At the end of 2009, the European Commission closed two long-running investigations into misuse of market power afforded to companies whose patented technology had been incorporated into industry standards: the Rambus case and the Qualcomm case. Although the cases are further illustrations of the on-going tension between IP rights, which seek to reward investment in innovation by protecting holders from competition, and EU antitrust rules, which seek to ensure that “dominant companies” do not abuse their privileged position, they are perhaps less controversial than the last major case to consider the inherent tension between these two strands of law - the Microsoft case. Although neither the Rambus case nor the Qualcomm case resulted in fully-reasoned decisions from the Commission, the principles applicable to standard-setting now appear to be clear.
The Rambus case
The Commission had originally opened proceedings against Rambus in July 2007 reacting to complaints brought by certain DRAM manufacturers following Rambus’ 1992-1995 participation in a US industry standard-setting organisation, the Joint Electron Devices Engineering Council (JEDEC). The Commission was concerned that Rambus had engaged in so-called “patent ambush” whereby it intentionally concealed the fact that it had patents and patent applications which were relevant to technology used in the JEDEC standard, subsequently claiming high royalties for those patents.
Following discussions with the Commission and a public consultation, in December 2009, the Commission’s concerns were removed by Rambus committing to put a worldwide cap on its royalty rates for products compliant with the JEDEC standards for the next five years. The settlement led to the closure of the Commission’s case.
The Qualcomm case
The Commission opened formal antitrust proceedings against Qualcomm, a US chipset manufacturer following complaints lodged by Ericsson, Nokia, Texas Instruments, Broadcom, NEC and Panasonic, in October 2007. The Commission investigated whether the royalties that Qualcomm had been charging since its patent technology became part of Europe’s 3G standard were unreasonably high and whether Qualcomm had sought to exclude competing manufacturers from the market and to prevent new entry through imposition of unreasonable trading terms.
By December 2009, all the complainants had either withdrawn or indicated their intention to withdraw their complaints, following commercial settlements reached with Qualcomm. In spite of the time spent developing its case against Qualcomm and the resources invested in the investigation, the Commission closed its proceedings, given the withdrawal of all complaints.
What to learn from these cases?
The relevant antitrust rules applied in both cases were those prohibiting the abuse of a dominant market position held by a company (Article 102 of the Treaty on the Functioning of the European Union (TFEU)). It is worth noting that the prohibition under Article 102 TFEU relates to the abuse of a dominant position, not the holding of that position per se. This is an important distinction since patent holders, particularly when those patents are incorporated into industry standards, are highly likely to be viewed as holding a dominant position (i.e. a position where a company is sheltered from the usual competitive constraints imposed by competitors and customers).
The Rambus and Qualcomm cases highlight two potential forms of abuse by dominant companies whose technology is incorporated into an industry standard:
- “patent ambush”: which is defined as intentionally deceptive conduct in the context of the standard-setting process by not disclosing the existence of the patents and patent applications which are later relevant to the adopted standard; and
- exploitative licensing: whereby a company abuses its dominant position by claiming excessive royalties for or imposing unduly onerous conditions on the use of its patents, which have been incorporated into a standard on the basis that the patent holder has committed to contract on a FRAND basis.
The Commission’s views on this behaviour are clear - such conduct undermines confidence in the standard-setting process given that an effective standard-setting process is a precondition to technological development and the development of the market in general to the benefit of the consumer:
- When a patent ambush occurs during the standard-setting process, competition between different technologies for incorporation into the standard can be distorted, as crucial information on the cost of one of the competing technologies is intentionally hidden. If successful, the company that engages in the deception may gain control over a standard, unfairly excluding potentially competing technologies from the market and also charging unreasonably high royalties or imposing unduly onerous trading terms.
- Offering fair, reasonable and non-discriminatory (FRAND) terms and prices is therefore essential for patent holders not to exploit the extra power they have gained as a result of having technology based on their patent incorporated into the standard. Moreover, charging non-FRAND royalties could lead to final consumers paying higher prices and a slower development of the relevant technology.
The Commission is of the view that an effective standard-setting process should take place in a non-discriminatory, open and transparent way to ensure competition on the merits (which would include undertakings from patent holders of technology that might be incorporated into the standard to offer FRAND terms and pricing) and to allow consumers to benefits from technological development and innovation. Speaking at a conference in Brussels in December 2009, Per Hellström, a senior Commission official stated: “standards are increasingly important, and we will see more of them in the next commission”1. He indicated that companies that don’t disclose their patents, or that don’t respect principles of fair, reasonable and non-discriminatory terms for patent-use should face action stating that “open standards are important and it might be a smart business decision to choose open standards.”
1.The new EU Competition Commissioner - Joaquin Almunia - commenced his tenure in February 2010, replacing Neelie Kroes.
The continuing tension between IP rights and antitrust
The two standard-setting cases follow on from several previous cases involving consideration by the Commission of the “abuse” of IP rights, the most publicised one being Microsoft. In September 2007, the General Court upheld a Commission decision that Microsoft’s refusal to provide interoperability information to competitors breached competition rules prohibiting an abuse of a dominant position. Although the General Court made it clear that a refusal to licence can only be characterized as an abuse of a dominant position in “exceptional circumstances”, it held that such circumstances were present on the facts. The Court held that the presence of an IP right did not constitute sufficient justification to refuse to allow access to such information where:
- The information was indispensable to the exercise of a particular activity on a neighbouring market (in this case, access to interoperability information regarding Microsoft’s Windows PC operating system was indispensable to Sun Microsystems being able to develop server products);
- The refusal excluded any effective competition on the market (Sun had a small share of the server products market); and
- The refusal prevented the emergence of a new product for which there was potential consumer demand (in this case, the Court considered that Sun’s server products contained advanced features when compared to Microsoft’s products).
The Rambus and Qualcomm cases are arguably less controversial than the Microsoft ruling. Leaving aside the continuing debate as to what exactly FRAND means (a debate which mirrors the more general discussion as to what constitutes “excessive pricing” under Article 102 TFEU), in both cases, antitrust rules only sought to regulate conduct by an IP holder once the IP in question had been incorporated into an industry standard. The Rambus and Qualcomm cases arguably rest on a principle that patent holders need to be open and honest as to what they intend to do prior to adoption of their technology into a standard.
Outside of the standard-setting context, it is much less clear what balance between IP and antitrust rules should be struck in circumstances where the IP holder is merely exercising the exclusive right granted to it under IP law (albeit with a degree of commercial success!). Certainly, the existing case-law of the US and the EU don’t appear to be at one on how to deal with this dilemma and it would be surprising if Microsoft were the last word on the topic. In closing the Qualcomm case, the Commission hinted at further cases to come, stating that it remains “committed to fight against illegal behaviour by dominant companies in key innovative sectors like telecoms and IT when an abuse of their market power would deny consumers the benefit of competition and choice.”