Algorithmic agony? The perils of platform T&Cs

The rise of machine learning gives rise to knotty legal problems, whether these relate to how the law applies to robots and artificial intelligence*, or to algorithms which may be designed by humans, but then continue to run and 'evolve' automatically. For competition lawyers, a current topic of debate is whether machines are capable of collusion in a way which engages (or, potentially, evades) antitrust liability (see, for example, Ariel Ezrachi and Maurice Stucke's 2015 article "Artificial Intelligence and Collusion: When computers inhibit competition".

It is likely to be some time before there is anything like a definitive answer to such questions.  However, a recent Court of Justice ruling has something of this flavour, and is an important judgment for companies doing business online. 

Eturas, the case in question, concerned a platform which was used by travel agents wishing to have an online presence without the need to develop their own website. The CJEU has now endorsed the view of the Advocate General (on which we reported last year) that an anti-competitive agreement is capable of arising between members of a platform an its administrator when platform terms and conditions are updated.  This is so even if those companies had no direct knowledge of the acts of the other platform members, nor any direct contact with them - rather like the 'hub and spoke' type agreements identified between suppliers and separate distributors in a number of old OFT cases. 

The update in question in this case concerned the introduction of a cap on discounts which could be offered by platform members. Because an agreement which limits independent companies' ability to offer discounts on their separate (but competing) commercial offerings clearly infringes Article 101(1), the questions referred to the Court of Justice focussed on whether an agreement or concerted practice could be said to exist in circumstances where the participating companies had not given their express approval for the change in the T&Cs. The Court treated this as a question of the standard of proof: if the travel agents were aware of the administrator's message they may be presumed to have participated in an unlawful concerted practice unless they have publicly distanced themselves from the change, or have taken other steps sufficient to rebut the presumption of agreement.  

Much of this will be a matter for national law, subject to – on the one hand – the presumption of innocence and, on the other, the principle of effectiveness which must be observed by national legal systems when applying Treaty provisions. However, the Court made clear that national courts should not require that "excessive or unrealistic" steps be taken by companies to distance themselves from such an infringement.  Equally important is the response to the question of whether companies "ought to have been aware" of the infringement. The judgment (taking a slightly narrower approach than that suggested by the Advocate General) requires actual awareness for an infringement to be established, albeit that it may be possible, as a matter of evidence, to infer this from particular indicia which are suggestive of such awareness.  

All in all, the Court has taken a relatively cautious approach.  While the floodgates to liability have not been opened, there will no doubt be more such cases in future. In this case, the change to the T&Cs was sent by direct email to the platform members, but in principle an automated change could engage the same issues.  To avoid being one of those future cases, careful consideration should be given to the scope for excluding such liability in contractual terms agreed with platform providers and, in particular, how such relationships are managed at an operational level. It will not necessarily be the case that personnel who normally deal with such matters will have the relevant awareness of the competition rules, so appropriate training and/or supervision may need to be provided.


* Bristows colleagues Chris Holder and Vikram Khurana give a video introduction to the main legal issues and challenges presented by the rise of robotics and automation over on our sister blog, the Cookie Jar.

CMA’s mood boosted over fines for anti-depressant

The CMA has fined a number of pharmaceutical companies, including GSK, for anti-competitive conduct and agreements in relation to the supply of anti-depressant drug paroxetine (albeit not as quickly as it originally intended to do, as we reported in our blog post here).

GSK had settled litigation with several generic drug companies following allegations that the generic products would infringe GSK’s patents. The settlement terms included cash payments as well as an effective transfer of profit margins by permitting the supply of limited volumes of product to the market in place of GSK. The CMA found that these terms prevented the generic companies from entering the paroxetine market and deprived the NHS of price falls averaging 70%.

This is the first UK decision to consider the application of competition law to patent settlement agreements, and only the second such decision (following Servier) to include an abuse of dominance allegation alongside the Article 101/Chapter I infringement.  The timing is noteworthy – appeals in Lundbeck, the first Commission patent settlement decision, were heard a few months back, and the judgment must be due later this year. Having taken considerably longer than anticipated to reach the decision, the CMA has been left with a difficult choice of waiting for the General Court decision, knowing it would mean further delay but a possibly more robust legal basis for their own infringement finding, or pressing ahead, with the risk that any significant set-back for the Commission at European level could have an impact on how appeal-proof the CMA’s own decision is.

As yet, the text of the CMA’s decision has not been issued, but we may perhaps expect an approach which is somewhat different to the Commission’s, to hedge against these uncertainties.

The total fine by the CMA was just shy of £50 million, which included a fine of £37.6 million against GSK alone. The CMA clearly remains intent upon tackling abuses of competition law which impact the public purse.  More significant for GSK and the other pharmaceutical companies involved is likely to be the potential level of follow-on damages.  The Department of Health is highly likely to make a claim, and other generic companies may well also follow the pattern established with the claims that followed the OFT’s abuse finding in relation to Reckitt Benckiser’s withdrawal of Gaviscon (see here).

Sophie Lawrance and Robert Fett

The Commission’s consultation on the IP Enforcement Directive – a competition as well as an IP issue

In December 2015, the European Commission launched a public consultation on whether Directive 2004/48/EC on the enforcement of intellectual property rights (the Enforcement Directive) is still fit for purpose.  The Commission is seeking input from a wide range of stakeholders – IP owners; the judiciary and legal profession; intermediaries such as internet service providers and social media platforms; public authorities; and consumers and civil society – about their experiences of enforcing IP rights in the EU.  According to the Commission, this input is intended to support its assessment of the current legal framework governing the enforcement of IP rights and the potential need for amendments to the Enforcement Directive.  The consultation consists of five different questionnaires for the different stakeholder groups, and will end on 15 April 2016.

Origins of the consultation

The consultation stems from the Commission’s Digital Single Market and Single Market strategies, on which we have written previously (see e.g. here and here).  The Commission sees modernisation of IP enforcement as an important element of these strategies.  It has shown particular interest in adopting a ‘follow-the-money’ approach to IP enforcement, which seeks to deprive commercial-scale infringers of the revenue that draws them into such activities (rather than penalising citizens who often infringe IP rights unknowingly).  As the Commission puts it on the ‘Enforcement of intellectual property rights’ page of its website: “An efficient and effectively enforced intellectual property infrastructure is necessary to ensure the stimulation of investment in innovation and to avoid commercial-scale [IPR] infringements that result in economic harm”.  It is also focusing on the cross-border applicability of IP enforcement, suggesting that a “comprehensive enforcement policy is required to successfully combat these infringements at EU and national level, especially given the borderless nature of the internet”.

But why are competition lawyers interested in all this?

The primary purpose of the Enforcement Directive, as originally conceived in 2004, was to require all EU countries to apply equivalent sets of measures to enable IP owners to enforce their rights effectively.  Of particular relevance from a competition law perspective, however, is its further aim of preventing the abusive or disproportionate exercise of IP rights.  Recital 12 of the Preamble to the Directive directly refers to the importance of avoiding harm to competition, stating: “This Directive should not affect the application of the rules of competition, and in particular Articles 81 and 82 [now Articles 101 and 102] of the Treaty. The measures provided for in this Directive should not be used to restrict competition unduly in a manner contrary to the Treaty.”

In the run-up to this consultation, the CJEU referred to the Enforcement Directive’s treatment of the intersection between IP law and competition law in its Huawei v ZTE judgment of July 2015 (which we have written about here).  In that judgment, the CJEU considered whether the holder of a standard essential patent can seek injunctive relief against a manufacturer of standard-compliant products without abusing a dominant position under EU competition law.  In answering that question, the Court emphasised the importance of striking the right balance between “maintaining free competition” on the one hand and safeguarding IP holders’ rights – and particularly their “right to effective judicial protection” – on the other.  

The Commission’s consultation on the Enforcement Directive also raises questions relating to the intersection between IP law and competition law, albeit more obliquely.  For instance, the questionnaires for the different stakeholder groups include sections on the availability of injunctive relief, posing questions such as “Do you see a need for criteria defining the proportionality of an injunction?” and “Should the Directive explicitly establish that all types of intermediaries can be injuncted?”.  Given the past and current interventions by DG Competition into the seeking of injunctive and similar mandatory relief by holders of SEPs, these questions have direct relevance to the way in which competition law is enforced in the EU – both through public authority investigations and in private actions.

In addition, the questionnaires for the judiciary and legal profession and member states and public authorities both include the question: “Do you think that the existing rules strike the right balance between the need to effectively protect IPR and preventing IPR infringements and the need to protect fundamental rights including the right to respect for private life, the right to protection of personal data, the freedom to conduct a business as well as the freedom of information?” (emphasis added).  

If, after having reviewed the responses to its consultation, the Commission comes to the view that it is necessary to make changes to the Enforcement Directive, it is to be hoped that the Commission will bear in mind the need to maintain an appropriate balance between free competition on the one hand and the ability of IP holders to protect and enforce their rights on the other. 

The Commission’s 2016 Competition Enforcement Priorities: the Digital Economy and Standard Essential Patents

Margrethe Vestager, the European Competition Commissioner, has set out DG Competition’s enforcement priorities for 2016. 
 
In a speech to the College of Europe’s Global Competition Law Centre on 1 February 2016, she highlighted two issues that will be of particular interest to readers of this blog: the digital economy and standard essential patents (“SEPs”). 

Unsurprisingly, given the launch of the e-commerce sector enquiry last year (see our blogs on the launch of the enquiry and a review of the inquiry's scope) the digital economy was highlighted as a key enforcement priority, in particular contracts that stop retailers selling cross-border. The Commission intends to publish an issues paper on geo-blocking at Easter, aimed at tackling these online restrictions. 

The Commissioner also gave a heavy hint that the Commission is planning to bring competition enforcement cases following its e-commerce sector inquiry. 

Perhaps more surprisingly, given recent events and the degree of prominence given to SEP issues during her predecessor’s term, the Commissioner also mentioned SEPs, noting that the Motorola, Samsung and Huawei cases had set important precedents for SEPs, and that these cases had made clear that such patents must be licensed on FRAND terms. 

Finally (and not directly related to IP) the speech highlighted the need for some national competition law authorities to be given enhanced powers and suggested that the Commission was likely to propose potential new legislation to address any deficiencies.

Why a Spanish state aid decision is making EU governments nervous


In an expansion of our usual repertoire, this post is taking a quick look at the relationship between EU state aid rules and national support for national television platforms. 

The long running Spanish state aid saga, concerning the conversion of analogue television transmission to digital transmission, has reached a decisive stage with a decision by the lower European court, the General Court of the European Union (“the Court”), in 6 joined and similar cases on 26 November 2015.  Although an appeal to the European Court of Justice is technically possible, it seems unlikely.
 
What is the EU state aid regime?

For those of you unfamiliar with the state aid regime, the rules are set out in the EU Treaties (Article 107 TFEU) and govern (and attempt to limit) when EU member states can use public funds to support domestic industry.  The purpose of these rules, in common with the competition rules, is to level the playing field across the EU for industry.  Consequently, the application and interpretation of the rules are intensely political. 

What was the case about? 
 
The Court rejected appeals by a number of Spanish regional authorities against an infringement decision of the European Commission and in the process confirmed a number of important state aid principles.  

Principally, the Court upheld the Commission’s decision that the fact that the Spanish government had failed to respect the principle of ‘platform neutrality’, as its digital switchover funding was only available to Digital Terrestrial Television (“DTT”), as opposed to holding a procurement competition in which satellite, cable and internet protocol TV could also bid.  This conferred a ‘selective advantage’ on DTT in relation to its competitors and was therefore state aid. 

What makes this case interesting? 


The case raises questions about the ‘platform neutrality’ of other compensation schemes for DTT.  In particular, it highlighted the issue of whether DTT platform operators should receive compensation for regulatory changes, in this case changes to spectrum position; when this is not available to other (pay) digital television platforms. 

In the UK, the operators of the DTT platform have received public funds to compensate them for moving their channels to other spectrum frequencies.  However, the DTT platform was not selected through a competitive procurement process.  Therefore, this compensation may raise some state aid questions. 

For example, in 2014 OFCOM decided to move the DTT platform from the 700 MHz band to a lower frequency, in order to use the 700 MHz band for mobile data.  The change is estimated to have cost the UK Treasury between £550–660 million.

Equally, other (pay) television platforms do not receive similar compensation for regulatory changes, which could result in extra costs or a loss of income.  For example, the Department of Culture Media and Sport’s (“DCMS”) 2015 proposal to deregulate the Communications Act 2003 (“the Act”) may make it harder for Sky to charge public service broadcasters for ‘technical platform services’. 

How about future implications? 

The Spanish DTT case also suggests that similar compensation schemes for converting analogue to digital radio, using the Digital Audio Broadcasting (“DAB”) system, may be challenged by the Commission, again on the basis of ‘platform neutrality’. 

Unless EU member states hold public procurement competitions to select the technical solution for the provision of digital radio, they could therefore be open to allegations of state aid, as there are a number of competing technical systems to DAB; such as DRM+, HD Radio and DVB-T.

Is ‘big data’ the new frontier for competition law?

Margrethe Vestager, EU Competition Commissioner, addressed Munich’s zeitgeist-setting Digital Life Design (DLD) Conference earlier this month on the question of data, competition and restrictions to market access. 

The Commissioner raised a number of areas of potential competition concern, but she concluded that, to date, the use of ‘big data’ had not raised competition concerns. She also indicated that a number of the privacy issues in relation to data had been rather over-played. 

Is ‘big data’ in the Commission’s crosshairs?
 
The key theme of her speech was that competition enforcement action could be taken if the control of data was restricted by a small number of companies, such that other companies were driven out of markets. However, to date, the Commission had not found evidence of this. She also emphasised that the Commission should not take enforcement action just because a company holds a lot of data. 

This comment appears to be a riposte to more interventionist voices in the European Parliament (“EP”) and the European Data Protection Supervisor (“EDPS”). A report commissioned by the EP, and endorsed by the EDPS, found that European consumers suffer discrimination online due to lack of attention in the application of competition law, which it argued is demonstrated by an absence of uniform measures for reporting discriminatory practices and the lack of a harmonised approach to collective redress.

The Commissioner also went to some length to explain that any competition assessment of competition issues involving ‘big data’ will examine why competitors could not get hold of equally good information, as was the case in two previous merger cases: Google's acquisition of DoubleClick, and Facebook's purchase of WhatsApp. In neither case did the Commission consider there to be competition concerns in terms of access to data, as other companies would still have access to many sources of useful data.

Interestingly, she placed technology markets in a wider economic context; saying that these markets are no different from others but what is different is the pace of change. Although many online services are perceived as free to consumers, data is the currency with which they pay for these services. According to the Commissioner, this in itself is not a reason to treat such markets differently. 

Are privacy standards being used to kill off the competition?

Positively for data-based businesses, she thought that privacy was an issue for regulation rather than competition enforcement. She also considered that the EU will soon have adequate data protection rules, with the adoption of the new General Data Protection Regulation; which is expected to be agreed later this year by the EP, the European Council and the Commission.

However, she also highlighted that the standardisation of internet privacy protection should not be done in a way that makes it harder for smaller players to compete. 

So can we all move on now?
 
The Commissioner concluded her speech by observing that the Commission has not, as yet, found competition problems in relation to ‘big data’ and that Europe does not need a new competition rulebook for the ‘big data’ world. 

However, the question of whether the aggregation of ‘big data’ is foreclosing (European) competitors from online markets is a key economic question of the moment and is also intensively political, as demonstrated by the Commissioner’s somewhat barbed comments. Given this wider policy environment, it is almost certain that the Commission will revisit these questions in the future. 

Loyal to investigating pharma product discounts? - New CMA investigation

The Competition and Markets Authority (“CMA”) has recently opened a new investigation into product discounts in the pharmaceutical sector. This news follows hard on the heels of the CMA’s closure of a year-long investigation into a similar issue with another (unnamed) pharmaceutical company. The CMA intends to conduct an initial information-gathering phase, with a view taking a decision on whether to proceed with the investigation by May 2016. 
As we discussed here, the CMA’s previous investigation into pharmaceutical discounts was closed in accordance with the CMA’s Prioritisation Principles. The CMA decided on ‘administrative priority grounds, not to continue its investigation because it longer fitted within the CMA’s casework priorities’. The CMA did, however, offer some guidance on potential competition concerns arising from the offering of discounts or rebates, an indication that it was taking these potential abuses of competition seriously even though such offerings tend, in the short term, to result in lower prices for the NHS.  It also noted that the “decision to close this investigation should not be taken to imply that the CMA would not prioritise investigations into suspected loyalty-inducing discount schemes in the future”, a comment which appears to be borne out by the new investigation.

In comparison to investigations against excessive pricing (the CMA issued a Statement of Objections against Pfizer and Flynn Pharma in relation to such allegations back in August), the CMA’s decision to investigate low prices can seem counter-intuitive. After all, one of the primary aims of competition law is to ensure that prices are competitive. 

The danger is of course that if a dominant company keeps prices artificially low through discounts, it can prevent a newcomer from entering the market. In order to compete on price to win sales from the dominant company, the newcomer would essentially have to compensate the customer for the loss of the discount it would otherwise have received.  Restricting new players’ access to the market in this manner can stifle innovation, and may mean that the end-user is worse off in the long run. Loyalty discounts can make it particularly difficult for third parties to access the market, depending on how they are structured, as recently confirmed by the CJEU in Post Danmark II (available in English here). In that case, the Court rejected the requirement of a de minimis threshold that would have to be met before a finding of abuse of dominance could be reached.  This may assist competition authorities to meet the threshold for a case to be brought. 

However, despite this decision, a case of this kind is unlikely to be straightforward for the CMA.  In addition to proving the dominance of the pharmaceutical company in question, the discount scheme must be shown to be capable of restricting competition.  And of course, as in its previous investigation, the CMA will have to consider its Prioritisation Principles, including whether it has sufficient resources and whether the discount scheme has a significant enough impact to warrant seeing the investigation through to a conclusion.

US Court guidance on principles to apply for RAND royalty calculations

In a useful addition to the pool of incremental guidance on RAND royalties, the US Court of Appeal for the Federal Circuit (“CAFC”) has recently given judgment in CSIRO v Cisco on a damages only trial relating to a patent essential to the IEEE 802.11 WiFi standard.

Whilst the decision is of course US-centric, with the Georgia Pacific criteria featuring heavily, it builds on the previous CAFC decision in Ericsson v DLink (see our blog here) and offers commentary on broad principles that may well be of use this side of the Pond.  In particular the judgment focuses on two core issues: 

1. Smallest saleable unit

Cisco (the defendant) argued that damages models must begin with the smallest saleable unit. This is a methodology that can be helpful. If the smallest component in which the patent is implemented can be identified, and royalties charged using that component as a base, it avoids the risk that the patentee will capture some value from elements of the final product that do not depend on the patented technology. This, understandably, is an attractive prospect for any company faced with paying royalties.

However, the CAFC found this argument ‘untenable’; it conflicts with the use of other CAFC approved methodologies, such as the use of comparable licences to determine value (as the District Court had validly done in this case). The CAFC noted that different cases may require different methodologies. 

It also reiterated that the entire market value rule exists as a narrow exception to the smallest saleable unit principle; the patentee can rely on the end product’s entire market value as a royalty base where it can prove that the patented invention drives demand for the end product. This is of particular relevance in the US context where, as the CAFC noted in Uniloc v Microsoft, the value of the end product can ‘skew the damages for the jury’. 

2. Standardisation

The CAFC reaffirmed its finding in Ericsson that the patentee should only be compensated for the incremental benefit to the user which arises from the patented invention, and not for the additional value that can be attributed to the patent due to it being essential to a standard. To do otherwise would prevent the benefit created by standardisation from flowing to consumers and businesses practising the standard as intended. 

Furthermore, the CAFC found that in this case, the District Court had erred in law by using the parties’ informal negotiations as a basis for valuation without accounting for the possibility that the rates mentioned in negotiation might have been affected by standardisation and might need to be adjusted.

There is an interesting comparison to be drawn between the findings of the CAFC and the principles espoused by the newly established Fair Standards Alliance (“FSA” - see our blog post here), of which Cisco is a member. Whilst the FSA and CAFC are in agreement that any (F)RAND royalty should avoid apportioning any value to the patent that is attributable to its inclusion in the standard alone, the FSA favours the use of the smallest saleable unit in the majority of cases. Whilst there is no obvious tension between this and the CAFC’s ruling that the smallest saleable unit should not always be used as the royalty base; it’s a difference in emphasis that may be drawn out further in the future. 

The CAFC judgment is well worth a read. In addition to the above, it also suggests that similar principles should apply to SEPs generally, not just those subject to RAND commitments, and comments on the relevance of comparable licence agreements. It also has the unarguable benefit of being fairly short.

New industry coalition established to promote FRAND licensing

A group of companies has recently formed a new coalition to promote the licensing of standard essential patents ("SEPs") on fair, reasonable, and non-discriminatory ("FRAND") terms.  The Brussels-based Fair Standards Alliance ("FSA") was launched in mid-November, and the diversity of the member companies is striking.  Members include multinationals such as Cisco, Dell, HP, Intel, Lenovo, Sierra Wireless, BMW and Volkswagen, as well as a number of SMEs.  According to the FSA, the aggregate turnover of the member companies is more than €430 billion.

The Alliance states that its aim is to make SEP licensing more transparent and predictable, arguing that FRAND must have a clearer meaning if standards are to foster innovation, economic growth, competition, and consumer choice.  In an introductory position paper, the FSA makes clear that [a]buses of commitments to license [SEPs] on [FRAND] terms are [its] primary concern”.  It claims that unfair and unreasonable SEP licensing practices “pose a significant risk to the innovation eco-system, create barriers to entry for new market players, threaten to stifle the full potential for economic growth across major industry sectors, and ultimately harm consumer choice”

The FSA’s position paper sets out a number of ‘key principles’ relating to the licensing of SEPs, and suggests that FRAND should, at a minimum, mean the following:

  • A SEP holder should make licences available at any point in the value chain where the standard is implemented, and the key terms of those licences should be transparent to other companies implementing the same standards;
  • A FRAND royalty should reflect the value of the invention, and should also take into account the overall royalty that could be reasonably charged for all patents that are essential to that standard;
  • Injunctions and similar legal threats should be a last resort;
  • A FRAND commitment made in respect of a SEP should not fall away simply because the SEP is transferred to another company.
The Alliance emphasises the importance of an appropriate royalty base, suggesting that in most cases a FRAND royalty should be based on the ‘smallest saleable unit’ that implements the SEPs in question – and that it “should reflect only the value of the SEP, not the additional value conferred on it by its inclusion in the standard”.  In what is perhaps a sign of the times, the FSA also intends to address the prevalence of portfolio fragmentation. It argues that the diffusion of SEP portfolios over “more and more independent owners can exacerbate the problem of royalty stacking” (that is, the phenomenon whereby the royalties independently demanded by multiple SEP holders do not account for the presence of other SEPs and thereby lead to an inappropriately high overall royalty burden for implementers).  In addition, the Alliance urges standard-setting organisations and regulators to remain vigilant in ensuring that the initial transferee and all subsequent transferees remain bound by the FRAND commitment in situations where FRAND-encumbered SEPs are transferred. 

The foundation of the FSA reflects a trend toward clarifying – or at least attempting to clarify – the meaning of FRAND.  As we commented here, earlier this year the IEEE (the US standards body which developed the wi-fi standard) made a series of changes to its IP policy, placing limits on the ability of SEP owners to obtain injunctive relief and stipulating that SEP royalties should be based on the ‘smallest saleable unit’.  Some see these changes as striking at the heart of many SEP holders’ business models.  

At an IBC Legal conference that took place in London last week, representatives of Ericsson and Qualcomm warned that some SEP holders may become more reluctant to license their technologies if the recent changes to the IEEE’s IP policy are adopted more widely.  Speaking in her personal capacity, Claudia Tapia, a director at Ericsson, said: “If we are going to have extreme policies, like IEEE, where you favor one business model over another … I can imagine that technology leaders won't have the incentive to continue to share the best technology in standardisation."  Dan Hermele, a senior director at Qualcomm, also expressing his personal views, said that the IEEE had “made 'FRAND' stand for 'fragmentation, devaluation and delay'."  Dirk Weiler, the chairman of the board of ETSI, agreed with Tapia that some companies might become more reluctant to share their technology.  "If the FRAND concept gets developed in a way like IEEE has now implemented it, on a larger scale, […] every contributor of technology will be very careful … [and will be] unwilling to accept rules which do not allow you any more to monetise your technology," he said.

The FSA’s definition of FRAND is very similar to the one that the IEEE adopted earlier this year.  In pushing for more transparent – and lower – licensing royalty rates, the FSA has put itself on a collision course with some industry players who seek high financial rewards for the standard essential technologies that they have developed.  There has been a mismatch in the standardisation world between the expectations of SEP holders and manufacturers of products that implement SEPs for a number of years now, but the rift now seems to be deepening, rather than narrowing.  This is perhaps unsurprising: the stakes are high, particularly at a time when more and more devices depend on connectivity / interoperability.  (It is noteworthy that the FSA’s members include not just IT and mobile telecommunications companies, but also two big players in the automotive sector.)  And it seems likely that the debate over what FRAND means will only intensify as the market for the ‘Internet of Things’ grows and various appliances become connected to the internet for the first time.

6th Report on the Monitoring of Patents Settlements – déjà vu?

Last week the Commission published its 6th report on the monitoring of patent settlements, exploring the use of such agreements in the pharma sector in the EU during 2014.  The report triumphantly declares that the number of agreements which limit access to the market and contain a value transfer, attracting the highest degree of antitrust scrutiny, has “stabilised at a low level”.  It also claims that an increase in the total number of settlements (compared with the period before the pharmaceutical sector inquiry) demonstrates that companies have not been deterred from concluding settlements in general. 

Unfortunately the Commission’s conclusions are based upon a shaky foundation – the same criticisms made of the 5th report last year can be made again here.  This report similarly contains a fairly limited review of the impact of the Commission’s overall policy. 

First, the report  fails to consider a number of other reasons that may have contributed to or caused the number of patent settlements to increase in recent years compared with the period before 2008 (e.g. number of medicines losing patent protection, general increase in litigation, greater readiness of parties to settle and the introduction of new legislation).  The report doesn’t explain how, if at all, it has allowed for these variables in reaching its conclusions.  The report also overlooks the reduction in the number of patent settlements concluded each year since 2012.  It is therefore difficult to say with any certainty how the Commission’s enforcement activities in this area have affected the willingness of companies to engage in or to settle their patent disputes more generally. 

Second, the categorisation of patent settlements is flawed: settlements which involve a genuine compromise (as opposed to one party or the other just giving up) would most likely involve some form of limitation on access to the market and potentially some form of value transfer (as defined by the Commission).  It does not therefore follow that a decrease in the number of settlements of this type is necessarily a measure of effective antitrust enforcement or indeed that it enhances consumer welfare.  Given the uncertainty that faces parties in the pharma sector who may be contemplating settlement it is no surprise that they may be cautious in concluding agreements of this kind.  

Drawing reliable conclusions about the effect of the Commission’s enforcement activities on the settlement proclivities of the pharma sector would require something much less superficial than this annual scanning of the horizon.  This applies with even greater force to any attempt to draw conclusions about the overall effect of Commission competition policy on the sector; its impact on the speed and effectiveness of generic entry; and whether the Commission’s focus on that issue has indeed incentivised pharma companies to invest more in developing innovative products or fundamental R&D – an original rationale for the sector enquiry and all that flowed from it.