The NHS opens up to increased competition

From today the NHS is likely to significantly increase the number of contracts it advertises for external competition, as it will now be required to comply with the general EU procurement regime rather than relying on a temporary exemption for healthcare services. 

For the first time, the NHS will be under a statutory obligation to advertise their healthcare services contracts. 

This is a significant change to the UK healthcare landscape, and as many readers of The CLIP Board provide services to the NHS, we thought this a development worth bringing to your attention. 
 
What happens after 18 April 2016?

The NHS’s procurement of healthcare services has, until today, been regulated by the Procurement, Patient Choice and Competition Regulations (No. 2) 2013. 

From 18 April 2016, contracts for healthcare services above €750,000 (£589,148) must be awarded in line with the Public Contracts Regulations 2015 using the “light touch regime” for social services. 

This “light touch regime” requires:
publication of a contract notice in the OJEU; and
an award procedure which complies with the EU principles of non-discrimination and equal treatment.

What does this mean?

From today we anticipate that more NHS contracts will be put out to tender than before and NHS commissioners should reflect carefully on the legal risks of not competitively procuring health services. This change presents increased opportunities for private players and healthcare charities to win business with the NHS and public health services. 

However, this change is likely be accompanied by increasing political controversy, given the contentious debate around the healthcare procurement aspects of the Transatlantic Trade and Investment Partnership.

The government has published a guidance note on the new procurement regime and we are very happy to discuss these changes in greater detail with clients. 

A relatively rare beast: CMA clearance of a pharmaceutical sector merger

The Competition and Markets Authority (CMA) has announced that it has decided not to refer the acquisition by LEO Pharma of certain dermatological products belonging to Astellas Pharma for an in-depth Phase 2 merger inquiry. The CMA concluded that the merger was unlikely to result in a substantial lessening of competition, on the basis that the companies’ products were not sufficiently close substitutes.  

There have been few recent national merger decisions in the UK in relation to the pharmaceutical sector, as many such transactions are caught by the significantly higher EU merger thresholds. Interestingly, in the other recent case, McKesson/UDG Healthcare, the EU referred the UK aspects of the proposed transaction back to the CMA to review.   

Who did the case involve?

LEO Pharma is a Danish pharma company that develops and sells dermatological products. Astellas Pharma is a Japanese pharmaceutical company that develops cancer, immunology, and dermatology products. Both companies are active on the UK market.

Why was the CMA concerned? 

The CMA took the view that a ‘relevant merger’ situation had arisen as the ‘share of supply’ test was satisfied, due to the parties' combined shares of supply of non-steroidal products for inflammatory skin disorders. As is commonly done in merger cases at EU level, it took level 3 of the of the Anatomical Therapeutic Chemical classification as its starting point for this consideration (category D5X).

What did the CMA find? 

The CMA found that, in relation to dermatological products, Leo and Astellas’s products are not the closest alternatives to each other. In relation to the supply of products in the D5X category, the parties' products are not close substitutes as they are used to treat different skin conditions. It also found that the market would remain competitive post-merger, as there will remain several competitors to constrain the merged entity. 

In relation to hydrocortisone products, the CMA found that the increment in the combined share of supply post-merger would be very small (less than 5%). The CMA also found that the parties' products are not close substitutes and that there will again remain several competitors post-merger to constrain the merged entity. 

In relation to topical psoriasis products, again the increment in the combined share of supply post-merger is very small (less than 5%), indicating that the competitive impact of the merger will very limited; and as regards the supply of topical eczema products, the parties' respective products do not compete closely and there will remain several competitors post-merger.

What does this case tell us?

This case demonstrates the importance of contesting Phase I merger reviews as there is often a reasonable prospect of a clearance decision without a referral to Phase II.

International spring cleaning: time to review those IPR guidelines…

A number of national competition agencies have recently been reviewing their IPR guidelines giving rise to some interesting trends and developments…  

On 31 March 2016 the Canadian Competition Bureau released updated IPR Enforcement Guidelines (the “Canadian IPR Guidelines”) (see here for a press release and here for the Enforcement Guidelines themselves). The main revisions to the Canadian IPR Guidelines focus on the Bureau’s position on patent settlements and product switching in the pharma sector as well as the conduct of patent assertion entities and conduct involving SEP owners.
  
This followed hot on the heels of an announcement by the Korea Trade Commission (“KFTC”) on 30 March 2016 that the Guidelines regarding the Unfair Exercise of Intellectual Property Rights (“the Korean IPR Guidelines”), which have recently been amended, became effective on 23 March 2016 (the revised Guidelines do not yet appear to be publically available in English at least).  The primary purpose of the Korean IPR Guidelines is to provide a framework for the KFTC to regulate abuse of IPRs by holders of SEPs (including in particular NPEs).   The Korean IPR Guidelines were previously amended in December 2014.  The most interesting changes at that time included de facto SEPs being included within the definition of SEPs, and the introduction of examples of abusive or unreasonable acts, including the filing for injunctive relief against willing licensees by an SEP holder that has committed to grant a license on fair reasonable and non-discriminatory (FRAND) terms.  

The most notable changes to the Korean IPR Guidelines this time around are:

  1. carving out de facto SEPs from the IPR Guidelines (stakeholders argued that the previous change to include them led to over-regulation of the exercise of IPRs); 
  2. removing the reference to the choice of governing law and dispute resolution mechanism which is unilaterally unfavourable to one party as a factor in determining whether an exercise of patent rights in unfair; and 
  3. including a standard for determining unfair refusals to license which focuses on the intent of the SEP holder, the surrounding economic circumstances and the effects of the refusal to license.
Similar developments have taken place not that far from South Korea, with China also drafting IPR Guidelines.  China’s top antitrust authority, the Anti-monopoly Commission (“AMC”) of the State Council has instructed four Chinese antitrust enforcement agencies: the National Development and Reform Commission (“NDRC”); the State Administration of Industry and Commerce (“SAIC”); the Ministry of Commerce (“MOFCOM”); and the State Intellectual Property Office (“SIPO”) to draft antitrust guidelines on IPRs.  It has reported that these agencies are finalizing their respective drafts and that they were due to submit them to the AMC by the end of March 2016.  The AMC coordinates antitrust policies in China, so it will be responsible for consolidating the drafts and issuing an integrated policy.  

The purpose of the Chinese Guidelines will be to provide guidance on when the enforcement of IPRs, and in particular patents, would contravene China’s Antimonopoly law.  China’s IPR Policy is still very much under development. However, these latest developments correlate with a growing international view that the Chinese antitrust authorities are increasingly treating IPR as an enforcement priority (although I think it is still agreed that China has some way to go before it becomes a major jurisdiction for the enforcement of IPR).  One recent example from 2014 was the Chinese Authorities’ investigation into Qualcomm for anticompetitive conduct involving its licensing of 4G SEPs (see our previous blog post here).

It is unsurprising that telecoms and pharma both come under the spotlight in all these new IPR Guidelines given the competition law issues afoot globally in both sectors. The EU Commission’s TTBE Guidelines were also updated in 2014 to include new sections relevant to pharma and telecoms (see our previous blog post here).  It is also interesting to see such a detailed approach to IP and antitrust issues being taken in other jurisdictions and that these new Guidelines are in places going further than their EU counterparts, for example in their discussion of PAEs/NPEs, SEPs and injunctions and refusal to license IPRs. 

Competition law no bar to patent licence royalties

Advocate General Wathelet has delivered a significant Opinion on the relationship between Article 101(1) and patent licences. This arose from a disputed arbitration award between Genentech and Sanofi-Aventis, and followed a reference to the Court of Justice of the European Union (CJEU), from the Paris Court of Appeal. 

The AG noted that Article 101(1) is not there to protect the efficacy of commercial arrangements, and will be engaged only where an agreement between undertakings has the object or effect of restricting or preventing competition and affects trade between member states. 

What was the case about? 

The original arbitration concerned a dispute over unpaid royalty payments under a patent licence where one of the underlying patents had been revoked. The arbitrator found that the licensee should continue to pay royalties, notwithstanding the revocation of the patent. This was on basis that the licensee had entered into the licence to enable it to use the relevant technology without the risk of litigation. The licensee contested the award. The French Court of Appeal referred various questions to the CJEU including whether paying royalties for a revoked patent had put the company at a competitive disadvantage to competitors who had not been required to pay for the technology and therefore infringed Article 101(1).

What about Article 101 and Patent royalties?

Wathelet commended the reasoning in Ottung (1989 CJEU) that an obligation to pay royalties in a licensing agreement after patent expiry “may infringe Article 101(1) TFEU where the licence agreement either does not grant the licensee the right to terminate the agreement by giving reasonable notice, or seeks to restrict the licensee’s freedom of action after termination.” 

Applying that approach, Wathelet considered that there was no infringement of Article 101(1) here, as Genentech was freely able to terminate the agreement with a “very short” notice period of two months, and its “freedom of action was not restricted in any way during the period after termination, and it was not subject to any clause preventing it from challenging the validity or infringement of the patents at issue”. He also observed that the licence contained no restrictions on the licensee’s ability to set prices or conduct research.

The AG therefore held that Article 101(1) was not engaged and that Genentech should pay Hoechst EUR 110 million in back royalties even though a licensed patent had been revoked. In the circumstances:  “the mere use of the technology at issue during the term of the licence agreement was sufficient to trigger the obligation to pay”. 

The position taken by the Advocate-General reflects the views set out in the Technology Transfer Guidelines (paragraph 184) which regards royalty arrangements in technology licences as generally outside the scope of Article 101 and falling into the realm of commercial negotiation.
 
Arbitration disputes and Article 101? 

The AG also confirmed that competition issues arising in the context of arbitrations can always be referred by national courts to the CJEU. 

He gave short shrift to arguments that dealing with Article 101(1) issues through the  preliminary ruling process would infringe French law. It had been argued that French law prevented international arbitration awards being subject to judicial review, save in circumstances where there has been a flagrant infringement of international public policy. 

The AG considered that the CJEU was bound to give a preliminary ruling upon request by a national court, unless the request related to a fictitious dispute, or was on general or hypothetical questions, where the questions to the CJEU bore no relation to the facts.

So where does the case leave patentees?

This case is important for many patent owners and licensees, as it clarifies that Article 101(1) is not a bar to enforcing a licensing agreement and receiving royalties even when a licensed patent has been declared invalid (or, by implication, expired). 

This is in direct contrast to the US Supreme Court’s decision in Kimble v Marvel of June 2015, which confirmed that a patent holder cannot charge royalties for the use of his invention in the US after its patent term has expired. 

It will be interesting to see the CJEU’s final decision, as AG opinions are only persuasive (but in practice usually followed).

Genentech Inc. v Hoechst GmbH, formerly Hoechst AG, Sanofi-Aventis Deutschland GmbH (Case C-567/14).

Digital Single Market – geo-blocking of digital content

The Competition Commissioner, Margrethe Vestager, has today published her initial findings on geo-blocking, as part of the ongoing e-commerce sector inquiry. The inquiry, which was launched in May 2015, forms part of the Commission-wide digital single market initiative (see our previous posts here, here and here).
The Commission has found that geo-blocking is widespread in the EU, particularly for digital content. Geo-blocking is a technical practice which prevents consumers from accessing online content based upon residence.  Technical restrictions which prevent consumers from purchasing goods from other countries are considered alongside content restrictions in this report.  The fact sheet, and accompanying press release, provide significant insight as to how EU competition law may apply to such practices.

First, the Commission recognises that unilateral business decisions not to sell into different territories, when made by a non-dominant company, do not raise competition law issues. However, the Commission fails to comment on whether unilateral geo-blocking by dominant companies could be anticompetitive, leaving the door open for future enforcement… 

Second, the Commission reiterates its concern that geo-blocking linked to agreements between suppliers and distributors may be anticompetitive. The Commission found that 12% of retailers and 59% of digital content providers face contractual restrictions to geo-block.  Vestager indicates that DG Competition will be taking a closer look at these arrangements.  She accepts that there may be legitimate reasons to geo-block but plans to address ‘unjustified barriers’ (without indicating what they might be).  

Looking ahead, it will be interesting to see how Vestager’s findings fit in with the broader digital single market initiative. Particularly in relation to digital content, and in the context of the Commission’s ongoing Hollywood Studios Investigation, little headway can be made without reform of copyright law – there have already been a number of legislative proposals in that area, with further proposals due in May. 

Vestager today promised that the Preliminary Report in the e-commerce sector inquiry is on the horizon, due to be published in mid-2016. In the meantime, we will be assimilating the full report, and picking up on points of interest.  So watch this space…

Francion Brooks

Germany’s competition probe into Facebook’s T&Cs, precedent or outlier?

The German Competition Authority (BKA) has opened an investigation into Facebook “on suspicion of having abused its market power by infringing data protection rules”.   

The BKA’s press release indicates it is taking an expansive view of its competition law powers, “There is an initial suspicion that Facebook's conditions of use are in violation of data protection provisions. Not every law infringement on the part of a dominant company is also relevant under competition law. However, in the case in question Facebook’s use of unlawful terms and conditions could represent an abusive imposition of unfair conditions on users”.

This attempt to use competition law, in order regulate privacy, appears to put the BKA in conflict with the European Commission’s position: that it that it has not yet found competition problems in relation to ‘big data’ and that of the Court of Justice of the European Union: “any possible issues relating to the sensitivity of personal data are not, as such, a matter for competition law”. 

The BKA is also tacking in a different direction to the UK’s Competition and Markets Authority (CMA), which regards potentially unfair terms and conditions as a matter for enforcement under EU rules on unfair contractual terms, rather than competition law. 

It is too soon to tell whether the BKA’s interventionist approach to data protection will be followed by other national competition authorities. Here at the CLIP Board we suggest this is unlikely, rather the BKA’s investigation may be better seen in the context of German’s troubled historical relationship to personal information. However, we do anticipate increased competition scrutiny of potential foreclosure concerns in relation to dominant platforms and access to proprietary data. 

A week of Standard Setting Conferences – Part II, the London Leg

Following up on Sophie’s recent blog, it was my pleasure to be the Bristows’ attendee at the second of this week’s FRAND/standardisation conferences, along with IP partner Alan Johnson. The conference, organised by the Competition Law Forum, was well attended with a high quality panel of speakers. Among the attendees, it was very good to catch up with a couple of Bristows alumni, including David George, until recently a prolific CLIP Board blogger and now at the CAT as a referendaire – perhaps we’ll be able to persuade him to contribute a few guest blogs in future. 

On substance, as with the LCII conference on Monday, there was quite a bit of debate about the implications of recent judicial and SSO pronouncements for hold-up theories as well as the usual disagreement about where innovation in markets reliant on standardised technology really takes place and how best to incentivise it. 

An interesting point made by a couple of people was the need to recognise that those engaged in innovation through the standardisation process, and those who use standardised technology and innovate in other ways to develop products that will attract users, rely on each other to make money. Often a company will innovate in both fields, sometimes contributions are more in one aspect of innovation than the other, but the commercial success of the technology and the resultant financial rewards depend on efforts in both fields. 

On hold-up and hold-out, a number of the usual arguments were articulated. In summary, some argued that hold-up had always been theoretical, with no empirical evidence to show it had ever been a practical problem, and that following the Judgment in Huawei v ZTE (see our earlier posts here and here) it was no longer possible at all. As on Monday, however, others were not so sure. 

Those who saw remaining hold-up concerns pointed to distinctions between the clear obligations imposed on those who gave FRAND declarations under the new IEEE IP policy (no injunctions unless an implementer refuses to accept a third party adjudicated rate) described here and the less certain position under Huawei v ZTE which focuses on procedure and imposes obligations on both parties.
  
The basic approach under Huawei v ZTE was not widely criticised, but it was noted that a number of aspects of the procedure provided in the CJEU judgment were not entirely clear, leaving scope for debate and uncertainty about when the procedural requirements had been fulfilled. Given the possibility of different approaches by the courts in different member states when interpreting those requirements, some risk of injunction was still argued to exist (even for a party which had sought to comply with the CJEU’s process) implying that risks of hold up continued in the absence of some clear boundary - as under the IEEE policy. Others felt that the ability to seek an injunction was a basic right, that a threat to seek an injunction was not an abuse and that there was no need for ‘unnecessary and revolutionary changes’ such as those in the new IEEE IP policy. Such views underpinned challenges to the adoption of the policy as described here

As is almost always the case at such conferences, following recent case law in the US (see here and here) and the adoption of the IEEE policy, the linked questions of the place in the value chain at which licensing should/must take place (component manufacturer or end device manufacturer) and the appropriate royalty base (end device or smallest saleable patent practising unit (“SSPPU”) were hotly debated. Recent US cases were discussed and some expressed scepticism about importing the SSPPU concept to Europe – although the Commission’s Rambus settlement was mentioned as an example of an approach of that type. Commissioner Vestager’s comments (reported here) on the need to offer licences to all comers were also discussed. 

It was noted that a reason that these questions are so hotly contested is because they go to the fundamental question (mentioned above) of how great a share of the profits from the success of a standardised system should go to those who develop the underlying standardised technology and how great a share should go to those who design and manufacture products which consumers want to buy and to continue buying/upgrading. Not surprisingly, no resolution was reached. As ever, and as noted by Sophie in her comments on Monday’s conference, identifying what is FRAND when granting or taking a licence remains a difficult question - and central to all these debates. 

The economists present appeared to agree, broadly, with the Commission’s position in the horizontal guidelines that, while incentives to innovate should not be undermined, nevertheless in principle patented innovations incorporated in a standard should not be rewarded in a way which captures value beyond the value of the particular innovation. The economists present also appeared to agree that this was a difficult approach to apply in practice! Regular readers of this blog will recall that the recently created Fair Standards Alliance enshrines this as one of its key principles for FRAND licensing (see here). 

Finally, one company (and as this was a conference under Chatham house rules, I can’t reveal which one!) introduced an initiative to try and resolve some of the problems of SEP licensing in the forthcoming Internet of Things by creating a multiparty licensing platform to reduce transaction costs when licensing standardised technology. Guidance on the competition law treatment of patent pools can be found in the Technology Transfer Guidelines as discussed briefly here, and such initiatives have been tried in the past (including for 3G, where a pool arrangement was approved by DG Comp, when such things were still possible). It will be interesting to see how this one fares and we shall be looking out for more information…

Pat Treacy

A week of standard setting conferences - part 1: FRAND, hold-up and other mythical creatures

The context for the first of two standards-related conferences this week was the launch of the Liege Competition and innovation Institute (or LC2I to its friends). Perhaps unsurprisingly, given the sponsor, the day had something of a pro-licensor flavour, even though recent legal developments, at least in the US (see here)), have been rather more pro-implementer.

The majority of panellists seemed to consider the concept of "hold-up" - the idea that SEP holders can extract over-compensation for their rights by virtue of their inclusion in an industry standard - to be something of a mythical beast, that one can describe, but never actually encounter.  But agreement was not absolute.  Renate Hesse of the United States Department of Justice emphasised that an understanding of FRAND was necessarily founded on the potential for hold-up, even if empirical data tends to suggest that, on the whole, the industry is not in fact being 'held up'. Coming at the matter from a different angle, Professor Larouche (University of Tilburg) also noted the missing theory of harm from last year's Huawei judgment (something that was also discussed at the time, including on this blog) and pointed out that it is not only potential exclusion which can harm competition, but also exploitation, in the form of overly high royalties.  This is surely correct: however rare (or frequent) such "over-priced" licences are in practice, the FRAND concept surely implies a measure of restraint in royalty demands and is not limited, as one of the panellists suggested, to being a purely qualitative / procedural concept.

If anything, it was FRAND itself which was the "unicorn in the room": the focus of the FRAND debate has shifted over the past few years away from the question of what FRAND means, in terms of value, to more tractable - albeit still highly controversial - issues.  I would expect this trend to continue. With most SSO IPR policy reviews now having completed without consensus for change (or, in the IEEE's case, with change imposed despite the lack of consensus), the most likely focus now seems to be on measures to improve declaration processes, and to reduce possible over-declaration.  This may prove a more fertile ground for agreement, although aligning incentives, legality and cost-effectiveness is unlikely to be straightforward. 

In the meantime, we look forward to part 2 of the week of standards conferences at the BIICL this Wednesday

Standards, standards everywhere

Two conferences take place this week on the ever-hot topic of standards, SEPs and FRAND licensing - today in Brussels, courtesy of the Liege Competition and Innovation Institute, and on Wednesday in London, hosted by the BIICL.  

We are attending both conferences, and will endeavour to note points of interest here on the CLIP Board.  

By way of warm-up, the American National Standards Institute (ANSI) last week denied a final challenge to the IEEE's latest version of its IPR Policy.  That policy was introduced last year, amid significant controversy.  The imposition of limitations on licensors' rights to obtain injunctive relief as well as the indication that royalties should be paid on the basis of the smallest saleable functionality which uses the patented technology were both the subject of fierce dissent, as we reported here.

Following the failure of the challenge to the DOJ's decision to approve the IEEE's new policy, a further challenge was brought, this time to the accreditation of the IEEE.  This further action was led by Alcatel-Lucent, Qualcomm and Ericsson, and was supported by a number of other IP rich companies.  By contrast, net licensees, such as Cisco, supported the IEEE's new policy. 

While there appears to be little scope now for further challenge to the IEEE's policy, the tug-of-war between licensor and licensee positions remains an important dynamic in SEP licensing.  We expect the fireworks to continue during both conferences this week.

New technology and competition law – mapping the way

In a recent judgment, the High Court recognised that the rapid development of new products and services online presents challenges for competition law, making clear that we must have regard to the “particular characteristics” of this new online environment. The Court went on to rule in favour of Google in this abuse of dominance claim.

The claim related to the introduction of a Google Map at the top of Google’s search results page in response to certain search queries. Following his initial cautionary comments regarding new technologies, the specialist competition judge, Mr Justice Roth, went on to rule that, on the assumption that Google held a dominant position, it had not committed an abuse. He also held that Google's conduct was in any event objectively justified as it had advantages that benefitted consumers and was a proportionate way of making those advantages available to consumers. 

This important judgment offers some comfort for those working in the area, showing that the courts will grapple with the complexities of online markets when making important rulings like this one. There has been extensive commentary on the implications of the judgment including over on the Chillin’ Competition blog (here and here), and courtesy of Monckton Chambers, here.

Another interesting point in this case, was the Court’s use of a ‘new technology’. At trial, ‘hot-tubbing’ was used for the first time in a competition claim. This involved both parties’ economic experts giving evidence at the same time (rather than consecutively) and being questioned directly by the judge, with only a small window of opportunity for the barristers to ask further questions. This proved useful in narrowing down the issues and facilitating genuine debate between the experts – it remains to be seen whether a precedent has been set for future trials. 

Finally, and in the interests of full disclosure, we should mention that Bristows represented Google in this case and needless to say, we are delighted with the outcome!