The Antitrust Hotch Potch

Searle Center conference on Technology Standards, Innovation and Market Coordination

On February 7-8, I will participate in the above conference, which is organized by my friend Daniel Spulber at Northwestern University. Although the conference is on invitation only, the papers to be delivered can be dowloaded below.

The theme of the conference is on market-based approaches to standard setting. The conference will explore the economic benefits and costs of intellectual property (IP) protections in the context of standards. The conference will focus on the positive economics of incentives for invention and incentives for innovation and commercialization rather than the more standard normative economics calling for regulation of technology transfer contracts.

Papers

Exploring the Nature and Extent of Patent Hold-Up Surrounding Standards under Various Approaches to Patent Remedies
F. Scott Kieff, George Washington University
Anne Layne-Farrar, Charles River Associates

Property as Platform: Coordinating Standards for Technological Innovation
Henry E. Smith, Harvard University

Ex-Ante Agreements in Standard Setting and Patent Pool Formation
Joaquin Poblete, London School of Economics and Pontificia Universidad Catolica de Chile 
Gaston Llanes, Pontificia Universidad Catolica de Chile

Complementary Patents and Market Structure 
Klaus M. Schmidt, University of Munich

Standards and the Incentives for Innovation
Troy J. Scott, RTI International
John T. Scott, Dartmouth College

Do NPEs Matter?: Non-Practicing Entities and Patent, Litigation Outcomes
Michael J. Mazzeo, Northwestern University
Jonathan Hillel, Skadden, Arps, Slate, Meagher & Flom LLP
Samantha Zyontz, Harvard University

Participation in Standard Setting Organizations
Margaret Kyle, University of Toulouse
David Salant, University of Toulouse

Who Cooperates in Standards Consortia-Rivals or Complementors?
Justus A. Baron, Mines ParisTech
Tim Pohlmann, Technische Universitat Berlin

SSO Rules, Standardization, and SEP Licensing: Economic Questions from the Trenches
Roger G. Brooks, Cravath, Swaine & Moore LLP

Ten Years of DG Competition Effort to Provide Guidance on the Application of Competition Rules to the Licensing of Standard-Essential Patents: Where Do We Stand? 
Damien Geradin, Covington & Burling, LLP

Timing of Discovery and the Division of Profit with Complementary Innovations
Annalisa Biagi, University of Catania
Vincenzo Denicolo, University of Bologna and CEPR

Payments and Participation: The Incentives to Join Cooperative Standard Setting Efforts
Anne Layne-Farrar, Charles River Associates
Gerard Llobet, Centro de Estudios Monetarios y Financieros (CEMFI)
Jorge Padilla, Compass Lexecon

The Patent Policy Debate in the High-Tech World: A Literature Review
Kirti Gupta, Qualcomm Inc.

Damien

Ten Years of DG Competition Effort to Provide Guidance on the Application of Competition Rules to the Licensing of Standard-Essential Patents: Where Do We Stand?

After a two-year silence on the subject, here is my new paper on EU competition law and standard-essential patents:

One of the most intractable competition issues for the European Commission (the “Commission”) over the last ten years has been to define the circumstances in which the licensing conduct or litigation strategy of a standard-essential patent (often referred to as “SEP”) holders amount to an abuse of a dominant position in breach of Article 102 of the Treaty on the Functioning of the European Union (TFEU). This issue has been particularly difficult to handle, not only because of the complex nature of the legal and economic questions it raises, but also because of the significant business issues at stake. Hundreds of millions of dollars may be at stake in licensing negotiations.

The enforcement of SEPs has made headlines in the context of the “smartphone war”, where the main device manufacturers (Google Motorola, Samsung, HTC, Nokia, etc.) have been litigating heavily in court. For instance, the patent dispute between Apple and Samsung has generated over 50 lawsuits in a variety of jurisdictions. Some of these manufacturers have also filed competition complaints on both sides of the Atlantic, as well as in other jurisdictions. These complaints have, in turn, triggered investigations into the licensing conduct and litigation strategy of several SEP holders, which will be discussed below.

Against this background, the purpose of this paper is to address the competition law issues that may be raised by the licensing conduct and/or enforcement strategy of SEP holders. Section II reviews the Commission’s efforts in recent years to address the competition law concerns raised by SEPs. It will be shown that the Commission has used a variety of approaches to attempt to set some principles regarding the licensing of SEPs. The Commission still needs to create a precedent, which is probably its intention by sending a Statement of Objections to Samsung in December 2012. Section III contains a brief conclusion.

Damien

Free vs. Google - Ad Blocking and Net neutrality

On 3 January, France’s second largest internet service provider (“ISP”), Free, started blocking online adverting for its subscribers. This in itself did not come across as shocking, as this feature is already available to consumers (e.g., Adblock Plus on Firefox and Chrome). It was, rather, the way Free activated this functionality that was the subject of controversy in France. Indeed,  the change took place through an unannounced update of its modems and was activated by default. Internet content providers, who rely on advertising to provide free content and services to end-users, reacted immediately, asking the French authorities to take action.

It would be easy to presume that Free acted solely in its customers’ interests, however it appears that this would not entirely reflect the reality. The move seems, rather, to have been aimed at threatening Google’s revenues, which are mainly based on advertising. Indeed, Free has long tried to make Google pay for optimal access to its network. The battle between the two companies rests upon the fact that YouTube (Google’s video-streaming service) requires large amounts of bandwidth to be used in order for subscribers to connect. Free therefore considers that Google should participate financially in upgrading of the system to handle these bandwidth needs. In a decision of 22 November 2012, the French telecoms regulator (“ARCEP”) opened an administrative enquiry into the technical and financial terms and conditions governing the routing of online traffic between YouTube and Free.

This debate should also be seen in the context of the necessity for ISPs to make investments in ultrafast broadband infrastructures, as whished by the French government. Through its action, Free may want to raise the problem that, without the participation of content providers,  "investmentswill have to be made at a slower pace".

Notwithstanding the company’s motivations, the possibility for ISPs to regulate the content available online raises issues relating to the principle of net neutrality. Net neutrality is defined in EU instruments as the ability of end users to access and distribute information or run applications and services of their choice. It follows that all content and data should be treated in exactly the same way, regardless of their origin. Yet, by filtering web content, Free arguably went against this principle.

Fleur Pellerin, the French digital minister, reacted quickly and Free removed its ad blocker on 8 January. The round table on Net Neutrality that the minister subsequently decided to organise was not deemed sufficient. The issue was referred to the Conseil National du Numérique, a committee created in April 2011 to help French public authorities on the stakes of the digital economy and to create on-going discussions. No decision was taken as to a possible law which would enshrine net neutrality. ISPs were left free to monitor Internet content.   

The Digital Agenda Commissioner, Neelie Kroes, also reacted by publishing an article in a French newspaper. She invoked customers’ freedom to make choices regarding their Internet subscription and online activity. However, she advocated for the possibility to subscribe to differentiated, limited Internet offers, possibly for a lower price. Transparency and effective consumer control were considered as crucial elements in this regard: “on net neutrality, consumers need effective choice on the type of internet subscription they sign up to. That means real clarity, in non-technical language.” She then acknowledged the possibility for ISPs to distribute software aiming at blocking some or all advertising, but reminded stakeholders that many content providers rely on an advertising-driven business model and that “businesses should accept that different consumers will have different preferences, and design services accordingly”. Interestingly, it seems that Neelie Kroes’ current position differs from her previous opposition to tiered access, for which she advocated in 2010 when she said that ISP “shouldn’t be allowed to limit the access to service or content out of commercial motivation, but only in cases of security issues and spamming.”

Despite reaffirming the importance of the principle of net neutrality, both the French government and the Digital Agenda Commissioner have implicitly supported ISPs. Google, on the contrary, faces various investigations at the EU and the Member States levels. For instance, the French authorities are currently looking into allegations that Google has paid less taxes than required. In this fight between Free and Google, the French ISP seems, therefore, to have the upper hand.

On 17 January, Free reinstated the advertising blocking functionality for some of its customers (including approximately 5 million subscribers to Free Mobile). This time, Free proposed it as an option which is by default inactive. Finally, it should be noted that French newspapers are also trying to force Google to pay them for referencing their content. Today, Google reportedly proposed a €50 million deal to French publishers. This would involve Google buying advertising space on newspaper and online, as well as a commercial collaboration between the publishers and Google’s search engine and, finally, the use by publishers of AdSense, Google’s advertising platform.

Jennifer

 

Individual fined for incomplete notification

Imposing sanctions on individuals for competition law violations is common in a number of jusridictions worldwide but I had never heard of individual sanctions being imposed in merger cases.

Yet, I just read that the Bundeskartellamt had imposed a €90,000 fine on businessman Clemens Tönnies for the incomplete notification of his company’s acquisition of the slaughtering company Tommel. Mr. Tönnies, who is also the president of football club Schalke 04, apparently failed to disclose some of its controlling stakes. The fine comes more than a year after the Bundeskartellamt blocked the merger.

This case is a positive development as individual sanctions are probably more effective than corporate sanctions in ensuring compliance with the law.

John

Almunia on State aid modernisation

In a speech today at King's College London, Vice-President Almunia provided some insight into the Commission's effort to modernise EU State aid rules. 

He started by describing the overarching goals of the reform, explaining that "in times of shrinking budgets, EU countries have to to more with less". The main goal of the reform is thus to "help national governments make more efficient use of scarce resources." To achieve this, the reform will:

• Promote "well designed and targeted aid that limits competition distortions in the internal market, fixes market failures, and pursues common European objectives." According to Almunia, examples of good aid include aid that promotes innovation, green technologies, and the development of human capital.
• Promote aid that incentivises undertakings to adopt a conduct it would not have adopted absent the aid.
• Discourage aid that keeps unviable companies on indefinite life support.
• Tackle the "challenge to the level playing field" caused by the fiscal disparities between the different EU Member States.
• Increase transparency by better informing the public about the companies that are receiving  aid, the amout of aid they are receiving and the reasons why they are receiving aid.
• Streamline the different State aid law instruments and make them more consistent.

As part of this modernisation of the State aid rules,  the Commission adopted the new guidelines for the broadband sector in December. The Commission adopted also in December the review of the Enabling and Procedural Regulations, which the Council will start reviewing later this month. The revised regulations would allow the Commission to probe the industry, as it does in antitrust, and to conduct inquiries on aid granted in the same sectors by several Member States.

As to the future, Almunia explained that the Commission aims at revising the following guidelines over the next 12 to 18 months:

• Guidelines on Regional aid (May 2013)
• Guidelines on Industrial Rescue and Restructuring (Summer 2013)
• Aviation guidelines (Summer 2013)
• Framework for research and development and innovation (end of 2013)
• Guidelines on risk finance (end of 2013)
• Guidelines on environmental aid (begining of 2014)

Almunia stated that the Commission was also working on a revision of the General Block Exemption Regulation and was considering whether a review of the De Minimis regulation is warranted.

The full text of Almunia's speech is available here.

John

Commission sends Statement of Objections to Samsung on potential misuse of standard-essential patents

On 21 December 2012, the European Commission sent a Statement of Objections (SO) to Samsung.  The Commission's preliminary view is that Samsung abused its dominant position by seeking injuntive relief against Apple based on its mobile phone standard-essential patents (SEPs). The Commission takes the view that “under the specific circumstances of this case, where a commitment to license SEPs on [Fair Reasonable and Non-Discriminatory (FRAND)] terms has been given by Samsung, and where a potential licensee, in this case Apple, has shown itself to be willing to negotiate a FRAND licence for the SEPs, then recourse to injunctions harms competition.”

The Commission’s preliminary objections reflect the approach it took in Google/Motorola where it found that “[d]epending on the circumstances, it may be that the threat of injunction, the seeking of an injunction or indeed the actual enforcement of an injunction granted against a good faith potential licensee, may significantly impede effective competition by, for example, forcing the potential licensee into agreeing to potentially onerous licensing terms which it would otherwise not have agreed to.” 

The Commission is thus of the opinion that seeking an injunction to enforce SEPs may be abusive when the injunction is sought against a ‘good faith’ potential licensee willing to negotiate a FRAND licence.

While the sending of this SO may appear surprising as it came a few days after Samsung decided to withdraw the injunctions that were at the source of the Commission investigation, the most likely explanation for this SO is that the Commission wants to establish a precedent allowing it to define the circumstances in which the injunctions in SEP-related patent litigation are acceptable from a competition law standpoint.

John

Happy holidays

The Antitrust Hotch Potch team is taking a few days off and will be back in early January. We wish you all happy holidays.

In the meantime, if anyone feels like reading antitrust cases over the next few days, we suggest a couple of Christmas-related NCA decisions involving retail price maintenance for the sale of Christmas trees and Christmas toys...

Robert Bork (1927-2012)

Robert Bork passed away on 19 December 2012 at the age of 85 . Among other things, he served  as a professor at Yale Law School, as Solicitor General in the US Department of Justice as well as a judge for the United States Court of Appeals for the District of Columbia Circuit. He was also nominated to the Supreme Court by Ronald Reagan but his nomination was rejected by the Senate in 1987. His nomination to the Supreme Court led to Bork being the object of an extensive unfavourable media campaign by its opponents for his allegedly extreme views. In 2002, the verb "to bork" was even added to the Oxford English Dictionary with the following definition: "To defame or vilify (a person) systematically, especially in the mass media, usually with the aim of preventing his or her appointment to public office; to obstruct or thwart (a person) in this way." Most recently Bork was senior judicial adviser to the 2012 presidential campaign of Gov. Mitt Romney. Although he may be described as one of the greatest legal scholars of his generation, he will remain controversial for being involved in some political scandals such as the Watergate as well as for being a conservative judicial activist.

As a scholar, Robert Bork is most well-known for his activities in the field of antitrust. Bork will be remembered as the man “who redefined Antitrust”.  He was one of the leading exemplars of the Chicago school of thought, which was developed in reaction to the Harvard School approach which considered that there was a relationship between the structure of a market and its performance. According to the Harvard school, the more concentrated the structure of the market is, the more suboptimal the behaviours of the undertakings on that market are (supra-competitive prices) and the more negative the performance of the industry is. By contrast, Bork and other proponents of the Chicago school argued that competition authorities should not be concerned with market structure because most of the time the oligopolistic concentration of the markets is a source of efficiencies.

Bork’s magnum opus has been The Antitrust Paradox (1978).  Bork argued that while antitrust law should be enforced against collusive conduct and mergers creating monopolies, it should not apply to practices like vertical agreements and price discrimination which do not harm consumers.  In fact, if antitrust law were to apply in such cases, this eventually allows inefficient competitors to remain afloat and artificially raises the prices.  This is the “paradox” from which antitrust policy suffered in the 1970s, according to Bork.  Success in the marketplace is no crime and only as-efficient competitors must be protected.  Bork’s views have influenced the Supreme Court in a number of milestone judgments (e.g., Continental Television v. GTE Sylvania, Verizon v. Trinko, and Leegin Creative Leather Products, Inc. v. PSKS, Inc.).

Settlement in the EU e-book investigation

On 13 December 2012, the European Commission formally accepted the commitments offered by Apple and several publishers, putting an end to its investigation into e-book pricing. These companies’ behaviour on the market for e-books was indeed under review in both the EU and the US (for background information see here).

The Commission expressed concerns that, by switching the sale of e-books from a wholesale model to an agency model, the four publishers (Harper Collins, Holtzbrinck/Macmillan, Simon & Schuster and Hachette) and Apple engaged into collusive behaviour leading to higher retail prices of e-books in the EEA. Each of the agency agreements signed between Apple and the publishers contained the same key terms, including retail pricing restrictions and a  most favoured nation (“MFN”) clause. The latter required the publishers to set e-book prices on the iBookstore at or below the lowest price on the market, guaranteeing that Apple always had the lowest prices.

In a statement of the same day, Joaquin Almunia explained that Apple and the publishers had colluded to influence e-book pricing allowing them to face the threat coming from online retailer Amazon. The Commission was indeed concerned with the limitation of retail price competition flowing from these agreements and with the ability of the publishers to apply pressure on retailers, threatening them to stop supplying e-books if they offered lower prices or did not agree to the switch to agency agreements (allowing the publishers to control retail prices).

Although they did not agree with the Commission’s preliminary assessment, Apple and the four publishers committed to terminate the current agency agreements as well as to allow retailers to set their own prices or to offer discounts for e-books for a two-year period. The companies also undertook to refrain from concluding agreements containing MFN clauses for a period of five years. 

Despite its similarity to the commitments offered in Europe, the US settlement agreement was rejected by Holtzbrinck/Macmillan and Apple. Litigation against Apple, Holtzbrinck/Macmillan and Penguin is still on-going in the US. It has been argued that such a different outcome may be due to the differences in the litigation process between the US and the EU. This case reflects how different procedural rules in two jurisdictions may influence the conclusions reached by companies as to whether they should settle a case before the antitrust authorities. The EU antitrust probe also targeted Penguin but the publisher originally chose not to settle. Joaquin Almunia revealed that the company had come to the Commission willing to engage into discussions regarding similar commitments.  

Public Compensation for Services of General Economic Interest: An Analysis of the 2011 European Commission Framework

In this paper, I analyse the new Communication framework on public compensation for services of general economic interest.

For a long time, the legal regime applicable to State compensation for Services of General Economic Interest (“SGEIs”) was a source of uncertainty under State aid law. It is only in its Altmark judgment that the Court of Justice of the EU (“CJEU”) brought clarity on the matter by setting out the conditions under which SGEI compensation escapes State aid scrutiny. Drawing on the clarifications brought by the Altmark judgment, the European Commission (“Commission”) adopted in 2005 a so-called “SGEI Package”. It consisted of two documents, a Decision and a Framework, which detailed the conditions under which SGEI compensation would constitute compatible State aid. The 2005 SGEI Package, which has been applied extensively by the Commission, expired in November 2011.

To anticipate this, the Commission engaged in a wide consultation process on the revision of the Package. As a result, a draft Package was published in September 2011 and after additional comments were made by various stakeholders, the Commission adopted the final version of the Package in December 2011. The new Package includes three documents, a Communication, a Decision and a Framework.

The Communication clarifies the Altmark conditions. When the SGEI compensation meets these conditions, it does not constitute State aid and does not need to be notified to the Commission. When the SGEI compensation does not meet the Altmark conditions, the analysis turns to the Decision and the Framework.

In the Decision, the Commission describes certain types of SGEI compensation that are regarded as compatible with Article 106(2) TFEU and exempt from the requirement of prior notification. If the conditions set in the Decision are not met, the State aid measure is subject to the prior notification requirement, but it can still be declared compatible with the internal market if it meets the criteria spelled out in a third document: the EU Framework.

The Framework is perhaps the most contentious document in the Package. It has received both praise and criticism from stakeholders. Among the conditions that the Framework introduces for the compatibility of SGEI compensation with the internal market, some are not of a strictly economic nature as they relate to the existence of a genuine SGEI and the act by which it has been entrusted. For the sake of convenience, these are thus referred to as the “procedural” conditions. However, the most important condition, to which the largest part of the Framework is dedicated, is economic in nature in that it provides a methodology to determine whether the amount of compensation paid by the State exceeds what is necessary to cover the net cost of discharging the SGEI (including a reasonable profit). In this regard, the context of the financial crisis in which this Framework was developed is important. As Commissioner Almunia put it in one of his speeches, the Commission has to respond to the challenges created by the depleted state of “public coffers almost everywhere in Europe” and the “deep cuts into public services and the welfare state” by ensuring that public money earmarked for such services is spent wisely and efficiently. Finally, the Framework foresees that an SGEI entrustment can sometimes generate serious distortions of competition, in which case the Commission can impose additional requirements to declare it compatible with the internal market.

Against this background, this paper is structured as follows. Section II reviews the procedural conditions and places particular emphasis on the problems of linking State aid with the application of public procurement rules. Section III discusses in detail the economic condition that the SGEI provider should not be overcompensated. Section IV explores the additional requirements imposed when the SGEI entrustment seriously distorts competition. Section V concludes. It is submitted that the 2011’s SGEI Framework is in many ways a remarkable document for which the Commission should be commended. A number of provisions contained in the Framework give, however, rise to uncertainty in particular regarding the application of the “net avoided cost” methodology to assess the absence of overcompensation for SGEIs. In addition, linking public procurement with State aid control can lead to important practical difficulties, which will be discussed below. On the other hand, the emphasis placed by the Framework on efficiency is particularly welcome, especially at a time where public money is scarce given the imperative of fiscal discipline. As every new set of rules, the Framework should be applied with flexibility so as not to penalize SGEI providers. These undertakings should neither be advantaged not penalized as if Member States expect them to deliver quality public services they must be viable in the long-run.