EU competition law as it relates to licensing of intellectual property rights (IPRs) that are incorporated into technical standards has concentrated to date on the application of Article 102 of the Treaty on the Functioning of the European Union (TFEU), which prohibits an abuse of a dominant position. Focus has centered on the refusal of an IPR owner either to license the rights or to license the rights on Fair, Reasonable and Non-Discriminatory (FRAND) terms. However, this article will deal with licensing under the EU rules relating to anticompetitive agreements, namely Article 101 TFEU.
Standards play an important role, particularly in the telecommunications sector. It is not possible to manufacture telecommunications equipment—including infrastructure equipment, end-user terminal equipment and modems that comply with these standards—without infringing “essential IPR.” According to the European Telecommunications Standards Institute (ETSI),1 the term “essential” as applied to IPR “… means that it is not possible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operate EQUIPMENT or METHODS which comply with a STANDARD without infringing that IPR. For the avoidance of doubt in exceptional cases where a STANDARD can only be implemented by technical solutions, all of which are infringements of IPRs, all such IPRs shall be considered ESSENTIAL.”2
In simpler terms, an essential IPR is an IPR that has been included within a standard and where it would be impossible to implement the standard without making use of this IPR. The only way to avoid the violation of this essential IPR is to request a license from the IPR owner.3
Before the adoption of a standard by standard setting organisations (SSOs), patents from different suppliers may be in competition with each other for inclusion in the standard. Patents only become essential after a specific standard has been adopted and there is a “lock-in” to the standard. After the adoption of a standard, switching to an alternative technology is difficult, particularly if technology adopters have invested in manufacturing assets that are specifically designed to meet the standard. The situation is compounded if there are no other alternate technologies that are accepted as standard.
View of the European Commission
Although it has been recognised that standards are important, especially in the context of interoperability,4 there is a concern that implementation of standards can lead to competition issues.5 It has been recognised by antitrust authorities that upon inclusion of an IPR in a standard, the owner of an IPR necessary to implement the standard may have the power to extract higher royalties or other licensing terms that reflect the absence of competitive alternatives.6
The European Commission (the Commission) has considered standardisation agreements, and the Commission’s view is set-out in its guidelines on the applicability of Article 101 TFEU to horizontal co-operation agreements (the Guidance).7 The Guidance provides that standard-setting may have an effect on four possible markets:
The product or service market to which the standard or standards relate;
The technology market, where the rights to intellectual property are marketed separately from the products to which they relate;
The market for standard setting if there exists different standard-setting bodies or agreements; and
If relevant, the market for testing and certification.8
The Guidance further provides that standard setting agreements that risk creating market power need to satisfy certain conditions to fall outside the scope of Article 101(1) TFEU.9 One of those conditions is that standardisation agreements need to provide access to the standard on FRAND terms. The Guidance further provides that in order to ensure effective access to the standard, the IPR policy of the SSO should require the participants wishing to have their IPR included in the standard to provide an irrevocable commitment in writing to offer to license their essential IPR to all third parties on FRAND terms. This is known as a “FRAND commitment.” Paragraphs 280, 283 and 285 of the Guidance, respectively, state that:
280. Where participation in standard-setting is unrestricted and the procedure for adopting the standard in question is transparent, standardisation agreements which contain no obligation to comply with the standard and provide access to the standard on fair, reasonable and non-discriminatory terms will normally not restrict competition within the meaning of Article 101(1).
283. Furthermore, the standard-setting organisation’s rules would need to ensure effective access to the standard on fair, reasonable and non discriminatory terms.
285. In order to ensure effective access to the standard, the IPR policy would need to require participants wishing to have their IPR included in the standard to provide an irrevocable commitment in writing to offer to license their essential IPR to all third parties on fair, reasonable and non-discriminatory terms (‘FRAND commitment’). That commitment should be given prior to the adoption of the standard. At the same time, the IPR policy should allow IPR holders to exclude specified technology from the standard-setting process and thereby from the commitment to offer to license, providing that exclusion takes place at an early stage in the development of the standard. To ensure the effectiveness of the FRAND commitment, there would also need to be a requirement on all participating IPR holders who provide such a commitment to ensure that any company to which the IPR owner transfers its IPR (including the right to license that IPR) is bound by that commitment, for example through a contractual clause between buyer and seller.
The guidelines on the application of Article 101 TFEU to technology transfer agreements (the Technology Transfer Guidelines) also provide that technologies that support a standard will normally be required to be licensed to third parties on FRAND terms.10 The European Parliament has also stressed the need to ensure that licenses for essential IPRs contained in standards are provided on FRAND conditions.11
FRAND commitments are intended to prevent IPR holders from making the implementation of a standard difficult by refusing to license, or by requesting unfair or unreasonable fees (excessive fees) after the industry has been locked into the standard, or by charging discriminatory royalty fees.12 Thus, there is the potential for a hold-up by the owner of patented technology after its technology has been chosen by the SSO as a standard and after others have incurred sunk costs that effectively increase the relative costs of switching to an alternative standard.
The word “opportunism” is also used in the relevant economic literature to describe an IPR holder who, for example, waits until commitments are made and then seeks to extract a high royalty or to direct matters so that it will have an essential patent without making a firm commitment ex-ante on the terms on which its IPR will be licensed. A patent-holder may commit to offer its IPR under FRAND licensing terms ex-ante. Later, however, it might act to hold up technology adopters by requesting licensing terms that are not in line with its FRAND commitment after the adoption of the standard.13
A patent essential to the implementation of a standard may have a much higher value once the standard has been adopted. This creates an incentive for the patent holder to attempt to extract the ex-post, rather than the ex-ante, value of its technology. For this reason, it “… can be difficult in practice for a commitment to licence on fair, reasonable and non-discriminatory terms to constrain the charged price.”14
Is Exemption Available if There Are Competition Concerns?
Can an individual party or all parties to a standards agreement argue that exemption is available pursuant to Article 101(3) TFEU? The argument would be that a standard-setting agreement brings benefits and so standard-setting agreements that contain restrictions of competition may be exempted under Article 101(3) if they “… promote economic interpenetration in the common market or encourage the development of new markets and improved supply conditions.”15 However, it should be noted that “[t]he exemption is conditioned inter alia upon a finding that the agreements contain no restrictions of competition that are not indispensable to achieve the reasonable objectives of the standard, such as unnecessary restrictions on innovation and that access to the standard must be made available to new entrants on the market wishing to comply with the standard.”16
This view, together with the Guidance, suggests that the absence of a FRAND commitment in a standard-setting agreement means that it is not able to qualify for exemption under Article 101(3) TFEU. This point of view may only be valid when there is no alternate standard available. There is one Commission decision that, by analogy, supports this view. The case involved the joint acquisition and exercise of certain patents with a view to controlling the market in stereo television sets.17 In this case the Commission considered that where the exercise of patent rights has the object and effect of excluding from the relevant market firms not belonging to a group, it would constitute a restriction of competition within the meaning of Article 101 TFEU. Following the Commission’s investigations, IGR declared its willingness to grant licenses on reasonable terms to all other manufacturers. With respect to this case, the then-Director in the Competition Directorate General, in a speech published soon after the case, noted his personal opinion as follows:
[U]nder [Article 101], IGR and its members would not have been permitted to shut Salora out of the Germany [sic] market while exploiting it themselves. If necessary, the Commission would have ordered compulsory licensing by IGR.
[A]lthough in general there is no duty to supply under [Article 101], there is a duty when a discriminatory refusal has sufficiently serious anticompetitive effect.18
It is noteworthy that despite the absence of a FRAND commitment, the Commission did open an investigation in IGR Television/Salora and considered that there would be a marked effect on the structure of the market and considerable harm to consumer’s interests.
The discussion above relates to standard-setting agreements and the parties to them, showing that the Commission has precedent and guidance on the application of Article 101. There is an open point as to the extent of applicability of Article 101 to the individual licence between a patent owner that is party to a standard agreement and a third-party licensee. To date, the Commission has not considered this issue in any decisions, and the Guidance does not address the point. It remains to be seen whether review of the Technology Transfer Guidelines and the related block exemption will address this issue.
There are several challenges for the Commission in considering the application of Article 101 TFEU to the individual license. For example, the sanctions (void and unenforceable agreements) that would apply to an anticompetitive license may discriminate between the licensor whose agreement is challenged and another licensor who may not have complied with the FRAND commitment but who is not the subject of a complaint. At the same time, however, that other licensor is likely to have benefitted from the reduction in competition downstream.
It is, we suggest, these challenges that have drawn the Commission to focus on the possible application of Article 102 TFEU when considering individual license agreements. Even then, the Commission has largely used informal methods to resolve FRAND abuse of dominance allegations, strongly indicating the desire on the part of the Commission to use a light regulatory touch.
1 The European Telecommunications Standards Institute produces globally applicable standards for Information and Communications Technologies, including fixed, mobile, radio, converged, broadcast and Internet technologies and is one of the standard setting organisations recognised under Directive 98/34 EC of the European Parliament of the Council dated 22 June 1998.
2 ETSI Directives, Version 28, May 2011 available at: http://portal.etsi.org/directives/home.asp.
3 ETSI Guide on IPRs, 27 November 2008, clause 1.5.
4 See “Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, A Digital Agenda for Europe,” dated 19 May 2010.
5 “Intellectual Property rights in standard setting from a competition law perspective,” Grazyna Piesiewicz and Ruben Schellingerhout, (Directorate General for Competition), Competition Policy Newsletter, 2007, No. 3, p. 36.
6 See “Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition,” Issued by the U.S. Department of Justice and the Federal Trade Commission, April 2007.
7 “Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements,” text with EEA relevance, OJ C 11, 14.1.2011, p. 1–72.
8 Horizontal Guidelines, para 261.
9 Horizontal Guidelines, para 278.
10 Guidelines on the application of Article 101 to technology transfer agreements - OJ C 101, 27.4.2004, p. 2–42, paragraph 167.
11 European Parliament Resolution of 21 October 2010.
12 Horizontal Guidelines, paragraph 287.
13 See “Economics at DG Competition, 2009-2010,” Damien Neven, Miguel de la Mano; and Federal Trade Commission and Department of Justice Antitrust Division Roundtables, November 6, 2002.
14 Ibid., fn. 5.
15 Ibid., fn. 5 quoting paragraph 169 of a Commission notice that preceded the Guidance (see fn. 7).
16 Ibid., fn. 5.
17 IGR Television/Salora, Eleventh Report on Competition Policy, pp. 63-64.
18 John Temple Lang, European Community Antitrust Law-Innovation Markets and High Technology Industries (New York: Fordham Corporate Law Institute, Volume 20, Issue 3 1996).