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The Huawei Case. Patents and Competition reconciled?

Gabriella Muscolo*

* Commissioner at  the Italian Competition Authority. Email: gabriella.muscolo@agcm.it. I would like to thank Gianluca Pastuglia and Amalia Luzzato, stagiare at the Italian Competition Authority, for their help in the broad research of international precedents.

Patent law and antitrust law are to be deemed as compatible and complementary tools which ensure the functioning of the market and develop innovation, contributing in a different way, to maximize the consumer welfare. Nevertheless, it may occur that IP rights are abused by their holder to restrict market competition, then reducing consumer welfare.

The issue of abusive IP enforcement and litigation is intertwined with the debate on the relationship between the IP system and competition law, since, under certain conditions, such enforcement and litigation may constitute an abuse of dominant position.  In this context, several conflicts of different interests may arise. First of all, fundamental rights, such as the right to access to Court, are involved. The FRAND encumbered SEPs issue is currently a paradigmatic example of the complex relationship between patent law and competition.

BeforeHuawei, an abusive litigation doctrine has been developed, both in US and in EU.  According to EU doctrine, seeking an injunction is in principle a legitimate remedy that may result in an abuse of  litigation merely in exceptional circumstances, to be detected by ad hoc tests. In the landmark Motorolacase the European Commission dealt with the definition of the relevant market and the abusive nature of the conduct. In this last regard, it stated that seeking an injunction for FRAND encumbered SEPs against willing licensees may constitute an abuse of a dominant position. Different approaches have been adopted by national courts, which, from a general perspective, denied injunction when FRAND encumbered SEPs were involved. They payed remarkable attention to the good faith of the parties.

The Court - in theHuaweicase - affirmed the procedural obligations placed on the parties for the negotiation of licenses. The failure to comply with such obligations by the SEPs holder may constitute an abuse of dominant position. However, several issues left open, such as the assessment of SEP-related market power.

Following theHuaweicase, several national courts, especially in Germany and UK intervened on matters related to FRAND-encumbered SEPs. In particular, German Courts affirmed several principles on the applicability of article 102 TFEU, on the determination of FRAND terms, on the scope of application of theHuaweijudgment, and on the procedural obligations established by theHuaweijudgment. A UK court dealt with the features of the SEP holder proposal and the negotiation issue.

The Huawei case has also opened a huge debate on the role played by the different subjects involved in the patent protection and in the competition law enforcement. The national courts should have the task to assess compliance of licensing condition with FRAND terms and to strike the balance between IP protection and the need to ensure the functioning of competition dynamics. The Unified Patent Court will strike the abovementioned balance by deciding on the antitrust defence in cases related to FRAND encumbered SEPs. The European Commission, who opened the debate with the Motorola case, might act as a policy maker, for instance, by adopting guidelines for Courts on FRAND calculation, although it seems less desirable at the current stage.   The role of National Competition Authorities  remains at stake, although it is expected to be minor than the one played by National Courts and UPC.

* Commissioner at the Italian Competition Authority. Email: gabriella.muscolo@agcm.it. I would like to thank Gianluca Pastuglia and Amalia Luzzato, stagiare at the Italian Competition Authority, for their help in the broad research of international precedents.

Sommario:

1. The intersection between Intellectual Property and Competition and the litigation issue - 2. Standard Essential Patents at the crossroad between the right of access to Courts, the abuse of litigation and the abuse of dominance - 3. The abusive litigation doctrine and tests before Huawei - 4. The Huawei case: the doctrine and the tests - 5. The post Huawei case law - 6. The role of the enforcers and the role of the policy makers - NOTE


1. The intersection between Intellectual Property and Competition and the litigation issue

According to current legal and economic theory, [1] the intellectual property ("IP") system and competition law do not have conflicting goals, nor the grant of intellectual property rights ("IPRs") contrasts with the competitive market model. On the contrary, the IP and antitrust systems play a complementary role in ensuring the correct functioning of the market; indeed, through different means, both of them contribute to the maximization of consumer welfare. In particular, from a general perspective, the protection of intellectual property is coherent with the macro-economic goal of promoting product differentiation, prevents the imitation of products by competitors and thereby eliminates the risk that investments in the market concentrate on already successful products.[2] In addition, IPRs enforcement provides incentives to produce and commercialize inventions and creations and, by granting an exclusive right, allows the title-holder to appropriate the benefits and profits deriving from the use of his/her invention or creation[3]. Competition law aims at ensuring the correct functioning of the market, by preserving the competitive process and favoring the maximization of consumer welfare. The development and commercialization of innovative products represent a key driver of economic growth and an important mean of rivalry among firms and enhance consumer welfare. The IP system contains several provisions directed at stimulating competition, and in particular at favoring the circulation of innovative information, such as the duty to describe and disclose the invention in the database of the patent office. [4]   In certain circumstances, however, IP holders may use their rights so as to restrict rivalry in the market, violate competition and thereby reducing consumer welfare. The issue of the abuse of IPRs as an antitrust violation has been discussed mostly in the context of the application of the rules on abuses of dominant position. However, the emergence of certain trends in the market, such as standardization and patent pooling, raised the question of the application of the prohibition against anti-competitive agreements. The administrative, judicial and para-judicial enforcement of IPRs constitutes an important form of their exercise by the holder. Nevertheless, such right may be abused. The issue of abusive IP enforcement and litigation is intertwined with the debate on the relationship between the IP system and [continua ..]

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2. Standard Essential Patents at the crossroad between the right of access to Courts, the abuse of litigation and the abuse of dominance

According to the OECD definition,[15] «Standard setting is the process of determining a common set of characteristics for a good or service" and  technical standards «concern the establishment of norms and requirement for technical systems, specifying standard engineering criteria, methodologies or processes». There are several classifications of standards. For instance, as explained by OECD, standards may arise from industry collaboration or uncoordinated processes[16]. Also, standards may be classified as de jure or de facto standards. According to the International Organization for Standardization (ISO) and the European Telecommunications Standard Institute (ETSI) - two of the most distinguished standard-setting organizations ("SSOs") - a de jure standard may be described as «a document, established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context»[17]. A technology constitutes, instead, a de facto standard, if it has been developed by one or more companies and, due to certain peculiar factors or events, it is adopted and implemented by most market actors. Indeed, sometimes private innovations are adopted with such universality that they become de facto standards. Normally, standards arising from industry collaboration are agreed by standard-setting organisations, such as ISO and ETSI, in which patent holders and manufacturers of standard-compliant products participate. As a general rule, they may be classified as de jure standards. In the context of SSOs, participation in the standard setting process is often unrestricted and transparent. Standards are frequently set through consensus after wide discussion among members. SEPs are patents essential to implement a specific industry standard. This means that it is impossible to manufacture standard-compliant products - such as smartphones or tablets - without using technologies that are covered by said patents.  Standardization creates a specific context from the perspective of competition enforcement: on one hand, it implies benefits, favours economies of scale and reduce barriers to entry by fostering interoperability. On the other hand, however, it may raise antitrust risks, facilitate the choice of one technology to the exclusion of others and give market power to [continua ..]

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3. The abusive litigation doctrine and tests before Huawei

Some of the most active jurisdictions in developing sham litigation doctrines are US and EU and their positions - in this field - are singularly close. Under the Noerr-Pennington doctrine,[22] the first question to be answered is whether - according to an objective standard - the plaintiff reasonably could be held to believe it had rights to be protected. Secondly, it has to be assessed the intent of the same plaintiff and in particular whether the lawsuit was conceived as part of a plan aimed at eliminating competition. Moreover, when dealing with a number of lawsuits, the question is not whether one or more of them have merit, but whether they are initiated without regard to the merit of the case and for the purpose of injuring a competitor. The Noerr-Pennington and sham litigation doctrines developed by US Courts have been criticized by scholars on the grounds that they fail to consider relevant constitutional principles other than the right to petition, which may shift the current balance. As a result, the right to petition is strongly protected and such doctrines are rarely applied in practice. In the European Union, the ITT Promedia[23] cumulative criteria have been applied: the bringing of a lawsuit by a dominant company is abusive if such lawsuit (i) cannot reasonably be considered as an attempt to enforce its rights and can therefore only serve to harass the opposite party, (ii) is «manifestly unfounded» and (iii) is «conceived in the framework of a plan whose goal is to eliminate competition». A substantive analysis of the tests leads to the conclusion that also EU authorities adopted a very narrow definition of vexatious litigation, as referring only to unmeritorious, groundless litigation. Under such test, the bringing of a lawsuit may not be considered abusive if there is only a likelihood that the party aimed at achieving an illegitimate result. Even in jurisdictions without specific precedents on abusive litigation, the vexatious nature of lawsuits is assessed, considering the possibility of pathological use of the right of petition and the need to prevent evident harms to the competition environment. It is worth noting that, even in those systems where a substantially objective standard seems to prevail, demonstration of unlawful intent is frequently required due to the particular nature of the discussed tests. The «too much subjectivity» issue represents one of sham litigation [continua ..]

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4. The Huawei case: the doctrine and the tests

Taking into account the different approaches followed by the Commission and the German Courts, on 21 March 2013, the District Court of Dűsseldorf referred five questions to the European Court of Justice ("ECJ"):[46] a) does the owner of a FRAND encumbered SEP abuse its dominant position if he/she requests an injunctive relief, although the alleged infringer has declared its readiness to enter into negotiations? Or is an abuse to be excluded only if the license seeker has submitted to the patent owner an unconditional offer? b) if readiness to enter into negotiations is sufficient, are there any qualitative and/or time related requirements? c) if an unconditional offer is required, are there any qualitative and/or time related conditions that the alleged infringer must meet? May the offer include the condition that the SEP is legally valid? d) if the fulfilment by the licence seeker of the obligations arising from the future licensing agreement is a pre-requisite for preventing an injunction, are there specific conditions that the same seeker must meet (e.g. render an account for past acts of use)? e) does the same conditions for the finding of an abuse apply to actions against patent infringements other than injunctions (e.g. damages)? In the Huawei judgement, the ECJ  has reconciled the above-mentioned positions in an original way and confirmed the approach adopted by the Advocate General Wathelet in its [47] The Court has set up a number of specific obligations bearing upon the parties during the negotiation, explicitly stating that the failure by the SEP holder to comply with said obligations provisions would entail a violation of art. 102 TFEU. The mechanism should work as follows. Before bringing an action against an alleged infringer, the SEP holder must alert the latter of the infringement complained about by designating the infringed SEP and specifying the way in which it has been infringed, «even if the SEP has already been used by the alleged infringer» [48]. As pointed out by the Advocate General, the reason for this obligation is that the high number of patents covering some hi-tech standards (e.g.  in the smartphone environment) could lead a firm to infringe some of such patents without being aware of it.[49] Once the alleged infringer has expressed «its willingness to conclude a licensing agreement on FRAND terms», the SEP holder must submit «a written offer for a licence on [continua ..]

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5. The post Huawei case law

The judgment of ECJ has been followed by several decisions in European jurisdictions and notably in Germany and UK[73]. German courts affirmed several principles: firstly, on the applicability of article 102 TFEU, German case law argued that the legal consequences of a patent ambush is a licensing obligation on FRAND terms with respect to the patent, irrespectively of the applicability of article 102 TFEU, but not, automatically, the denial of injunctive relieves under patent law.[74] On the applicability of article 101,German courts stated that also the application of art. 101 TFEU does not lead automatically to the denial of the injunction. Indeed, «a violation of art. 101 TFEU can only lead to the nullity of the standardization agreement and may, under certain circumstances, trigger third party civil law claims for injunctive relief and removal with respect to the cartel-law violation, namely the adoption of the standard. […] Such a violation does not preclude the assertion of SEPs. The third-party damages claim [resulting from the violation of article 101] is not a claim for the grant of a license either».[75] Secondly, the German Courts have ruled on the meaning of FRAND:the customary level of royalties in the industry is an indication of FRAND terms; however, when considering royalties applied in the industry, the specific technology licensed should be also taken into account and may justify a deviation from customary levels.[76] The relevance of customary royalties also means that the more concluded license agreements on similar terms the SEP proprietor can present, the stronger is the assumption that the requested royalties are FRAND. In general terms, such previous license agreements are the more indicative, the more is similar the use undertaken by the alleged infringer relative to that of previous licensees. Also, the fact that the previous license agreement has been agreed after the claim of an injunction does not exclude per se that the same complies with FRAND terms.[77] German judges addressed also more specific issues on the meaning of FRAND in case of patent portfolios, patent pooling and worldwide licenses: according to some courts, in determining whether a portfolio license is FRAND, it is necessary to see whether this is in accordance with commercial practices in the relevant sector; in any case, the defendant may demonstrate that the SEP holder is bundling SEP and non-SEP patents in the portfolio [continua ..]

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6. The role of the enforcers and the role of the policy makers

The Huawei case has also opened a huge debate on the role played by the different subjects involved in patent protection and in competition law enforcement. First of all the key role of national patent (and Competition law) courts emerges: the ECJ goes beyond the approach adopted by the Commission in its assessment of SEP holders' conduct, thereby enabling decision-making bodies to find a compromise between the protection of intellectual property and the need to ensure the proper functioning of competitive dynamics.[103] National courts  are well equipped to undertake to strike the above-described balance on 'a "case by case" basis, and by making reference to specific facts. In this regard, it should be noted that judges will be frequently obliged to assess the compliance of licensing conditions with FRAND commitments. Sir Robin Jacob stated that following Huawei case "The emphasis is on a FRAND defence before a national court, not enforcement by competition authorities"[104]. Secondly, as soon as the Unified Patent Court ("UPC") enters into force[105] its involvement in the debate surrounding FRAND encumbered SEPs should be considered. In the context of the unitary patent system, there is no express provision on actions for infringements of competition law by patent holders. However before the UPC, acting in its competence ex article 32 of the Agreement on a Unified Patent Court ("UPC Agreement"), an antitrust defense may be raised in patent infringement actions. Moreover, I also wonder if the standardization issue might be raised in a nullity action and if  the exception of non-essentiality of the patent could be regarded as a feature of the validity of SEPs. In  18thDraft of the Rules of Procedure, changes in article 118.1 contain an explicit reference to the «discretion of the Court» with respect to the granting of injunctions by the Court articles 63, 64, 67 and 80 of the UPC Agreement, make implicit reference to such discretion by stating  that the Court " may" grant an injunction or other measures. By deciding on antitrust defenses in a case of FRAND encumbered SEP litigation, the UPC will have the opportunity to strike a balance between barriers to entry and interchangeability and consumer welfare, between competition protection and legitimate exercise of IPRs, on a case by case basis. Thirdly also European Commission has an important role, as a decision maker, as well as a policy maker. In the first role [continua ..]

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NOTE

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