7 August 2017
Last year we reported the Italian’s take on excessive pricing (here), where South African pharmaceutical Aspen was in the firing line for increasing the price of four cancer drugs by a hefty 300% – 1500%. The Italian Market Competition Authority (AGCM) found that this amounted to an abuse of dominance by artificially inflating the price of the drugs, which had long been off patent. The company was fined €5.2 million in October 2016. On 14 June 2017 Aspen lost all grounds of its appeal against the AGCM decision (the judgment – in Italian only – is here).
This loss for Aspen was set against a troubling back drop for the company: not only had the South African Competition Commission announced an investigation into Aspen, Pfizer and Roche for suspected collusion over cancer drug prices just days earlier, but on 15 May 2017 the European Commission opened a formal investigation into Aspen in relation to excessive pricing of five cancer drugs.
The Commission’s press release states that – in addition to investigating the apparently ‘significant and unjustified’ price hikes applied to Aspen’s products – the Commission is also looking at the way in which Aspen threatened to withdraw the drugs in issue from Member States. This was also an influential fact in the AGCM decision and subsequent appeal ruling by the Italian Appeal Court.
The separate statement recording the opening of proceedings suggests that the Commission’s focus is wider than simply the negotiation of prices with national health authorities. It notes that Aspen’s negotiation practices “have included reducing the direct medicine supply and/or threatening supply reductions, as well as defining EAA-wide stock allocation strategies and implementing them in cooperation and/or agreement with local wholesalers”. It has been a while since stock management has been subject to scrutiny by the Commission, and this is likely to be an unwelcome development for the industry more widely. For now, it is probably safe to assume that this aspect of the investigation is ancillary to the primary case on pricing issues. Meanwhile, back in the UK, the date for an appeal of the (now-published) Pfizer/Flynn decision has been set by the Competition Appeal Tribunal – a four-week hearing is due to start on 30 October.
11 July 2017
The CMA has accepted commitments from ATG Media, the largest provider of online auction sites in the UK, to bring an end to practices which it considered hinders competition from rival bidding platforms (press release and decision here and here).
ATG’s Live Online Bidding (LOB) platforms cover a wide range of markets, including: antiques and art; industrial and insolvency; and construction and agricultural equipment.
LOB platforms are aggregators that host live auctions run by multiple auction houses. They aim to attract both individual bidders and auction houses to list live auctions. Traditionally live bidding was available only by attending in person or by telephone.
The CMA’s investigation began in November 2016 and focused on three practices:
- obtaining exclusive deals with auction houses, so that they do not use other providers;
- preventing auction houses getting a cheaper online bidding rate with other platforms through Most Favoured Nation clauses; and
- preventing auction houses promoting or advertising rival live online bidding platforms in competition with ATG Media.
In order to bring the investigation to an end ATG has given the CMA legally binding commitments under the Competition Act 1998 to stop all three practices.
The CMA’s Annual Plan 2017/18 (here) stresses the importance of digital markets in its enforcement priorities: “Online aspects of markets have become a major focus of our work, as many industries have become more digital in how they trade, raising important questions of policy and law.”
Online platforms (particularly those with market power) are likely to face increased scrutiny as competition authorities across the world focus ever more of their resources on the digital economy.
23 May 2017
An announcement by the European Commission last week resolves an open question about its view on the recent spate of pharma sector excessive pricing cases that have been seen in Italy and the UK. The Commission has now confirmed that, following dawn raids across four member states in February, it has opened an investigation into Aspen Pharma for suspected breach of Article 102. The concern is that Aspen’s pricing practices in relation to off patent drugs containing five ingredients used for treating cancer has led to unjustified price increases. This overlaps with the Italian Market Competition Authority’s decision in October 2016 to fine Aspen €5.2 million for unfair price increases, which covered four of the five ingredients now under investigation (see here for our report). This is the Commission’s first excessive pricing case in the pharma sector, following a trend set by the national competition authorities (including in the UK and US – although given that US antitrust does not apply to pure pricing issues, the US cases have tended to focus on another form of abuse (e.g. here) which led to the excessive prices). The EU NCAs have been well placed to deal with such conduct, as pharma markets are national in scope, and subject to significant regional differences resulting from the different formation of public health services. However, setting the benchmark price is a difficult – and controversial – aspect in any investigation (see here for our thoughts on the CMA’s recent approach) and it will be of interest to see how the Commission tackles the issue, as its approach may well be followed by other NCAs.
Bearing these points in mind, we will be particularly keen to see how the Commission deals with the following two points:
- The definition of the relevant market and whether a company is dominant – before assessing whether its prices are excessive, a pharma company must first know whether it is dominant. With diverging approaches on product market definition (definitions have been drawn from therapeutic / molecular / dosage level and from regulatory guidance), it can be difficult to make an assessment of dominance. In Aspen’s case, it has found itself one of few companies willing to manufacture low volume generic drugs, and despite low barriers to entry, no other companies have entered the market to exert a form of price control on Aspen. It has perhaps therefore become dominant as a result of market failures.
- How the Commission determines an acceptable level of profit (i.e., what is the meaning of ‘excessive’?). While under patent protection, pharmaceutical product prices are generally constrained in some way (e.g. through profit caps under the UK PPRS), but in theory, profits could be competed upwards following patent expiry, even if overall prices decline (this is a key part of the argument raised by Pfizer and Flynn in their appeals of the CMA infringement decision). The recent opinion of AG Wahl considering unfair prices (albeit in a copyright licence context) concluded that there is no single method of determining the benchmark, and acknowledges that there is a high risk of error, but a price should only be excessive if it is significantly and persistently above whatever benchmark is determined. Whilst AG Wahl was unable to point to any guaranteed failsafe methods of analysis, he stated that an authority should only intervene when there is no doubt that an abuse has been committed.
The investigation does signal that the Commission is keen to address the fairness of pricing in the pharmaceutical industry, but as with all such investigations, its approach should not be one of a price regulator. Indeed, the Commission is at pains to point out that it is looking at a case where the price increases were extremely significant (100s of percent uplift). It may reveal that a case-by-case approach is not appropriate, and the real issue is regulatory failure that will need to be corrected by legislation (such as that currently before the UK Parliament).
15 February 2017
True to its current focus on all things digital, the European Commission has recently announced that it has launched three separate investigations into whether certain online sales practices prevent, in breach of EU antitrust rules, consumers from benefiting from cross-border choice in their purchases of consumer electronics, video games and hotel accommodation at competitive prices.
The Commission is now examining whether the companies concerned are breaking EU competition rules by “unfairly restricting retail prices” or by excluding customers from certain offers because of their nationality or location (geo-blocking).
The Commission’s rationale for the inquires is that these practices may make cross-border shopping or online shopping in general more difficult and ultimately harm consumers by preventing them from benefiting from greater choice and lower online prices. Whether the evidence gathered from the investigations ultimately bears out this hypothesis is very much an open question.
Whatever the wider benefits to the Commission of the sector investigation, it is questionable whether these investigations in themselves justify the full arsenal of an antitrust sector inquiry. To judge by the press release, at least a significant part of the Commission’s concern appears to relate to classical infringements of competition law – resale price maintenance and contractual barriers to parallel trade – which merely happen to have come to light through the sector inquiry. Time will tell whether this hypothesis is correct, or whether more specific types of online anti-competitive conduct are in fact concerned.
23 January 2017
On 18 January, the FTC announced that Mallinckrodt ARD Inc. (formerly Questcor Pharmaceuticals, Inc.) and its parent company have agreed to pay $100 million to settle FTC charges that they violated antitrust laws when Questcor acquired the rights to a drug that threatened its monopoly in the U.S. market for adrenocorticotropic hormone (ACTH) drugs. The announcement was made concurrently with the release of the FTC's complaint. Antitrust (as opposed to merger) cases about acquisitions of competing technology are not an everyday occurrence. However, this complaint has something of the flavour of the EU Commission’s Tetra Pak 1 decision. In that case, the EU Commission objected to Tetra Pak’s acquisition (through a merger) of exclusive rights to what was at the time the only viable competing technology to Tetra Pak’s dominant aseptic packaging system. The Commission (and subsequently the EU courts) held that this would prevent competitors from entering the market and therefore amounted to an abuse of a dominant position.
The FTC’s Mallinckrodt complaint alleges that while benefitting from an existing monopoly over the only U.S. ACTH drug, Acthar, Questcor illegally acquired the U.S. rights to develop a competing drug, Synacthen (a synthetic ACTH drug which is pharmacologically very similar to Acthar). This acquisition stifled competition by preventing any other company from using the Synacthen assets to develop a synthetic ACTH drug, preserving Questcor’s monopoly and allowing it to maintain extremely high prices for Acthar.
To judge by the FTC’s complaint, the case appears to contain some pretty stark facts which may have contributed to the immediate settlement of the proceedings by Mallinckrodt. Those facts also bring the case squarely into line with the US and EU competition regulators’ current concern over excessive pricing in pharma.
First up is the finding that Questcor had a 100% share of the U.S. ACTH market and that it took advantage of that monopoly to repeatedly raise the prices of Acthar from $40 a vial in 2001 to more than $34,000 per vial today – an 85,000% increase. The complaint details that in August 2007 Questcor increased the price of Acthar more than 1,300% overnight from $1,650 to $23,269 per vial and that it has taken significant and profitable increases on eight occasions since 2011 pushing the price up another 46% to its current $34,034 per vial. Acthar is a speciality drug used to treat infantile spasms, a rare seizure disorder affecting infants, as well as being a drug of last resort (owing to its cost) for a variety of other serious medical conditions. According to the FTC, Acthar treatment for an infant with infantile spasms can cost more than $100,000. In Europe, Canada and other parts of the world doctors treat these conditions with Synacthen which is available at a fraction of the price of Acthar in the U.S. (Synacthen is not available in the U.S. as it does not have FDA approval.) The FTC relies on the supra-competitive prices charged in the U.S. for Acthar as evidence of Questcor’s monopoly power as well as its 100% market share and the existence of substantial barriers to entry.
It is also part of the FTC’s case that Questcor disrupted the bidding process for Synacthen when the rights came up for acquisition. According to the complaint, Questcor first sought to acquire Synacthen in 2009, and continued to monitor the competitive threat posed by Synacthen thereafter. When the U.S. rights to Synacthen were eventually marketed in 2011, dozens of companies expressed an interest in acquiring them with three firms proceeding through several rounds of detailed negotiations. All three firms planned to commercialise Synacthen and to use it to compete directly with Acthar including by pricing Synacthen well below Acthar. In October 2012, Questcor submitted an offer for Synacthen and subsequently acquired the rights to Synacthen for the U.S. and thirty-five other countries and did not subsequently bring the product to market in the US.
In addition to the $100 million payout, the proposed court order requires that Questcor grant a licence to develop Synacthen to treat infantile spasms and nephrotic syndrome to a licensee approved by the FTC, a pretty far-reaching remedy.
This case is the latest in a string of cases on both sides of the Atlantic relating to escalating pharma prices (as discussed in our previous blog posts here and here). While companies retain significant scope to price products as they see fit, it reaffirms that pharma companies should be wary of implementing very significant price increases in the absence of good objective reasons for doing so. This is particularly so where the increase is facilitated by commercial strategies such as acquiring IP rights to existing/potentially competitive products. In the EU, it is also worth remembering that – as established by Tetra Pak I (on appeal to the General Court) – an agreement which falls within a block exemption can at the same time constitute an infringement of Article 102. So companies and their advisors should remember to wear Article 101 and 102 hats when reviewing agreements.
23 January 2017
The FTC complaint focusses on three main areas*:
- Requiring customers for its baseband processors (in which Qualcomm is said to have a dominant position for both CDMA (3G) and LTE (4G)) to take a patent licence, thus achieving elevated royalties;
- Refusing to license its essential patents to competitors (such as Intel), contrary to Qualcomm’s FRAND commitments;
- Exclusive dealing, notably with Apple, to cement its position in the 4G smartphone market
In combination, this conduct is said to impose a “tax” on mobile phone manufacturers, even when using non-Qualcomm processors. The complaint also notes that licensees are passing up the opportunity to challenge whether Qualcomm’s rates are FRAND. The FTC lists a number of reasons why Qualcomm’s licences might not be FRAND, such as the maintenance of Qualcomm’s royalty rates at a significant level despite its reduced patent share; the charging of royalties on the selling price of the whole handset, even though this includes many features not subject to Qualcomm’s patent claims; and the extraction of onerous cross-licensing terms.
But why is this occurring? – why is it that licensees do not litigate Qualcomm’s royalty demands, as they do with other significant SEP holders? The answer lies – according to the FTC – in the cost to licensees of litigation with Qualcomm. It argues that rational licensees will be willing to litigate if the cost of doing so appears likely to be outweighed by the prospect of reduced royalties. In this instance, however, it is said that the cost of litigation for prospective Qualcomm licensees is usually too great: as Qualcomm’s licensees are also customers of Qualcomm’s chipsets (for which there are few – if any – substitutes), they not only have to bear the cost of the litigation itself, but also, potentially of significantly impeded market access, arising from difficulties in obtaining Qualcomm chips.
Patent licensing, once regarded as a largely benign or even pro-competitive business model, is now at the forefront of the antitrust authorities' attention around the world. The fact that Qualcomm’s conduct is perceived to have effects on a market as valuable and crucial to the economy as the smartphone market have served to make it a particularly attractive target for the antitrust authorities. This is not without controversy, however: US DOJ officials have previously expressed concerns about investigations seeking to curb royalties would be liable to affect innovation, and – as Qualcomm has emphasised – the present FTC Complaint was launched on the basis of only 2-1 agreement by the FTC commissioners, in the face of opposition from Maureen Ohlhausen. Whatever the divergence of views, it appears inevitable that Qualcomm will continue to appear in the antitrust headlines for some time to come.
* One further area has been identified by the FTC, but is subject to protective order.
13 December 2016
The year is 2011. The Office of Fair Trading (the predecessor to the current Competition and Markets Authority) contributes to an OECD round table on excessive pricing, concluding that: “firms should not face fines for excessive pricing, and should not face the risk of private damages actions in respect of such behaviour”. Five years later, in early December this year, the CMA announced that its investigation into the supply of phenytoin sodium capsules by Pfizer and Flynn had concluded with its highest ever fine (£90 million), and ordered the companies to reduce their prices within 4 months. How times change… Excessive pricing is one of the more controversial types of abuse of dominance – the lack of a bright line test between competitive and anti-competitive pricing has meant that infringement decisions in relation to this form of abuse have been rarely pursued. Indeed, this is the first UK competition authority decision based on excessive pricing by a pharmaceutical company since the 2001 Napp decision, which involved differential pricing in the hospital and community sectors. As we have previously reported, however, something of a sea change in competition policy currently appears to be taking place, at least for certain parts of the pharmaceutical sector.
The full reasoning of this decision will therefore be closely reviewed. For now, however, the text of the decision remains unpublished. While we wait for a non-confidential version, the following 4 points seem to us to be worth noting:
- Phenytoin sodium is not a new drug – it has been off patent for many years, although only entered as a generic following the conclusion of a UK supply deal between Pfizer and Flynn. The case – as with other high profile excessive pricing investigations in the EU and beyond (see here/here) – concerns a sudden and significant jump in previously established market pricing, in this case of around 2,600%. This is an entirely different legal and commercial context to that applicable for new or branded drugs: it would be extremely surprising if this decision provides any new basis for future intervention in relation to drugs which are subject to the PPRS, even at the stage of free initial pricing.
- Although two companies are involved, no anti-competitive collusion has been alleged. Rather, the case is based only on abuse of dominance. It is rare for such cases to involve two separate companies. Here, the allegation appears not to be that Pfizer and Flynn are jointly dominant, but that each holds a separate dominant position and has separately proved it. This is a surprising feature of the investigation – proving excessive pricing is notoriously difficult, and the CMA given itself the task of pulling that off twice, with each company being held separately to have extracted supra-competitive prices. Flynn is at once the ‘victim’ of Pfizer’s excessive pricing, and the perpetrator of an abuse of its own.
- The basis for the findings of dominance is also far from obvious. While details of how the market has been defined have not yet been released, it appears from a 2015 parallel trade case also relating to Flynn Pharma’s phenytoin sodium product that the drug is only a third line treatment for certain specific types of epilepsies, and that its sales have been in decline for a number of years. It appears that the CMA’s dominance finding may be based on clinical guidance that stabilised patients should remain on one specific brand of product rather than being switched between different formulations even of the same API. The trend to ultra-narrow market definition in the pharma sector thus appears to be continuing (see Perindopril, Paroxetine…) – but query whether it will survive review in the Competition Appeal Tribunal.
- And finally, compliance with the price reduction remedy may not be straightforward – the companies will have to calculate what measure of reduction is sufficient to bring the infringement to an end. Pfizer has already been subject to a procedural fine for failure to comply with a procedural order; if the companies miscalculate their price reductions, further fines could follow – in addition to the now inevitable follow-on claims from, at least, the Department of Health.
19 October 2016
Pricing issues in the pharmaceutical industry have continued to keep competition authorities busy, this time with the Italian Market Competition Authority (AGCM) fining the multinational South African pharmaceutical company Aspen near €5.2 million on 14 October 2016, following its finding that Aspen abused its dominance to artificially inflate the price of four of its cancer drugs. In its press release/statement, the AGCM stated that Aspen, which had acquired the rights to the four essential drugs (Leukeran (chlorambucil), Alkeran (melphalan), Purinethol (mercaptopurine) and Tioguanine (tioguanine)) from GlaxoSmithKline (GSK), had threatened to interrupt their supply to the Italian market in order to compel the Italian Medicines Agency to accept price increases for the drugs of between 300%-1,500% of the initial price. The drugs were described by the AGCM as “irreplaceable” and central to the treatment of blood cancers especially for children and elderly patients. In the relevant period Aspen was the only supplier of these drugs in the Italian market, which led to the finding that Aspen held a dominant position in the relevant national market and had unfairly increased the prices. The AGCM noted in particular that there was no direct substitute for the drugs, the patents had been expired for years and no economic justification for the price increases could be established.
The antitrust authority applied a two-step test to determine whether the increase in pricing amounted to unfair pricing in contravention of Article 102. The AGCM first established that there was an excessive discrepancy between the manufacturing costs and the final prices of the products and secondly considered that the pricing was excessive and unfair, by reference to factors such as the change in prices and any economic basis for this change, any potential benefits for patients, and conversely any harm to the Italian National Health Service.
There is no easy method for competition authorities (or indeed companies) to determine what constitutes excessive pricing, due to the number of variables involved. A justified price increase might be due to increased manufacturing costs or could be the reflection of a profitable market or a high-risk marketing strategy, among other factors. Ultimately, the determination of when a price is excessive remains challenging, and – where pharmaceuticals are involved – may well vary from country to country. As yet, the impact of excessive pricing on reference prices has not been examined.
Italy is not the only country to look at excessive pricing of off-patent drugs, however. Another example from the UK (on which we have reported here and here) is the ongoing CMA investigation into the pricing of the anti-epilepsy drug Epanutin by Pfizer and Flynn Pharma (the latter having acquired the marketing rights of Epanutin by Pfizer in late 2012). The CMA has recently updated its case file to push back the expected date of the conclusion of the investigation, to November 2016. The focus of the investigation is understood to be whether the pricing for phenytoin sodium capsules is excessive and unfair and thus constitutes an Article 102 and Chapter II abuse. On the other side of the Atlantic, the antitrust authorities have considered similar issues with the 50-fold increase in the price of Turing Pharmaceuticals’ Daraprim and the more recent Mylan EpiPen controversy, caused by a six-fold price rise in the popular emergency allergy treatment. In September 2016, Mylan became the subject of a congressional hearing on this subject. The allegations about increased pricing were followed by suggestions that Mylan had been misclassifying EpiPen as a generic, as opposed to as a branded product, in order to benefit from the lower rebate rate available (13%) than the equivalent for branded drugs (23%). In this case, it was of significance that Mylan had a market share of around 90%, and the increase in pricing was accompanied by a direct increase in Mylan’s profits. The US FDA itself was criticised for not intervening more effectively in order to allow competing products to reach the market. The complex topic of excessive pricing continues to be an issue in the EU more generally. The announcement of the Aspen investigation has led to calls by public interest bodies such as the BEUC for the Commission to carry out EU-wide investigations into whether companies use similar tactics to increase pricing. No doubt, as the case law develops, so will our understanding of when a company’s pricing tactics risk being in breach of Article 102.
20 September 2016
Last week, the European Commission published its Preliminary Report in the e-commerce sector inquiry. The Report focusses on two main areas: goods and digital content. In each case, the Report surveys the responses received to the requests for information sent over the past 15 months and sets out the Commission’s preliminary findings. We reported on those findings on goods here, and now examine the preliminary conclusions on digital content, which focus in particular on audio-visual and music products.
Contractual restrictions in licensing agreements
Based on the market data received, the Commission concludes that contractual restrictions, in terms of licensed transmission technologies, timing of releases and licensed territories, are the norm in digital content markets. Exclusivity is also widespread and can be granted along one or more of a number of different dimensions. For example:
- Technological restrictions: Rights may be split according to method of transmission (e.g. satellite, online, mobile), whether content was streamed, downloaded or watched on a standard TV set; licences may also cover ancillary/usage rights on features such as catch-up services or use of multiple screens.
- Temporal restrictions: This includes the use of “release windows” which can be the subject of complex negotiations with significant price differences depending on the period secured.
- Territorial restrictions: Here the concerns in relation to digital content closely mirror those identified in relation to goods (as we have discussed here). ‘Geo-blocking’ is common, but causes are multiple. For example, the Report finds that the main reasons why digital content providers do not typically make their services available in more than one territory are: (a) the cost of purchasing content for new territories, and (b) that the rights for the content are not available for licensing in some territories. Even those digital content providers that do make their services available in more than one Member State often offer different catalogues in each Member State, normally because they are unable to obtain licences for all of the Member States in which they are active.
Where geo-blocking was used, many of the agreements submitted to the Commission contained clauses enabling the right holder to monitor the implementation of geo-blocking measures and to suspend distribution or even terminate the agreement if the measures weren’t implemented to its satisfaction. Almost 60% of digital content provider respondents are contractually required by right holders to geo-block, although the percentage varies considerably between licensing business models and Member States. In Italy, for example, only a minority of respondents reported that geo-blocking occurred, whereas in the UK the majority did so.
Overall, contractual restrictions of these kinds are found to be prevalent in a number of sectors investigated, and are often included in contracts of long duration. (An exception is noted in relation to music content, where less use is made of exclusive licensing.) The Commission notes the difficulties to which this can give rise for new entrants and smaller players. The same is true of certain prevalent payment structures, such as requirement for advance payment, minimum guarantees and fixed/flat fees. All of these are said to make it difficult to compete with large established providers. (The results do also indicate that certain flexible payment arrangements have been used for certain types of digital products, which allow for payments proportionate to the number of users and facilitate competition. The Commission indicates that it is likely to encourage the wider use of such payment mechanisms, as they might promote risk sharing and streamlining of incentives along the supply chain.)
Lost in translation?
As every good competition lawyer knows, contractual restrictions do not always translate into restrictions on competition. The conclusion announced by the Commission, that it “will assess on a case-by-case basis whether enforcement action is necessary to ensure effective competition” is thus hardly surprising. The question for companies active in the licensing or distribution of digital content will be to translate the Commission’s preliminary conclusions into a concrete risk assessment as to the status of existing licensing agreements and practices.
This is of course only a preliminary report, on which comments are requested. Past sector inquiries (such as that in the pharmaceutical sector) suggest, however, that amendments after the first report are likely to be around tone and details rather than on the substance. The data gathered by the Commission will already be under intensive analysis and case teams may already have been put together to start to pursue individual cases.
It appears likely that such cases will be one of two main types:
- Geo-blocking cases in which a breach of Article 101 is identified, akin to the ongoing Hollywood Studios investigation (as to which, see here), the outcome of which is likely to turn on eventual review by the EU courts (or potential further commitment decisions of the type entered into by Paramount).
- Abuse of dominance cases based around foreclosure of new entrants. In principle, such cases could be brought against either content providers or rights holders, depending on the source of market power. The Commission will want to try to focus such cases around the use of contractual provisions (e.g. the use of long-term exclusivity) rather than on refusal to license per se, where the existing law is likely to make new cases in this complex field very difficult.
It is early days, but we question how many abuse of dominance cases of this kind are likely. The Report suggests that many of the perceived market access problems arise from widespread structural issues, rather than the conduct of individual undertakings. As content markets are currently likely to be national in scope (due to language requirements, if nothing else), it may be for national competition authorities to take the lead in this. The Commission can of course also sponsor new legislation, as it has already done in relation to geo-blocking as it relates to goods (see here). If that is on the agenda, a number of rounds of further consultation can be expected. Stakeholders are invited to submit responses to this particular Report by 18 November 2016.
13 July 2016
When Intellectual Ventures (IV), the world’s largest non-practising entity, sued Vodafone GmbH for infringement of a batch of its standard essential patents (SEPs) in Germany last September, it probably wasn’t expecting the communications services provider to launch a FRAND counterattack in Ireland. But that’s exactly what has happened. Last month, the Irish High Court gave an indication that Ireland was the appropriate jurisdiction for hearing Vodafone’s allegations that two companies in the IV group – IV International (based in Ireland) and IV LLC (based in Delaware, USA) – had breached their obligations to license their SEPs on FRAND terms. As far as we’re aware, this is the first Irish case on issues relating to FRAND and SEP licensing. As the Irish High Court noted in its judgment, the patent and competition law issues raised by Vodafone’s application made it “something of a first in the Irish courts”. According to the judgment, IV first approached Vodafone to discuss the terms of a licence to various IV patent portfolios in 2012. No agreement was reached, however; and IV LLC filed two sets of patent infringement proceedings against Vodafone GmbH in Germany in September 2015 and January 2016. The patents in question relate to DSL technology, a type of broadband technology which connects a user to a high-speed internet connection across a telephone network. DSL services operate in accordance with so-called ‘xDSL standards’, which are set by the International Telecommunications Union (commonly known as the ITU). Like other standard-setting organisations, the ITU has developed policies relating to IP rights which require SEP holders to license their patents on FRAND terms. Vodafone has alleged that IV abused its dominant position on the markets for the licensing of the relevant patents by making a licence offer to Vodafone on non-FRAND terms and failing adequately to explain how the patents in question are said to be infringed. In making these allegations, Vodafone has expressly relied on the CJEU’s July 2015 judgment in Huawei v ZTE (which we commented on here and here).
At this early stage, two aspects of the case are interesting:
1. Vodafone’s attempt to sue IV for breach of its FRAND obligations in Ireland
Vodafone’s ‘Irish torpedo’ strategy is noteworthy. We are not involved in the case and so can only speculate, but it is plausible that Vodafone’s aim in bringing FRAND proceedings in Ireland may be to seek to limit the prospect of IV obtaining swift injunctive relief in Germany (in the event that any of its patents are found to be infringed). Whether this will work is unclear. Immediately, it’s important to bear in mind that the Irish Court’s judgment is based on Vodafone’s ex parte application for permission to serve a defendant (IV LLC) out of the jurisdiction. IV has not yet had the chance to make any points about jurisdiction or the nature of its dispute with Vodafone. The Irish Court states that it has been “advised” that “none of the eleven sets of proceedings [which IV has commenced against Vodafone in Germany] involves or is related to issues of FRAND licensing”. This leads the Irish Court to take the view that it may have jurisdiction because the issues before it do not involve the same subject matter or cause of action as the issues already before the German Court. But if IV can show that FRAND / SEP licensing issues are in fact relevant to the German proceedings, this puts the Irish Court’s jurisdiction in issue. It remains to be seen whether IV will bring a jurisdiction challenge.
2. The types of declaratory relief sought
Vodafone has asked for a number of declarations (some in the alternative). In particular, the Irish Court’s judgment makes clear that Vodafone wants the Court to determine that: (i) the terms of the written licence offer made by IV in March 2016 were not FRAND; and (ii) the terms of the licence counter-offer made by Vodafone in June 2016 were FRAND. In addition, and perhaps more interestingly, if neither IV’s offer nor Vodafone’s counter-offer is deemed to be FRAND, Vodafone wants the Irish Court to determine the terms and conditions of a licence “of the relevant patents for use in Germany” which would be FRAND. It is not entirely clear from the judgment whether Vodafone is asking the Irish Court to identify FRAND terms and conditions just for the individual patents on which IV has sued in Germany, or whether it would instead like the Court to deal with some kind of wider IV patent portfolio. If it’s the latter, it would be interesting to see whether the Irish Court takes a similar approach to that taken by Mr Justice Birss in Vringo v ZTE ( EWHC 1591 (Pat) and [2015 EWHC 214 (Pat)). In that case, the English High Court judge held that the court should only be able to set the terms of a portfolio licence if both parties agree to be bound by such a determination.
The question of FRAND rates and “what is FRAND” has been of great interest in the TMT sector for some time (as we have discussed previously, for example here and here). A couple of cases have grappled with it, but guidance remains sparse. It will be very interesting to see whether the Irish Court is willing and able to grasp the thorny issue, and we will be watching closely the next move from IV in the litigation and whether it resists Vodafone’s FRAND manoeuvre.