By Maria E. Sturm
On July 18, 2019, the EU Commission, the European antitrust supervisory body, fined Qualcomm Inc. for using predatory prices between 2009 and 2011. The EU Commission argued as follows:
- It explained that Qualcomm had a dominant position in the world market. This dominance is based on:
- Its market share of 60% and
- The high entry barriers: competitors are confronted with significant initial investments for research and development in this sector, as well as with obstacles regarding intellectual property rights.
- While it is not illegal to hold a dominant position, the EU Commission accuses Qualcomm of abusing such a position by using predatory prices for UMTS-chip sets. To prove this, the EU Commission used a price-cost test for the chipsets in question. In addition, it claimed to have qualitative evidence for anti-competitive behavior. Qualcomm used this problematic pricing policy when its strongest competitor, Icera, tried to expand on the market in an effort to hinder Icera from building up its market presence.
- Finally, the EU Commission argues that Qualcomm’s behavior could not be justified by potential efficiency gains.
This Commission decision is the latest, but presumably not the final point of a long case history. Already in 2015, the Commission has initiated a formal investigation and issued Statements of Objections against Qualcomm. In 2017, the Commission requested further information from Qualcomm. As Qualcomm did not respond to this request, the Commission made a formal decision which Qualcomm claimed to be void. Qualcomm filed for annulment of the decision and an application for interim measures. The latter was dismissed on July 12, 2017. Art. 278 TFEU establishes the principle that EU actions do not have a suspensory effect, because acts of EU institutions are presumed to be lawful. Thus, an order of suspension or interim measures is only issued in exceptional circumstances where it is necessary to avoid serious and irreparable harm to the applicant’s interests in relation to the competing interests. The cumulative requirements are:
- The applicant must state the subject matter of the proceedings.
- The circumstances must give rise to urgency.
- The pleas of fact and law must establish a prima facie case for the interim measures.
Qualcomm mainly brought forward two arguments for the urgency of the matter:
- The amount of work and cost for answering the questions would be too burdensome. In response, the Court stated that the damage would be only of a pecuniary nature. Such damage normally is not irreparable, because it can be restored afterwards. Qualcomm did not argue that its financial viability would be jeopardized before the final judgment would be issued, that its market share would be affected substantially, or that it was impossible to seek compensation.
- The enormous amount of work for the employees of the financial department would make it impossible for them to perform their regular tasks. However, Qualcomm mentioned itself that the burden would weigh particularly heavily on a limited number of employees in the financial department only. The Court held that if only some employees of only one department would be affected, the argument is not strong enough to justify urgency.
The latest decision in this case was issued on April 9, 2019, about Qualcomm’s claim for annulment. Qualcomm brought forward six pleas against the EU Commission, but all of them were dismissed:
- Infringement of the obligation to state reasons.
According to relevant case law, statements of reasons must be appropriate to the measure at issue and must disclose the reasons clearly and unequivocally. The Commission must show that the request is justified. The undertakings concerned must be able to assess the scope of their duty to cooperate and their right to defense must be safeguarded. However, the EU Commission is not obliged to communicate all information at its disposal, as long as it clearly indicates the suspicions. Since the Commission clearly indicated the products and the customers involved, as well as the suspicions of infringement, it fulfilled its obligation to state reasons.
- Infringement of the principle of necessity.
There must be a correlation between the request for information and the presumed infringement and the Commission must presume reasonably that the information will help determine whether the alleged infringement has taken place. Qualcomm accused the Commission of having expanded the scope of the investigation and contended that the required information was not necessary. Concerning the first point, Qualcomm mainly referred to the Statement of Objections and said the Commission must terminate its preliminary investigations before issuing such a document. However, according to the Court, the Statement of Objections is only procedural and preliminary, the Commission is thus free to continue with fact-finding afterwards. Concerning the second point, the Court grants the Commission broad powers of investigation, including the assessment of whether information is necessary or not. In particular, the Commission needed the information required from Qualcomm to avoid factual errors in calculating the price-cost test. The Commission had to request the information to keep up with its obligation to examine carefully and impartially.
- Infringement of the principle of proportionality.
Qualcomm argued that the information requested was disproportionate, because it was not legally obliged to keep documents for longer than three and a half years and that they did not organize their documents systematically. Here, the Court said that at least from the moment when Qualcomm learned about the Commission’s investigation, it should have been more careful and should have kept documents. Moreover, undertakings who keep their documents in an organized and systematic order cannot be penalized for that. Therefore, the unsystematic organization falls under Qualcomm’s responsibility. Furthermore, a significant workload is not per se disproportionate. One must consider it in relation to the investigated infringement. An alleged predatory pricing requires complex analyses of a large amount of data and is not disproportionate because of its nature.
- Reversal of the burden of proof.
This plea is, according to the Court, based on a misreading. Qualcomm was asked to neither audit financial accounts nor prove that they have conducted their business in accordance with the law. Rather, it was only asked to issue information for the Commission to conduct the price-cost test and internal documents pertaining to the relevant period.
- Infringement of the right to avoid self-incrimination.
Qualcomm claims that the Commission’s requests were beyond the scope of simply providing information. According to Regulation No 1/2003, undertakings cannot be forced to admit that they have committed an infringement, but they are obliged to answer factual questions and to provide documents, even if this information may be used to establish against them. Therefore, they do not have an absolute right of silence. On the contrary, in order to ensure the effectiveness of Regulation No 1/2003, the Commission is entitled to request all necessary information concerning relevant facts to prove the existence of anticompetitive conduct.
- Infringement of the principle of good administration.
Qualcomm claimed the required information was excessive and that the Commission abused its investigative power by prolonging a flawed investigation. According to the relevant case law, the principle of good administration requires EU institutions to observe the good guarantees afforded by the legal order. Those guarantees include the duty to examine carefully and impartially all the relevant aspects of the individual case. Here, the Court held that the Commission requested the information in question precisely to comply with its duty to examine carefully and impartially the arguments put forward by Qualcomm regarding the Statement of Objections.
On June 18, 2019, Qualcomm lodged an appeal for the annulment of the General Court’s judgment. The case is to be continued.
By Pratyush Nath Upreti
On 23 March 2018, the United States launched a WTO complaint against China’s discriminatory licence practices. The request for consultations filed by the United States highlights the grounds for complaint as:
“China denies foreign patent holders the ability to enforce their patent rights against a Chinese joint-venture party after a technology transfer contract ends. China also imposes mandatory adverse contract terms that discriminate against and are less favorable or imported foreign technology. Therefore, China deprives foreign intellectual property rights holders of the ability to protect their intellectual property rights in China as well as freely negotiate market-based terms in licensing and other technology-related contracts.”
Later in April 2018, Ukraine, Saudi Arabia, Chinese Taipei (Taiwan), and the European Union (EU), formally requested to join the consultations requested by the US, citing a substantial interest in the matters related to the protection of intellectual property rights by WTO members, interpretation of TRIPS Agreement and trade interest.
On 1 June 2018, the European Union filed its own WTO complaint against China’s rules, which are applicable to technology transfer. According to the request for consultations, the European Union has accused China of using its domestic legislation to impose a different set of rules on the import of technology, including intellectual property rights, than the rules which are applicable to technology transfers occurring between Chinese companies. Further, in the consultations request, the EU argues;
“The Chinese measures at issue appear to (i) discriminate against foreign holders of intellectual property rights, and (ii) restrict the foreign right holders’ ability to protect certain intellectual property rights in China, contrary to China’s WTO obligations.”
The WTO consultations give the parties an opportunity to discuss the issues and to find a satisfactory solution without resorting to litigation. In case of failure to produce a satisfactory solution within 60 days, the complainant may request for adjudication by a panel.
In recent years, there have been few IP disputes brought to the WTO Dispute Settlement Understanding (DSU). From 1995-2016, the TRIPS Agreement has been invoked only 33 times in WTO complaints- (20 cases in 1995-99: 5 cases in 2000-04; 1 case in 2005-09; 7 cases in 2010-14; 0 cases in 2015-16). In the past, the US and the EU had a history of IP related tension at WTO with China. However, the recent request for consultations by two key global actors has come at a time when the rise of bilateral and plurilateral trade agreements is at its peak. Thus, these requests for consultations depict their faith in the multilateral system.
 China-Certain Measures Concerning the Protection of Intellectual Property Rights- Request for Consultations by the United States (WT/DS542/1, 26 March 2018)
<https://www.wto.org/english/news_e/news18_e/ds542rfc_26mar18_e.htm> accessed 22 July 2018.
 See communication from the Ukraine, Saudi Arabia, Chinese Taipei (Taiwan), and the European Union (EU) to join consultations requested by the United States.
 China-Certain Measures on the Transfer of Technology – Request for Consultations by the European Union ( WT/DS549/1, 6 June 2018)
 For more information on WTO Dispute Settlement
< https://www.wto.org/english/tatop_e/dispu_e/disp_settlement_cbt_e/c6s2p1_e.htm> accessed 22 July 2018.
 Kara Leitner and Simon Lester, ‘WTO Dispute Settlement 1995-2016- A Statistical Analysis’ (2017) 20(1) Journal of International Economic Law 176. (Based on the statistical data, authors argue that with regards to intellectual property, the number of complaints has been limited and has been a decline in recent years.)
 See China- Measures Affecting the Protection and Enforcement of Intellectual Property Rights (WT/DS362) < https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds362_e.htm> accessed 22 July 2018/
By Nicole Daniel
On 22 March 2018, in a court hearing in the Qualcomm case, Judge Koh expressed her concern over possible abuses in asserting legal privilege over certain documents.
In January 2017, the U.S. FTC sued Qualcomm, alleging that the company consistently refused to license its essential patents to competitors, thereby violating its pledge to standards organizations that it would license them on FRAND terms (fair, reasonable and non-discriminatory). Allegedly, Qualcomm also engaged in a policy of withholding processors unless its customers agreed to patent licensing terms favorable to Qualcomm. A trial is set for January 2019.
Furthermore, a class action alleged that Qualcomm’s behavior raised the prices of devices operating with its chips.
At the hearing, judge Koh said she is “deeply disturbed” by the very high percentage of privilege assertions by Qualcomm. However, Qualcomm continues to produce documents after reviewing them again and removing earlier assertions of privilege. Judge Koh expressed her concerns at the court hearing several times and said that she will allow witnesses to be redeposed, as often as necessary, until all documents are available before testimony.
This issue centers around documents from Apple and other customers which were gathered under an EU investigation into the baseband chipsets market. Even though the plaintiffs have already obtained a redacted version of the Commission’s January 2017 decision fining Qualcomm EUR 997 million, they ask for an unredacted version. In this decision, Qualcomm was fined for paying Apple to refrain from buying rival manufacturers’ chips.
The U.S. plaintiffs argue that Qualcomm should have simply asked for third parties’ permission to share the information given to the EU investigators. Qualcomm in turn argued that it cannot circumvent EU law by making the disclosures asked for and referred to the version of the decision to be published by the Commission. In the public version, the Commission makes its own redactions. The U.S. plaintiffs further argued that they contacted Apple, as well as its contracted manufacturers, and those parties do not object to disclosure. Qualcomm replied that they could simply ask them directly for the information. In sum, the U.S. plaintiffs called Qualcomm’s behavior unfair, as it prevents them from fully understanding the EU decision.
Until early May 2018, no public version of the Commission was available. The Commission and the companies involved are still in the process of deciding on a version of the decision that does not contain any business secrets or other confidential information.
Qualcomm’s Acquisition of NXP Receives Antitrust Clearance by the European Commission, Subject to Commitments
By Kletia Noti
On 28 April 2017, the European Commission (“Commission”) received, pursuant to the EU Merger Regulation, notification of a proposed concentration involving the acquisition, within the meaning of Article 3(1)(b) of the EU Merger Regulation, of NXP Semiconductors N.V., a Dutch global semiconductor manufacturer headquartered in Eindhoven, Netherlands, by Qualcomm Incorporated, a United States company world leader in 3G, 4G and next-generation wireless technologies, through its indirect wholly owned subsidiary Qualcomm River Holdings B.V..
On 9 June 2017, the Commission announced that it was launching an in-depth market investigation (Phase II review). The investigation rests, at least in part, on the basis of conglomerate theories of harm (as will be better seen infra) that resulted from the Commission’s initial market investigation during Phase I. To do away with the Commission’s concerns, Qualcomm submitted a series of commitments (see infra).
On 18 January 2018, the Commission announced that it would clear the proposed transaction, as modified by the commitments, on the ground that it would no longer raise competition concerns. The Commission’s clearance decision is conditional upon Qualcomm’s full compliance with the commitments.
At present, Qualcomm has already received approval from eight of nine required global regulators to finalize the acquisition of NXP. The only exception is China, where clearance is currently pending, amid USA-China trade tensions. Should all the regulatory approvals not be in place by the deadline of 25 July, 2018, Qualcomm’s holding company, Qualcomm River Holdings B.V., will pay NXP a termination fee.
A background: the companies
Qualcomm Incorporated (Qualcomm) is engaged in the development and commercialization of a digital communication technology called code division multiple access (CDMA). Qualcomm is mostly known for mainly developing and supplying baseband chipsets for smartphones, i.e. chips that allow smartphones to connect to cellular networks.
Qualcomm is divided into two main segments: (i) Qualcomm CDMA Technologies (‘QCT’) and; (ii) Qualcomm Technology Licensing (‘QTL’). QCT is a supplier of integrated circuits and system software based on CDMA, Orthogonal frequency-division multiple access (OFDMA), one of the key elements of the LTE standard, and other technologies for use in voice and data communications, networking, application processing, multimedia and global positioning system products. QTL grants licenses or otherwise provides rights to use portions of Qualcomm Incorporated’s intellectual property portfolio, which, among other rights, includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products.
NXP Semiconductors N.V. (NXP) is active in the manufacturing and sale of semiconductors, in particular integrated circuits (‘ICs’) and single unit semiconductors. NXP sells broadly two categories of products, standard products and high performance mixed signal (“HPMS”) devices. NXP’s HPMS business includes application-specific semiconductors and system solutions for: (i) Automotive; (ii) Secure Identification Solutions; (iii) Secure Connected Devices; and (iv) Secure Interfaces and Power. The semiconductors supplied by NXP, including near-field communication (NFC) and secure element (SE) chips for smartphones, are chips enabling short-range connectivity, which are used in particular for secure payment transactions on smartphones.
NXP has also developed and owns MIFARE, a leading technology used as a ticketing/fare collection platform by several transport authorities in the European Economic Area (EEA).
On October 2016, Qualcomm and NXP announced a definitive agreement, unanimously approved by the boards of directors of both companies, under which Qualcomm would acquire NXP by way of a share purchase acquisition carried out through Qualcomm River Holdings B.V. On May 11, 2018, Qualcomm Incorporated announced that Qualcomm River Holdings B.V. has extended the offering period of its previously announced cash tender offer to purchase all of the outstanding common shares of NXP Semiconductors N.V. (NASDAQ: NXPI) until May 25, 2018.
The Commission’s concerns and the in-depth investigation
Following its initial market investigation, the Commission had several concerns about semiconductors used in mobile devices and the automotive industry.
Concerns in the markets for chipsets used in mobile devices
Conglomerate effects’ theory of harm
More specifically, the Commission’s market investigation showed that, since the merged entity would hold strong market positions within both baseband chipsets (mainly developed and supplied by Qualcomm) and near field communication (NFC)/secure element (SE) chips (supplied by NXP), it would have had the ability and incentive to exclude Qualcomm’s and NXP’s rival suppliers from the markets (through practices such as bundling or tying).
Concerns in the merged entity’s licencing practices related to parties’ significant intellectual property portfolios
Since the merged entity would have combined the two undertakings’ significant intellectual property (IP) portfolios, in particular with respect to the NFC technology, the Commission was additionally concerned that, post-merger, the Commission would have had the ability and incentive to modify NXP’s current IP licensing practices, in relation to NFC’s technology, including by means of bundling the NFC IP to Qualcomm’s patent portfolio.
According to the Commission, this could have caused the merged entity to avail itself of a stronger buying power vis-à-vis customers than absent the transaction. The Commission opined that this would have led to anticompetitive effects in the relevant market, including by means of higher royalties for the NCF patent licences and/or competitors’ foreclosure.
Concerns in the markets for semiconductors used in the automotive sector
An additional Commission concern was that the merged entity resulting from the proposed acquisition would have removed competition between in the markets for semiconductors used in the automotive sector, and, more specifically, the emerging Vehicle-to-Everything (“V2X”) technology, which will play an important role in the future development of “connected cars” (through which cars can “talk” to other cars).
Phase II investigation
On 21 June 2017, the Commission launched its Phase II market test.
The Commission’s in-depth market investigation during Phase II of the merger review confirmed some of its initial concerns.
Concerns related to MIFARE
One of the Commission’s concerns was that the merged entity would have had the ability and incentive to make it more difficult for other suppliers to access NXP’s MIFARE technology (a contactless security technology platform used as a ticketing/fare collection platform by EEA transport authorities) by possibly raising licencing royalties and/or refusing to licence such technology, thus resulting in potential anticompetitive foreclosure effects for competitors.
Concerns related to interoperability
In addition, the Commission also noted that, due to Qualcomm’s strong position in the supply of baseband chipsets and NPX’s strong position in the supply of near field communication (NFC)/SE chips, the merged entity would have had the incentive and ability to reduce interoperability of such chipsets with those of rival supplies. The Commission feared that this, in turn, could have resulted in competitors’ foreclosure.
Concern related to the merged-entity’s licencing practices
Finally, the in-depth investigation also confirmed concerns that the merged entity would have had the ability and incentive to modify NXP’s current IP licensing practices for NFC technology, which could have led the merged entity to charge significantly higher royalties.
By contrast, the Commission’s initial concerns concerning the markets for semiconductors in the automotive sector were not confirmed.
Concerns related to MIFARE
As seen above, some of the Commission concerns related to possible rivals’ foreclosure effects through actual or constructive refusal to supply of the MIFARE technology.
To address the Commission’s concerns, Qualcomm committed “from the Closing Date and for a period of eight (8) years thereafter, upon written request by any Third Party, to grant any such Third Party a nonexclusive MIFARE License also involving the use of MIFARE Trademarks on commercial terms (including with regard to the fee, scope and duration of the license) which are at least as advantageous as those offered by NXP in existing MIFARE Licenses on the Effective Date”.
Qualcomm also committed “to offer to MIFARE Licensees, on commercially reasonable and nondiscriminatory terms, the extension of the MIFARE Licenses for MIFARE Implementation in an Integrated Secure Element.”
Concerns related to interoperability
A second element of the Commission’s concerns related to the merged entity’s ability and incentive to degrade interoperability of Qualcomm’s baseband chipsets and NPX’s products.
In this respect, Qualcomm also undertook “from the Closing Date, on a worldwide basis and for a period of eight (8) years thereafter to ensure the same level of Interoperability, including, but not limited to, functionality and performance, between: (a) Qualcomm Baseband Chipsets and NXP Products, and the Third Party’s NFC Chips, Secure Element Chips, Integrated Secure Element or NFC/SE or Secure Element Technology; and (b) NXP Products and the Third Party’s Baseband Chipset or Applications Processor as will exist at any point in time between Qualcomm’s Baseband Chipsets and NXP’s Products, unless Qualcomm demonstrates to the Commission by means of a reasoned and documented submission to the Trustee that there are technical characteristics of the Third Party’s products that do not allow Qualcomm to achieve the same level of Interoperability, such as generational differences between Qualcomm’s and the Third Party’s respective chips”.
Concern related to the merged-entity’s licencing practices
The market analysis confirmed the Commission’s initial competition concerns with respect to the licensing of NXP’s NFC patents as a result of the transaction, as seen supra.
Qualcomm committed to not acquire NXP’s NFC standard-essential patents (SEPs) as well as certain of NXP’s NFC non SEPs. NXP undertook to transfer the abovementioned patents that Qualcomm commits not to acquire to a third party, which would be under an obligation to grant a worldwide royalty free licence to such patents for a period of three years. At the same time, with respect to some of NXP’s NFC non-SEPs that Qualcomm would have acquired, in order to do away with the Commission’s concerns, Qualcomm committed, for as long as the merged entity would own these patents, not to enforce rights with respect to these patents vis-à-vis other parties and to grant a worldwide royalty licence with respect to these parties.
On 18 January 2018, the Commission rendered public its decision to clear the proposed transaction, as modified by the commitments submitted by Qualcomm, on the grounds that such commitments would suffice to do away with its competition concerns.
The Commission’s clearance decision is rendered conditional upon Qualcomm’s full compliance with the commitments. A Monitoring Trustee, namely one or more natural or legal person(s) who is/are approved by the Commission and appointed by Qualcomm, has the duty to monitor Qualcomm’s compliance with the obligations attached to this Decision.
Pending sign-off from China’s regulator, the transaction remains incomplete. At Qualcomm, hopes remain high that the situation will be finalized soon.
 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EU Merger Regulation) (Text with EEA relevance) Official Journal L 024 , 29/01/2004 P. 0001 – 0022. Under Article 4(1), It is mandatory to notify concentrations with an EU dimension to the European Commission for clearance.
 See prior notification of a concentration (Case M.8306 — Qualcomm/NXP Semiconductors), OJ C 143, 6.5.2017, p. 6–6.
 After notification, the Commission has 25 working days to analyze the deal during the Phase I investigation. If there are competition concerns, companies can offer remedies, which extends the phase I deadline by 10 working days. At the end of a phase I investigation: (a) the merger is cleared, either unconditionally or subject to accepted remedies; or
(b) the merger still raises competition concerns and the Commission opens a Phase II in-depth investigation. If Phase II is opened, the Commission has 90 further working days to examine the concentration. This period can be extended by 15 working days when the notifying parties offer commitments. With the parties’ consent, it can be extended by up to 20 working days.
Brussels, 18 January 2018, press release, “Mergers: Commission approves Qualcomm’s acquisition of NXP, subject to conditions”, available at: http://europa.eu/rapid/press-release_IP-18-347_en.htm
Under Article 6(2) EUMR, “Where the Commission finds that, following modification by the undertakings concerned, a notified concentration no longer raises serious doubts within the meaning of paragraph 1(c), it shall declare the concentration compatible with the common market pursuant to paragraph 1(b). The Commission may attach to its decision under paragraph 1(b) conditions and obligations intended to ensure that the undertakings concerned comply with the commitments they have entered into vis-à-vis the Commission with a view to rendering the concentration compatible with the common market.”
On request of China’s commerce ministry (MOFCOM), just days before the regulator’s April 17, 2018 deadline to decide on whether to clear the transaction expired, Qualcomm withdrew its earlier application to MOFCOM on April 14, 2018, and, in concomitance with such withdrawal, it re-filed a new application to obtain clearance of the proposed transaction. See M.Miller, April 16, 2018, Qualcomm to refile China antitrust application for $44 billion NXP takeover: sources, available at: https://www.reuters.com/article/us-china-qualcomm-antitrust/qualcomm-to-refile-china-antitrust-application-for-44-billion-nxp-takeover-sources and Qualcomm Press Release, Qualcomm and NXP Agree, at MOFCOM Request, to Withdraw and Refile Application for Chinese Regulatory Approval, April 16, 2018: https://www.qualcomm.com/news/releases/2018/04/19/qualcomm-and-nxp-agree-mofcom-request-withdraw-and-refile-application.
 A. Barry, “Stock Selloff Hurts Arbitrage Traders”, 3 May 2018, https://www.barrons.com/articles/stock-selloff-hurts-arbitrage-traders-1525369030
 Qualcomm Press Release, Qualcomm and NXP Agree, at MOFCOM Request, to Withdraw and Refile Application for Chinese Regulatory Approval, April 16, 2018: https://www.qualcomm.com/news/releases/2018/04/19/qualcomm-and-nxp-agree-mofcom-request-withdraw-and-refile-application.
 Qualcomm Press Release, Qualcomm to acquire NXP, 27 October 2016, available at: https://www.qualcomm.com/news/releases/2016/10/27/qualcomm-acquire-nxp.
 Qualcomm Press Release, Qualcomm extends cash tender offer for all outstanding shares of NXP, May 11, 2018, available at: https://www.qualcomm.com/news/releases/2018/05/11/qualcomm-extends-cash-tender-offer-all-outstanding-shares-nxp
 See, for a non-confidential interim text of the commitments, Case M.8306 – QUALCOMM / NXP SEMICONDUCTORS, Commitments to the European Commission, published on 24 January 2018, available at: http://ec.europa.eu/competition/mergers/cases/additional_data/m8306_3395_3.pdf
Brussels, 18 January 2018, press release, “Mergers: Commission approves Qualcomm’s acquisition of NXP, subject to conditions”, available at: http://europa.eu/rapid/press-release_IP-18-347_en.htm
See above, foonote 4.
 Under Article 6(2) EUMR, “Where the Commission finds that, following modification by the undertakings concerned, a notified concentration no longer raises serious doubts within the meaning of paragraph 1(c), it shall declare the concentration compatible with the common market pursuant to paragraph 1(b). The Commission may attach to its decision under paragraph 1(b) conditions and obligations intended to ensure that the undertakings concerned comply with the commitments they have entered into vis-à-vis the Commission with a view to rendering the concentration compatible with the common market.”
Full-work Licensing Requirement 100 Percent Rejected: Second Circuit Rules in Favor of Fractional Licensing
By Martin Miernicki
On 19 December 2017, the Second Circuit handed down a summary order on the BMI Consent Decree in the dispute between the Department of Justice (DOJ) and Broadcast Music, Inc. (BMI). The court ruled that the decree does not oblige BMI to license the works in its repertoire on a “full-work” basis.
ASCAP and BMI are the two largest U.S. collective management organizations (CMOs) which license performance rights in musical works. Both organizations are subject to so-called consent decrees which entered into force 2001 and 1994, respectively. In 2014, the DOJ’s Antitrust Division announced a review of the consent decrees to evaluate if these needed to be updated. The DOJ concluded the review in August 2016, issuing a closing statement. The DOJ declared that it did not intend to re-negotiate and to amend the decrees, but rather stated that it interpreted these decrees as requiring ASCAP and BMI to license their works on a “full-work” or “100 percent” basis. Under this rule, the CMOs may only offer licenses that cover all performance rights in a composition; thus, co-owned works to which they only represent a “fractional” interest cannot be licensed. In reaction to this decision, BMI asked the “rate court” to give its opinion on this matter. In September 2016, Judge Stanton ruled against the full-work licensing requirement, stating that the decree “neither bars fractional licensing nor requires full-work licensing.”
Decision of the court
On appeal, the Second Circuit affirmed Judge Stanton’s ruling and held that fractional licensing is compatible with the BMI Consent Decree. First, referencing the U.S. Copyright Act – 17 U.S.C. § 201(d) –, the court highlighted that the right of public performance can be subdivided and owned separately. Second, as fractional licensing was common practice at the time the decree was amended in 1994, its language does indicate a prohibition of this practice. Third, the court rejected the DOJ’s reference to Pandora Media, Inc. v. ASCAP, 785 F. 3d 73 (2d Cir. 2015) because this judgment dealt with the “partial” withdrawal of rights from the CMO’s repertoire and not with the licensing policies in respect of users. Finally, the Second Circuit considered it to be irrelevant that full-work licensing could potentially advance the procompetitive objectives of the BMI Consent Decree; rather, the DOJ has the option to amend the decree or sue BMI in a separate proceeding based on the Sherman Act.
Implications of the judgement
The ruling of the Second Circuit is undoubtedly a victory for BMI, but also for ASCAP, as it must be assumed that ASCAP’s decree – which is very similar to BMI’s decree – can be interpreted in a similar fashion. Unsurprisingly, both CMOs welcomed the decision. The DOJ’s reaction remains to be seen, however. From the current perspective, an amendment of the decrees appears to be more likely than a lengthy antitrust proceeding under the Sherman Act; the DOJ had already partly toned down its strict reading of the decree in the course of the proceeding before the Second Circuit. Yet, legislative efforts might produce results and influence the further developments before a final decision is made. A recent example for the efforts to update the legal framework for music licensing is the “Music Modernization Act” which aims at amending §§ 114 and 115 of the U.S. Copyright Act.
By Gabriel M. Lentner
On 13 December 2017, an international investment tribunal delivered its decision on expedited objections, accepting jurisdiction to hear the trademark dispute in the case of Bridgestone v Panama. The dispute arose out of a judgment of the Panamanian Supreme Court of 28 May 2014, in which it held the claimants liable to a competitor to pay US $5 million, together with attorney’s fees, due to the claimants’ opposition proceedings regarding the registration of a trademark (”Riverstone”). The claimants argued that the Supreme Court’s judgment weakened and thus decreased the value of their trademarks (“Bridgestone” and ”Firestone”). The tribunal rejected most of the expedited objections raised by Panama. The decision is particularly interesting because it is the first detailed exploration of the question whether and under what conditions a trademark and license can be considered covered investments.
Trademarks are investments
On this issue, the tribunal first followed the text of the definition of investment under the applicable investment chapter of the United States—Panama Trade Promotion Agreement (TPA) (Article 10.29 TPA). It held that the investment must be an asset capable of being owned or controlled. The TPA also included a list with the forms that an investment may take, including ”intellectual property rights”, as many BITs do (paras 164 and 166). However, the TPA also requires that an investment must have the ”characteristics” of an investment, giving the examples of commitment of capital or other resources; expectation of gain or profit; assumption of risk (para 164). The tribunal also noted that other characteristics, as those identified in the case of Salini v Morocco, are to be found, such as a reasonable duration of the investment and a contribution made by the investment to the host state’s development. In this respect, the tribunal held that “there is no inflexible requirement for the presence of all these characteristics, but that an investment will normally evidence most of them” (para 165).
In deciding this issue, the tribunal reviewed the way in which trademarks can be promoted in the host state’s market. The tribunal found that ”the promotion involves the commitment of resources over a significant period, the expectation of profit and the assumption of the risk that the particular features of the product may not prove sufficiently attractive to enable it to win or maintain market share in the face of competition.” (para 169) However, the tribunal noted that “the mere registration of a trademark in a country manifestly does not amount to, or have the characteristics of, an investment in that country” (para 171). According to the tribunal, this is because of the negative effect of a registration of a trademark. It merely prevents competitors from using it on their products and does not confer benefit on the country where the registration takes place. Nor does it create any expectation of profit for the owner of the trademark (para 171).
The exploitation of a trademark is key for its characterization as an investment (para 172). This exploitation accords to the trademark the characteristics of an investment, by virtue of the activities to which the trademark is central. It involves a “devotion of resources, both to the production of the articles sold bearing the trademark, and to the promotion and support of those sales. It is likely also to involve after-sales servicing and guarantees. This exploitation will also be beneficial to the development of the home State. The activities involved in promoting and supporting sales will benefit the host economy, as will taxation levied on sales. Furthermore, it will normally be beneficial for products that incorporate the features that consumers find desirable to be available to consumers in the host country.” (para 172)
Licenses are investments, too
Another way of exploiting a trademark is licensing it, i.e. granting the licensee the right to exploit the trademark for its own benefit (para 173). The tribunal then brushes aside the following counter-argument raised by Panama:
“Rights, activities, commitments of capital and resources, expectations of gain and profit, assumption of risk, and duration do not add up an ‘investment’ when they are simply the rights, activities, commitments, expectations, and risks associated with, and the duration of, cross-border sales.” (para 175)
The tribunal responded that Panama did not provide any authority for this argument and only rebuts that the “reason why a simple sale does not constitute an investment is that it lacks most of the characteristics of an investment.” (para 176 It further noted that ”[i]t does not follow that an interrelated series of activities, built round the asset of a registered trademark, that do have the characteristics of an investment does not qualify as such simply because the object of the exercise is the promotion and sale of marked goods.” (para 176).
The problem with this argument is that it is precisely the point raised by Panama that the legal requirement for characteristics of investments were developed to distinguish an investment from a mere cross-border sale of goods. Arguably, the tribunal did not explain how the characteristics related to the trademarks at issue differ from those related to the marketing of ordinary sales of goods.
Against this background, the finding of the tribunal that trademark licenses are also investments is even less convincing. Here the tribunal refers to the express wording of Article 10.29(g) of the TPA, which provides that a license will not have the characteristics of an investment unless it creates rights protected under domestic law of the host state (para 178). After reviewing the arguments and expert testimony presented during the proceedings, the tribunal concluded that the license to use a trademark constitutes an intellectual property right under domestic law (para 195), and is thus capable of constituting an investment when exploited (para 198). It reasoned that ”[t]he owner of the trademark has to use the trademark to keep it alive, but use by the licensee counts as use by the owner. The licensee cannot take proceedings to enforce the trademark without the participation of the owner, but can join with the owner in enforcement proceedings. The right is a right to use the Panamanian registered trademark in Panama” (para 195).
In conclusion, it will be interesting to see how future tribunals will deal with this question and react to the precedent set in this case.
By Martin Miernicki
On 14 September 2017 the Court of Justice of the European Union (“ECJ”) handed down its decision in AKKA/LAA v. Konkurences padome (C-177/16). The case originated in a fine imposed on the Latvian collective management organization (CMO) AKKA/LAA – which possesses a legal monopoly in Latvia – by the national competition authority. The authority asserted that the CMO had abused its dominant position by charging excessively high license rates. In the following, the Latvian Supreme Court made a reference for a preliminary ruling, asking the ECJ, inter alia,
- whether it is appropriate to compare the rates charged by a national CMO to those rates charged by CMOs in neighboring and other member states, adjusted in accordance with the purchasing power parity index (PPP index);
- whether that comparison must be made for each segment of users or the average level of fees;
- above which threshold the differences between the compared fees indicate abusive conduct; and
- how a CMO can demonstrate that its license fees are not excessive.
Article 102(a) of the TFEU declares the imposition of “unfair purchase or selling prices” as an abuse of a dominant position. The seminal case for the interpretation of this provision is United Brands v. Commission (case 27/76). Furthermore, the ECJ has repeatedly been asked to gives its opinion on this matter in the context of copyright management services. Relevant case law includes Ministère public v. Tournier (case 395/87), Kanal 5 v. STIM (C-52/07) and OSA v. Léčebné lázně Mariánské Lázně (C‑351/12). In contrast, U.S. antitrust doctrine does not, as a principle, recognize excessive pricing as an antitrust violation.
Decision of the court
The ECJ largely referred to the opinion of the Advocate General and confirmed that a comparison of fees charged in other member states, relying on the PPP index, may be used to substantiate the excessive nature of license rates charged by a CMO. However, the reference member states must be selected according to “objective, appropriate and verifiable” criteria (e.g., consumption habits, economic factors and cultural background) and the comparison must be made on a consistent basis (e.g., similar calculation methods). For this purpose, it is, in principle, permissible to refer to a specific segment of users if indicated by the circumstances of the individual case (paras 31-51). With regard to the level license fees, the ECJ ruled that there is no minimum threshold above which a license fee can be considered abusive; yet, the differences between the compared fees must be both significant (not a minor deviation) and persistent (not a temporary deviation). CMOs can justify their rates by reference to objective dissimilarities between the compared member states, such as differing national regulatory regimes (para 52-61).
Implications of the decision
The court reconfirmed its approach taken in the former decisions which introduced the comparison of fees charged in different member states as well as the “appreciably higher” standard. In the case at hand, the court further elaborated on this general concept by providing new criteria for the analysis which should assist competition authorities and courts in assessing excessive pricing under the EU competition rules. Clearly, however, it will still be challenging to apply those guidelines in practice. Furthermore, it seems that the ECJ does not consider the method of comparing license fees in other member states to be the only method for the purposes of Article 102(a) of the TFEU (see also paras 43-45 of the AG’s opinion); this might be of special relevance in cases not related to CMOs. In this connection, it is noteworthy that the ECJ expressly permitted authorities to consider the relation between the level of the fee and the amount actually paid to the right holders (hence, the CMO’s administrative costs) (paras 58-60).
Lastly – although the finding of abusive pricing appears to be the exception rather than the rule in European competition law practice – the decision supplements the case law on CMOs which is especially important since the rules of the Collective Management Directive 2014/26/EU (CMD) are relatively sparse in relation to users. Nevertheless, it should be noted that said directive contains additional standards for the CMOs’ fee policies. Article 16(2) states that tariffs shall be “reasonable”, inter alia, in relation to the economic value of the use of the licensed rights in trade and the economic value of the service provided by CMOs. These standards may be, however, overseen by national authorities (CMD article 36) which are not necessarily competition authorities. A coordinated application of the different standards by the competent authorities would be desirable in order to ensure the coherence of the regulatory regime.
 Focus is put here on the most important aspects of the decision.