Will pricing algorithms be the European Commission’s next antitrust target?

There has been considerable debate over the last year or so about the potential anti-competitive impacts of pricing algorithms. They could lead to discriminatory pricing, for example a company quoting different prices to different people based on an algorithmic analysis of their personal data, or cases of collusion, for example companies using algorithms to automatically fix prices. 

In a recent speech, Commissioner Vestager sounded a clear warning against the latter example: “companies can’t escape responsibility for collusion by hiding behind a computer program”. She also indicated that the use of pricing software forms part of the issues being investigated in the Commission’s new investigation into price-fixing in consumer electronics.

However, as pricing algorithms increase in complexity and sophistication, and their use becomes more prevalent, it will not be easy for competition authorities to establish where the use of such algorithms equates to actionable infringements of competition law.

How might pricing algorithms be used?

A new book by Professors Ariel Ezrachi and Maurice Stucke have identified four scenarios in which pricing algorithms may promote anti-competitive collusion (see here; also developed in more detail in their book Virtual Competition). 

The first is where firms collude as in a traditional cartel, but use computers to manage or implement the cartel more effectively, or to monitor compliance, for example by utilising real-time data analysis. Competition authorities have already investigated this kind of subject-matter – for example, the CMA issued an infringement decision last year against two companies that agreed to use algorithms to fix prices for the sale of posters and frames on Amazon (see here).

The second example is a hub-and-spoke scenario whereby one pricing algorithm may be used to determine prices charged by numerous users. Evaluating this sort of issue is a current challenge for competition authorities. Last year, in Eturas, the CJEU held that travel agents participating in a platform that implemented a discount cap could be liable if they knew about the anti-competitive agreement and failed to distance themselves from it (see here).  An ongoing case in the US (Meyer v Kalanick) is examining Uber’s ‘surge’ pricing algorithm, which increases the price of an Uber journey as demand increases.  The claimants allege that this constitutes an implied horizontal price-fixing agreement.  

The examples seen so far involve relatively straightforward cases of the use of algorithms as an aid or means to fix prices (although the Uber example arguably involves only unilateral conduct, rather than collusion).  However, Ezrachi and Stucke’s final two scenarios move into more uncertain territory – what if there is no express collusion by the companies? 

In the third scenario, each firm independently adopts an algorithm that continually monitors and adjusts prices according to market data. Although this can lead – effectively – to tacit collusion, particularly in oligopolistic markets (those with a small number of sellers), there is no agreement between companies that could form the basis of an investigation.  However, there can evidently be an anti-competitive effect: if an online retailer can track the prices used by another online retailer for common products, and immediately adjust its own prices to match any discounts, it can prevent the second online retailer from gaining a reputation for lower prices. The incentive for either retailer to lower its prices is removed.  On the other hand, examples from the analogue world suggests that this kind of market review can be used to ensure lower prices for consumers, at least for now (think supermarkets’ price match promises…).

In the fourth scenario, machine learning and the increasing sophistication of algorithms expand tacit collusion beyond oligopolistic markets, making it very difficult even to detect when it’s happening.

The latter two examples pose obvious difficulties for competition authorities. If they do consider such actions to be anti-competitive, how would they prove the requisite intention to co-ordinate prices?

How will competition authorities react?

As discussed above, competition authorities have already undertaken investigations against companies using pricing algorithms in collusion. We have previously noted the CMA’s interest in developing digital tools to aid its investigations (here). It seems certain that such tools will be necessary as these algorithms become more sophisticated and harder to detect.

The actions of non-dominant companies in using pricing algorithms whilst acting independently do not fall within the current competition law framework, even if such use ultimately results in higher prices for consumers. Commissioner Vestager has accepted that “what matters is how these algorithms are actually used”. This sensibly suggests that for now the Commission’s focus will remain on the more clear-cut cases of collusion. Anything else is arguably a matter for policy and regulation rather than enforcement by competition authorities.

However, Commissioner Vestager also stated that “pricing algorithms need to be built in a way that doesn’t allow them to collude”, suggesting that they needed to be designed in a way that will oblige them to reject offers of collusion. It is unclear whether this means Commissioner Vestager intends to target the use of pricing algorithms more generally, or simply to drive home that the competition rules apply equally where collusion is achieved algorithmically.

The fourth scenario, where machine learning algorithms tacitly collude to fix prices, does sound speculative. However, recent developments such as Carnegie Mellon’s Liberatus beating four of the world’s best professional poker players (here) and Google Deep Mind’s AlphaGo victory against Lee Sedol (here) indicate that it might not be too far from becoming reality in the near future.

Collusion in the online economy – new competition law traps for the unwary?

We reported last year on the Eturas decision, in which the Court of Justice ruled that technical measures applied on an online platform gave rise to a potentially anti-competitive agreement.  The Lithuanian Court which had referred the matter to the CJEU then went on to consider liability, based on the participants’ knowledge of the relevant facts (for a review of this decision, see here).

But the risks posed by agreements over platform T&Cs are not the only thing for companies to be aware of.

The European Commission is now carrying out active enforcement in relation to geo-blocking, which can be achieved primarily through technical measures.  The Steam video games investigation is looking in particular at whether anti-piracy measures have an anti-competitive effect. 

Meanwhile, the CMA last autumn issued a statement noting another practice potentially raising antitrust concerns.  This concerned agreements restricting the use of paid online search advertising (e.g. through use of Google AdWords).  The CMA suggested that restrictions on bidding for particular ad terms, or on negative matching (identifying terms for which ads should not be shown) may infringe the competition rules.  It appears that the CMA sees this in terms of potential effects on competition, rather than as a new form of object restriction, with the CMA stating that the practices are particularly likely to be problematic “where one or more similar agreements include parties that collectively represent a material share of the relevant markets and, in the context of brand bidding restrictions, as a result of negative matching obligations in relation to brand terms which an advertiser would not negatively match but for the agreement”.   It should therefore not be assumed that such a provision would in fact be restrictive of competition – but it is something which bears watching.  Indeed, the CMA is not the only competition authority to have lighted on this issue – a similar point is under investigation in the United States, where the FTC accuses 1-800 Contacts of “orchestrating a web of anticompetitive agreements with rival online contact lens sellers that suppress competition in certain online search advertising auctions”.

In conjunction with this statement, the CMA also announced a market study into digital comparison tools; it described the study as an opportunity to explore the nature of competition between price comparison websites and their relationship with service providers.  This may lead to further issues in this area; in the meantime, judgment in the Coty case, which considers contractual prohibitions on the use of certain online sales channels, such as price comparison websites, is due from the CJEU in the near future.

And then there’s the risk of good ol’-fashioned collusion, with a modern twist.  One thing that comes to mind is the new attention on the significance of privacy conditions for consumers.  Now that these are recognised as a parameter of competition (see here, for example), is there a risk that exchanging information about planned changes to privacy conditions / other online trading T&Cs, or actually agreeing a common strategy for these could amount to a breach of Article 101 or its national equivalents?   Or that an agreement between separate companies to adopt a common practice on such terms (in particular if it results in less protection for consumers) could amount to active collusion?  These are open questions for now, but companies should remember that – while benchmarking is often sensible – they should ultimately take their own decisions, and keep their own counsel, about such matters.

Coincidentally, the consumer arm of the CMA has just closed an investigation into the online terms and conditions of cloud service providers following changes agreed by a number of companies.  The closure statement notes that “the CMA remains interested in unfair terms and conditions, particularly in the digital economy”.  It should not be assumed that this interest is limited only to the parts of the CMA responsible for enforcement of consumer laws… 

Pay-for-delay focus on steroids

At the end of last week, the CMA sent a formal statement of objections to Actavis UK and Concordia alleging that they had entered into illegal ‘pay-for-delay’ patent settlement agreements.
 
For a number of years Actavis was the sole supplier of hydrocortisone tablets used to treat conditions such as Addison’s disease that result in insufficient amounts of natural steroid hormones. Concordia was the first potential competitor to obtain a market authorisation for a generic version of the drug. The CMA alleges that Actavis incentivised Concordia not to enter the market with its generic version of the drug by agreeing a fixed supply of its drug to Concordia at a very low price for resale to customers in the UK. As a result Actavis remained the sole supplier of the drug for most of the duration of the agreements (January 2013 to June 2016), during which time the cost of the drug to the NHS rose substantially from £49 to £88 per pack. 
 
The CMA has provisionally found that the pharma companies have breached competition law by entering into anti-competitive agreements.  It has also provisionally found that Actavis abused its dominant position by inducing Concordia to delay its independent entry into the market. This case is separate from the CMA’s other continuing investigation into Actavis UK, which it announced at the end of last year.  That investigation is looking at whether Actavis UK has abused a dominant position by charging excessive prices to the NHS for the drug following a 12,000% price rise over the course of several years.  A substantial portion of that price rise took place in the period before the start of the agreements in issue in this investigation.
 
This latest development comes amidst a number of appeals regarding the application of competition law to pay-for-delay patent settlement agreements in the pharma sector.  In particular, the General Court of the EU recently upheld the European Commission’s decision fining Lundbeck and a number of generic companies in relation to patent settlement agreements (see here and here). That decision is now on appeal to the EU Court of Justice – the grounds of appeal are available here.  Separately, the CAT is currently hearing the appeal of the CMA’s infringement decision against GSK and a number of generic companies for pay-for-delay agreements (see here and here) – this hearing is listed for five weeks, continuing until the end of this month.
 
In both of these appeals a key issue is whether the competition authorities applied the correct test in finding that the pay-for-delay agreements restricted competition ‘by object’, meaning that the effects of the agreements did not need to be considered. The appellants argue that, following the EU Court of Justice’s decision in Cartes Bancaires, ‘by object’ restrictions should be interpreted restrictively.   The Lundbeck appeal to the EU Court of Justice also raises the critical issue of how the General Court dealt with the existence of Lundbeck’s patents. With this in mind, we will be keeping a close eye on the CMA’s investigation into Actavis/Concordia, particularly the legal basis for any final finding of infringement…  

Francion Brooks

Back to the future: the Commission opens e-commerce competition investigations

True to its current focus on all things digital, the European Commission has recently announced that it has launched three separate investigations into whether certain online sales practices prevent, in breach of EU antitrust rules, consumers from benefiting from cross-border choice in their purchases of consumer electronics, video games and hotel accommodation at competitive prices.

The context to the investigations is the Commission's Digital Single Market Strategy and its related sector inquiry on e-commerce, which suggested that the use of online sales restrictions were widespread throughout the EU (previous posts here and here).

The Commission is now examining whether the companies concerned are breaking EU competition rules by “unfairly restricting retail prices” or by excluding customers from certain offers because of their nationality or location (geo-blocking). 

The Commission’s rationale for the inquires is that these practices may make cross-border shopping or online shopping in general more difficult and ultimately harm consumers by preventing them from benefiting from greater choice and lower online prices.  Whether the evidence gathered from the investigations ultimately bears out this hypothesis is very much an open question. 

Whatever the wider benefits to the Commission of the sector investigation, it is questionable whether these investigations in themselves justify the full arsenal of an antitrust sector inquiry.  To judge by the press release, at least a significant part of the Commission’s concern appears to relate to classical infringements of competition law – resale price maintenance and contractual barriers to parallel trade – which merely happen to have come to light through the sector inquiry.  Time will tell whether this hypothesis is correct, or whether more specific types of online anti-competitive conduct are in fact concerned.

Amazon’s E-Books antitrust saga - War now Peace?

Amazon has offered commitments to the European Commission to end the antitrust investigation into its use of ‘most favoured nation’ (MFN or parity) clauses in its e-books contracts with publishers, launched in 2015. The Commission is now inviting comments on these proposed commitments from customers and rivals. 

The Commission’s concern is that the clauses may breach EU antitrust rules and result in reduced competition among e-book distributors and less consumer choice.

Amazon’s MFN clauses require publishers to inform Amazon about more favourable terms or conditions offered to Amazon's competitors and to offer Amazon similar terms and conditions. This includes requiring publishers to offer Amazon any new or different distribution methods or release dates, any better wholesale prices or agency commissions, or to make available a particular catalogue of e-books.

The Commission considers that the cumulative effect of these clauses is to make it harder for other e-book retailers to compete with Amazon by developing new and innovative products and services. It also takes the view that imposing these clauses on publishers may amount to an abuse of a dominant market position.

In parallel, Audible, Amazon’s audio-books subsidiary, has announced the end of its exclusivity provisions in its distribution agreement with Apple following a joint antitrust investigation by the Commission and the German competition authority, the Bundeskartellamt. 

Amazon’s proposed commitments

Amazon disputes the competition law basis for the Commission’s investigation.  Nevertheless, in order to bring the investigation to a close (and to avoid the risk of a costly infringement decision), it has offered commitments:
  • Not to enforce:
    1. any clause requiring publishers to offer Amazon similar terms and conditions as those offered to Amazon's competitors; or 
    2. any clause requiring publishers to inform Amazon about such terms and conditions. 
  • To allow publishers to terminate e-book contracts that contain a clause linking discount possibilities for e-books to the retail price of a given e-book on a competing platform. Publishers would be allowed to terminate the contracts upon 120 days' advance written notice.
  • Finally, not to include, in any new e-book agreement with publishers, any of these clauses.
The commitments would apply for five years and (as is usual for behavioural commitments) be subject to oversight by a monitoring trustee.

E-Books - déjà vu? 

This is not the first time the Commission has investigated the e-books sector. In 2011 it opened antitrust proceedings against Apple and five international publishing houses (Penguin Random House, Hachette Livres, Simon & Schuster, HarperCollins and Georg von Holtzbrinck Verlagsgruppe) on the basis that it considered that they had colluded to limit retail price competition for e-books. In that case the companies also offered commitments to address the Commission's concerns (see our previous comment).

Where does this leave MFNs?

The Commission and national competition authorities have conducted investigations into MFN clauses in a number of other sectors, including online motor insurance and online sports goods retail, on which we have previously commented.  

While MFNs are not per se unlawful, and in some circumstances may even be pro-competitive, companies should carefully consider their possible anti-competitive effects before including them in new contracts. 

FTC settles abusive acquisition of pharma licensing rights

On 18 January, the FTC announced that Mallinckrodt ARD Inc. (formerly Questcor Pharmaceuticals, Inc.) and its parent company have agreed to pay $100 million to settle FTC charges that they violated antitrust laws when Questcor acquired the rights to a drug that threatened its monopoly in the U.S. market for adrenocorticotropic hormone (ACTH) drugs.  The announcement was made concurrently with the release of the FTC's complaint.

Antitrust (as opposed to merger) cases about acquisitions of competing technology are not an everyday occurrence.  However, this complaint has something of the flavour of the EU Commission’s Tetra Pak 1 decision.  In that case, the EU Commission objected to Tetra Pak’s acquisition (through a merger) of exclusive rights to what was at the time the only viable competing technology to Tetra Pak’s dominant aseptic packaging system.  The Commission (and subsequently the EU courts) held that this would prevent competitors from entering the market and therefore amounted to an abuse of a dominant position.  

The FTC’s Mallinckrodt complaint alleges that while benefitting from an existing monopoly over the only U.S. ACTH drug, Acthar, Questcor illegally acquired the U.S. rights to develop a competing drug, Synacthen (a synthetic ACTH drug which is pharmacologically very similar to Acthar).  This acquisition stifled competition by preventing any other company from using the Synacthen assets to develop a synthetic ACTH drug, preserving Questcor’s monopoly and allowing it to maintain extremely high prices for Acthar.  

To judge by the FTC’s complaint, the case appears to contain some pretty stark facts which may have contributed to the immediate settlement of the proceedings by Mallinckrodt.  Those facts also bring the case squarely into line with the US and EU competition regulators’ current concern over excessive pricing in pharma.

First up is the finding that Questcor had a 100% share of the U.S. ACTH market and that it took advantage of that monopoly to repeatedly raise the prices of Acthar from $40 a vial in 2001 to more than $34,000 per vial today – an 85,000% increase.  The complaint details that in August 2007 Questcor increased the price of Acthar more than 1,300% overnight from $1,650 to $23,269 per vial and that it has taken significant and profitable increases on eight occasions since 2011 pushing the price up another 46% to its current $34,034 per vial.  Acthar is a speciality drug used to treat infantile spasms, a rare seizure disorder affecting infants, as well as being a drug of last resort (owing to its cost) for a variety of other serious medical conditions.  According to the FTC, Acthar treatment for an infant with infantile spasms can cost more than $100,000.  In Europe, Canada and other parts of the world doctors treat these conditions with Synacthen which is available at a fraction of the price of Acthar in the U.S. (Synacthen is not available in the U.S. as it does not have FDA approval.)  The FTC relies on the supra-competitive prices charged in the U.S. for Acthar as evidence of Questcor’s monopoly power as well as its 100% market share and the existence of substantial barriers to entry.

It is also part of the FTC’s case that Questcor disrupted the bidding process for Synacthen when the rights came up for acquisition.  According to the complaint, Questcor first sought to acquire Synacthen in 2009, and continued to monitor the competitive threat posed by Synacthen thereafter.  When the U.S. rights to Synacthen were eventually marketed in 2011, dozens of companies expressed an interest in acquiring them with three firms proceeding through several rounds of detailed negotiations.  All three firms planned to commercialise Synacthen and to use it to compete directly with Acthar including by pricing Synacthen well below Acthar.  In October 2012, Questcor submitted an offer for Synacthen and subsequently acquired the rights to Synacthen for the U.S. and thirty-five other countries and did not subsequently bring the product to market in the US.

In addition to the $100 million payout, the proposed court order requires that Questcor grant a licence to develop Synacthen to treat infantile spasms and nephrotic syndrome to a licensee approved by the FTC, a pretty far-reaching remedy.  

This case is the latest in a string of cases on both sides of the Atlantic relating to escalating pharma prices (as discussed in our previous blog posts here and here).  While companies retain significant scope to price products as they see fit, it reaffirms that pharma companies should be wary of implementing very significant price increases in the absence of good objective reasons for doing so.  This is particularly so where the increase is facilitated by commercial strategies such as acquiring IP rights to existing/potentially competitive products.  In the EU, it is also worth remembering that – as established by Tetra Pak I (on appeal to the General Court) – an agreement which falls within a block exemption can at the same time constitute an infringement of Article 102.  So companies and their advisors should remember to wear Article 101 and 102 hats when reviewing agreements.

Helen Hopson

Patent licensing and antitrust – Qualcomm in the firing line

Ten years after the European Commission opened an investigation into Qualcomm's royalties for 3G essential patents, and 8 years after it closed that investigation without any finding of infringement, the US FTC last week week (January 2017) brought a new complaint against the chipset manufacturer's patent licensing practices.

In the meantime, Qualcomm has not been long out of the competition authorities' sights, with statements of objections in the EU on exclusivity payments and predatory pricing, an infringement decision and $853m fine by the Korean FTC (the second imposed on the company by that agency) just after Christmas last year, and a settlement worth over $900m with the Chinese antitrust authorities in 2015.  It has also attracted private actions, as we reported here (Icera’s 2016 claim in the English courts) and as has been further reported in recent days (Apple’s new lawsuit in California, alleging overcharging for chips and failure to pay rebates due).

The FTC complaint focusses on three main areas*:

  • Requiring customers for its baseband processors (in which Qualcomm is said to have a dominant position for both CDMA (3G) and LTE (4G)) to take a patent licence, thus achieving elevated royalties;
  • Refusing to license its essential patents to competitors (such as Intel), contrary to Qualcomm’s FRAND commitments;
  • Exclusive dealing, notably with Apple, to cement its position in the 4G smartphone market

In combination, this conduct is said to impose a “tax” on mobile phone manufacturers, even when using non-Qualcomm processors.   The complaint also notes that licensees are passing up the opportunity to challenge whether Qualcomm’s rates are FRAND.  The FTC lists a number of reasons why Qualcomm’s licences might not be FRAND, such as the maintenance of Qualcomm’s royalty rates at a significant level despite its reduced patent share; the charging of royalties on the selling price of the whole handset, even though this includes many features not subject to Qualcomm’s patent claims; and the extraction of onerous cross-licensing terms.

But why is this occurring? – why is it that licensees do not litigate Qualcomm’s royalty demands, as they do with other significant SEP holders?  The answer lies – according to the FTC – in the cost to licensees of litigation with Qualcomm.  It argues that rational licensees will be willing to litigate if the cost of doing so appears likely to be outweighed by the prospect of reduced royalties.  In this instance, however, it is said that the cost of litigation for prospective Qualcomm licensees is usually too great: as Qualcomm’s licensees are also customers of Qualcomm’s chipsets (for which there are few – if any – substitutes), they not only have to bear the cost of the litigation itself, but also, potentially of significantly impeded market access, arising from difficulties in obtaining Qualcomm chips. 

Patent licensing, once regarded as a largely benign or even pro-competitive business model, is now at the forefront of the antitrust authorities' attention around the world.  The fact that Qualcomm’s conduct is perceived to have effects on a market as valuable and crucial to the economy as the smartphone market have served to make it a particularly attractive target for the antitrust authorities.  This is not without controversy, however: US DOJ officials have previously expressed concerns about investigations seeking to  curb royalties would be liable to affect innovation, and – as Qualcomm has emphasised – the present FTC Complaint was launched on the basis of only 2-1 agreement by the FTC commissioners, in the face of opposition from Maureen Ohlhausen.  Whatever the divergence of views, it appears inevitable that Qualcomm will continue to appear in the antitrust headlines for some time to come.

* One further area has been identified by the FTC, but is subject to protective order.  

Compulsory Licencing: the Brave New World for (non-personal) data in Europe?

The Commission has published its Data Economy Package for non-personal data*, which is the final building block of its Digital Single Market (DSM) strategy – see our previous posts on the DSM here, here; and here.

With its new package, the Commission aims to: 

  • review the rules and regulations impeding the free flow of non-personal data and present options to remove unjustified or disproportionate data location restrictions; and
  • outline legal issues regarding access to and transfer of data, data portability and liability of non-personal, machine-generated digital data.
The package includes a Consultation on Building the European Data Economy, a Communication and Staff Working Paper.

Why is the Commission acting on data?

The economic rationale is that the EU data economy was worth €272 billion in 2015, and is experiencing close to 6% growth a year.  It is estimated that it could be worth up to €643 billion by 2020, if appropriate policy and legal measures are taken. Data also forms the basis for many new technologies, such as the Internet of Things and robotics.  The Commission’s ambition is for the EU to have a single market for non-personal data, which the EU is a long way from achieving.  The Commission refers to the issues in terms of – the “free movement of data”, suggesting something akin to a fifth EU fundamental freedom. 

What action is the Commission proposing to take? 

The Consultation sets out options for addressing the legal barriers to the free flow of non-personal data, in particular in relation to:

  • data access and transfer;
  • unjustified localisation of data centres;
  • liability related to data-based products and services; and
  • data portability.
Some of the more eye-catching (and interventionist) options set out by the Commission are the introduction of:

  • legislation to define a set of non-mandatory contract rules for B2B contracts when allocating rights to access, use and re-use data;
  • creation of a sui generis data producer right for non-personal machine-generated data, with the aim of enhancing tradability; an obligation to license data generated by machines, tools or devices on fair, reasonable and non-discriminatory (FRAND) terms; and
  • technical standards to facilitate the exchange of data between different platforms.
The Consultation is also seeking evidence on whether anti-competitive practices are restricting access to data.  In particular, the Consultation refers to: the use of unfair business practices; the exploitation of bargaining power when negotiating licences; and abuses of a dominant position.  Interestingly, it also asks whether current competition law and its enforcement mechanisms sufficiently address the potentially anti-competitive behaviour of companies holding or using data.

So where are we headed?

To date, competition law has mandated the compulsory licensing of IP rights only in exceptional circumstances, where the owner has a dominant position and there are no alternatives to the technology.  The Commission is now considering a range of regulatory options, of which the most interventionist could require access to be granted to non-personal data in a far wider range of contexts (albeit without any proposal to amend the existing database right and the new Trade Secrets Directive). These issues are likely to be of considerable concern for any company holding large amounts of non-personal data.  The Consultation runs until 26 April 2017. 


* Non-personal data includes personal data, where it has been anonymised

European Commission publishes two new studies on the interplay between patents and standards

In December 2016, the European Commission published two new studies on standard essential patents (SEPs).  As regular readers of this blog will know, SEPs protect technologies that are essential to standards such as 4G (LTE) and Wi-Fi, which rely on hundreds of patented technologies to function effectively.  For the same reason, SEPs will be crucial to 5G and the nascent “Internet of Things”.

The two studies form part of the Commission’s project to improve the existing IPR framework and to ensure easy and fair access to SEPs.  The specific aims of the Commission’s project were outlined in its April 2016 Communication “ICT Standardisation: Priorities for the Digital Single Market”, which we commented on here.

The first new study, titled “Transparency, Predictability and Efficiency of SSO-based Standardization and SEP Licensing”, and prepared by economics consultancy Charles River Associates (CRA), examines a number of issues relating to the standardisation process and SEP licensing.  Building on a previous 2014 report on patents and standards, and on the responses to a 2015 public consultation, the authors outline what they see as the main “problems which have real significance and impact ‘on the ground’”.  They then go on to consider a number of specific policy options which might help alleviate those problems.  Particular focus is placed on “practical and readily implementable solutions” which would, according to the authors, enhance the transparency of the standardisation process and reduce the transaction costs of SEP licensing.

One of the CRA study’s most notable – and doubtless controversial – proposals is the imposition of a ceiling on the aggregate royalty for a given standard.  The authors suggest that a commitment by SEP holders to observe a maximum total royalty burden would go a long way to tackling the problems of patent hold-up and royalty-stacking*.  While the study recognises that there would be a number of difficulties in implementing such an approach, it arguably underestimates the challenges.  The first problem would be determination of the aggregate royalty level.  Assuming that can be overcome, allocation of total royalties between SEP holders would be a formidable challenge, even for a ‘static’ standard.  The landscape here is far from static, however.  Not only do SEPs change hands regularly (as the second report by IPlytics emphasises), but telecoms standards themselves evolve, through the addition of new releases which improve on or supplement existing technologies.  When you throw into the mix the lack of public information about licence fees charged across the industry (something which the authors also have in their sights**), and the multiplicity of methods for comparing the relative values of SEP portfolios, it is difficult to see how such a system would work in practice – except, perhaps, as very general guidance.

The CRA study goes on to emphasise the importance of preserving flexibility on issues such as the appropriate royalty base and the level of the value chain at which SEP licensing should occur.  In the authors’ opinion, economic analysis of these issues suggests there is no appropriate one-size-fits-all solution.  This stands in contrast to the conclusion on royalty-stacking, where greater control is advocated.

The second new report, prepared by the Berlin-based data analytics company IPlytics, uses a dataset of over 200,000 SEPs to paint a more quantitative portrait of the SEP landscape.  It provides detailed empirical evidence on a number of issues, including:

  • Technology trends – The report shows that most declared SEPs relate to communication technologies, followed by audio-visual and computer technologies.  More than 70% of all SEPs are declared as essential to ETSI.
  • Regional trends – The proportion of SEPs filed at the Korean and Chinese patent offices has increased in recent years (particularly in the telecommunications sector), reflecting the growing importance of Asian markets in the global economy.
  • SEP transfers – More than 12% of all SEPs have been transferred at least once.  The study reveals that the top sellers of SEPs are Motorola, Nokia, Ericsson, InterDigital and Panasonic.  The most active buyers include Qualcomm, Intel and – perhaps surprisingly, given its recent suit alleging that Nokia evaded FRAND by transferring patents to two PAEs – Apple.  
  • Comparison with non-SEPs – A comparison with a control group of patents which have not been declared as standard essential suggests that SEPs are more frequently transferred, litigated, renewed and cited as prior art than non-SEPs.  This implies that SEPs are generally more valuable than non-SEPs, but the study refrains from considering whether the technology protected by SEPs is intrinsically more valuable than that protected by non-SEPs, or whether the higher value of SEPs is merely a product of their incorporation into a standard.

One striking feature of both studies is their attempt to grapple with the thorny issue of ‘over-declaration’.  The authors of the CRA study point to research showing that, when tested rigorously, only between 10 and 50 per cent of declared SEPs turn out to be actually essential.  Both studies propose some form of independent essentiality testing to address the problem.  The CRA study claims that random testing of a sample of each SEP holder’s portfolio would provide useful information about how royalty payments should be allocated between SEP holders; and that the benefits of such testing would be especially pronounced when combined with the imposition of an appropriate ceiling on the total royalty stack.  According to the IPlytics report, patent offices have the requisite technical competence and industry recognition to perform essentiality testing at a reasonable cost.

To conclude, the two studies provide a reminder – if any were needed – that issues relating to the standardisation process and SEP licensing remain high on the Commission’s agenda.  The Commission says it intends to draw fully on the studies’ findings when assessing the interplay between patents and standards in the EU Single Market.  However, whether the Commission will embrace any of the practical solutions proposed by the studies remains to be seen.

* As mentioned in this December 2015 blog post, royalty-stacking refers to the situation where the royalties independently demanded by multiple SEP holders do not account for the presence of other SEPs, potentially resulting in excessively high total royalty burdens for implementers.

** See pages 71 and 85 of the CRA study.

A decision of Paramount importance to independent film financing…?

In the latest instalment of the pay-TV saga, the French pay-TV operator Canal Plus has asked EU judges to overturn a commitments decision agreed earlier this year between Paramount and the European Commission.  Those commitments (on which we reported here) ended Paramount’s involvement in the Commission’s antitrust investigation into the distribution arrangements between Sky UK and the six Hollywood film Studios, with no infringement finding or fine. 

The Commission’s investigation into Disney, NBCUniversal, Twentieth Century Fox and Warner Bros remains ongoing.  In the background is the Commission’s Digital Single Market Strategy which aims to break down barriers preventing cross-border E-commerce.

What has been agreed with Paramount? 

Paramount has agreed to remove restrictions on customers trying to access content from another EU country.  In practice, this means it will no longer insert “geoblocking” obligations in its licensing contracts with EU broadcasters. 

As we previously commented, the Commission considered that the Studios bilaterally agreed restrictions with Sky UK that prevented it from both making active sales in to other EU territories and from accepting passive sales requests. 

These restrictions effectively granted Sky UK ‘absolute territorial exclusivity’ in the UK and Ireland, eliminating cross-border competition between Sky and other pay-TV broadcasters in other Member States.

Why is Canal Plus appealing?

Canal Plus wants the General Court to annul the Paramount settlement, as – in common with other EU broadcasters – it considers that the terms agreed with the Commission risk undermining the EU system of film financing which relies on broadcasters being able to use different pricing and release strategies for different EU counties.  

The appeal seems likely to face an uphill struggle; the General Court has only recently underlined the high hurdle for a successful appeal against a commitments decision in its Morningstar judgment.  Nevertheless, the Commission appears to be seeking to understand (or at least to address) this issue – it is understood to have requested further information from Sky and the remaining Hollywood Studios about the potential impact of a decision on the financing of independent films. 

Last thoughts 

Sky has also been in the news of late in relation to the recent bid by Twentieth Century Fox for the 61% of Sky that it does not already own.  If cleared, Sky’s future distribution arrangements with the film arm of Twentieth Century Fox are likely to fall outside of any future competition remedy imposed by the Commission in the Hollywood Studios investigation. Once their production and distribution businesses are vertically integrated, the rules on anti-competitive agreements will no longer apply, as there will no longer be any agreement between separate undertakings. 

Case T-873/16 Groupe Canal + v Commission