12 April 2012
An essential IP right is one which has been included within a standard and without which it would be impossible to implement the standard. The only way to avoid the violation of this essential IP right is to request a licence from the rights owner.
The European Commission has considered standardisation agreements, and its view is set out in its guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union (TFEU) to horizontal cooperation agreements. The guidance provides that standard-setting agreements which risk creating market power must satisfy certain conditions to fall outside the scope of Article 101(1) of the treaty. One of those conditions is that standardisation agreements provide access to the standard on fair, reasonable and non-discriminatory (FRAND) terms. The guidance further provides that in order to ensure effective access to the standard, the IP rights policy of the standard organisation should require participants, wishing to have their IP right included in the standard, to provide an irrevocable written commitment tooffer to license their essential IP rights to all third parties on FRAND terms. The guidance on the application of Article 101 to technology transfer agreements also provides that technologies which support a standard will normally be required to be licensed to third parties on FRAND terms.
FRAND commitments are intended to prevent rights 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 in to the standard, or charging discriminatory royalty fees. Thus, there is the potential for hold-up by the owner of patented technology after its technology has been adopted as the standard and others have incurred sunk costs which effectively increase the relative costs of switching to an alternative standard.
In addition to the word 'hold-up', 'opportunism' is another word that is commonly used in the relevant economic literature. A patent that is essential to the implementation of a standard may have a much higher value once the standard has been adopted. Thus, a patent holder may commit to offer its IP right under FRAND licensing terms ex ante and after the adoption of the standard request licensing terms which are not in line with its FRAND commitment. It has thus been acknowledged that it can be difficult, in practice, or a commitment to license on FRAND terms to constrain the charged price.
Could an individual party or all parties to the standards agreement argue that an exemption is available pursuant to Article 101(3) of the treaty? The argument would be that a standard-setting agreement brings benefits, and so standard-setting agreements which 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 improve supply conditions. However, the exemption is conditioned upon a finding that the agreement contains no restrictions of competition that are indispensable to achieve the reasonable objectives of the
standard, such as unnecessary restrictions on innovation; and access to the standard must be made available to new entrants on the market wishing to comply with the standard.
This point of view, together with the guidance, suggests that the absence of a FRAND commitment in a standard-setting agreement means that it is unable to qualify for exemption under Article 101(3). This point of view might be valid only when no alternate standard is available. One commission decision, by analogy, supports this view. IGR Television v Salora involved the joint acquisition and exercise of certain patents, with a view to controlling the market for stereo television sets. The commission considered that where the exercise of patent rights has the object and effect of excluding from the relevant market companies not belonging to a group, it will constitute a restriction of competition within the meaning of Article 101. Following the commission's investigations, IGR declared it was all willing to grant licences on reasonable terms to all other manufacturers. With respect to this case, a commission director noted that:
"under [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...
although in general there is no duty to supply under [Article 101], there is a duty
when a discriminatory refusal has sufficiently serious anticompetitive effect."
The above relates to a standard-setting agreement and the parties thereto, showing that the commission has precedent and guidance on the application of Article 101. The extent to which Article 101 is applicable to the individual licence between the patent owner, which is party to a standard agreement, and a third-party licensee is an open question. To date, the commission has not addressed this in any decisions, and the guidance does not address the point. Whether the review of the Technology Transfer Guidelines and the related block exemption will address this issue remains to be seen.
There are several challenges for the commission in considering the application of Article 101 to the individual licence. One is that the penalties (void and unenforceable agreements) that would apply to an anti-competitive licence would then create discrimination between the licensor whose agreement is challenged and another licensor which also may not have complied with the FRAND commitment, but for whatever reason is not the subject of a complaint. Yet at the same time, that other licensor is likely to have benefited from the reduction in competition downstream.
Arguably, these challenges have drawn the commission to focus to date on the possible application of Article 102 when considering individual licence agreements. Even then, the commission has used largely informal methods to resolve FRAND abuse of dominance allegations, strongly suggesting its desire to use a light regulatory touch.