Huawei v ZTE - three months on

Three months have gone by since the Huawei v ZTE judgment.  Having considered the judgment on behalf of both licensors and licensees, I find myself wondering if my views have changed, compared to when the judgment was first handed down. 
 
It was clear on initial review that the judgment was potentially more favourable for licensors than licensees. If anything, this impression has been reinforced by looking at how the judgment may work in practice: whereas licensors can avoid (most of) the obligations by not seeking injunctive relief; licensees are in the dark as to what patents may be asserted until it happens. At that point it may be too late to correct any non-compliant conduct (although that is still far from clear). 
 
This may be a desirable or undesirable outcome depending on your market position. However, there is undoubtedly an information asymmetry which can favour the licensor. 
 
The judgment is (at least in the recitals) also extraordinarily prescriptive in a way which has no clear legal foundation.  Neither Article 102 nor the Enforcement Directive contain any basis for the imposition of such obligations on (unproven) patent infringers.  
 
In fact, the operative parts of the judgment (i.e. the final two paragraphs) are much less prescriptive. Given the procedural autonomy of national courts, the detailed provisions in relation to matters such as provision of security may well become a matter of national judicial discretion. 
 
For those who would like to read more, an article (here) we have written on the judgment has been published in Competition Law Insight. 

Sophie Lawrance

Online platforms hold on tight...

...Geo-blocking and online platforms are the next dip in the roller-coaster that is the e-commerce sector enquiry - which is fast gathering pace. 

On 24 September 2015 the European Commission announced that it is now launching two public consultations: one on geo-blocking and the other on online platforms. 
The consultations’ aim is to identify and categorise potential antitrust problems and other practices which may create barriers to cross-border trade. Of note perhaps is the comment in Director General Laitenberger’s “retour aux sources” speech on 21 September that the competition authorities may use different tools to tackle the same behaviour. The suggestion is that where the behaviour is practised by a dominant undertaking, then competition law armoury may be used while behaviour by non-dominant undertakings may require other “legislative initiatives”. It is becoming clearer that there are certain topics that are very much in or out of the competition law remit of this particular enquiry...
 The timeline for the next steps and beyond are summarised below.

Timeline
UK parallel enquiry

In parallel to the above consultations, the UK House of Lords launched its own enquiry into online platforms. The deadline for responding to this enquiry is 16 October 2015.

The aim is to provide a “constructive contribution” to the EU debate. The aim is to identify the benefits that platforms can provide as well as collect data to inform any recommendations for regulatory change that the U.K. may propose.

More Questions than answers?

In short, for those involved in the sector, it can fairly be said that lots of people and institutions are currently asking lots of questions – some of which may be at cross purposes. What is less clear at the moment is who is responding and how the responses will in fact be used to inform policy. 

“Everything online” including “everything copyright”

On 9 October 2015, the European Commission published its clearance decision in relation to the joint venture between three collecting societies (GEMA, STIM and PRSfM). This joint venture - and the European Commission’s (Commission) decision to clear it (following commitments offered by the parties) is of particular note, not only because it fits under the e-commerce umbrella (it is all about the licensing and administration of online rights in musical works), but also because it represents a further move towards breaking down the practice by collecting societies of dividing up the licensing and administration of copyright along national boundaries, long-criticised by the Commission. As highlighted by Competition Commissioner Margrethe Vestager in her recent speech in Florence:**   barriers to cross-border trade can be created either by national copyright laws or by the use of contractual terms in copyright licences. This decision deals with the latter.

To be clear, up to now, reciprocal representation agreements between collecting societies have permitted each participating collecting society to license the repertoires of other collecting societies around the world to users but only for use in its own territory. Although collecting societies have started granting multi-territorial licences for their own repertoires, they have licensed the world repertoire of other collecting societies only on a mono-territorial basis for their home country. 

Several “firsts”

The joint venture will provide new products on both sides of this two-sided market:

  • The joint venture will provide multi-territorial licences to online platforms for all three collecting societies’ musical repertoires. Going forward, the likes of iTunes will need to negotiate only one single multi-territorial licence for all three repertoires instead of negotiating a licence for each country where the platforms operate. Small collecting societies who do not license their repertoire on a multi-territorial basis will also be able to request that their repertoire is included in any multi-territorial online licensing offer. 
  • Collecting societies and large music publishers will also have the opportunity to obtain copyright administration services on a multi-territorial basis for the first time. Until now such services have been offered for a single country, namely that of the collecting society providing the service. 
What was the Commission concerned about?

The Commission’s concerns lay in the market for the provision of copyright administration services to collecting societies and particularly to large music publishers (so-called “Option 3 publishers”) in relation to transactional multi-territorial licences. These publishers tend to license the mechanical rights for their Anglo-American repertoires themselves but obtain a mandate from the PRSfM to license the performing rights. They still obtain administration services from collecting societies. One of the Commission’s concerns was that in return for granting a mandate to license the performing rights for the Option 3 publisher’s repertoire, the PRSfM would oblige Option 3 publishers to obtain all their administration services from the joint venture, thus excluding collecting societies who wished to compete in providing these services.  In the eyes of the Commission, the joint venture might also impose exclusivity provisions or bundle such services in an attempt to foreclose competitors. Lastly, the Commission was concerned that the joint venture may make it difficult for users of its database to transfer their data to a competitor if they decided to switch to a different collecting society.

The commitments made by the parties

The PRSfM committed: 

  • not to use its position in relation to Option 3 publishers’ performing  rights to require them to obtain their copyright administration services from the joint venture. Other collecting societies and Option 3 publishers will be able to pick and choose the services they require from the joint venture and such services will not be bundled together.
All three collecting societies committed that the joint venture would:

  • not enter into exclusive contracts other than for database services; 
  • offer copyright administration services to competing copyright societies on fair reasonable and non-discriminatory terms when compared with the terms offered to its parent companies; 
  • facilitate switching; and 
  • allow termination of the contract at any time on the provision of reasonable notice.
Not only will the Collective Management Directive (“CMD”) be directly applicable to the joint venture, but the joint venture itself puts into practice the idea, made legally binding in the CMD, that musical repertoires should be able to be aggregated into multi-territorial online licences regardless of the location of the right-holder or the collecting society. In addition, the Commission’s decision may pave the way for easier switching by rights holders which will increase their choice of collecting society.  Offline licensing and mono-territorial online licensing and administration are not the subject of the decision and will continue to function as before.

It will not be surprising if the impact of the CMD, the European Commission’s investigations in relation to the e-commerce sector enquiry as well as the review of copyright rules across the EU, lead to a change in the landscape relating to the licensing and administration of online musical rights, and pave the way for more exciting “tie-ups” in the future. Who knows if the offline world of music licensing will follow?

**Speech by Commissioner for Competition, Margrethe Vestager,  at the 19th IBA Competition Conference, Florence 11 September 2015 

Competition law as panacea for high prices?

It seems that the CMA's opening of an investigation into Pfizer / Flynn (which we discussed here) may not be the only pending competition case on excessive pricing of pharmaceuticals. A possible investigation into Turing Pharmaceuticals is being mooted in the US, following the company's decision to increase the price of Daraprim (an anti-parasitic) from $13.50 to $750, according to reports.  
 
Pricing, in particular excessive pricing, is a notoriously difficult area for competition authorities. The legal test does not lend itself well to markets where intellectual property rights may apply.  There may also be many reasons why a company might seek to introduce above-inflation price increases: to reflect increased input / manufacturing costs, to improve the margin, to reflect changed competitive dynamics, to compensate for financial problems elsewhere in its business, and so on. None of these are in themselves contrary to competition law.
 
Nevertheless, price increases of the type introduced by Turing at least seem to indicate a lack of effective competition on the relevant market. The drug is long off patent, yet prices are evidently unconstrained by generic competition. This may be due to low sales of the drug, or manufacturing cost/complexity that third parties may find difficult to replicate without the originator's know-how.  The regulatory framework almost certainly plays a role in raising barriers to entry and also – in countries where free pricing is an option – in failing to constrain the price at which such drugs are sold.  The enormous differences in wealth and living standards across the globe also lead to difficult questions for pharmaceutical companies – high prices in one country may in fact facilitate lower prices being made available to health services in countries which are less able to afford such drugs.
 
These complex dynamics certainly contribute to the dearth of excessive pricing cases in this sector.  Competition law seems an unlikely panacea.  But pharmaceutical companies considering their pricing strategy should nevertheless be aware of the tools potentially available to competition authorities and private claimants.
 
The message to business seems to be: 
  • Don’t forget the possibility of competition law scrutiny when increasing prices;
  • Document the objective basis for any price increases and be particularly cautious when increasing prices to captive parts of the market.
Sophie Lawrance

Competition law developments in the pharma sector


Last night we had the pleasure of giving a seminar at our offices on competition law developments in the pharma sector. We looked at investigations into patent settlements, and in particular the ‘pay for delay’ cases. We also reflected at how the recently published Lundbeck and Servier decisions may impact upon other important areas for pharmaceutical companies, such as licensing transactions. We concluded by drawing some ‘bright lines’ to try to assist in navigating what can sometimes appear to be a very grey area, providing practical guidance where we could. After a thorough review of a complex, and sometimes daunting, area of competition law we enjoyed a well deserved drink with many familiar faces, and some new ones too...

For those of you who couldn’t make the seminar a webinar version is available here and the slides here.


Huawei may not be the end of the story

On 11 September  2015 the Antitrust Commissioner Margrethe Vestager announced in a speech at the 19th IBA Conference in Florence that certain companies are potentially circumventing the rules established by the Court of Justice in the recent Huawei v ZTE judgment (see our blog posts here, here and here and here).
 
In that judgment, the Court of Justice held that in certain circumstances a holder of a standard essential patent which has committed to licensing it on fair, reasonable and non-discriminatory (FRAND) terms would be abusing its dominant position if it seeks an injunction against an implementer (typically a manufacturer) which is willing to licence on FRAND terms.  However, some companies are now seeking injunctions not against manufacturers, but against other parties further down the distribution chain (for example telecoms operators selling phones), which are exercising the same patent right. 

Of course, this isn’t a breach of patent law, which countenances the possibility of “infringing acts” at many different levels of the supply chain.  In her Florence speech, however, Vestager made clear that the Commission will consider it an abuse of dominance to impose an injunction on any party exercising the same patent right even if they are not the actual product manufacturer.  

Vestager also suggested a broadening of the debate, referring elliptically to “new questions arising in patent enforcement that have a competition law dimension”.  Which exact aspect of the exercise of a right-holder’s patent she had in mind is not clear, given there have been a number of types of conduct in this area that have caused DG Competition consternation.  Given the Huawei ruling’s endorsement of patentees’ right to seek damages, it is to be presumed that Vestager has claims for injunctive relief primarily in mind.  

Vestager also suggested that, as with copyright law, competition law may not always be the solution and that a re-design of certain patent laws and practice may be required.  Those involved in the negotiations to reach agreement on the UPC will no doubt wish the Commissioner “good luck” with that particular enterprise…

No rest for the Commission

You could be forgiven for thinking that after a busy year DG Competition would take a break over the summer period.  In fact, it continues to focus on the e-commerce sector inquiry which it launched in May (see our previous commentary here and here). 

Over the past few weeks DG Comp has continued to send information requests to numerous stakeholders in the digital market throughout the EU. This includes suppliers, wholesalers, online platforms and online retailers. The currently proposed timetable for the inquiry is as follows:
Earlier this summer the Commission also made a number of other significant moves in the e-commerce sector. First, it opened an investigation into Amazon’s e-book distribution agreements and in particular its ‘most-favoured-nation’ clauses. Second, it approved under the EU Merger Regulation the proposed creation of a joint venture for multi-territorial online music licensing and copyright administration services by three music collecting societies (we will be writing a post on this shortly). Third, it sent a Statement of Objections to MasterCard in relation to the MasterCard’s inter-regional inter-change fees and its rules on cross-border acquiring. It is alleged that these rules prevent arbitrage on interchange fees in different Member States thereby artificially raising costs for consumers using the card.

National authorities also remain active: the German Bundeskartellamt recently concluded its investigation into the selective distribution system of Asics which prohibited dealers from: (i) using online marketplaces such as eBay and Amazon; (ii) supporting price comparison engines; and (iii) using its trade mark on third party sites, even to guide customers to the site of an authorised dealer.  The regulator found that each prohibition was itself a hardcore restriction, and taken together essentially amounted to a de facto ban on internet distribution, causing serious restraints to competition.  The Commission is bound to be following such outcomes with great attention.  

With so much activity in the area it is clear that the Commission, as well as the national authorities, are scrutinising closely the behaviour of those working in the e-commerce sector.  We will be sure to keep readers updated as developments in the area unfold...

Interested in competition law developments in the pharma sector…?

If you are interested in competition law developments in the pharma sector, it’s still not too late to register for a seminar that a couple of us will be giving on Wednesday 30 September.  We will be looking in some detail at the latest patent settlement cases, with a view to trying to find some much-needed legal certainty.  We will also be talking about how the Commission’s conclusions in its Lundbeck and Servier decisions may apply to other areas such as licensing transactions, as well as considering the impact of the competition authorities’ increasingly narrow approach to market definition.

Registration is via Bristows’ main website – here.

A podcast of the seminar, together with the slides, will be available after the event

Pat Treacy and Sophie Lawrance

Flynn, Pfizer and Pharma in the Frame

Whilst the European Commission has shifted its focus to e-commerce and all things digital (see here, here, here and here), the CMA has put the spotlight back on pharma – this time, looking at pricing issues. 

On 6 August 2015, the CMA issued a statement of objections to Pfizer and Flynn Pharma alleging abuse of a dominant position in relation to the supply of the anti-epilepsy drug Epanutin.  The drug started receiving media attention in late 2012, when Pfizer transferred the marketing of it to Flynn Pharma and the price increased from £0.66 per 28 capsules to £15.74.  Epanutin was still to be made by Pfizer, in the same factory, but now had a new name with the active ingredient, ‘Phenytoin Sodium Flynn Hard Capsules’ (although the capsules themselves are still marked ‘Epanutin’).      
                         
Once Pfizer had transferred the marketing rights of Epanutin to Flynn Pharma, Epanutin was no longer a branded drug and outside price regulation.  In theory, generic markets are competitive, so the prices of generics are not directly regulated (although special rules still apply to reimbursement).  Yet three years after Epanutin’s move to the generic market, there’s still no direct competitor and the market has apparently failed to self-regulate.  Add to that the fact Epanutin has a very narrow therapeutic index, and there is said to be a difficulty in switching to close substitutes.  As a result, the Epanutin capsules reportedly still account for 85% of the market – and the CMA is investigating whether Pfizer/Flynn may have abused a possible dominant position.  
     
The abuse under investigation consists in the charging of excessive and unfair prices – which is usually a difficult abuse to establish because of the challenges around establishing what a price “should” be in a free market economy.  

So when does a price become “excessive”?  This is an area with limited case law (but some theory), and generally we look first to bananas for guidance – but the bananas test is far from definitive and there are a number of ways to assess excessive prices (as the Court of Appeal pointed out when it went to the races and considered the right way to assess prices for media deals).  A factor which is usually relevant is the profit margin, but – unlike for predatory (unfairly low) pricing - there’s no bright line test.  And after all, the opportunity to make large profits is what attracts companies into business, a factor which is particularly relevant in industries built on complex inventions yet where the actual costs of production may not be that high.  

The OFT did record an early success in the pharma/excessive pricing arena, but that case focussed on price differentials between hospital and community segments of the market, and was also able to rely on data from certain sufficiently comparable third party products.  The Court of Appeal’s wrestle with excessive pricing produced a decision that shows how difficult it is to estimate economic value – especially in industries where production costs are not a good guide.  Here, with no obvious comparator and only a steep price increase to go on (which Flynn Pharma has stated was necessary in order to maintain the drug on the market), it’s difficult to judge whether the price of Epanutin is excessive and unfair in a competition law sense.  Of course NHS funds are stretched and price increases are often unwelcome, but the CMA will need to be wary of a decision that may limit companies’ abilities to make profits.  

Finding the balance between prohibiting excessive prices and sufficiently rewarding innovation is a tricky area that is usually avoided by regulators.  In the end, we hope any decision manages the complexities in a way that gives those manufacturing generic drugs some clarity on pricing in the UK market and when risks may arise.

Aimee Brookes

Product-hopping prohibited – Actavis’s most recent brush with US antitrust

Interim mandatory relief to compel a company to continue doing something it wanted to stop doing is one of the more draconian remedies in the legal arsenal.  Yet the last few years have seen enough such cases in the competition law context to suggest that it is a real weapon for claimants and a real risk for dominant companies.  Examples in the UK alone include Barclays Bank, which was compelled to keep providing banking services and O2 which was required earlier this month to maintain SIM card services to a downstream user of those services, pending a full trial. 

The pharma sector in the UK has also seen its fair share of cases in which such relief was sought.  The majority of those have been refused (notably in Chemistree v. Abbvie, upheld by the Court of Appeal - see here for our post on the first instance decision), although in one case (Intecare v. Aventis, 2009, not reported) a short-term obligation to continue to supply pending full hearing of the interim relief request was enforced.

In the US, Actavis has also found itself on the receiving end of an obligation to continue to supply, pending a full court investigation of whether it had breached s. 2 of the Sherman Act (the US equivalent of Article 102 TFEU).  Earlier this month, the Court of Appeals for the 2nd Circuit rejected a request to reconsider relief confirmed by the same court in May.  

The issue arose from the decision taken by Actavis, the manufacturer of Alzheimer’s treatment Namenda, to switch patients from an immediate release (IR) version of the product onto a sustained release version (Namenda XR).  Switching patients to the new XR product entailed a change to dosage regimens, from two tablets a day down to one.  According to the case report, Actavis planned to (largely) withdraw the IR product in advance of patent expiry and thus to migrate patients, in the period immediately before patent expiry, into the new XR product – which enjoyed patent protection until 2029. 

This is a type of life cycle management strategy which the competition authorities sometimes refer to as 'product-hopping'.  It is not the first such case – in the EU, one of the abuses identified by the Commission in its AstraZeneca decision (later upheld by the CJEU) involved the withdrawal of a capsule form of a dominant product, in favour of a new tablet formulation.  The facts in this case are somewhat closer to the UK Reckitt Benckiser decision, another abuse of dominance case, than to AstraZeneca.  Unlike in AstraZeneca, there was no regulatory impediment preventing generic Namenda IR products from coming to market. Rather, there was a practical difficulty – once the IR product was withdrawn, there would be minimal prescriptions for the twice-daily product and thus (according to the interim assessment) very little generic substitution.  The court determined, on an interim basis, that there were no substitutes for Namenda IR other than the XR version and that patients were very unlikely to go back to IR once they had been moved onto XR - a practice known as "reverse-commuting".  This might be thought to be an acknowledgement of the real benefits offered by the new product, but the issue was addressed purely as one of practicality (requirement of a new prescription, acclimatising vulnerable patients to the new dosage regimen, etc).   

The court acknowledged that neither the introduction of a new, arguably superior, product nor the withdrawal of an old product is anti-competitive in itself.  Concerns arose because both strategies were carried out in combination, with a “coercive” effect upon customers/prescribers, who had no option other than to switch to the new product.  In the particular context of the pharma sector, and given the impact of Actavis’s IP protection, the Court decided not to allow Actavis to implement its “hard switch”.  Instead, the relief granted means that it has been left to the market to choose whether to favour the improved release profile of the XR version, or to take advantage of the cost-savings generated by the generic products.  The grant of mandatory interim relief is often the end of the story, but perhaps Actavis will decide to take up the fight for its “right to product-hop” at a full trial.