Competition law as a defence in patent infringement cases the universal tool for getting off the hook or a paper tiger?

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1 Newsletter IP & Technology Competition law as a defence in patent infringement cases the universal tool for getting off the hook or a paper tiger? For decades any cry of patent infringement from a patentee has been met with a twofold countermeasure from the alleged infringer that he does not infringe and that the patent is invalid or unenforceable. In recent years a tendency seems to have added a third leg to many alleged infringers defence; that invoking the patent is contrary to competition law. To be more specific, in Europe alleged infringers have claimed that enforcing the patent is an abuse of a dominant position. What has prompted this line of argument cannot be traced back to any single source; rather it appears that several parallel evolvements on the legal scene as well as industry practices can be regarded as the root cause. One might ask if this line of defence is going to be the prime shield for infringers in their attempts to avoid the dreaded weapon of an injunction. Further, if the defence is successful, this begs the question; what is the consequence of an abuse? To try to provide an answer to these questions, it is necessary to dig beneath the surface of patent law as well as competition law and see where these two areas of law originated. At the end of the day, it is all a matter of squaring two different legal disciplines that clash now and then. In this process one will eventually have to decide which of the disciplines should overcome the other when in these special and fortunately rare situations they point in different directions. Patent law For more than a century the possibility of obtaining a legal monopoly in the form of a patent right has existed. At the heart of the patent right lies the right for the patentee to prevent others from using the patented technology whether the patentee himself can exploit the patents depends on the patent rights of others. The right bestowed upon the patentee is therefore essentially a right to prohibit everybody else s use of the technology.

2 Page 2 Provided the patentee is able to use the patented technology himself, this will allow him to obtain a monopoly profit from selling products using this technology this is the innovator s payment for making the invention. Society rarely gives anything for free, and the mirror image of this legal monopoly, which usually lasts up to 20 years, is the obligation for the patentee to describe the patent in the patent application at a level of detail that enables a man skilled in the art to perform the invention thereby allowing society at large to utilise the invention once the patent expires. While being far from perfect, this system is intended to spur innovation which has been recognised as a key driver in developing a prosperous society. In other words, the temporary restraints encountered by non-patentees during a patent s lifetime are considered to be outweighed by the benefit to society of creating an incentive to innovate in the long run. That being said, legislators are not oblivious to the problems a patent right may cause, and therefore most patent acts comprise provisions allowing for compulsory licenses. Usually, the requirements to be met for obtaining such licenses are very harsh, which is adequately illustrated by the number of Danish court decisions granting a compulsory license under the current Patent Act from 1968: one! Competition law While on the face of it competition law regulates something completely different than patent law, the goals of these legal disciplines are to a certain extent the same: innovation. The declared goal of competition law varies from jurisdiction to jurisdiction, eg in the Danish Competition Act one is taught that the overall aim of the Act is to promote an efficient society use of the economic resources. Looking at the competition law of the European Union, one cannot avoid the overall goal of the Treaty on the Functioning of the European Union (TFEU) of obtaining a single market that has deeply influenced the practice of the European Commission and European Courts. Asked to define the purpose of competition law, many economists would reply that it all boils down to maximising consumer welfare. Either way, there is general consensus that in order to achieve the aims, it is necessary not just to seek to reduce prices to the lowest possible level but also to favour dynamic efficiency. Dynamic competition implies per se a need for innovation. In other words, at an overall level both patent law and competition law spur innovation. From a practical point of view, competition law works in different ways to achieve its aim. Again, while there are differences between jurisdictions, generally competition law looks at firms behaviour in the market as well as at the structure of the market. The remainder of this newsletter will focus on EU competition law. Under EU competition law the first category comprises the prohibitions against agreements in restraint of competition, cf. Article 101 TFEU, and against abuse of domi-

3 Page 3 nance, cf. Article 102 TFEU, whereas the latter category comprises merger regulations, cf. Reg. 139/2004. Relevant to the question of competition law as a defence in infringement cases is the prohibition against abuse of dominance. Article 102 TFEU provides that [a]ny abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States. The provision comprises several components which must all be present in order for there to be infringement. For the purpose of this newsletter, we will zoom in on two such components: dominance and abuse. Dominance Abuse can only arise if a firm has a dominant position. Hence, when asking if invoking a patent right can be an abuse of dominance, it must first be clarified whether a patentee is dominant. The European Court of Justice (ECJ) has on several occasions explained that a firm is dominant when it holds a position of economic strength which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers (eg case 27/76 United Brands). Accordingly, an assessment of dominance is essentially one of an economic nature. Above, a patent right was referred to as a legal monopoly, However, what is clear is that a patent does not necessarily confer an economic monopoly which could be considered the ultimate dominant position. Indeed, from an economic perspective the patentee may not even be anywhere close to being dominant as the patented technology may have many substitutes, some of which may even be freely available on the market. Before a conclusion on dominance can be reached, it is therefore necessary to assess the market for the particular technology in question. Are there viable alternatives? How large is the patentee s market share? Is the market developing and characterised by innovation, etc.? Thus, it is equally clear that one could imagine a patent of such nature that it would in fact confer upon the patentee a dominant position. Such findings have been made in practice in several instances in various jurisdictions, and obvious candidates for creating a dominant position through patent ownership are patents which cover technology required to comply with an industrial standard.

4 Page 4 Abuse The next question one must ask is whether invoking the patent right is an abuse? This is where the potential clash between competition law and patent law emerges: if invoking the patent is an abuse, it is prohibited. As a result, the patentee cannot use the patent right for that which lies at the heart of the right. Particularly, since the legislator has already introduced safety valves in the form of provisions on compulsory licenses in the patent acts, it appears that weighty arguments must be present if competition law is to prevail in these cases. In for instance the Volvo/Veng case (case 238/87), the ECJ indicated at an early stage that the clear starting point is that the holder of an intellectual property right can enforce his rights without that in itself constituting an abuse of dominance. In other words, exceptional circumstances need to be present if enforcing an IP right is to be considered an abuse as later became apparent in the Magill case (case C-241/91). This case showed, however, that enforcing ones rights could amount to an abuse. In subsequent cases, the ECJ has proven its willingness to use competition law in situations where owners of intellectual property rights have used these in what was considered by the Court to be an anti-competitive way. The Magill case and the IMS Health case - both relating to access to copyright protected rights - are indications of this and recently also the Microsoft case can be interpreted as a case which falls within this category. In addition, the Commission has followed in the footsteps of the ECJ. This was already clear from Magill, which started as a Commission case, and the Microsoft case, however, it became even more apparent from the 3 December 2008 Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings. While strictly speaking no patent cases has yet reached the ECJ, other intellectual property type cases have, and from the case law established and the Commissions guidelines, it appears that if an abuse allegation is to succeed the following conditions must be met: Access to the patented technology must be objectively necessary, i.e. indispensable. A refusal to supply would eliminate effective competition.

5 Page 5 A refusal will result in consumer harm, eg because new innovative products will be prevented from entering the market 1. Raising abuse of dominance as a defence The defence has been invoked in several different situations but what seems to be the common denominator in most of these cases is a refusal to license either a blunt refusal or a de facto refusal due to the offered license terms. This is also how the issue has been dealt with in the competition case law mentioned above; however, one could also contemplate that an actual patent ambush in itself could constitute a new and separate type of abuse with or without the same requirements to indispensability, etc. In the standard refusal-to-license cases, the argument has lead to a requirement from the alleged infringer that the patentee offers a license on so-called FRAND terms, i.e. a Fair, Reasonable and Non-Discriminatory license. Standard Setting Organisation However, the discussion of FRAND licensing in competition law cases has its root in discussions which are not directly related to competition law and which take place within or around so-called standard setting organisations (SSO), such as the European Telecommunications Standards Institute (ETSI), which is the organisation behind, inter alia, the 3G mobile phone standard. The discussion conducted in these SSOs has first of all been concerned with the issue of whether firms taking part in setting a standard have a duty to disclose the existence of a patent covering technology that will be part of an industrial standard. Some SSOs regulations already deal with this issue while others do not. If a firm contrary to the rules of the SSO has chosen not to disclose the existence of a patent included in the standard, the consequences will initially be a question to be answered under the SSO regulations in other words it is a civil matter. Even if the SSO regulation includes a duty to disclose, only a limited number of the regulations, however, seem to regulate what happens if a patent is disclosed accordingly and included in the standard. Do the firms using the standard have an automatic right to use that patent? And on what terms (and should the terms also be disclosed beforehand by the patentee)? This is where the discussion of FRAND licenses comes into play: if a patented technology becomes part of a standard, is the patentee obliged to grant a license on FRAND terms? 1 Case law related to licensing may be seen as a natural development from other refusal to supply cases but we will not touch upon this line of case law here.

6 Page 6 In a competition law perspective regardless of the SSO regulation in question the question arises: if a company that is involved in a standard setting process chooses not to disclose a patent covering technology that will be part of the standard, can the patentee still invoke the patent against the users of the standard, including through licensing? This situation is not uncommon or impractical which is witnessed by the term attached to such practice, i.e. a patent ambush. Further, if the firm that is involved in the standard setting process discloses its patent, will it then be forced to license, perhaps on FRAND terms? 2 Additionally, the question arises as to what position firms would be in, if they were not involved in the standard setting process and have therefore not disclosed and most likely have not even had the possibility to disclose its patent? Can such firms also be forced to grant licenses? How is this dealt with by competition law? As will be apparent from the sections above, what on the surface appears to be a simple issue actually raises a number of questions, the answers to which are not easy to give and the questions raised above only scratch the surface. Case law from the US as well Europe suggests that these are complicated issues. In a recent German decision, the German Supreme Court established in the so-called Orange Book Standard case that it may indeed be possible to invoke abuse of dominance as a defence in a patent infringement case. The decision, however, made it clear that these issues are complicated and concluded that the infringer must 1) make a binding and unconditional offer to take a license which the patentee cannot reject without infringing competition law, and 2) behave as if the license had already been granted. This already leads to questions, such as how is the infringer to assess whether or not a license offer is sufficient, and what if the patent is found to be invalid? In the US, earlier this year the Federal Trade Commission (FTC) dropped its long lasting case against Rambus whom it had accused of not disclosing certain of its patents related to Dynamic Random Access Memory (DRAM) technology in the standard setting process within Joint Electron Device Engineering Council (JEDEC) after the FTC failed to satisfy its burden of proof. In early December, Rambus struck a deal with the EU Commission to cap its license fees on its DRAM technology, cf. commitments proposed by Rambus in June 2009, to avoid the consequences of its al- 2 In addition to competition law consideration related to abuse of dominance in the Commission's Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements one will also find a section on standard setting which states that "to avoid elimination of competition access to the standard must be possible for third parties on fair, reasonable and non-discriminatory terms.".

7 Page 7 leged abuse of dominance. The Commission s view has been that Rambus acted deceitfully in the standard setting process and subsequently charged unreasonable prices. The topicality of the issue was also reiterated in another EU Commission press release from 10 December 2009 in which the EU Commission welcomes IPCom s public FRAND declaration. In 2007 IPCom took over Robert Bosch GmbH s mobile telephony patent portfolio which includes patents essential to the GSM and UMTS standards, and IPCom s declaration followed in the footsteps of Robert Bosch GmbH s earlier FRAND commitment. Going forward? The Guidelines from the Commission indicate a way forward in the refusal-to-license type of cases at a European level. Perhaps the door has even been left too open. When searching for a clear principle in ECJ case law to the effect that a refusal to license requires exceptional circumstances in order to constitute abuse at all, this cannot be clearly found in the main text of the Guidelines but has only found its way into one of the footnotes. However, as will be apparent, the indispensability requirement still means that invoking Article 102 as a defence in patent cases is not a situation likely to occur often. That being said, if one is faced with an industrial standard, which reads upon a patent, your problem may be very real, and an infringer may be so fortunate as to find support in competition law for obtaining a license on acceptable terms. As always, the devil is in the details: how do you define what a FRAND license is? Establishing that the principle may apply is only half the job, and it will require careful consideration to establish the actual terms. Undoubtedly, the last word has not been said in this area of law and apart from having opened up the possibility of invoking abuse of dominance as a defence in a patent case, the remaining issues are left unanswered. Any questions may be directed to Lasse A. Søndergaard Christensen on or lsc@gorrissenfederspiel.com or Kenneth Kvistgaard-Aaholm on or kka@gorrissenfederspiel.com.