Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Keynes and standard-essential patents (or Huawei as the ultimate triumph of an economist)

with 14 comments

Keynes

[Alfonso posted a great entry on Huawei the other day. There is not much to add to it, but I could not resist preparing a ‘B-side’ on more general issues]

Keynes famously observed that ‘the ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else’. I was reminded of this sentence (and what follows) when reading Huawei. Formal economic analysis is nowhere to be found in the judgment. Yet, it is impossible to make sense of it without taking into account the work of economists who have speculated over the past decade about the consequences of the use of injunctions by the holders of standard-essential patents (‘SEPs’).

The idea that hold-up and exclusion are a concern in the context of standard-setting has become very popular, so much so that the Court did not even see the need to discuss whether there is theoretical and empirical support for it. It is presented in Huawei as a given fact, in the same way that cartels are simply assumed to be harmful for consumers and society at large. You know that economic theories have won the day when law and policy-makers do not even see the point of discussing their validity. You know you are really influential when people do not bother to cite you anymore. From this perspective, Huawei represents an enormous victory for the economists that first advanced the assumptions informing the ruling.

Yet, the idea that patent hold-up is (i) a pervasive problem that (ii) requires intervention under competition law is hotly disputed. I have not followed this debate as closely as others, but it seems clear to me that there is no consensus around it. Many articles published in recent years claim that remedial action to limit the ability of SEP holders to use injunctions is based on a assumptions that do not necessarily reflect the actual operation of standard-setting organisations, of negotiations between developers and implementers or of intellectual property regimes.

If there is something I regret from AG Wathelet’s opinion, is that he did not see the need to engage with these debates (and an AG’s opinion is an ideal forum to do so). In line with the position broadly endorsed by the Commission, he simply took it as given that the use of injunctions by an SEP holder may amount to an abuse of a dominant position. This position is not necessarily wrong and it may well be right. My point here is that it is not self-evident and that a legal test has been crafted without considering the assumptions underpinning it. As a result, is not certain that the ruling in Huawei is the one that best reflects the available knowledge.

I guess the broader question raised by the judgment (and the one that I find really interesting, and I would love to read your views on it) is whether intervention under competition law (as opposed to deference to intellectual property regimes) is justified when there is no consensus about whether, why and how often a given practice is anticompetitive. We know from experience that, when conduct is not yet well understood, and when there are two sides to the story (as is true here), the risk of errors and over-enforcement is very high.

This debate is similar in many ways to that around net neutrality, which I have followed more closely and about which I said a word earlier this month. It is accepted as self-evident that net neutrality is a good thing. This, again, represents a great victory for the companies and activists advocating for the adoption or strengthening of such rules. Unfortunately (and this is the source of my frustrations), this victory is not the result of their ability to advance cogent and convincing evidence in support of their views, but of powerful slogans and lobbying.

Written by Pablo Ibanez Colomo

22 July 2015 at 1:52 pm

Posted in Uncategorized

14 Responses

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  1. Hi Pablo. The Court’s antitrust concern in Huaweï is one of exclusion, and more precisely of anticompetitive leveraging. The judgment talks about foreclosure risks on secondary markets (see §52: “reserve to itself the manufacture of products in question”), and makes no reference to concerns of exploitation, which is what patent hold-up is about. This very omission is of considerable relevance, because it suggests that the Court is reticent to approach SEP injunctions through the Shapiro-Lemley framework (unlike the Commission).

    Huaweï v ZTE is thus of conservative craft. It does not fall into the trap of taking as a given the controversial patent hold up theory. To add further nuance to previous posts, I fail to see how the Court advanced on the path laid by the Commission in Samsung and Motorola. Sure, ITT Promedia/Protégé International gets no space in the judgment. But this seems to be the only area of concordance between Commission and Court. Take a closer look:

    – Huaweï does not talk of anticompetitive exploitation
    – Huaweï delineates a safe harbour for domcos (read the operative part), whilst the Commission had sought to create a safe harbour for patent implementers
    – The focus on leverage theory insulates pure licensors and NPEs from 102 liability…

    Nicolas Petit

    22 July 2015 at 5:57 pm

  2. Hi Nico,

    Thanks for taking the time to share your thoughts. I do not think anybody would disagree with your comments, which are pretty apparent when one reads the judgment.

    The real question is why the Court felt the need to craft a test specific to FRAND licensing and SEPs. In other words, why it did not resort to the general principles applying to access to court and to refusals to license.

    I do not know whether you can think of another legal test in EU competition law that is so tightly built around a particular set of concerns and facts (off the top of my head, and as I write this, I cannot). The only explanation for such an issue-specific test is that the ruling cannot be understood without considering the literature that made the use of injunctions suspicious in this context. In a different vein, I am not sure that the exploitation/exclusion divide is so marked in this context as you seem to imply.

    Your comment on leveraging is quite interesting. My question for you is how you read and interpret the operative part of the ruling (IMS would be a relevant point of comparison in this regard).

    Pablo Ibanez Colomo

    22 July 2015 at 10:33 pm

  3. Hi Pablo, thanks for this.

    My two cents on your query on test-specificity: explainer must probably be found in the very institutional setting of this case, as you wrote in your great paper on preliminary rulings and their implications for advances in the law on 102.

    We all know that there was a raging EU wide debate, with the agency test – COMP’s one, very patent hold up driven – and a German one – the OBS test not patent hold up driven at all. The Court was asked to take a stance. And in so doing, I am not sure it tried to affirm a new test. On close read, what the Court says comes 1 inch close to a refusal to supply test with disruption of supplies – that’s where “legitimate expectations” make sense. The real novelty is that the indispensability requirement is presumed in the SEP context, which is wrong on the facts and denotes a superficial technical understanding of standardization by the Court.
    In my humble opinion, the true originality of the case lies in the domco safe harbour and the regime of per se immunity set for NPEs.

    Voilà, always good to read your posts.

    Nico.

    Nicolas Petit

    23 July 2015 at 2:31 pm

  4. With all respect due to Pablo, his post reminded me of a joke I once heard about an economist who, presented with empirical evidence, remarked “yes, that is how it works in practice, but how does it work in theory?” Companies that implement standards created by ETSI and other FRAND-based standards development organisations don’t need economists to decide as a matter of theory whether hold-up is real, and whether the availability of injunctive relief changes the relative bargaining power of licensor and licensee in SEP negotiations. They know from direct experience that the owner of an SEP that is (or, more usually, may be) essential to implement a widely adopted standard can use the threat of obtaining an injunction to coerce implementers to pay super-competitive royalties because of the very high costs that injunctions impose on operating companies. Likewise, both Advocate General Wathelet and the ECJ panel that authored the Huawei v. ZTE opinion could easily reach the same conclusion without crediting the self-serving arguments to the contrary of SEP licensors and their economic guns for hire.

    Gil Ohana

    28 July 2015 at 5:51 am

  5. Interestingly, the Court’s anticompetitive leveraging statement of §52 is repeated again at §73, this time in the context of the discussion of SEPs holders actions for damages. And this does not seem incidental. The Court says “as is apparent from §§52 and 53 above”. With all this, the patent hold-up exploitative theory of harm seems to have lost much steam when it crossed the atlantic.

    Nicolas Petit

    28 July 2015 at 7:09 am

  6. Thanks so much for your comments, Gil and Nicolas!

    Nico:

    I find your interpretation of Huawei really interesting, When I read the judgment, it seemed very clear to me that the Court was not defining a test that would only apply when the licensor is vertically integrated (ie when the concern is exclusionary). After re-reading it, I remain persuaded of my initial conclusion. My own bet is that a national court would consider it clear that Huawei applies to factual scenarios where there is no vertical integration. It is likely that it will not feel the need to submit a preliminary reference to clarify this point. Nothing in the test itself (ready-made and quite detailed) suggests that it is confined to instances of exclusion, and my own understanding of the logic underlying it (which arguably matters more) leads, in my view, to the same conclusion. I would be really interested to know how other readers of the blog interpret the judgment!

    On exclusion vs exploitation, I have already pointed out that it is somewhat artificial to draw a line between the two, as the underlying issues are in any event the same and the two concerns are interrelated. Royalties (and their level) remain at the heart of the test crafted by the ECJ.

    Gil:

    I do not believe we disagree. I would even say that your comment captures very well the point that I was trying to make.

    To be sure, I am not suggesting that disputes about the level of royalties are not real or that implementers do not perceive them to be an actual problem in their day-to-day business. My point is a different one. You seem to be saying (and please correct me if I am wrong) that patent hold-up is so real and self-evident that one needs not a theory to provide intellectual support for intervention under EU competition law. It is, in other words, a practical problem that needs no theory. Well, this is where, I guess, our friend Maynard would step in. He would say that the issue may now seem eminently practical and self-evident, but this is only because somebody has created a theoretical framework in support of intervention in the first place. And that was also the point I was trying to make.

    Thanks to both again!

    Pablo Ibanez Colomo

    28 July 2015 at 11:47 am

    • Pablo, I appreciate your insightful response. I believe that the relationship between the practical perspectives on the impact of the availability of injunctive relief to SEP owners that companies like Cisco have gained (at significant cost) and the academic literature (I’m thinking now of articles by Carl Shapiro, Mark Lemley, Jorge Contreras and others) has been a dialogue with industry. This is not, in other words, a situation in which the theoretical framework preceded the support for antitrust intervention. Both emerged simultaneously.

      Both Shapiro and Lemley live and teach in the San Francisco Bay Area, and are exposed on a regular basis to the active debate in the tech community regarding the strength of the relationship between strong IPR protection and innovation. SEP licensing practices form an aspect of that broader debate. Competition enforcement agencies in both the US and Europe have been regularly exposed to the concerns implementers of standards have with the impact threats of injunctions wielded by SEP licensors (in Cisco’s experience, rarely participants in standards development themselves, far more frequently non-practicing entities that acquire patents from participants) have on the bargaining power different parties have in SEP licensing disputes. .Lemley, Shapiro, and others have provided a theoretical framework for those concerns, but the concerns pre-date the academic contributions.

      Both the academic contributions and regular interactions between SEP implementers and antitrust enforcement agencies have encouraged the agencies to make the issue of the use of injunctions to enforce patents that are subject to voluntary FRAND licensing commitments an area of interest in enforcement and in the agencies’ competition advocacy functions. So, pace Maynard Keynes, implementers of standards that advocate for meaningful FRAND commitments are doing more than channelling the insights of some (fortunately, very much alive) academics. They are also bringing to the debate the practical insights they have learned at the coal face of licensing negotiations with SEP owners.

      Gil Ohana

      28 July 2015 at 5:25 pm

      • Gil, thanks very much for taking the time to participate in the blog! Again, I believe we are very much in agreement.

        I am familiar with the context in which this literature originated (and I have great memories of the few months I spent in the Bay Area!). The fundamental point I intended to make (by reference to Keynes), and with which I do not believe you disagree, is that theoretical frameworks explaining or describing a reality are very powerful, much more than commonly assumed. How a debate is structured matters immensely for outcomes. This fact does not mean, of course, that theoretical frameworks create the underlying reality.

        Shapiro (we are fortunate indeed that he is very much alive!) is, to me, the prime example of the power of theory in articulating a claim or grasping complex and elusive phenomena

        Pablo Ibanez Colomo

        28 July 2015 at 6:17 pm

  7. Except that Huaweï v ZTE does not talk a single time of holdup and reasons the entire issue as one of vertical leveraging. Sorry to repeat, but I also read the judgment again and there is no single word, letter, trace or even subliminal hint of what you say Pablo. I understand that I may not “persuade” you, but beware of “faith based” legal interpretation (apologies for the Lemley pun).

    @Gil: to be clear, under the Huaweï precedent, non practicing entities are off the EU antitrust hook. Device manufacturers with strong patent positions not. The legal confirmation that the Bay Area is miles away from Kirchberg.

    Nicolas Petit

    29 July 2015 at 4:30 pm

    • Again, Nico, thanks very much for the comments

      Understanding the ratio decidendi of a ruling is an art, not a science (since you refer to faith, I would add that it is not religion, either).

      I believe that my interpretation of the ruling is the correct one, but I would not dare to claim that it is the only possible interpretation, or that the ruling is unambiguous in support of my conclusion. And I would certainly not say that there is no support for your interpretation which, as I said from the outset, I found really interesting and is without any doubt a reasonable one.

      Just to illustrate my point. I have read in the past couple of days two interesting notes on the judgment, one by Miguel Rato and another one by James Killick and other lawyers from White and Case. It is possible that the two agree with you if you asked them. If you take a look at the two case notes, however, they are much more nuanced than your categorical statements. James and his team, for instance, say that paras 52-53 ‘may simply reflect the underlying facts of the case’ (which is how I read them) and that the issue remains ‘open’. Miguel, on the other hand, explains that (the by now famous) para 52 ‘gives the impression’ that the ruling only applies to vertically-integrated entities.

      I guess we will have to wait for future developments!

      Thanks again for taking part in this lively discussion

      Pablo Ibanez Colomo

      29 July 2015 at 5:29 pm

  8. Thank you for those ideas and references Pablo. And sorry if my comment read a little straightforward.

    True that it is uneasy to decypher the ratio decidendi of cases. That said, I’d be reluctant to put too much weight – as James does – on the “underlying facts of the case”, given that facts are – legally-speaking – irrelevant in a preliminary ruling context.

    Now, on the ratio decidendi. My intimate feel does not go in the sense of an “arty” reading of the judgment. Recent judgments do not really service the idea that the Court knows what it is doing in competition cases. Most are inconsistent. Except when it comes to reduplicate the brown shoes of EU competition law, namely United Brands and Hoffmann La Roche.

    Judgment writing is an art? I’d love to see things this way. But frankly speaking, if it is an art, then it is the art of copy/pasting paragraphs in decade old judgments.

    Coming back to Huaweï v ZTE, my understanding of its reasoning is not as glorious as yours. Whilst I like its outcome, in my own opinion, the Court presumably had little vision of how to handle the “patent holdup” conjecture, let alone the Brussels-Dusseldorf-Manheim-Karlsruhe institutional SNAFU. So it canvassed all of this in a sort of essential facilities-type reasoning.

    Fortunately, and unlike often, ignorance served this time the interest of an administrable Article 102 TFEU :).

    Nicolas Petit

    29 July 2015 at 6:39 pm

    • As an aside to my previous entry, notable exceptions are Cartes Bancaires and Post Danmark though this last one is a little old now. Post Danmark II also offers opportunity to reinject some common sense in Article 102 TFEU. AG Wathelet’s opinion in Toshiba was also welcome. He sides with N. Wahl in terms of understanding object restrictions in a sort of probabilistic concept and this is where I believe the law should move.

      Nicolas Petit

      30 July 2015 at 1:49 pm

  9. Long time reader, first time posting a comment :).

    My main issue with the presumed immunity enjoyed by NPEs under Huawei is this: if such an immunity existed, what is there to stop a manufacturer such as Huawei from selling all its portfolio to a ‘third party NEP’ for a nominal sum + a % of the proceedings, with the third party NEP being able to then use its SEPs to actually prevent the entry on the market for all its competitors and/ or obtain excessive royalties? Indeed, as we are all aware, IP litigation on the merits usually lasts forever, and any preliminary injunction obtained in court may well hinder significantly the activity of a manufacturer.

    I believe that the distinction between NEPs and manufacturers is irrelevant and should be irrelevant in this case, as should be the distinction between exclusionary and exploitative abuse.

    Last but not least, I’d argue that the issue with the indispensability of a SEP is not that it’s presumed by the Commission/ ECJ, but rather that it’s presumed by national courts. Indeed, you’ll find that, as a holder of a SEP, it’s incomparably easier to obtain a preliminary injunction than as a holder of a regular patent – consequently, it could be argued that a ‘live by the sword, die by the sword’ attitude is justified.

    Adrian

    Adrian

    10 August 2015 at 3:26 pm

  10. More food for thought friends: the slides of Thomas Kramler and Maurits Dolmans have been posted on the LCII website: http://www.lcii.eu/event/huawei-v-commission-implications-for-antitrust-and-patent-law/

    Nicolas Petit

    7 September 2015 at 10:31 am


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