents (“OTA”) following the OFT investigation into the online supply of room-only hotel accommodation by OTAs.

As it may be recalled, last January 2014 the OFT accepted commitments from online travel agents, Booking.com B.V. (“Booking.com”, and its ultimate parent company Priceline.com Incorporated) and Expedia Inc (“Expedia”), together with InterContinental Hotels Group plc (“IHG”) (see Newsletter 1/2014, Newsletter 5-6/2013 and Newsletter No. 4-5/2012 for additional background).

Based on the commitments, all OTAs and hotels that deal with Booking.com, Expedia and IHG, would be able to offer in UK hotels discounts off headline room-only rates, up to the level of their commission or margin, so long as customers:

  • Sign up to the membership scheme of an OTA or hotel to be able to view specific discounts (i.e. become members of so-called “closed groups” to whom discounts are offered), and
  • Make one undiscounted booking with the OTA or hotel in question to be eligible for future discounts.

Under the commitments, OTAs cannot publicize information about the specific level or extent of discounts outside the closed group.

Skyscanner’s appeal related primarily to this latter publicity restriction, claiming that the OFT did not duly consider the possible effect of the proposed commitments on price transparency, and on meta-search websites. Skyscanner operates a “meta-search” site that displays prices offered by third parties, and thereby assists consumers to compare pricing.

In fact, among the ways in which a consumer could book a room at Hotel Inter-Continental London Limited, other than the IHG website and the OTAs, the OFT appears to have limited itself to have only considered search engines such as Google, whereas meta-search sites were not referred to.

According to the CAT, if a consultation response, such as that from Skyscanner, raises an important and obvious point of principle, it is for the authority to examine it further, particularly so where the authority has not carried out an analysis of the economic effects of the practices which it proposes to address with its commitments decision and where that decision itself may generate its own economic effects within the market.

Interestingly, the CAT noted that “by pursuing its investigation on the basis that it had identified restrictions ‘by object’ the OFT may have deprived itself of the ability properly to appreciate the significance of the role of operators such as Skyscanner, even though it had initially acknowledged the importance of price transparency as a force for competition and was aware, at least, that meta-search operators existed.” The CAT appears to have qualified, albeit indirectly, the practice in issue as a restriction by “effect” rather than “by object”.

Accordingly, in failing to investigate such a plausible point further, the CAT found that the OFT acted unfairly, and that the process by which it subsequently reached its decision was procedurally improper.

Similarly, the CAT held that the OFT acted unreasonably in coming to a decision that effectively ignored the point Skyscanner and others had raised in relation to the potential impact of the publicity restriction on meta-search and competition more generally. The OFT failed to inform itself about the possible impact on price transparency of an obvious and clear restriction on disclosure of price information. In doing so, it failed to take account of a matter of which it ought to have taken account and acted as no reasonable authority should act. The Tribunal concluded that the decision was therefore irrational.

Accordingly the CAT remitted the case to the OFT’s successor, the Competition and Markets Authority, with a direction to reconsider the matter in accordance with the Judgment.