On Feb. 25, 2015, the U.S. Supreme Court held, in a 6-3 decision, that a state board with a controlling number of decision-makers, who are active market participants in the occupation the board regulates, does not enjoy state action immunity from federal antitrust laws unless “the State has articulated a clear policy to allow the anticompetitive conduct, and, the State provides active supervision of [the] anticompetitive conduct.” N.C. State Bd. of Dental Exam’rs v. F.T.C., 135 S. Ct. 1101, 1112 (2015). (Click here for a copy of the opinion.)
On Feb. 2, 2015, the U.S. Department of Justice (DOJ) issued a business review letter that effectively approved a proposal by the Institute of Electrical and Electronic Engineers (IEEE) to update the IEEE Standard Association’s Patent Policy (Policy) regarding standard-essential patents (SEPs) (the Update). The DOJ’s approval of IEEE’s Update is an important step in the development of policies that standard-setting organizations can adopt with respect to SEPs while reducing the risk of an enforcement action by the DOJ. Read More
This article originally appeared in Law360 on Jan. 16, 2015. A pdf version is available here.
The Foreign Trade Antitrust Improvements Act has confounded practitioners and courts alike for years. This past year brought long-anticipated decisions from the Second (Lotes), Seventh (Motorola Mobility II) and Ninth (Hsiung) Circuits regarding four important issues: (1) whether the FTAIA is substantive or jurisdictional; (2) the scope of the exclusion for conduct affecting “import commerce”; (3) the appropriate standard for the “domestic effects” test; and (4) the increasing importance of the “gives rise to a claim” test. This article summarizes these recent circuit court opinions and offers some thoughts about issues to watch going forward.
The Foreign Trade Antitrust Improvements Act, 15 U.S.C. § 6a (FTAIA), enacted in 1982, has provided ambiguous direction to courts and practitioners regarding the applicability of U.S. antitrust laws to conduct occurring wholly or partially in other countries. In Motorola Mobility LLC v. AU Optronics Corp. et al., No. 14-8003 (7th Cir. Nov. 26, 2014) (Motorola Mobility II), the 7th U.S. Circuit Court of Appeals became the latest appellate court to weigh in on the meaning of this opaque statute, holding that purchases by a U.S. parent company’s foreign affiliate of price-fixed goods that were incorporated into products subsequently shipped to the U.S. parent did not give rise to damages claims under Section 1 of the Sherman Act. At the same time, however, and in an apparent reversal of direction by the same panel, the Court made clear that its decision does not preclude efforts by the U.S. Department of Justice to pursue criminal charges against foreign defendants for cartel activity relating to components of finished products sold in the United States. Read More
On Dec. 4, 2014, the Federal Circuit issued a much-anticipated opinion in Ericsson, Inc. v. D-Link Sys., Inc., Nos. 2013-1625, -1631, -1632, -1633 (Fed. Cir. Dec. 4, 2014). The panel—consisting of Judges Kathleen O’Malley, Richard Taranto and Todd Hughes—ruled on several issues, the most significant of which is the proper methodology for calculating “reasonable and non-discriminatory” (RAND) royalty rates for RAND-encumbered “standard essential patents” (SEPs). The opinion, authored by Judge O’Malley, represents the first guidance from an appellate court on how to calculate a RAND royalty. Read More
For some time, many in the antitrust community have expressed concerns about how China is enforcing its antitrust laws against foreign companies. The past several months have seen a steady stream of criticism from the United States that in certain areas—notably, dominant firm conduct, intellectual property rights and mergers—China is selectively enforcing its antitrust laws outside of international norms in order to protect domestic industries. The criticism includes pointed complaints, comments and recommendations from the U.S. enforcement agencies, U.S. business groups and antitrust practitioners. This article provides a brief overview of some of the comments and recommendations being offered to the Chinese government. Read More
In April 2014, the European Parliament approved legislation governing antitrust damages actions brought in the national courts of European Union Member States. The Parliament’s approval followed several years of debate, and was the last significant hurdle for developing a private damages law for the EU. The Directive requires the approval of the European Council, which will be a formality, at which point it will be formally adopted. EU Member States then have two years to implement it into their national laws. The Directive aims to make it easier for companies and consumers to bring damages actions against companies involved in EU antitrust infringements. The text of the Directive is available here.
There has been a great deal of commentary concerning the extent to which EU private damages law will become like that of the United States—with all of its benefits for those harmed by anticompetitive conduct and all of its burdens for those accused of engaging in the conduct. Now that the Parliament has approved the Directive and the scope and contours of the forthcoming EU law have become clearer, this article compares some of the key features of the new law with U.S. law in price-fixing cases. For simplicity, the article focuses on U.S. federal law, with references to state law only where important. Our discussion of the new EU law similarly omits reference to national laws. Although brevity is the soul of wit, it also can be a source of potentially incomplete short-cuts that can lead to debatable, or even misleading, conclusions. Accordingly, while this article provides a general overview and comparison of some important issues under U.S. and EU law, it is not meant to substitute for independent legal research and analysis. Read More
Note: This article was adapted from a speech given by Mr. Popofsky at the Oxford Centre for Competition Law & Policy in the UK on May 2, 2014.
Will opt-out class actions proposed by the UK Parliament’s Consumer Rights Bill bring the dreaded U.S.-style litigation culture to the United Kingdom? My personal assessment—that of a seasoned American antitrust practitioner—is that it’s doubtful.
But first, some background. Opt-out class actions are a form of what are known as collective actions or collective proceedings. Such actions are currently permitted in UK and European courts only on an opt-in basis—essentially a form of voluntary joinder—but then only in private claims for redress in the high court that follow on a prior public agency decision of wrongdoing under the competition laws of the UK or EU. Private antitrust actions in the UK are quite rare; only 27 such cases resulted in judgment in the 2005-2008 period. Only one collective action for damages has been brought on behalf of consumers. Read More
This article originally appeared in Law360 on March 26, 2014.
On March 27, 2013, the U.S. Supreme Court issued its decision in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), overturning an order certifying an antitrust class action under Federal Rule of Civil Procedure 23(b)(3), which requires that questions of law or fact common to class members predominate over questions affecting only individual members.
The Supreme Court held that the plaintiffs’ expert’s damages model was unable to measure classwide damages attributable to the only theory of antitrust impact found viable by the district court. Because of this flaw in the damages model, individual damages calculations would overwhelm questions common to the class, and the class therefore could not be certified under Rule 23(b)(3).1
On remand, plaintiffs filed a new motion for class certification, slicing several years off the class period and limiting the geographic market to only five of the 18 counties in the Philadelphia area for which they originally sought certification.2 The defendants opposed the motion and filed a new motion to exclude the opinions of plaintiffs’ expert. The court then granted plaintiffs’ unopposed request to stay the case while the parties conduct settlement discussions. Plaintiffs and Comcast recently agreed to de-certify the Chicago-area class based on the Supreme Court’s decision, and plaintiffs filed an amended complaint limited to the five Philadelphia-area markets.3
It was not unexpected that class counsel in Comcast would narrow the class for which they sought certification, or that settlement discussions might take place after the Supreme Court’s decision. But what effect is Comcast having on class certification in other antitrust cases? Read More
In June 2013, the European Commission launched a consultation on its proposed reform of the EU Merger Regulation (EUMR), which included a proposal to extend the scope of the EUMR to cover acquisitions of non-controlling shareholdings between undertakings. The consultation closed in September 2013. This article provides an overview of the Commission’s proposal and the issues raised by the consultation, and sets out next steps in the legislative process.
The Commission’s Proposal
The EUMR entitles the Commission to review, prior to completion, transactions that confer control by one undertaking over another, provided that the parties to the transaction meet certain turnover thresholds. As part of a wider revision of the EUMR, the Commission proposes extending its jurisdiction to cover acquisitions of shareholdings that fall short of conferring “control” over the target, but which give the minority shareholder the ability to exercise sufficient influence over the target to reduce the intensity with which it competes, for example, by influencing pricing decisions.
In its proposal, the Commission refers to such transactions as the acquisition of “structural links,” reasoning that some problematic structural links may not be detected and sanctioned under Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU)—which prohibit, respectively, anticompetitive agreements between undertakings and the abuse of a dominant position. In its discussion of the effects of such structural links, the Commission refers at length to Ryanair/Aer Lingus, where the Commission’s repeated prohibitions against Ryanair’s acquisition of full control of Aer Lingus did not prevent Ryanair from holding a 29.8 percent “non-controlling” stake in Aer Lingus, Ryanair’s only competitor on certain routes. The rights attached to Ryanair’s stake, although falling short of conferring “control,” allowed Ryanair to block certain strategic decisions in the shareholders meeting of Aer Lingus, which allegedly weakened Aer Lingus’s ability to compete with Ryanair. Read More
Every antitrust lawyer should be familiar with the U.S. Supreme Court’s decision in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), which overturned a 3rd U.S. Circuit Court of Appeals decision affirming an order certifying an antitrust class action under Federal Rule of Civil Procedure 23(b)(3). The Supreme Court held that the plaintiffs’ expert’s damages model was unable to measure class-wide damages attributable to the plaintiffs’ theory of antitrust impact. Because of this fundamental flaw in the damages model, individual damage calculations would overwhelm questions common to the class, and the class therefore could not be certified under Rule 23(b)(3).
In the six months since Comcast issued, decisions applying it have fallen into three general categories: (1) opinions distinguishing Comcast, finding an acceptable common formula at the class certification stage and Rule 23(b)(3)’s predominance test satisfied; (2) opinions certifying a class as to liability only under Rule 23(c)(4) (“When appropriate, an action may be brought or maintained as a class action with respect to particular issues.”); and (3) opinions applying Comcast and rejecting class certification on the ground that impact cannot be determined on a class-wide basis or no common formula exists for determining damages on a class-wide basis. See, e.g., Jacob v. Duane Reade, Inc., No. 11 Civ. 160 (JPO), 2013 U.S. Dist. LEXIS 111989 (S.D.N.Y. Aug. 8, 2013) (discussing decisions since Comcast).
Although courts have applied Comcast inconsistently, the decisions thus far suggest that Comcast may have a greater effect on class certification in antitrust cases than in other areas, because of the complexity of isolating the impact of various categories of alleged anticompetitive conduct, and the difficulty of disaggregating the conduct for class-wide damages models. Accordingly, defendants in antitrust cases should continue to see Comcast as offering an opportunity for an early test of plaintiffs’ damages models regarding class-wide damages.
This article first summarizes the Comcast decision. It then provides a high-level overview of decisions since Comcast, focusing on appellate decisions and a sampling of district court antitrust cases. Finally, we offer some thoughts on what these cases tell us about Comcast’s likely effects on antitrust class actions. In brief, recent decisions provide defense counsel with ammunition to use Comcast to challenge class certification under Rule 23(b)(3) by attacking plaintiffs’ (and their experts’) theories regarding class-wide impact and damages. Read More
Until this year, China’s enforcement activities in the field of antitrust, particularly as these activities have affected foreign companies, had been mainly focused on merger control with merger filings handled by the Anti-Monopoly Bureau of the Ministry of Commerce (MOFCOM). Other areas of competition law such as resale price maintenance, price fixing, cartels and abuse of dominance, although addressed under China’s Anti-Monopoly Law (AML), had received scant attention from domestic and foreign companies, and the relevant regulatory bodies had taken few if any steps to enforce the relevant provisions of the AML. By way of example, until this year, an investigation into proposed price increases by Unilever in 2011, which resulted in a RMB 2 million (US$318,000) fine for Unilever, had been China’s only investigation of a multinational company related to pricing issues, and this investigation was carried out under the provisions of China’s Price Law, which dates from 1997.
Widening the scope of enforcement activities
For some time now, there have been signs that this limited focus is changing. Last year, both the National Development and Reform Commission (NDRC)—the body responsible for enforcing the price-related provisions of the AML—and the State Administration for Industry and Commerce (SAIC)—responsible for the enforcement of non-price-related provisions of the AML—expanded their antitrust teams in a move widely seen as a precursor of increased enforcement activities. In addition, the Supreme People’s Court (SPC) published the Provisions on Several Issues Concerning the Application of the Law in Trials of Civil Dispute Cases Arising from Monopolistic Acts (see previous Newsletter coverage here) with the apparent intention of encouraging the private enforcement of the provisions of the AML in the Chinese courts.
The first half of 2013 has seen a notable increase in the scope of enforcement of China’s AML and the involvement of regulatory bodies other than MOFCOM. There were several high-profile court cases addressing complex antitrust issues. We highlight some of the most important developments below. Read More
The Internet has given rise to information-based businesses that create value by accumulating pools of data captured from many sources. Indeed, the collection and analysis of vast amounts of consumer data has become the engine driving significant innovation on the Internet. From search to social networks to shopping to gaming, the use of consumer-generated data is increasingly the way to monetize web services. Internet companies amass vast amounts of new data by the second. These data are then used by them, and others, to generate advertising revenue and to develop new products.
For many companies, products derived from raw data will drive innovation. For example, access to personal data will help firms better understand consumers and how to meet their needs. Retailers maintain extensive data on their customers (tied either to a customer loyalty card, name, or physical or email address). Using demographic information and purchasing history, companies can determine—through the power of data analytics—shopping habits and can then develop targeted advertising. For example, companies can now use predictive analytics to identify potentially pregnant women. They then can use targeted advertising to suggest a new product purchase—baby products—when that customer orders cleaning supplies or groceries.1
As Internet firms grow ever larger and their stores of data grow exponentially, questions regarding the control of, and access to, these data have emerged. Firms seeking to gain or ensure continued access to these data have asserted antitrust theories as a basis for doing so, although no European court has yet to accept any such claim. In reality, such claims have been raised principally as a counterattack when firms with some degree of market power have sued third parties for violating terms of service and copyright by accessing data in an unauthorized manner. These types of counterclaims raise numerous questions—the most obvious of which is, who owns the data anyway?
In our last edition, we addressed the first four “no-nos” and their current status under U.S. antitrust law. Here’s a discussion of the remaining five.
In the 1970s, Bruce Wilson, a former deputy assistant attorney general at the U.S. Department of Justice, developed a well known list of nine patent licensing “no-nos.” The somewhat formalistic U.S. antitrust law of the 1970s viewed these licensing practices as generally unlawful, if not per se illegal. In this article, and the previous one, we consider the nine “no-nos” from the perspective of U.S. antitrust law in 2013. Many “no-nos” are no longer automatically unlawful, but it is nevertheless important to understand the issues, because patent licensing practices can still draw fire under the Rule of Reason.
In the 1970s, Bruce Wilson, a former deputy assistant attorney general at the Department of Justice, developed a well-known list of nine patent licensing “no-nos.” The somewhat formalistic U.S. antitrust law of the 1970s viewed these licensing practices as generally unlawful, if not per se illegal. In this article, and in a follow-up article that will be published in the next edition of this newsletter, we will consider the nine “no-nos” from the perspective of U.S. antitrust law in 2013. Many “no-nos” are no longer automatically unlawful, but it is nevertheless important to understand the issues, because patent licensing practices can still draw fire under the Rule of Reason.
So without further ado, here is a discussion of the first four “no-nos” and their current status under U.S. antitrust law.
In October 2012, the UK Supreme Court issued its first antitrust judgment, ruling that the UK statutory limitation period for bringing “follow-on” damages actions—i.e., claims based on antitrust infringement decisions—was sufficiently clear that, under the facts of the case, it did not deprive the claimants of effective redress. This ruling is significant as it is the first time the UK’s highest appeal court has examined antitrust damages claims and shows, alongside several high-profile UK Court of Appeal judgments handed down earlier this year, that the UK courts are gaining experience and confidence in dealing with complex antitrust matters. This increased competence will continue to benefit both claimants and defendants in the form of increased legal certainty in what remains a growing and developing area of EU and UK law.
BCL v. BASF centered on the compatibility of the UK limitation rules for follow-on damages actions with the European Union legal principles of effectiveness and legal certainty. The claimants, BCL Old Co. Limited and others (BCL), brought an action, in 2004, for damages against members of the vitamins cartel other than BASF, following a decision issued by the European Commission in November 2001. BCL did not sue BASF until more than six years after the decision, in March 2008, bringing its action in the UK specialist Competition Appeal Tribunal (CAT). Pursuant to the CAT’s rules, a claimant wishing to bring such an action must do so within two years from the date on which the decision of the relevant competition authority becomes final, suspended by any appeal brought against the decision. BASF had appealed the Commission’s decision, but only on the level of the fine. BCL argued that it was not clear from the limitation rules that an appeal of the fine alone did not invoke the suspension of the limitation period and that, in any event, it had not been clear at the time the appeal was brought what BASF was appealing against.
In May 2009, the UK Court of Appeal found that BCL’s claim was time-barred and could proceed, if at all, only with an extension to the limitation period granted by the CAT itself. Later that year, the CAT assumed that it did have the power to extend but declined to do so. On appeal of this decision, the Court of Appeal, however, held that the CAT had no such power to extend the statutory deadline for bringing an action before the CAT and that European Union law did not require the CAT to hold such a power.
The UK Supreme Court was asked to consider whether the statutory limitation period and its application violated the claimant’s rights under European Union law principles by rendering it “excessively difficult” for BCL to bring a claim against BASF. The Supreme Court considered that the statutory language was “plain and ordinary” and the legal position was “clear.” It found that the risks to BCL of not bringing a claim against BASF in January 2004 were or should have been evident and the Supreme Court found no evidence that the reason BCL had not brought its claim earlier was actually due to any legal uncertainty. In any event, the Supreme Court held, even if the legal position had not been clear, the only remedy for BCL would have been to bring an action against the UK government. Any uncertainty would not have permitted an action for damages to be brought against BASF at this stage.
The ruling clarifies the CAT limitation period: An appeal of a Commission decision limited to the level of fine does not suspend the two-year period. By contrast, an appeal on the substance of the infringement, by any addressee of the decision—even if not a defendant in the damages claim—does suspend the limitation period.
The UK Supreme Court and recent Court of Appeal judgments have a number of practical implications for both claimants and defendants in UK private damages actions. First, a claimant will need to review the details of all appeals of any relevant infringement decision to determine whether it is the infringement itself that is the subject of the appeal or merely the level of fine. An appeal of the level of fine will not suspend the CAT limitation period. For potential defendants who did not appeal the Commission’s decision, for example because they were one of the immunity or leniency applicants, this may mean a number of years of uncertainty where they have no influence over the outcome of any appeal. Conversely, a claimant will not be able to proceed with an action before the CAT until the outcome of any appeal brought on the substance of the infringement by one of the decision addressees, even if the claimant did not intend to sue that particular defendant. This may significantly delay any recovery by the claimant through an action brought before the CAT. Instead, a claimant may decide to bring a damages action before the UK High Court, which also has jurisdiction to hear follow-on damages actions, and where a claim is more likely to proceed pending appeals of the underlying infringement decision.
As outlined in previous editions of this Newsletter, the UK regime is currently undergoing significant reform with the planned merger of the Office of Fair Trading and the Competition Commission due to take place as early as spring 2014. The procedure for bringing antitrust damages actions is also currently under review by the UK government with a proposal to expand the CAT’s jurisdiction to hear damages claims that do not arise from a decision by a competition authority (also known as “standalone” claims). The full text of the Supreme Court’s judgment is available here.
It is well established in the United States that a patent holder generally has broad discretion to determine how it uses or licenses it patents. The U.S. Supreme Court’s bottom-line principle expressed in Trinko—that companies are free to refuse to deal with anyone—applies to intellectual property as is does to other property rights.1 As the U.S. DOJ and FTC have expressed, “the unilateral right to refuse to grant a patent license is a core part of the patent grant.”2 And as patent holders generally are free to refuse to license their patents, they also generally are free to impose any restrictions they wish on licenses that they do grant.3
This general rule holds as well in the rapidly growing and changing cloud computing industry. Nevertheless, the antitrust laws do impose some limits on a patent holder’s rights, and as a result patent licensing and litigation have become significant competitive issues in the technology industry in recent years. Companies licensing patents in the cloud should be aware that certain licensing practices in the cloud might have anti-competitive effects that could trigger antitrust concerns. This article reviews, at a high level, whether the nature of cloud computing raises special antitrust risks, and if so, when a company should consider further review of its licensing practices.
A. An Overview of Cloud Computing
Cloud computing is the provision of data or applications on demand, over the web, to remote users. The cloud can best be viewed as a “stack” consisting of five layers—hardware, virtualization, infrastructure as a service (“IaaS”), platform as a service (“PaaS”), and software as a service (“SaaS”):
Each layer depends on interface and protocol interoperability to those above and below it for the cloud to work properly. For example, when a user opens a photograph in her Facebook account on her smartphone, she is using a SaaS application (the Facebook app) to retrieve data (the digital photograph file) stored in remote hardware (the Facebook servers) that are collectively managed by virtualization software and an operating system. If the remote hardware fails, then neither the SaaS application nor the data can be retrieved, and the user experience collapses.
Within each broad layer is an abundance of potential product and technology markets that are similarly codependent: servers and mainframes with connected storage devices and networking gear; server, mainframe, and cloud operating systems; video compression and streaming software; search engines; webmail; online advertising; and others. Surrounding these is an overlapping series of products (and potential markets) such as smartphones, tablet computers, PCs, set-top boxes, and game consoles. Many, and likely most, of the underlying technologies in these markets are subject to intellectual property protections.
To recoup investments and obtain cost predictability, players at all levels in the cloud rely on patent licensing, frequently in the form of cross-licenses and portfolio licenses that provide a form of “patent peace” to the parties. The licensing practices are particularly important to the heavyweight patent holders that compete across multiple markets in the cloud. One player that competes in several cloud-related markets, IBM, perennially has been one of the top two patent holders in the world. Apple, Microsoft, Amazon, Hewlett-Packard, and Oracle/Sun also possess significant patent portfolios and compete with one another within the cloud industry. And recently, Google appears to be scrambling to catch up.
B. Antitrust Risks in the Cloud
Cloud computing represents a disruptive “paradigm shift” potentially comparable to the emergence of the Internet and the personal computer. As such, the cloud presents opportunities for companies to leverage rapid technology change to challenge previously dominant competitors in once-unassailable markets. And like the Internet and the PC before it, the cloud promises tremendous potential efficiency and innovation benefits for consumers and the economy. This virtually guarantees that competition authorities around the world will closely watch cloud-related markets for potential antitrust violations. For patent licensors, some of the most important antitrust risks include: (1) market power and tipping points; (2) tying and package licenses; and (3) standards setting and patent pools.
(1) Market Power and Tipping Points
As described above, the cloud consists of multiple intersecting and overlapping markets. As a result, cloud computing may present scenarios where a company that has market power in one cloud market can use that market power to foreclose competition in adjacent markets. This is especially the case because of the need for interoperability between technologies in the cloud. A company that holds patents covering protocols and other links between a monopoly product and products in another market can expect greater scrutiny of its licensing practices. This is especially the case in jurisdictions, such as the European Union, where monopoly leveraging is a more viable claim than in the United States).
Like other technology industries, the cloud also presents risks of tipping points, where one company’s product becomes an accepted standard. This potential for market tipping can be exacerbated by the presence of network effects or high barriers to entry, just as in more mature technology markets. Providers that operate across multiple cloud markets—and especially providers that are dominant in one or more markets—therefore should carefully review licensing practices to avoid being accused of leveraging market power in one area of the cloud into another area of the cloud.4
(2) Tying and Package Licenses
Another, related risk arising from the multiple layers of cloud markets is that of anti-competitive tying or bundling. Generally, a distinction exists between patent-to-product tying and patent-to-patent tying. In patent-to-product tying, the patent owner “uses the market power conferred by the patent to compel customers to purchase a product in a separate market that the customer might otherwise purchase from a competitor.” U.S. Philips Corp. v. Int’l Trade Comm’n, 424 F.3d 1179, 1189-90 (Fed. Cir. 2005). Courts have found such licenses to constitute antitrust violations or patent misuse, and companies should be wary of any such conditions in patent licenses. See, e.g., United States v. U.S. Gypsum Co., 333 U.S. 364, 400 (1948); Int’l Salt v. United States, 332 U.S. 392, 395 (1947); Virginia Panel Corp. v. MAC Panel Co., 133 F.3d 860, 868-69 (Fed. Cir. 1997).
By contrast, in most cases, companies may offer a license to a portfolio (or package) of patents without undue concern about potential antitrust risk. See Philips, 424 F.3d at 1190-91. However, package licenses can raise antitrust issues if a company that owns rights to essential patents forces licensees take a license to non-essential patents, and that coercion forecloses competition from commercially viable alternative technology. Id. at 1194. Therefore, patent holders who offer package licenses including both essential and non-essential patents should carefully review portfolio licenses, bundles, and package licenses to ensure that they do not present such risks.
(3) Standards Setting and Patent Pools
As with other technology industries, the need for interoperability in the cloud means that companies often must conform to industry standards to be serious providers of products or services providers. Where this is the case, special issues may arise. Most standards-setting organizations require participants whose patents read on an adopted industry standard to promise to license their patents on terms that are “reasonable and nondiscriminatory” (“RAND”). Any such promise places an immediate limitation on what is otherwise freedom to license on terms the patentee desires. Antitrust risks, as well as other contractual or tort law risks, may flow from undertaking a RAND obligation if those obligations are not fulfilled.5 In addition, similar issues may arise in the context of patent pools, where bundles of patents from different patent owners are collected in one pool for licensing subject to the kinds of commitments the DOJ has required in approving patent pools.6
* * *
In sum, companies can expect that the licensing practices that are increasingly commonplace in cloud computing, as elsewhere, likely are pro-competitive and in line with well-settled legal principles. However, the importance of the cloud and its nature mean that antitrust authorities will closely watch any licensing conduct in the cloud. In addition, any licensing that implicates more than one potential product market—especially where a patent owner has a monopoly in one market—could prompt greater scrutiny. In such cases, patent owners in the cloud should carefully review licensing strategies for potential antitrust risks.
1 See Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004) (“[A]s a general matter, the Sherman Act ‘does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.’”) (citing United States v. Colgate & Co., 250 U.S. 300, 307 (1919)).
2 U.S. DEP’T OF JUSTICE AND FED. TRADE COMM’N, ANTITRUST ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOVATION AND COMPETITION (2007) (“JOINT ANTITRUST/IP GUIDELINES”), at 6.
3 See General Talking Pictures Corp. v. Western Electric Co., 305 U.S. 124, 127 (1938) (“The practice of granting licenses for restricted use is an old one. So far as it appears, its legality has never been questioned.”); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 706 (Fed. Cir. 1992) (“Restrictions on use are judged in terms of their relation to the patentee’s right to exclude from all of part of the patent grant.”).
4 Because companies in the cloud frequently acquire businesses in adjacent markets or decide later to enter previously uncontested adjacent markets, an “Aspen Skiing” scenario may arise in this context. For example, a company that licenses software to hardware providers, and then enters the hardware business itself, should be wary of changes to existing licensing practices that could be viewed as anti-competitive attempts to foreclose hardware competition. See JOINT ANTITRUST/IP GUIDELINES at 28 (liability could attach “when a patent owner refuses to continue to license under circumstances paralleling those in Aspen”); Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).
5 See, e.g., Broadcom Corp. v. Qualcomm Inc., 501 F. 3d 297 (3d Cir. 2007).
6 See, e.g., JOINT ANTITRUST/IP GUIDELINES at 65-85; Letter from Thomas Barnett to William Dolan and Geoffrey Oliver, Oct. 21, 2008 (RFID patent pool), available at http://www.justice.gov/atr/public/busreview/238429.htm.
The French Competition Authority (the “Authority”) has been very active and recently published several sets of important guidelines. On May 16, 2011, it published guidelines on fines and on Feb. 10, 2012, it published guidelines on settlement proceedings and compliance programs. It also has rendered a very important decision in the leniency context, detailing new ways to calculate fines and demonstrating the need for companies to consider applying for leniency in cartel cases. We highlight below these recent developments of interest to companies and competition practitioners in France.
French Competition Authority Fines Four Laundry Detergent Manufacturers for Cartel Activity. On Dec. 8, 2011, the French Competition Authority fined four major laundry detergent manufacturers up to M€ 367.95 (the total amount of fines would have been M€ 713.57 without reductions due to leniency applications) for participating in a cartel through a trade association. This proceeding was initiated through applications for leniency by each party to the cartel before the Authority, as well as before the European Commission (“Commission”) in a separate proceeding that resulted in fines against Unilever, Procter & Gamble, and Henkel totaling M€ 315.2. In France, the Authority imposed its fines after finding that Unilever, Procter & Gamble, Henkel, and Colgate Palmolive held regular secret talks on their pricing and promotion policies and imposed a monitoring device of compliance with the cartel rules. Significantly, the Authority held that the benefits of the leniency and settlement procedures can be combined in certain circumstances (e.g., when the objections notified on the concerned company differ in one or more significant aspects from the content of its leniency application) and applied its new methods related to the setting of the financial penalties (cf. Notice on the Method Relating to the Setting of Financial Penalties of 16 May 2011).
French Settlement Procedure. On Feb. 10, 2012, the Authority released a framework document concerning its settlement procedure. The settlement procedure enables companies to waive their right to challenge the charges notified by the Authority’s investigation services in return for a reduced fine. The notice explains how to implement such a procedure, in particular how a company must waive its right to challenge the charges notified. In the framework of such a procedure, the companies can also change their behavior in the future by making structural (separate accounts, spinning off, etc.) or behavioral (modifications to contractual clauses, general terms of sale, price scales, etc.) commitments or by setting up antitrust compliance programs. Following the decision of the Authority regarding the detergent cartel referenced above, the benefits of the leniency procedure can be combined with the settlement procedure, in particular if the objections notified on the company in question differ in one or more significant aspects from the content of its leniency application. The settlement procedure grants a 10% reduction in the financial penalty, which may be combined with additional 5 to 15% reductions depending on the commitments made by the companies.
French Antitrust Compliance Programs. On February 10, 2012, the Authority released a framework document aimed at encouraging antitrust compliance programs whereby companies express how they comply with European and French competition rules. Such programs must seek two objectives: (1) prevent the risk of committing infringements and (2) provide the means of detecting and handling misconduct. Therefore, programs should provide informational measures (training, awareness) and operational initiatives (internal and external monitoring, audit, and alert mechanisms). The document does not provide a template compliance program but outlines five key features for establishing credible, efficient, and size-tailored programs. Although the existence of a compliance program is neither a mitigating circumstance nor an aggravating factor, implementing one may help companies to discover infringements and encourage them to submit an application for leniency, which may grant a complete or partial immunity. The commitment to establish or improve an existing compliance program within a settlement procedure may allow a reduction of the financial penalty up to 10%, to which other discounts may be added for a total reduction of up to 25%.
The Authority’s new framework will need time to be enforced and adapted and also may be challenged before the Court of Appeals and the Supreme Court. In the context of the European Competition Network and of the International Competition Network, it might be a subject of discussion among competition agencies and authorities. Of course, the new framework should influence companies in their organization, compliance, and defense strategies.
China’s Anti-Monopoly Law (AML) continues to evolve since it went into effect in 2008. Recent developments offer some guidance on how future matters will be handled. Highlights of China’s latest antitrust and competition issues over the past six months include:
China Anti-Monopoly and U.S. Antitrust Agencies Sign Memorandum of Understanding. On July 27, 2011, China’s three anti-monopoly enforcement agencies—National Development and Reform Commission (NDRC), Ministry of Commerce (MOFCOM) and State Administration for Industry and Commerce (SAIC)—signed a Memorandum of Understanding (MOU) with the U.S. Federal Trade Commission (FTC) and the Department of Justice (DOJ) to further promote communication and cooperation among the agencies in the two countries. The MOU provides for periodic high-level consultations among all five agencies as well as separate communications between individual agencies. Specific areas of cooperation include, among others, (1) exchange of information about competition law enforcement and policy developments; (2) training programs, workshops and other means to enhance agency effectiveness; (3) provision of comments on proposed laws, regulations and guidelines; and (4) cooperation on specific cases or investigations when in the agencies’ common interest.
China’s Local Administration of Industry and Commerce Departments Sign Regional Cooperation Agreement for Enforcement of Anti-Monopoly Law. On Aug. 3, 2011, six of China’s provincial and regional Administration of Industry and Commerce (AIC) Departments (Xinjiang, Shanxi, Gansu, Qinghai, Ningxia and Xi’an) signed a regional cooperation agreement for the enforcement of the AML and the Anti-Unfair Competition Law. The cooperation agreement aims to improve cooperation between the six AICs on the enforcement of the AML and the Anti-Unfair Competition Law in general, and specifically in trans-regional cases. The agreement provides for the AICs to establish cooperation mechanisms, such as data exchanges, to notify each other of ongoing investigations, to commission joint surveys and to hold annual meetings to share experiences. Under the agreement, the AICs will also focus on investigating and dealing with unfair competition issues—in particular, widespread alleged illegal activities in key industries, commodity markets and regions—and they will conduct joint law enforcement activities.
China’s First Enforcement Action of Abuse of Administrative Power Under the AML. On July 27, 2011, China’s State Administration for Industry and Commerce (SAIC) published information on China’s first anti-monopoly case regarding abuse of administrative power to eliminate or restrict competition. The Guangdong AIC conducted investigations after three vehicle global positioning system (GPS) operators filed a complaint alleging that a municipal government abused its administrative power by issuing administrative orders that (1) required all targeted vehicles to upload real-time monitoring data to a specified municipal platform operated by a private company and to pay a service fee to that platform of no more than 30 yuan per vehicle, and (2) required traffic police departments to forbid vehicles that failed to comply from passing annual vehicle examinations. The Guangdong AIC concluded that these orders constituted an abuse of administrative power under the AML, and recommended that the Guangdong Provincial Government (GPG) correct the abuse. The GPG then ruled that the orders violated the AML and constituted an abuse of administrative power.
MOFCOM’s Promulgation of M&A Security Review Rules. On Aug. 25, 2011, the Ministry of Commerce (MOFCOM) promulgated the final version of the Implementing Rules for Security Review System on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“Implementing Rules”), replacing the provisional rules issued on March 4, 2011. Under the Implementing Rules, transactions involving enterprises in the fields of national defense security, agricultural products, energy and resources and other areas with a bearing on national security—and which will be acquired and controlled by foreign investors—will be required to undergo a security review. Transactions ruled to have potential or significant impact on national security may be blocked. The requirements for filings under Article 5 of the Implementing Rules go beyond those of an anti-monopoly filing for a concentration of undertakings in some aspects, and include the following: application and introduction of the transaction; identification documents and basics of the foreign investors; basic introduction and documents of the merged domestic enterprise; documents of the foreign investment enterprise to be set up post-transaction; share transaction documents; asset transaction documents; and documents on the potential control of the foreign investors over the target.
The Implementing Rules remain largely the same as the provisional rules with the significant addition of Article 9, the anti-circumvention provision. Article 9 emphasizes that whether an M&A deal falls within the scope of national security review should be assessed by the substance and the actual impact of the deal, and any foreign investors are prohibited from escaping the security review via shareholding entrustment, trust, multiple-level reinvestment, leasing, loans, agreement control, overseas transaction or other ways.
MOFCOM’s Promulgation of Competitive Assessment in Anti-Monopoly Review Rules. On Aug. 29, 2011, MOFCOM promulgated the Interim Provisions on Assessment of the Impact of Concentration of Undertakings on Competition (“Interim Provisions”). The Interim Provisions discuss the unilateral effects and the coordinated effects of horizontal concentrations and the potential impact of non-horizontal concentrations on the up/downstream or associated markets to be considered in MOFCOM’s assessment of a transaction. Articles 5 through 12 identify six factors to be considered, including the following:
- Article 5: Market shares, market structure and whether the business operators who are party to the concentration will gain or increase market control as a result of the concentration.
- Article 6: Herfindahl-Hirschman Index and CRn index are clearly mentioned, but no specific index thresholds above which a concentration is considered as anticompetitive are provided. This reflects a case-by-case approach of MOFCOM, at least for the time being.
- Articles 7–11: In analyzing the impact of the concentration of undertakings on market entry, technological progress, consumers, other relevant undertakings and the development of national economy, the Interim Provisions note the potential negative impact of concentration, and at the same time, acknowledge the potential positive side.
- Article 12: Near-bankruptcy (the failing firm defense) and countervailing buying power are two of the catch-all factors to be considered. The latter is newly added in the Interim Provisions.
Orrick’s European competition team assisted and represented Total (Totalgaz and its parent company Total Raffinage Marketing) in a major, multi-year case in France that wrapped up on December 20, 2010, and that involved the five main players in the liquefied petroleum gas (LPG) market. Total’s competitor Shell had lodged price cartel accusations as part of its application for price leniencies submitted to the French Competition Authority (FCA), France’s national competition regulator. Shell had alleged that two cartels existed in the LPG market: one involving collusion on prices and one involving collusion to raise entry barriers for mass distributors who planned to enter the market.
The FCA investigated the allegations for more than five years and, at the end of the probe, accused the five companies involved of perpetrating a price cartel. The FCA also accused the parents of four of the companies, following the Akzo precedent (see Orrick’s summary of that ruling here). The FCA also determined that alleged barriers raised to hinder mass distributors’ entry represented an abuse of a collective dominant position, but not a cartel.
However, Shell’s leniency application, which had prompted the FCA investigation, was primarily based on e-mails and an affidavit from a former employee. The Orrick team discovered and proved that the e-mails were not genuine. No other party, nor the FCA itself, had raised this issue. Once Orrick’s team filed its findings, the FCA immediately appointed an expert who fully confirmed Orrick’s analysis. The FCA subsequently withdrew all of its accusations, dismissing the case without finding that any company had participated in a cartel.
Further, the FCA invited in the public decision its General Rapporteur (the head of investigations at the FCA) to initiate proceedings against Shell for misleading the FCA, which could net a fine up to one percent of Shell’s worldwide turnover. It also invited the chairman of the FCA to initiate criminal proceedings.
This case required complicated legal and economic analyses. One of the questions raised was whether the Airtours standard applied not only to ex-ante cases (merger control) but also to ex-post cases (antitrust) and whether it was the only standard to apply. The FCA decided to apply the Airtours test only and concluded, as argued by Total, that there was no collective dominant position in the LPG bottled gas market in France. This decision is very important for major companies because it applied the mergers and behavioral practices standard to antitrust cases and also gave useful guidance for how to analyze concentrated markets requiring high and long-term investments. Orrick’s team included associates Lise Damelet Grilli, Guénolé Le Ber and Philippe Zeller, and was led by Partner Philippe Rincazaux, all of the Paris office.