Paradoxically, a patent grants its proprietor a monopoly and allows derogation from the general principles of free competition. Yet, this is precisely what European competition law seeks to regulate.
It is therefore essential to understand the interplay between patent law and European competition law.
Distortion of Competition
Principle
Article 101 TFEU provides that an undertaking may not prevent, restrict, or distort normal competition.
Necessary Restrictions
Nevertheless, such conduct may be acceptable if it improves the production or distribution of products or promotes technical or economic progress. However, there is a significant caveat: this is only acceptable if:
- the restrictions are absolutely necessary to achieve this objective; and
- it does not enable the undertakings (engaging in such conduct) to eliminate competition.
De Minimis Doctrine
Principle
To facilitate the determination of what constitutes an appreciable distortion of competition, the Commission published a communication on the de minimis doctrine (2001).
Thus, Article 101(1) TFEU does not apply if the combined market shares of the undertakings involved do not exceed, on the relevant market:
- 10% for agreements between competitors (primarily horizontal agreements),
- 15% for agreements between non-competitors (primarily vertical agreements), and
- 10% for mixed agreements (both horizontal and vertical) or where their nature is unclear.
Exceptions
However, there are exceptions:
- hardcore restrictions: price-fixing, output limitation, market allocation, etc.;
- the cumulative effect theory, i.e., « where competition on a relevant market is restricted by the cumulative effect of agreements for the sale of goods or services entered into by different suppliers or distributors« ;
- where market shares do not exceed the threshold by more than 2% for two consecutive calendar years.
However, exceeding these thresholds does not necessarily mean that the restriction is « appreciable. » A case-by-case assessment is required. Furthermore, SMEs (i.e., companies with fewer than 250 employees and an annual turnover not exceeding €50 million or an annual balance sheet total not exceeding €43 million) are not affected.
Technology Transfer Agreements
Principle: Authorization of Such Agreements
Under Commission Regulation No 316/2014 of 21 March 2014, Europe has more precisely regulated technology transfer agreements or license agreements in which the licensor imposes specific conditions on the licensee (particularly at the commercial level rather than the use of a product covered by IP rights).
The principle is therefore that Article 101(1) TFEU does not apply to technology transfer agreements that impose competition restrictions, provided the following conditions are met:
- the IP rights are valid;
- the combined market share held by the parties does not exceed 20% on the relevant market(s) (for horizontal agreements);
- the market share held by each party does not exceed 30% on the relevant market(s) (for vertical agreements).
Prohibited Clauses
Nevertheless, the following remains prohibited:
- If the companies are competitors
- fixing sales prices to third parties (or limiting the ability to set them);
- limiting production for each party to the agreement (within the framework of reciprocal agreements);
- allocating customers or a market (particularly for reciprocal agreements and under certain conditions);
- limiting the licensee’s own rights over its own technologies.
- If the companies are not competitors
- setting a minimum sales price to third parties;
- limiting the territory or customers (under certain conditions).
Furthermore, it is impossible to prohibit in the license agreement:
- the ability to challenge the licensed IP rights;
- the obligation to assign any IP related to improvements made to the licensed technologies.
Dominant Position
Principle
The Article 102 TFEU provides that any abuse of a dominant position in the European market must be avoided.
A dominant position is not in itself a problem: it is the abuse of that position that is problematic.
Examples of Abuse in IP
In the field of interest, abuse may include:
- deliberately preventing interoperability with its products (Commission decision, Microsoft, COMP/C-3/37.792, 23 March 2004, upheld on appeal)
- refusing, without objective justification, to license to third parties (CJEU decision, IMS Health, C-418/01, 29 April 2004);
- settling disputes regarding the validity of its IP rights as this limits the entry of new players
- etc.
Standard-Essential Patents
Principle
A standard-essential patent is a patent whose exploitation is « indispensable to any competitor considering manufacturing products compliant with the standard to which it is linked » (CJEU Huawei v. ZTE, 16 July 2015, C-170/13).
What is a Standard?
There are numerous standards, particularly in the fields of electronics and communications: USB, 5G, Wi-Fi, etc.
These standards enable strong interoperability.
Most often, standard-setting organizations (or SSOs) are entirely independent and are not organized around Europe or its Member States. Among the key standard-setting organizations are:
- European Committee for Standardization (CEN),
- European Committee for Electrotechnical Standardization (CENELEC),
- European Association for the Co-ordination of Consumer Representation in Standardisation (ANEC),
- European Telecommunications Standards Institute (ETSI),
- European Computer Manufacturers Association (ECMA),
- Institute of Electrical and Electronics Engineers (IEEE).
However, if a patent exists and covers a standard, it is theoretically possible to block this interoperability…
This is why industrial players (or even Europe) have attempted to define rules to regulate the market.
Industry Self-Regulation
Declaration of essential patents
Most often, members of standardization bodies commit to declaring their patents essential to the standard in question.
For example, Article 55 of the 3GPP rules states:
Individual
Members should declare at the earliest opportunity, any [Intellectual
Property Rights] which they believe to be essential, or potentially
essential, to any work ongoing within 3GPP. Declarations should be made
by Individual Members to their respective Organizational Partners.
It is relatively rare for this essentiality to be verified at the time of declaration, although it can always be challenged in the context of litigation.
In return for this declaration, and depending on the standardization body, any third party wishing to implement the standard must:
- pay a single license to the standardization body, which distributes the proceeds (e.g., MPEG standard) (though this is very rare among standardization bodies); or
- negotiate with each declared patent proprietor,
- without the license terms being regulated by the standardization body; or
- under FRAND terms.
If this declaration is not made, the patent will likely not be enforceable, though this is ultimately for the courts to decide.
FRAND licenses
A FRAND license means that the license must be:
- Fair: the license must not include terms that unduly restrict competition;
- Reasonable: the license fee must not be prohibitive in relation to the advantage provided by the inventions covered by the industrial property rights;
- Non-Discriminatory: all third parties must be treated equally, and if this is not the case, it must be justifiable.
Assignment of essential patents
An interesting question arises when a patent essential to a standard is assigned to a third party and the assignor had committed to granting FRAND licenses for that patent.
Does this commitment « transfer » to the assignee (i.e., the theory that the commitment is an accessory to the title), or is the commitment personal and does not bind the assignee?
German case law (IP Bridge v HTC, Mannheim October 2018) appears to consider it an accessory to the patent and thus inseparable from it…
Regulation by the CJEU in general
It should never be forgotten that the competition law of the European Union remains applicable.
Regulation by the CJEU concerning FRAND licenses
Background
In the 2010s, ZTE was attempting to reach a FRAND license agreement with Huawei but considered the terms requested not entirely reasonable.
As the agreement was delayed, Huawei decided to initiate an infringement action against ZTE.
ZTE (Huawei vs ZTE, C‑170/13, 16 July 2015) argued that the infringement action brought by Huawei Technologies constituted an abuse of a dominant position, as Huawei Technologies’ demands were disproportionate toward a third party (ZTE) willing to pay a license but unable to reach an agreement with the rights proprietor.
ZTE therefore argued that Huawei Technologies’ behavior was contrary to Article 102 TFEU.
Dominant position linked to refusal to grant a license?
Furthermore, the CJEU considers that refusing to grant a FRAND license may constitute an abuse of a dominant position:
In these circumstances and having regard to the fact that a commitment to grant licenses on FRAND terms creates legitimate expectations on the part of third parties that the SEP proprietor will indeed grant licenses on such terms, a refusal by the SEP proprietor to grant a license on those same terms may constitute, in principle, an abuse within the meaning of Article 102 TFEU.
Dominant position linked to infringement action?
According to the CJEU, an action is not in itself an abuse of a dominant position.
The CJEU thus distinguished two types of action:
- Actions for cessation of infringement or for product recall,
- Actions seeking the provision of accounting data and damages
Regarding point 1, there is no abuse of a dominant position if, cumulatively:
- prior to initiating the action, the patent proprietor has,
- warned
the alleged infringer that one of its actions was potentially
infringing by identifying the relevant IP right and specifying the
manner in which it was being infringed, and, - submitted to that alleged infringer,
after the latter expressed its willingness to conclude a license
agreement on FRAND terms, a license offer specifying in particular the
official fee and its calculation method;
- warned
- the alleged infringer, while continuing to exploit the IP right, has not responded to that offer with due diligence, “in accordance with recognized commercial practices in the field and in good faith,” which must be determined on the basis of objective factors and implies, in particular, the absence of any delaying tactics.
In short, as you will have gathered, there is still a lot of subjectivity involved…
Regarding point 2, the CJEU considers that there is no abuse of a dominant position under any circumstances, as the request for accounting information and the claim for damages have no direct impact on competition in the commercial sense.
Furthermore, the CJEU provides no guidance on the official fee: how should it be calculated? In short, plenty of interesting debates ahead…
Royalty-stacking concept
“Royalty-stacking” refers to the consideration of all patent license official fees for a product.
So far, nothing particularly groundbreaking…
However, this concept helps to understand that it is, of course, unthinkable for the total amount of official fees to exceed the price of the product… otherwise, one might conclude that the official fees are not very reasonable.