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Is dominance the missing piece of the Huawei puzzle? (di Emanuela Arezzo)

A standard-essential-patent is not just like any other patent. As the very same name implies, it is a patent insisting on a teaching, often a sliver of technology, that forms a standard. When a certain technology becomes the – or is chosen to be a -- standard, such a determination has generally the effect of excluding the existing competing alternatives from the market. Access to the standard becomes then essential to compete both in the markets of standard-embedding products and in the (related) markets for standard-compatible devices or tools, which must be fully interoperable and functional with the standard product or technology. This means that proprietary control – thanks to IPRs -- on such technologies often becomes the key to rule the market(s). From this comes the specialty of the SEP or standard essential IPRs in general.

To complete this picture, however, one must add that in complex technologies markets products are often featured by a vast set of components, each separately patentable. And this happens also for technological standards, which happen to be protected by several hundreds patents. So while control on the standard is crucial, can the mere holding of a patent on a fragment of technology composing the overall standard be regarded as conferring dominance? This crucial question – not raised in the preliminary ruling – seems to remain dormant in the Huawei judgement, but it is somehow implicitly answered in the affirmative. This contribution will try to delve into this issue and to provide some suggestions to be applied to future cases.

KEYWORDS: standard essential patent, abuse of dominance, FRAND licenses, refusal to license


Introduction - 1. The obligation to disclose patents and to enter FRAND commitments - 2. The CJEU ruling - 3. Compression of SEP rights and exceptional circumstances - 4. SEPs and the assessment of dominance - 4. .1 The implementation of a standard-compliant product does not imply tout court infringement of all SEPs insisting on the standard - 5. Conclusion - NOTE


A standard-essential-patent is not just like any other patent. As the very same name implies, it is a patent insisting on a teaching, often a sliver of technology, that forms a standard[1]. Sometimes standards emerge de facto, as a result of a natural process within the market whereby consumers gradually gather all around the same product, igniting a vicious circle whereby the more consumers choose the item, the more other consumers will find it advantageous to use the same product (so called direct network effect), and this in turn will lead firms active in adjacent markets to produce standard-compatible products (so called indirect network effect)[2]. Some other times, public authorities of different kinds (at national, European or international level) can dictate the adoption of certain technical specifications by product manufacturers: so called legal standards. Eventually, in other occasions, market participants themselves recognize the importance to elicit together a standard to be commonly adopted within the industry[3]. Although not legally binding, conformity to such standards becomes extremely valuable to manufacturers willing to produce standard-compatible devices, as their products would be far less appealing to consumers (think of a new generation smart-phone only capable of connecting to GSM technology)[4]. In such cases, standardization becomes a complex process which takes place within so called standard setting organizations (i.e. SSO) [5]. In all of the three examples, when a certain technology becomes the - or is chosen to be a --standard, such a determination has generally the effect of excluding the existing competing alternatives from the market. And indeed, while many technologies initially compete for the market, once one of them emerges the others are driven off, as all producers of standard-compliant products will find it more convenient - in case of a de facto standard - or will be forced - in case of legal standard or standard chosen by a SSO, when no other feasible alternatives do exist - to implement the standard technology[6]. Access to the standard becomes then essential to compete both in the markets of standard-embedding products and in the (related) markets for standard-compatible devices or tools, which must be fully interoperable and functional  with the standard product or technology. This means that proprietary control - thanks to IPRs - on such technologies becomes the key to rule the [...]

1. The obligation to disclose patents and to enter FRAND commitments

In order to avoid opportunistic behaviours by SEP holders, both in the phase before the standard has been selected and after[17], many SSOs have adopted detailed IPRs policies which compel their members to i) timely disclose the holding of patent(s) that might insist on a technology considered to be chosen as standard or to be further developed to become a standard; ii) endorse a duty to license such rights, to whomever interested, on fair, reasonable and non discriminatory conditions (so called FRAND terms)[18]. The duty to disclose should eliminate the risks of so called patent ambush, as it happened in the Rambus case[19], while the commitment to license should eliminate the risk that the SEP holder incurs in unfair and abusive conduct. In fact, the requirement of fairness and reasonableness clearly aims at preventing exploitative unilateral abuses in the form of excessively high royalty rates and unfair trading conditions[20], which the SEP holder might try to impose on third parties, and the element of non discrimination clearly implies a duty not to apply dissimilar conditions to equivalent transactions: i.e. not to discriminate in setting licensing conditions and royalty rates among different implementers [21]. While it is dubious whether such obligations can refrain strategic behaviours of firms overstating the essentiality of their right to the standard[22], especially in the case of low quality patents, the obligation to license at FRAND terms clearly curtails good portion of the excluding powers stemming from patent rights, as SEP holders basically accept the fact that they cannot refuse licensing their rights to third parties[23].   Having said this, on the nuances of such contractual obligation and its corollaries much remains to be said. Academics tend to disagree on how strongly - or weakly - should this contractual obligation be interpreted and in particular on whether, together with her right to exclude in general, the SEP holder should be deemed to have implicitly waived also her right to enforce preliminary measures, such as preliminary injunctions, in the case negotiation regarding the FRAND license should break down[24]. It must be stressed, indeed, that SSOs have a very limited power when it comes to enforce the obligation to license on FRAND terms[25]. Should the FRAND commitment not be honoured, often the only thing a SSO can do is changing the standard's specification in a way to avoid the infringement of the essential [...]

2. The CJEU ruling

Torn between the complexities of the German "Orange book test", strongly favouring patentees' interests[38], and the more straightforward "willining licensee" test adopted by the EU Commission in the Motorola case[39], which clearly sided for manufacturers of standard-embedding products, the CJEU seems to have endorsed an approach closer to the latter,[40] by ruling that the conduct at issue should not be regarded as abusive if the SEP holder has duly informed the manufacturer of the alleged infringement before commencing the action and the implementer has immediately demonstrated his willingness not to enter the agreement[41] or has engaged in dilatory tactics[42]. On the contrary, seeking a preliminary injunction by the SEP holder might be regarded an abuse when the latter is clearly asserting his right against a willing licensee[43]. While it is clear that the Court did not intend to adopt the legal technicalities put forward by the German Courts (for example about the offer to be unconditional and not containing specific clauses, such non challenge clauses), the judgement strikes the attention for being peculiar at best. And in fact rather than setting a clear cut principle to determine if seeking an injunction against the manufacture and commercialization of standard-compliant products by a SEP holder is or is not an abuse of dominance, the Court has dictated a sort of best practices of how negotiations should be conducted, by placing upon each party time-specific obligations the completion of which shifts the burden on the counter part[44]. Therefore, a first informational duty lies on SEP holders: they must alert the (supposedly good faith) infringer, specifying which essential patent has been violated and how it has been infringed upon[45]. A obligation which finds its rationale in the circumstance that standard technologies in tele-communication sector are normally protected by a vast array of IPRs, so many that it could actually happen that the manufacturer is not aware of that specific infringement[46]. Once the SEP holder has informed the alleged infringer, it is upon the latter to declare that he is willing to enter a licensing agreement on FRAND terms. Again, once this second step has been accomplished, it is again the SEP holder's turn to make a move: namely, SEP holders are encumbered with the obligation to make the first offer on FRAND term, specifying the amount of the royalty and the way for it to be calculated[47]: an [...]

3. Compression of SEP rights and exceptional circumstances

In the reasoning of the Court, the circumstance that SEP holders detain exclusive control on a resource which is essential by definition and not duplicable nor interchangeable because market leaders have chosen so, together with the other circumstance thatSEP holders have entered an obligation to license their technology on FRAND terms to each interested party, thereby creating the legitimate expectation on them that they could access the technology at a reasonable rate, are to be regarded tantamount to the "exceptional circumstances" that featured the well known refusal to deal cases involving IPRs[56]. In those cases, the European Courts and the Commission agreed on the fact that although the mere exercise of an IPR, including the refusal to grant access to such right to third parties, was in principle perfectly legitimate, it may nonetheless turn into an abuse of a dominant position when special exceptional circumstances were present[57]. Namely, access to the intangible resource was essential to enter the market, as the IPR subject matter was not substitutable, often thanks to a set of other external market circumstances (mainly network effects), and it prevented new products from being released (i.e. it prevented innovation), to the detriment of consumers[58]. In both line of cases, even if the SEP cases could also be framed as exploitative rather than exclusionary abuses[59] (the category refusal to deals belong to)[60], analogies can be found in the presence of exceptional circumstances to justify the compression of otherwise legitimate exercise of IPRs and constitutional rights of access to Court [61] (in the case of SEP, the legitimate right to fully enforce and defend her right in Court by presenting civil actions and preliminary measures). This to preserve not only competitors' interests but also consumers' welfare which in the refusal to deal cases suffered from a lessening of innovation, while in the SEP case could be damaged by the price increase eventually passed by SEP users on the portable devices sold on the market (more than on the risk that SEP users incapable of finding an agreement would recall their products from the market) [62].             Despite all these commonalities, however, there is a significant difference between these two set of cases which casts a dark shadow not just on the judgement rendered by the Court but more generally on the antitrust [...]

4. SEPs and the assessment of dominance

While the issue was not raised in the preliminary ruling, hence not dealt by the CJEU, the question of whether the mere holding of a SEP can be enough in itself to confer a position of dominance bears a crucial importance in the assessment of these cases as the finding of dominance should be the first step to construe the theory of abuse[64]. There are no doubts that the selection of a patented technology within a standard enhances the value of the patent. As already pointed out, the strong lock-in effects characterizing telecom industries together with the impossibility to design around the standard technology, once it has become standard, will grant SEP holders a stronger bargaining position vis-à-vis implementers, conferring to the former a certain degree of market power[65], intended in economic terms as the power to raise the royalty rates of the licensing agreement (by threatening not to license in the first place)[66]. Under this perspective, it would seem that the SEP holder has the power to behave independently of its competitors, customers and consumers, as enshrined in the European notion of dominance, as his control over a fragment of technology insisting on a small component (the standard) of a much more complex product (for example a smartphone), sold in a separate market (i.e. the market for smartphones), grants him power to successfully threaten implementers' products survival on such market [67]. Moreover, the SEP holder's threat to enforce its patent(s) can determine a direct significant price increase of the final product[68], as experience has shown that often SEP holders have demanded royalties calculated as a percentage of the price of the final product sold in the market (for example a smartphone), despite the fact that their rights insisted on a sliver of technology composing a component of the overall final device[69]. The overall considerations just highlighted have led several authors to agree that the mere holding of a SEP is sufficient per se for the firm to be regarded as dominant.[70] Nonetheless, if such enhanced patent value or market power is tantamount to a finding of dominance pursuant to art. 102 of the TFEU[71] is a question to which conflicting answers have been provided[72]. In particular, it seems that the EU Commission is not at all convinced by this theorem. The Guidelines on horizontal cooperation clearly explain that even if the establishment of a standard can create or increase the [...]

4. .1 The implementation of a standard-compliant product does not imply tout court infringement of all SEPs insisting on the standard

Another aspect seems relevant when we discuss the implications stemming from the assumption that mere holding of a SEP confers dominance. And in fact, even if it well might happen - and it has happened -- that firms holding SEPs on technologies embedded into a standard successfully hold-up implementers in the downstream markets, it is just not convincing that eachSEP holder, even one controlling the tiniestmarginalfragment of technology declared to be essential, or even one who is aware of possessing a very weak patent, can alwaysand just by himself successfully threaten the survival on the market of every possible standard-embedding products[76]. This conclusion stems from the widely accepted belief that manufacturing of a standard-embedding product necessarily implies per se the infringement of allthe essential IPRs insisting on the standard. Such theorem is based on two intertwined assumptions. The straightforward infringement assumption stems from the very same concept of "essentiality" (hence: indispensability) adopted by the majority of SSOs. Essentiality of the IPRs is indeed generally described as a situation whereby it is not possible on technical grounds to make equipment which complies with the standard without infringing it[77]: which means that if implementers make something which is standard-compliant without proper access to the underlying IPRs they must be infringing them[78]. The second part of the theory implies that the infringement automatically covers all the standard essential IPRs. This assumption has strong procedural implications. In fact, if the essential IPRs all at once are inevitably infringed, there is no need to prove that any specific SEP's violation has taken place. It will suffice to show that the SEP has been declared essential to the standard and that the alleged infringer has manufactured a standard-compatible product without a license. This second assumption derives straightforwardly from the application of the famous Cournot "complements theory" to essential IPRs[79], deriving that SEPs (and essential IPRs in general) are all to be deemed essential inputs to the release of a final product (which would be the standard) and therefore all necessarily to be employed for the manufacture of a standard-compliant product[80]. Both the assumptions of the above described theorem, however, are not entirely convincing. First of all, SEPs are not always trulyessential, despite being declared so by their holders. It is common [...]

5. Conclusion

The CJEU sentence in theHuaweicase tries to provide an answer to one of the most thorny issue of this century, namely whether the holder of a standard essential patent commits an abuse of dominant position when he enforces his right - apparently legitimate - to a preliminary injunction against an implementer wishing to make and sell a standard-embedding product without a license. As the CJEU rightly states, the answer cannot be provided without taking into consideration the conduct of the opponent: meaning, whether the implementer wishes or not to enter the negotiation and to pay for the appropriate rate of royalties. To this end, in responding to the preliminary ruling posed by the German Court, the CJEU sets some sort of best practices, a set of detailed rules of conduct to which both parties involved shall abide, in order for the circumstances of the case not to be held abusive. Despite being quite reasonable and convincing in its holding, the sentence does not delve into a crucial aspect which remains in the shadows. The Court, indeed, takes for granted the assumption that mere holding of SEPs is tantamount to holding a dominant position in the market, avoiding also the second related question of how to delineate the relevant market in such a case. One might easily respond that dominance was not an aspect raised in the preliminary ruling, henceforth the Court was not compelled to deal with the issue. While this is circumstance is true, one cannot avoid adding however that still the Court might have - or should have - stressed that all the reasoning put forward is valid as long as the firm is indeed found dominant. In an attempt to apply the exceptional circumstances test also to SEPs, the Court stretched the overall reasoning well beyond the boundaries set in the well known refusal to deal cases (fromMagilltoMicrosoft), inferring dominance fromex anteandendogenousfactual situations (namely: the declaration that the patent is essential by its holder and the FRAND commitment), without any need to inquire whether suchprivatelyelected standard was also ade factostandard or whether there are other market circumstances which prove it to be actually indispensable to compete in the market. This latter element is crucial when speaking about privately elected standards as, despite being remote, chances could exist that alternative technologies are present or will soon enter the market. Such an analysis, indeed, has been conducted by the European Commission in [...]