European policies for competition and growth in ICT through regulation of Big Tech, network operators and standard-essential technology licensing

 Big Tech companies have profited greatly from dominant market positions while riding largely for free over the top of fixed and mobile telecom networks and devices. The entire Information and Communications Technologies (ICT) ecosystem is enabled by a variety of interoperability technologies including 5G cellular, WiFi and HEVC/H.265 video compression that are openly available in published standards and embedded in components and end-products. How much, if anything, should beneficiaries pay for the capabilities upon which their standard-based implementations are built?

There are great expectations that technology and market developments will provide yet more stellar economic growth and improved consumer welfare in ICT with new innovations in Artificial Intelligence (AI), the metaverse (e.g. Augmented Reality (AR) and Virtual Reality (VR)) and the Internet of Things (IoT). This is a high stakes game with some players having fared rather better than others as computing, communications, applications and Internet-based services have advanced over the last couple of decades. Big Tech companies continue growing handsomely to command a large and ever-increasing proportion of total ecosystem revenues, as I have noted here before.

European policies to regulate ICT markets in various ways that will redistribute rewards and costs are being formulated following various public consultations and extensive lobbying. Regulation is unquestionably required in data protection, child protection and cyber security, as it is in health and safety.  Measures to preserve national security are also required, but excessive restrictions there can be a dubious pretext for over-reach with anti-competitive protectionism. Regulating competition in other ways is also questionable and should only be contemplated where there is clear evidence of market failure or harm to consumers. Reformers should also tread carefully to ensure that remedies don’t do more harm than good through unintended consequences.

Three proposed interventions to guide the invisible hand

In unregulated or lightly regulated markets, competition and growth can develop most dynamically among different players, technologies and business models. Nevertheless, significant interventions are being pursued in ICT where there have been many successes with enormous and widespread market growth and benefit to consumers. A firm’s market dominance, abnormally high growth and profits might or might not result from anticompetitive abuse. Making a determination on that — one way or the other — requires extensive investigations and ties up lots of limited public agency resources. We should be wary of those accused of such abuse when they seek to distract regulators from that contention by claiming it is those in other markets who are causing market failure or harm to competition.

Two major EU interventions have been conceived to reign-in the dominance of Big Tech companies over others with whom they compete or depend.  A third intervention—with the pretext of protecting Small and Medium-sized Enterprises (SMEs) from abusive patent licensing—will perversely have the opposite effect.  It bolsters Big Tech and major industrial firms such as car manufacturers against the major value generators in the ICT ecosystem that create the standardized technologies that everyone benefits from using. 

Gatekeepers and other Core Platform Service competitors

America’s Big Tech companies—Alphabet, Amazon, Apple, Meta and Microsoft—are deemed to be so big and powerful that they have been identified as “gatekeepers” by  the European Commission under its Digital Markets Act, as has China’s ByteDance. Gatekeeper designations reflect positions in search, browsers, operating systems and video sharing among other Core Platform Services.  The success of these companies is illustrated by those American companies’ combined market value increasing by a half to $9 trillion this year. Prospective regulation could limit the extent to which they own and how they offer and operate complementary services, such as in bundling. Similarly, in the US, Alphabet is being sued by the Department of Justice for abusing its dominant position in search to distort the market, for example, by making Google the default on most smartphones and browsers.

It remains to be seen whether regulating gatekeepers will foster more competition, innovation or economic value overall versus other Core Platform Service providers. Figuring out what kinds of structures and behaviors are anti-competitive is difficult in markets where prices are zero for consumers who pay in-kind by being targeted for advertising and who like the simplicity of bundled and integrated offerings.  What’s not to like about also getting free deliveries when one subscribes to Amazon Prime Video? A recent article in the Economist heralds Garmin in fitness trackers, Dropbox in cloud storage and Mercado-Libre in Latin American e-commerce  as examples of companies that have succeeded in growing revenues in competition with the Big Tech firms. Market failure and harm is difficult to prove because counterfactuals—in the but for world— cannot be observed.  Attempts to block acquisitions by Big Tech companies, manipulate their offerings or even break them up will surely be met with extensive and vigorous legal challenges.

Network cost sharing

Telco industry groups GSMA and European Telecommunications Network Operators’ Association (ETNO) have demanded that companies such as those above they depict as Large Traffic Generators (LTGs), and that are sometimes called Large Traffic Originators (LTOs), should pay their “fair share” of the costs to provide broadband Internet access. The sender-pays principle is based on a long-standing grievance of large telecom operators that Big Tech companies generate the majority of traffic and reap most of the benefits of the Internet economy while not chipping in with the costs.  The European Parliament concurred in a June 2023 resolution:

“that the economic sustainability of telecom networks is essential to achieving the 2030 Digital Compass connectivity targets and high-performance connectivity for all citizens within the EU without jeopardizing competition rules; urges the commission to address and mitigate persistent asymmetries in bargaining power as set out by the European Declaration on Digital Rights and Principles for the Digital Decade; calls for the establishment of a policy framework where large traffic generators contribute fairly to the adequate funding of telecom networks without prejudice to net neutrality.”

Most network traffic is video and this proportion continues to increase. Alphabet’s YouTube, Amazon’s Prime Video and ByteDance’s TikTok among others are evidently major originators of network traffic. 

There is a clear need to keep increasing network capacity to accommodate data traffic growth. According Ericsson’s Mobility Reports, mobile network traffic has doubled every couple of years over the last decade or so. Fixed network traffic has also surged in multiples over recent years. A WIK-Consult study for the Commission found that €174-200 billion is needed to achieve Europe’s 2030 Connectivity Targets, including 5G coverage of all populated areas and gigabit-speed fiber.  As reported by Compass Lexecon, ETNO estimates previous investments of €36-40 billion per year, of which roughly half are traffic related and could have been saved absent the largest content providers’ traffic. According to HSBC, the average return on invested capital for major listed European telcos fell from around 8% in 2012 to around 5% in 2020, with many not achieving their cost of capital. 

There is disagreement about those investment figures. Opposing interests argue that the correct figures show there is no investment gap, and so subsidization by tech would result in excess profits for big telcos. However, the validity of the sub-par return on invested capital figure above does not appear to have been challenged. Big Tech companies have much higher rates of return.

A Compass Lexecon research paper concludes there is market failure. Its economic analysis shows that, where data usage is unlimited for a fixed price per month, there will be under-investment in access networks. Network operators do not have the incentive to maximize investment where incremental traffic generates no additional revenue. While LTOs invest in infrastructure such as content delivery networks, they have no incentive to increase their own costs by investing in access networks to the benefit their direct competitors. Perversely, Europe’s Open Internet Regulation (i.e. net neutrality requirements) only exacerbates this shortcoming because it prohibits allowing a traffic generator to make payments to prioritize or improve its services versus competitors’.  

Incremental capacity investments need to generate incremental revenues to provide a return on such investments. There is a very clear and direct causal relationship between the amount of traffic generated and the network capacity required to carry it. For example, 1 Gbps connections that can reliably carry 1 Tbytes per month will be required as video streaming almost entirely displaces multichannel terrestrial, satellite and cable distribution, eventually. The Big Tech firms can afford to contribute because they derive incremental revenues as the traffic they originate (e.g. as requested by customers) or generate themselves (e.g. advertising) increases.  If charges on them are even-handed versus their direct competitors they will all benefit, as will end users and the network operators. There is precedent elsewhere for cost sharing. In Korea, SKBroadband and SKTelecom have ended their dispute with Netflix and instead forged a partnership in which Netflix service is purchased in a subscription that presumably enables some of the network operator’s costs to be covered. 

Transparency and predictability in SEP licensing

While the Commission’s own studies have found no market failure in Standard-Essential Patent (SEP) licensing, proposed legislation requires licensors to register their patents and have some of them checked for essentiality. Proposals also include the setting of aggregate royalties, and mandatory but non-binding conciliation in the determination of Fair, Reasonable and Non-Discriminatory (FRAND) royalty rates.

Purported objectives for “improving the SEP licensing system” include providing transparency and predictability—for example, to SMEs with little or no expertise in licensing. However, licensors claim the associated costs and delays will weaken their positions and devalue their SEPs. 

Some MNOs lobbied to lower royalties as handset costs increased with the introduction of 3G and then 4G in the 2000s. Mobile phones were significantly morphing from mere voice and text devices to smartphones back then. Today’s Big Tech companies showed little interest in mobile SEP licensing until the introduction of the iPhone in 2007 and of Android in 2008.  Many Original Equipment Manufacturers (OEMs) subsequently entered the smartphone market without ownership of SEPs.

Comments favoring the Commission’s proposals to regulate royalty rates and licensing are significantly by Apple, automotive manufacturers  and trade groups representing implementers and in some cases funded by the above. The current Spanish Presidency of the Council of the EU is also a fan. The proposed new ministry of patent counting that will also be responsible for setting royalty rates will be at the EU Intellectual Property Office (EUIPO) in Alicante. Major SEP owners and licensors are largely against the proposals. Among the 78 responses to the Commission’s request for feedback on its proposed SEP legislation, the only response from a network operator was from Japan’s NTT DoCoMo, which is also an SEP owner. It also notes that “Regulation imposes excessive tasks and costs on SEP holders, even though it is unclear whether SEP holders will receive a fair and adequate return for their efforts.”  It seems Europe’s network operators are prioritizing their more pressing concerns about network costs, as indicated above, over getting involved too deeply in the public debate on SEP licensing.

Europe has enormous existing assets and potential in development and exploitation of new ICT including 5G Advanced, 6G, IoT and AI. For example, Ericsson and Nokia are global leaders in innovation and standards development for communications and video compression technologies. This needs to be nurtured not undermined. They have each invested around one billion dollars in R&D annually over many years. SEP licensing growth to support further innovation in standards should be fostered not attenuated by regulation. Licensing growth with bilateral and multilateral programs to increase licensing in verticals will encourage development of valuable standard-essential technologies that focus on those verticals. For example, SEP licensing in cars by Avanci has encouraged development of C-V2X technologies in 4G and 5G.  Licensing charges at a maximum of $20 for 4G and $32 for 5G per car are small in comparison to the existential threat posed to incumbent OEMs by them being marginalized in provision of value-added ICT services by Big Tech platforms or by being entirely displaced by new-entrant OEMs in Electric Vehicles (EVs), with alternative distribution and customer relationship models, such as Tesla and BYD. 

Harms, litigation and cures

It is abundantly clear that Big Tech platforms are commanding the lion’s share of any economic surplus in consumer ICT markets. Network operators, standard-essential technology developers and many implementers are much less profitable or rated far more modestly for expected growth. 

While I doubt examples of growth by Garmin, Dropbox and Mercardo-Libre will be sufficient to placate the European authorities, market failure and harm to other Core Platform Services providers will be difficult to prove. Vigorous legal challenges to any proposed interventions are inevitable.

Elsewhere, intervention is warranted in dysfunctional markets where some companies are flourishing while others upon whom they depend are unable to make the investment and returns required to provide what consumers want and need. Society will benefit socially and economically  from ubiquitous fixed and mobile gigabit per second and gigabyte per month broadband. 

However, the EU’s proposed regulation in SEPs will diminish SEP licensing costs to the detriment of the licensors who invest in developing the standard-essential technologies that are openly employed by numerous others. No good will come from biting off the hands that feed the entire ecosystem with new and useful standard-based technologies. There is no sign of harm from the SEP licensing business model. On the contrary, this has substantially enabled the very success that America’s Big Tech companies and the predominantly Asian smartphone OEMs have enjoyed from cellular and video standards with an increasingly mobile-first approach in the provision of many ICT services. In most cases these companies contribute little to the cellular and video technology standards development processes. In technology standards development it is a relatively small number of companies that own and license the vast majority of patents declared standard essential, in comparison to the many more firms that implement them.

This article was originally published by RCR Wireless on 27th September 2023.

U.S. Antitrust Division Chief Makan Delrahim: Making Patents Great Again?

Makan Delrahim, the leader of the Antitrust Division of the U.S. Department of Justice of the Trump Administration, has made several interesting comments concerning patents and the antitrust interface.  In a recent post on the Patently Obvious Blog, Professor Dennis Crouch discusses some debate concerning Mr. Delrahim’s positions as to when patent holders may create antitrust issues: “[Delrahim] explained that the DOJ’s historic approach has been a “one-sided focus on the hold-up issue” in ways that create a “serious threat to the innovative process.””  Professor Crouch includes links to documents concerning Delrahim’s positions as well as some responses. 

A few days ago, Mr. Delrahim spoke to the College of Europe in Brussels.  His speech is titled: “Good Times, Bad Times, Trust Will Take Us Far: Competition Enforcement and the Relationship Between Washington and Brussels.”  Most of the speech concerns the successes of cooperation between the DG Competition and the US DOJ Antitrust Division.  However, he does note some divergence in approach concerning intellectual property:

In the intellectual property area, we each have licensing guidelines; DG Competition’s guidelines were revised in 2014; ours just last year.  Both sets of guidelines highlight the benefits of robust IP protection, the importance of innovation incentives, and the risk that certain hardcore conduct poses to competition.

Intellectual property rights and innovation are topics I have cared about for a long time.  Intellectual property rights are enshrined in the U.S. Constitution, and I believe that strong protection of these rights drives innovation incentives, which in turn drive a successful economy.

A deep-seated concern for protecting incentives to innovate underlies many of the changes in U.S. antitrust law over the past several decades, and it is no coincidence that we have enjoyed a period of staggering innovation over that time.  But in an ever-evolving marketplace, success is not a static outcome.  We must continue to think critically about how best to calibrate our enforcement decisions to promote competition and innovation.

As you may know from what I have said publicly, a particular concern of mine is how we use antitrust enforcement in the context of standard setting.  In particular, I worry that we have strayed too far in the direction of accommodating the concerns of technology licensees who participate in standard setting bodies, very likely at the risk of undermining incentives for the creation of new and innovative technologies.  We continue to better our understanding of this important field.

The dueling interests of innovators and implementers always are in tension, but the tension is best resolved through free market competition and bargaining.  And that bargaining process works best when standard setting bodies respect the intellectual property rights of technology innovators, including the very important right to exclude.  To the extent a patent holder violates its commitments to a standard setting organization, remedies under contract law, rather than antitrust remedies, are more appropriate to address licensees’ concerns.

I am aware that there may be some distance between my position and that of some of my European counterparts.  If that is the case, however, we can look to our long history of effective and productive collaboration for guidance about how to proceed.  I will make every effort to work with our counterparts at DG Competition to narrow any gap between Brussels and Washington in this area.  We must maintain our close dialogue on the cutting-edge issues—innovation, intellectual property rights, and digital markets—that will occupy much of our time in the future. Innovators and consumers in both of our unions deserve nothing less.        

Mr. Delrahim also discussed the purpose of antitrust or competition law, and digital markets:

We also continue to work to narrow the differences between us on policy and substance.  Mr. Kolasky’s speech identified a “sharp divergence” between the EU approach and “the central tenet of US antitrust policy – that the antitrust laws protect competition, not competitors.”  But since those remarks, European Commissioners have again and again affirmed their commitment to the consumer welfare standard.  Starting with then-Commissioner Mario Monti and continuing with Commissioners Neelie Kroes, Joaquin Almunia, and on to Commissioner Margrethe Vestager today, Commissioners have expressed their commitment to the same consumer welfare standard that guides U.S. competition enforcement.  As Commissioner Vestager has stated, “we don’t always do things the same way.  But I think our goals are very similar: We want to protect competition and consumers.”

This is not to say that we have overcome all of the differences between us.  We still do have differences, but we talk about them regularly and respectfully, so that we can understand what motivates them.  

For example, we have not yet closed the gap in the area of unilateral conduct. European competition law still imposes a “special duty” on dominant market players, while we in the U.S. do not believe any such duty exists.

With respect to unilateral conduct, we have particular concerns in digital markets.  We continue to advocate for an evidence-based approach based on existing theories, which are sufficiently flexible to apply to new forms of doing business in the digital economy.  Where there is no demonstrable harm to competition and consumers, we are reluctant to impose special duties on digital platforms, out of our concern that special duties might stifle the very innovation that has created dynamic competition for the benefit of consumers. 

But the benefit of our close relationship with DG Competition is that we can and do talk about these differences, making progress along the way.  For example, in the ICN’s Unilateral Conduct Working Group, we spent significant time working together to develop an Analytical Framework for Unilateral Conduct.  Even though we have different views on how dominant players should be treated, we nevertheless reached agreement on a fairly significant policy document.

Will Mr. Delrahim Make Patents Great Again? 

EU Competition Commissioner Vestager is Wrong to Claim Smartphone Royalties are Excessive and Unjustified

I would like to introduce you to guest blogger Trevor Soames, a leading Brussels based antitrust lawyer with extensive experience of major high tech and IP-related investigations and litigation, having represented several major corporations in various cases over the years including Qualcomm, Nokia, Samsung and Microsoft.

The Competition Directorate of the European Commission (DG Comp) has, over the years, become increasingly interested and active in the field of SEPs. 

In a series of cases it has investigated a variety of potential competition law issues arising from the FRAND commitment, including allegations of patent ambush in Rambus, the transfer of FRAND commitments in IPCom, the risk of supposed “hold up” resulting from SEP holders seeking injunctive relief in Samsung, and in Motorola, here, and here. In addition, the European Commission investigated Qualcomm between 2005 and 2009 for, inter alia, alleged excessive pricing regarding its FRAND-committed SEPs. However, the case was terminated by the Commission when the four outstanding complaints were voluntarily withdrawn.

On 21 November 2016, the European Competition Commissioner, Margarethe Vestager, delivered a speech which indicated that the she intended to use the competition law tools at her disposal to deal more aggressively with excessive pricing cases.  She claimed smartphone royalties could be unjustifaibly high. I have already blogged, here, about her use of a defective aggregate royalty figure in support of her claims in this speech.

The following article by written by Trevor, and based on what he posted, here, comments generally on her speech, the policy issues that it raises and the wrongful identification of SEPs as being a supposed example of excessive pricing: 

"The Opening of the Door: is Excessive Pricing Control under Article 102 TFEU coming back into vogue

Commentary on Commissioner Vestager’s speech

Trevor Soames

Commissioner Vestager’s speech deliveredat Chillin’ Competition on 21 November 2016 entitled “Protecting consumers from exploitation,” spent much time discussing the application of Article 102 TFEU to excessive pricing.  A video of the speech is available on the Chillin’ Competition website, here, together with the Q&A in which the Commissioner said that she is taking a door which was almost closed and opening it a little.  The Q&A is at 14.50, my comment and question at 16.30 and the Commissioner’s response thereafter.

This short note provides a brief commentary on the subject of excessive pricing, European Commission enforcement policy, the examples cited by the Commissioner and what all this may mean for the application of Article 102 TFEU.

Excessive pricing control under Article 102 TFEU has been a fraught subject ever since the United Brands judgment of the CJEU. For our US cousins, the very idea that antitrust law could apply to excessive pricing must seem more than passing strange.  The Supreme Court made its views on the subject very clear in Justice Scalia’s Trinko opinion where he argued that the "mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices – at least for a short period – is what attracts 'business acumen' in the first place; it induces risk taking that produces innovation and economic growth”.

The European Commission, to its great credit, has exercised great restraint in applying Article 102 TFEU in this area.  A critical step in this process of increasing self-restraint was the adoption of the two Helsingborg complaint rejection decisions in 2014 which, unusually for such decisions, made a finding not merely that there was no Community interest in investigating the case further but rather, and more strongly, that there was “insufficient evidence to conclude that the prices charged…are unfair/excessive and thus constitute an abuse within the meaning of article 82 of the Treaty”. The decisions are worth (re-) reading, see this and this.

Since that time there have been very few cases of excessive pricing at EU level.  Except for a handful of exceptional cases, those which have been investigated as such have been terminated by the Commission without findings of infringement. 

The European Commission emphasised its cautious and restrained approach to the application of Article 102 TFEU to alleged excessive pricing in its written submission to the OECD of 7 October 2011. The paper provides a useful summary of its enforcement policy, the rationale behind its emphasis on exclusionary practices and the problems that would be encountered in taking on excessive pricing cases.  Given that this subject has raised its head again, re-reading this carefully written paper is well worthwhile.  The position was well summarised at para. 42, as follows:

“It seems that enforcement action against excessive prices has only been considered as a last resort, in markets where high prices and high profits do not have their usual signalling function to attract entry and expansion because of very high and long lasting barriers to entry and expansion. This recognises that even though in many markets prices may be temporarily high, due to a mismatch of demand and supply or the exercise of market power, it is preferable to give market forces the time to play out and entry and expansion to take place, thereby bringing prices back to more normal levels. We have not seen enforcement activity in such markets, recognising that it would be unwise to run the risk of taking a wrong decision and furthermore spend enforcement resources on solving a problem that would solve itself over time anyway. This is so even in markets characterised by sufficient entry barriers where there can be dominant firms. Of course, it may be that a dominant firm tries to prevent this process of entry and expansion taking place by artificially raising entry barriers. However, in such a situation it is more efficient for the competition authority to tackle the raising of these entry barriers directly since this will likely amount to an exclusionary abuse. If, however, the market is characterized by such entry barriers that it is unlikely that market forces over time will bring prices down, enforcement actions aimed directly against excessive prices may indeed be appropriate.”

We have seen, however, a greater willingness by some member states with less self-control than the Commission to develop cases in this area.  We have also seen other non-EU competition jurisdictions which look to the EU for inspiration in the area of dominance control seeking to utilise their domestic Article 102 equivalents to attack what they see as excessive pricing or unfair terms.  Some of these cases have been notorious in terms of the intellectual contortions and use (sometimes misuse) of EU case law relied on to reach their conclusions.

Although the Commissioner identified a few limits to the application of excessive pricing control, she gave a clear message.  Namely, that the European Commission is open for business in this area in a manner not seen for many years.  In response to my question, she confirmed that a door which had been almost closed has now been opened, at least to some degree.   She said “...we’re still bound to come across cases where competition hasn’t been enough to provide a real choice. Where dominant businesses are exploiting their customers, by charging excessive prices or imposing unfair terms”.  Rightly, she emphasised caution saying that “we have to be careful in the way we deal with those situations. Because sometimes, a company is dominant simply because it’s better than its competitors. And when that’s the case, it’s only fair that it should get the rewards of its efforts. But we also need to be careful that we don’t end up with competition authorities taking the place of the market. The last thing we should be doing is to set ourselves up as a regulator, deciding on the right price”.

However, “there can still be times when we need to intervene”.  In closing the Commissioner said that “we need to act carefully when we deal with excessive prices. The best defence against exploitation remains the ability to walk away. So, we can often protect consumers just by stopping powerful companies from driving their rivals out of the market.  But we still have the option of acting directly against excessive prices.  Because we have a responsibility to the public. And we should be willing to use every means we have to fulfil that responsibility”.

For me, it is those last two sentences that gave some cause for concern and indicated that the door was being opened, as was indeed confirmed.

Now, it is true, that the Commissioner stated that excessive pricing control should only be used where there is no ability for the customer/consumer to “walk away”. The product or service being charged for does not need to be an essential facility in the manner normally used, namely whether access to the deemed essential facility is denied to a competitor, or is granted only on discriminatory terms, but rather whether the customer/consumer has a choice (note that the Commissioner didn’t use the essential facility concept, the application of which has been limited after the Oscar Bronner case).  Furthermore, the Commissioner says that although there may be future cases where alleged excessive pricing may be investigated and, indeed, decided upon, the Commission would not be a price regulator and would not decide on “the right price”.  That is all very well and it sounds comforting, but what it really means is that the Commission would merely decide that the price charged was unlawful, explain the grounds on which it so held and no doubt order that the price be adjusted so that it was reasonable. Little guidance may be provided by the Commission as to what it considers reasonable in the particular circumstances and if the allegedly dominant company gets its pricing wrong, it will be fined for having failed to comply with the Commission’s order without being able to seek clarity from a Court.  So, although the Commission would indeed not “set” the price, its actions would undoubtedly change the pricing levels set and the impugned and allegedly company would need to be cautious. De facto the Commission will therefore be a price regulator, whatever it may claim.

Let us turn (briefly) to the three examples of excessive pricing identified by the Commissioner, Gazprom, pharmaceuticals and Standard Essential Patents (SEPs):

• Gazprom: this is not a pure excessive pricing case at all and seems a strange example to choose.  The Commission’s allegations revolve around a series of exclusionary behaviours, territorial restrictions and market partitioning including export bans, destination clauses and measures that prevent the cross-border flow of gas, the combination of which has resulted in higher gas prices and the segmentation of gas markets along national borders.
  
• Pharmaceuticals: the Commissioner seemed to be focussed on a number of examples of off-patent drugs having been subject to significant price increases.  A notorious example was the 5,000% price increase implemented by Turing Pharmaceuticals and its CEO Martin Shkreli for Daraprim, a 62 year old medication. In addition there have been a number of NCA investigations as referred to by the Commissioner, including the recent Article 102 TFEU decision of the UK CMA regarding alleged excessive pricing for phenytoin sodium capsules (Pfizer/Flynn). These cases warrant a lengthier discussion than is possible in this note, but there are special circumstances at play in the pharmaceutical sector due to Government imposed price regulation that create a somewhat unique environment within which competition law operates.  One might have thought, along the lines of Justice Scalia’s reasoning in Trinko, that an off-patent drug which is subject to a substantial price increase would incentivise new entrants to generate competitive alternatives.  This would be consistent with para. 61 of the European Commission’s 2011 OECD paper where it stated that “enforcement against excessive prices is generally only contemplated in markets with an entrenched dominant position where entry and expansion of competitors cannot be expected to ensure effective competition in the foreseeable future, that is markets where high prices and high profits do not have their usual signalling function to attract entry and expansion.”
  
• SEPs: this is yet another strange example to have been included in the Commissioner’s list as it relates to an alleged phenomenon (royalty stacking and hold-up) for which there is no evidence at all.  Unlike the Gazprom and pharmaceutical examples cited by the Commissioner, the claimed phenomenon is entirely hypothetical and there is no empirical evidence that shows or proves that it exists.  The speech claims that a recent study “shows that 120 dollars of the cost of each smartphone comes from paying royalties for the patents it contains.”  This is untrue.  The study cited by the Commissioner is based on a purely hypothetical analysis as its authors themselves said when they caveated the report by stating that “we estimate potential patent royalties in excess of $120 on a hypothetical $400 smartphone.” Even Professor Carl Shapiro, one of the leading proponents of the royalty stacking and hold up theory was unable in his 2015 IEEE paper to provide any such evidence, see the note I posted on this subject, here. There are multiple recent studies on this subject that elaborate on the utter and complete absence of any empirical evidence and, indeed, in the case of one important paper by Padilla and Llobet on “The Inverse Cournot Effect in Royalty Negotiations with Complementary Patents” seeks to explain, in a rigorous manner, why royalty stacking is not observed in real, as opposed to hypothetical, life. In other words, the Commissioner’s SEP example of alleged excessive pricing is no example at all.

In conclusion, I cannot recall a Competition Commissioner’s speech on excessive pricing in recent times.  It was clearly delivered for a purpose and as the Commissioner confirmed it would seem that “a door which was almost closed” has now been opened “a little”.  But what does that mean?  Some of the statements made, as well as examples used, give cause for concern.  We will have to wait and see how this policy initiative develops, both at the Commission and at member state level.  My sense is that there is a greater potential for investigation and intervention in this area than for many years and a political willingness to go into territory only rarely entered into previously.

© Trevor Soames

Avocat au Barreau de Bruxelles

Solicitor-Advocate & Barrister"

DG Comp Pursues Settlements on SEP Licensing with Samsung and Google’s Motorola

Here's IP Finance's latest guest post from Keith Mallinson (WiseHarbor). Here he brings us up to date on the prospects for closure in an investigation which many people feel should not have been started in the first place. Keith writes:

DG Comp Pursues Settlements on SEP Licensing with Samsung and Google’s Motorola 

According to Bloomberg press reporting, the European Union’s competition chief said he is hoping to close probes into whether Samsung Electronics and Google’s Motorola Mobility breached European antitrust rules by seeking injunctions for infringement of key mobile-phone patents in their struggle for supremacy with Apple. Competition Commissioner Joaquin Almunia has recently said that the European Commission’s approach on standard-essential patents will be “clarified” in two separate cases concerning these companies.

Allegedly, it’s a hold up!

Yet the case for competition authority intervention lacks adequate support. Key issues under consideration by DG Comp include whether these defendant companies have the possibility to “hold-up” standards if they seek, obtain or even threaten injunctions for the infringement of standard-essential patents, and are thereby able extract unreasonable royalties. As Commissioner Almunia said in 2012, 

“[B]ecause to build a modern smartphone one needs thousands of standard-essential patents, their holders often have considerable market power. Any company that holds these patents can effectively hold up the entire industry with the threat of banning the products of competitors from the market. This sort of hold-up is not acceptable”.

The qualifiers possibility and threaten are most significant here because there is so little evidence of hold-up, with abundant indications to the contrary, and because injunctions involving standard-essential patents are so rarely granted and are invariably short-lived. In the recent case with Microsoft pursuing claims of hold-up against Motorola in the Western District of Washington, even Microsoft’s experts Kevin Murphy, Timothy Simcoe, Matthew Lynde conceded under cross-examination that hold-up was not necessarily a problem. Instead they stated there was no evidence of hold-up and could not identify a single license that had been held up. Similarly, in a U.S. International Trade Commission investigation, Michael Walker who was until recently ETSI’s Chairman, testified that patent hold-up has never been a problem at ETSI and that no standards have been blocked by SEPs.

The attention of competition authorities has been drawn to the smartphone “patent wars” because the players are large, very vocal, deep-pocketed, have disparate positions with respect to SEPs and are most litigious. Those who are crying foul and seeking antitrust remedies include companies commanding some of the highest profit margins and largest cash piles in the ICT sector. Patent infringement litigation is predominantly among the above smartphone market leaders Apple, Samsung and it also includes some other industry heavyweights – most notably Microsoft and Google’s Motorola. These players are all jockeying for position in the large and severely disrupted smartphone marketplace. This is illustrated by the market entry of Apple with its highly-successful iPhone models since 2007 at the expense of Nokia and BlackBerry in particular, with their rapid demise from smartphone market leadership to fighting for survival since 2009.  

Exhibit: Stellar Market Growth, with Dramatic Rises and Falls for Smartphone Manufacturers

Even Commissioner Almunia’s spokesperson, Antoine Colombani, remarked in March of this year that 

“[t]he markets for smartphones and tablets are very dynamic, innovative and fast-growing. Samsung's growing market position and the success of Google's Android platform are good reasons to believe that competition is strong on these markets.”

Tilting the playing field

Changing rules of the game for SEP licensing would be a major step and, given the success of the mobile communications market, completely unwarranted. It would significantly affect the relative competitive positions of many market players. Business models and IP assets differ enormously between old-guard phone manufacturers owning many mobile technology SEPs, and new entrants having to build their stocks of these from scratch while already owning rich troves of other IP, in many cases. Nokia fell to only a few percent smartphone market share despite its multi-billion Euro annual R&D investments over many years building market-leading accumulations of SEPs.

Injunctions are fundamental to patent law, and are purposely not precluded in the intellectual property rights policies agreed by consensus or majority voting in standard-setting organisations such as ETSI and in SEP licensing agreements. Eliminating or restricting further the possibilities for seeking injunctions (for example under the threat of antitrust sanctions) would have major adverse consequences. For example, in the absence of being able to seek injunctive relief, a potential licensee might see little downside in simply waiting to see if a court eventually awards “reasonable royalty” damages, instead of agreeing to pay these with certainty at the outset. With no possibility of injunctions, “ reverse hold-up” could occur, with patentees unable to receive adequate compensation for their innovation investments.

The U.S. Federal Trade Commission’s Joshua Wright also counsels against competition authorities’ “attempts to influence SSOs' IPR policies." Instead he states that 

"sanctions available to address patent hold-up and related concerns under other legal regimes are more than adequate to provide optimal deterrence against patent hold-up." 

Injunctions are far from being automatic entitlements and are only ever granted, if at all, for SEPs after extensive deliberations in court. In the U.S., decisions by the courts and the International Trade Commission show that judges have the ability to determine whether or not injunctions or import Exclusion Orders are warranted. And Exclusion Orders can be vetoed by the President of the United States, as recently occurred when an import ban instigated by Samsung against Apple was overturned. In the EU there have been only a few SEP-related injunctions granted, and product bans have had little impact on the market or consumers.

Evidence indicates that competition authority interventions are unwarranted and could be very harmful. Apple, for example, has achieved rapid market share growth and stellar gross profit margins of up to 60% on the iPhone while relying overwhelmingly on others’ SEPs. It is far from certain that any antitrust intervention-induced SEP cost reductions for manufacturers would necessarily be passed on to consumers. But limiting innovators’ ability to derive licensing income and other value from SEPs would deter R&D investment, participation in SSOs and contributions to standards. Under the existing system, consumers have not been harmed, they have benefited from exceptional improvements in product performance, while the numbers of suppliers and products have expanded substantially. Quality-adjusted consumer prices have reduced significantly and continue to do so.

Time out on intervention

Time is running out for Joaquin Almunia who is coming towards the end of his term as Competition Commissioner. He is therefore eager to close the Samsung and Motorola cases before departure. Recent comments, as reported by Bloomberg; that decisions “not only depend on the Commission side” seem to indicate he is seeking a voluntary remedy with agreement from Samsung and Motorola (or a Commitment Decision under Article 9 of the EU’s antitrust regulation). With such poor evidence of hold-up or consumer harm, it is unsurprising he prefers to pressure the defendants into such a settlement than go for a full negative decision that could be appealed by these defendants. This is because a Commitment Decision is “voluntary” and does not require the EC to establish that the company has “market power”, nor that it abused such power. On the other hand, a full negative decision would require the EC to establish its theory of harm under scrutiny of the courts, which would appear appropriate given that Commissioner Almunia aims to provide “clarity”. However, despite investigating the issue of SEP licensing on the basis of Fair Reasonable and Non-Discriminatory terms for almost a decade, DG Comp has not yet had the confidence (or, some would say, the legal basis) to issue a full decision. That stance seems unlikely to change right now and there are real questions that the EC has to answer about why it is taking this aggressive position and how it believes its actions will encourage, rather than jeopardise, the great work and accomplishments of SSOs and their members.