Patent Assertion Entities on the European Commission’s watch

A speech last week by Alexander Italianer, number two at DG Competition, signals that the European Commission is carefully watching the activities of patent assertion entities (PAEs) in suing the distributor of a mobile phone for allegedly infringing its patents.  The comments were made in relation to ongoing litigation in Germany but could have wider implications. 

A PAE collects and enforces patents often on behalf of the original owners.  In a recent case a standard essential patent (SEP) owner has sued the distributor – Deutsche Telecom - rather than the phone manufacturer.  A similar case is pending against Vodafone. 

The remarks are interesting and add to the  debate in this controversial area of law at the interface between IP and competition law.  Litigation against the distributor is a neat technique which prevents the manufacturer raising a FRAND defence, namely that the alleged infringer is willing to license the patents on fair, reasonable and non-discriminatory terms.  This is because the manufacturer is not the direct target of the injunction in litigation against PAEs.  However, where the distributor itself  is sued the practical result may be the same in that the distributor is not able to market the product without securing a licence.  Litigation against the EU distributor may well be the most viable option where the devices are manufactured abroad. 

The Commission  has not indicated that it is formally investigating PAEs, although this would not be a surprising development after the Commission’s recent enforcement actions in the Samsung and Motorola cases.

Source: Speech by Alexander Italianer "Shaken, not stirred. Competition Law Enforcement and Standard Essential Patents", Mentor Group – Brussels Forum, 21 April 2015

Commission sends Statement of Objections to Gazprom in abuse of dominance investigation

 

Barely a week since issuing objections to Google, the European Commission has sent a Statement of Objections (SO) to Gazprom for alleged abuse of dominance in Eastern Europe.  The development indicates a new momentum in another high profile case inherited by new Commissioner Vestager.

The Commission alleges that provisions in Gazprom’s contracts hindered competition in eight Eastern European countries: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Poland and Slovakia.  Its concerns relate to three areas, namely that Gazprom (1) prevented resale in other EU territories (2) charged excessive prices and (3) demanded unrelated commitments relating to gas transport infrastructure.

The case dates back to 2011 when Gazprom was among the companies that were subject to a dawn.  The inspections concerned its German (Gazprom Germania) and Czech (Vemex) offices.  In September 2012 the Commission announced formal proceedings to investigate whether Gazprom may be abusing a dominant position contrary to Article 102 TFEU.  Having formally opened proceedings, the Commission indicated that it would treat this investigation as a priority.  In October 2013, EU Commissioner Almunia indicated that the Commission was preparing objections but there had been no visible sign of movement since then.

Gazprom refutes the EU’s case and has expressed its hope that the matter can be resolved at an “intergovernmental level”.  Gazprom has drawn attention to its connection with the Russian state as a strategic state-owned entity established outside the EU.

As in the Google case Vestager has been at pains to emphasise that an infringement decision is not an inevitability and that the case is not politically motivated.  She has faced criticism that the issuance of an SO is premature at least while the prospect of commitments remains on the table.

At a time when the EU relies on Russian imports of gas for about a third of its needs the case is highly significant.  The Commission’s competition law interest in the energy sector is not new.  What is interesting is the shift eastwards in its focus.  A particular theme in the last few years has been the weighting of the Commission’s attention towards abuse of dominance investigations in the energy sector in central and Eastern Europe.  It has launched high profile investigations against European energy incumbents in Bulgaria, the Czech Republic and Romania, as well as against Russia’s Gazprom.

The theory of harm relating to restrictions on resale is typical of other cases that the Commission has raised in the energy sector.  However, one particular line of inquiry that will particularly test the boundaries of the law is the allegation based on excess pricing due to contractual indexation of gas prices to oil.  Such cases are typically difficult to substantiate. In the United Brands case (Case 27/76) the EU Court considered that charging a price that was excessive because it had no reasonable relationship to the economic value of the product supplied would be an abuse.  This formulation of what constitutes an excessive price for EU competition law purposes picks up on the claims that the price bears no rational relationship to the current gas market in European energy markets.  Market liberalisation and “gas-on-gas” competition where gas could be purchased at wholesale hubs have put pressure on long-term contracts indexed to oil.  The case will test the limits of what constitutes an excessive price for EU competition law purposes.  It remains to be seen whether the Commission will substantiate a case that the setting of the price of gas against the price of another commodity (oil) is not economically rational and therefore abusive (i.e., it bears no reasonable relationship with the economic value of the product supplied (gas)). 

In accordance with the normal procedure Gazprom has 12 weeks to prepare a response to the SO. 

Commission issues Statement of Objections to Google: Where next?

The Commission’s failure to secure acceptable commitments from Google in its search engine investigation has further prompted concerns as to the effectiveness of the existing legal tools to curb abuse of dominance in digital markets.  The Commission’s issue of a Statement of Objections to Google on 15 April 2015, however, suggests a new impetus in the investigation. 

The Commission’s investigation into alleged abuse of dominance by Google in relation to its search engine practices dates back to February 2010, when the Commission announced that it had received complaints about Google, including allegations revolving around grants of preferential placement in search results to its own vertical search services.

The Commission announced that it had initiated Article 102 proceedings against Google on 30 November 2010.  Since then the investigation has been very much in the public eye but on successive occasions where a resolution has seemed imminent, this has not materialised.

The Commission consulted on two rounds of commitments from Google and on 5 February 2014, the Commission announced that it had obtained an enhanced proposal that it was minded to accept.  In particular, Google offered a remedy that where it promotes its own services, at least three rivals will be displayed in a “comparable” way, such as by using the same sized photos.  Interestingly, when similar concerns were raised in the US these resulted in more modest concessions being offered to the FTC than those offered by Google in the EU.

In June 2014 Commissioner Almunia said that the investigation was “hopefully coming to an end with the adoption of a decision before the end of my mandate”.  However, in September 2014 this appeared unlikely and Google was asked to offer improvements after feedback from the market test.  Revised objections were raised by third parties including the price comparison site Foundem.  These question, for example, why Google should be able to give greater visibility to paid links.

It is not unusual for the Commission to consult on more than one set of draft commitments.  It has not yet accepted commitments in a case involving four rounds.  Moreover, where the market test reveals that the commitments on offer are insufficient the Commission should be wary of accepting a revised offer without putting it back to the market, unless it was very obvious that the new package addressed the Commission’s concerns.  Given the obvious trade-off between an early resolution and an uncertain legal challenge, it is understandable why the process can be iterative. 

On 15 April 2015, however, the investigation took a rather different turn and the Commission sent Google a Statement of Objections.  The Commission alleges that by favouring its own comparison shopping pages in its general search results this hinders the ability of its rivals to compete.  The Commission alleges that as a result of artificially shifting traffic to its own sites, users do not necessarily see the most relevant results in response to their search queries.

On the same day as issuing its Statement of Objections in the search engine case the Commission announced a formal investigation into Google’s Android operating system.  The Commission has concerns that Google may be unlawfully restricting competitor operating systems and applications. Commissioner Vestager states that: "In recent years, smartphones and tablets have changed the way that consumers access the internet and the way that many companies do business. Mobile internet usage is growing rapidly and there is no reason to think that this will change in the coming years. I want consumers to benefit from the broadest range of mobile services and innovation in the sector".  While the investigation is separate from the search engine case and has been under the Commission’s watch for some months, it confirms sustained momentum in the Commission’s policy focus.

A test of the substantive theory of harm

Much of the debate about the Google case has focused on remedies.  Those issues cannot be divorced from the underlying substantive issues.  Novel and controversial theories of harm have been raised. 

When the Commission set out its preliminary assessment, of most concern was the prominent display, within Google's web search results, of links to Google's specialised web search services (e.g. Google Shopping) relative to links to competing specialised web search services (including services allowing users to search for restaurants, hotels or products).

At first sight it might appear that the preference shown by a dominant company to its own services could be a classic abuse of dominance.  However, on closer inspection this conclusion does not automatically follow.  It may be asked why Google cannot show what it considers to be its own directly responsive results, since that is precisely what a search engine does and is a core value proposition.  Search engines will compete on the basis of their own offering by showing exactly what they consider to be responsive to a user query.  An issue for competition, then, is what Google should or should not be permitted to do in terms of differentiating itself.  Putting it another way: should third parties be entitled to an equal position in Google’s search results?  Even if that is accepted, how is that to be achieved in a way that allows consumers to make an informed choice and without destroying Google’s incentives to innovate?  These are the issues at the heart of the Google case.

Where next in the investigation?

The new commissioner Danish politician Margrethe Vestager may provide the impetus for a change in direction.  Those who expect such a route to be speedier and more definitive may, however, be disappointed.  Should the Commission proceed to a formal finding of infringement, it cannot expect to be immune from challenge given the vigour with which all sides have pursued their case so far.

Google now has to prepare its defence to the Statement of Objections in advance of an oral hearing.  One possible outcome is that the Commission finds an abuse of dominance and imposes a penalty on Google.  However, Vestager’s comments that this is “not the end” seem to suggest that outcome is not inevitable and that there is still the possibility of a consensual remedy.

A key difference between the commitments route and an infringement decision under Article 7 of Regulation 1/2003 is that the Commission will almost certainly impose a penalty in the latter case.  If the Commission issues an infringement decision Google could be fined up to 10 per cent of its worldwide turnover (i.e. up to US$ 6 billion).  The actual level of the fine imposed will be based on a number of factors including the ‘gravity’ or seriousness of the infringement.  The Commission will typically take as a starting point the relevant sales in the market concerned by the infringement.  The highest fine imposed for a breach of EU competition law was on Intel in 2008 and amounted to just over a billion euro.  This was still some way short of 10 per cent of Intel’s 27,972 million euro (US$ 38 834 million) worldwide turnover in 2007.

The Commission’s focus on Google (and Microsoft before it) has prompted the often recurring question as to whether US companies are receiving rather more scrutiny than their European rivals.  However, only a day after issuing the Statement of Objections on her first visit to the USA, Commissioner Vestager has made clear her views that Google is a “good company” and that it makes no difference from the EU competition law perspective whether a company is American or European.

The announcement of a Statement of Objections has been hailed as a win for many complainants, including rival search engines.  However, in law as well as in life there can be an element of ‘be careful what you wish for’.  The commitments offered so far have not appeased complainants but an infringement decision may not give them complete satisfaction either.  This is because a prohibition decision is just that: it will say what is not permitted but it is not so susceptible to prescribing changes to market conduct.

Reference:

Commission press release IP/15/4780 , MEMO/15/4781 and STATEMENT/15/4785

Speech by Margrethe Vestager "Competition policy in the EU: Outlook and recent developments in antitrust", Peterson Institute for International Economics Washington DC, 16 April 2015

 

Shell and BG in largest energy merger for over a decade

Shell’s proposed £47 billion acquisition of BG Group is an energy transaction on a scale not seen since Chevron’s acquisition of Texaco in 2000 for a reported US$45 billion.

The transaction will require merger clearance in a number of  jurisdictions including the EU, Australia, Brazil and China.

The merger will increase Shell’s proven oil and gas reserves by 25% and its oil and gas production by about 20%.  It will also expand the company’s position in the supply of LNG and in Asia and the Atlantic Basin and has been claimed by the parties as pivotal to their financial growth strategy.

Increasing consolidation in the sector seems almost inevitable against falling oil prices.  After a lack-lustre M&A environment of recent years the antitrust authorities are facing an increasing workload as further consolidation takes place in the industry.  In addition to consolidation amongst the major producers consolidation is also taking place among suppliers and services providers to the oil and gas industry.  For example, the US Department of Justice is currently reviewing Halliburton’s US$34.6 billion acquisition of its drilling competitor Baker Hughes.

The Shell/ BG tie-up is expected to close in the second half of 2016.  In the ensuing months, it will be interesting to see how the existing industry landscape is redefined and whether other mergers will follow in the wake of announcement of this mega-deal.

Sector Inquiry into E-Commerce

 

On 26 March 2015 Margrethe Vestager, EU Competition Commissioner announced a proposal for a sector inquiry into the e-commerce sector.  The Commission has concerns that there are barriers to cross-border online trade and that it is necessary for the Commission to gain a better understanding of digital markets.  The sector inquiry is intended to contribute to the Commission's objective of creating a digital single market.   

Increasingly, the European and UK competition authorities are carrying out sector and market investigations.  These are industry wide probes where there are concerns that markets may not be working as well as they should but where the problem does not appear to be related to unlawful action by individual companies.  

Before the recent announcement of an EU sector inquiry into e-commerce the Commission’s use of this power had been on the back-burner.  The last EU competition sector inquiry concerned the pharmaceutical sector and was launched in January 2008.  The Commission launched three other sector inquiries in June 2005 (energy and retail banking and business insurance).   

A range of potential outcomes are possible.  Outcomes can range from investigation or enforcement action against companies or individuals for infringing competition laws, to giving the market a clean bill of health.  Even where an inquiry does not lead to direct enforcement action, it will bring to light large amounts of information, often shared across Member States of the EU, upon which other authorities may start their own inquiries and third parties may launch challenges.

The outcome will depend on a number of factors including (i) whether complaints, particularly from consumers, can be substantiated; (ii) strength of evidence gathered; (iii) arguments and analysis presented by interested parties; (iv) legal powers available to the Commission to take action or recommend that others such as the Member States do so; and (v) overall policy. 

There is no formal timeline for Commission sector inquiries as distinct from the position in the UK for market studies and market investigation references which are subject to statutory timelines.  The more open-ended nature of EU sector inquiries is therefore a source of frustration and concern for business.  The Commission is increasingly attempting to complete sector inquiries in around 18 months.

It may be difficult at the outset to see any immediate benefits for businesses affected by a sector inquiry.  However, such inquiries can provide opportunities for companies to put forward arguments to support opening up of markets such as where there are legislative or regulatory barriers to entry.  Every sector inquiry is an opportunity to educate the authorities and the public about the industry which will stand a business in good stead in its future dealings with the authorities. 

Where certain industry interests are aligned it can be effective to make submissions through a trade association and indeed one of the legitimate functions of a trade association is to do just that.  However, there can be situations where an individual player may find that its interests diverge from others in its industry or it may not be able to mobilise a trade association to get its viewpoint across effectively.  In those situations a business will want to consider how it can best put its case individually.  The potential strategies for engagement (collective or individual) are not necessarily mutually exclusive as a business may join in an industry submission and supplement that with its own representations on issues that are particularly relevant to it. 

Below is a summary of some key issues for companies and their advisers to consider if their industry sector becomes the subject of a sector inquiry.

·       Investigation of suspected competition law infringement: treat the inquiry as an investigation of suspected competition law infringement; plan for inspection visits and requests for information; engage advisers early to help establish where the business’ interests lie and how to respond. 

·        Resource commitments: engaging with a sector inquiry and dealing with any follow-up action tends to involve the commitment of substantial resources; assess how to present the business’ case and take a long term view about the resource commitment that may be needed.   

·       Questionnaires:  consider whether business documents could be misinterpreted and how best to defend them; consider the impact of responses on the authority’s thinking.

 

·        Consistency:  note that information may be exchanged between Member States of the EU; consistency of message and positioning is vital. 

·        Third party complaints:  third party complaints will need to be addressed; anticipate how third parties (customers, suppliers and competitors) may be concerned about industry practices and how best to address those concerns. 

·         Strategy: there is no ‘one size fits all ‘strategy that will be appropriate for all businesses affected.  At the outset a ‘wait and see’ approach may be justified until the shape and direction of the inquiry develops but this carries the risk that the later a company engages with an inquiry the more limited the prospects for influencing more fundamental issues such as the overall scope and key issues to be examined. 

·        Media and PR:  an inquiry may be high profile; consider how to engage the business’ PR and media team to help shape public perception and deliver a consistent message. 

·        Opportunities:  consider whether there are any business-specific messages to get across or potential to work with trade bodies to improve the profile of the industry.

 

Commission press release IP/15/4701 and SPEECH/15/4704 "Competition policy for the Digital Single Market: Focus on e-commerce"

Competition Commission of India clears Holcim/ Lafarge merger with commitments

For only the second time in its history the Competition Commission of India (CCI) has approved a merger with conditions. 

The CCI has approved the merger between cement companies Holcim and Lafarge on condition that the companies sell two of Lafarge’s cement plants in India (the Sonadih plant in Chhattisgarh and the Jojobera grinding plant in Jharkhand).  The CCI found that the merged business would represent 31 per cent and 79 per cent of the local markets in these areas.  As a result of the divestments the CCI states that the merged entity’s market share will be 28 and 33 per cent respectively. 

The CCI states that the divestments must be sufficient to cover all tangible assets so as to enable a new market player to enter the market easily. 

This transaction is only the second occasion since the advent of mandatory merger control in June 2011 where the CCI has accepted commitments from the merging parties as a condition of clearance.  In December 2014 the CCI accepted commitments in the Ranbaxy/ Sun Pharmaceuticals merger, another high profile transaction.

 

These cases show that the CCI is prepared to accept modifications to a merger rather than prohibit it entirely.  It is understood that in other cases potential modifications to combinations have been discussed with the CCI at the pre-notification stage and during its review of a proposed combination.  However, the merger remedies experience is limited and there are no formal guidelines as in the EU on the type of commitments that will be acceptable. 

As increasingly complex and potentially more problematic transactions come before the CCI, the CCI is urged to set out its views as to the types of modifications or remedies it would consider acceptable. Among the areas for further clarification could usefully be:

1. whether the CCI has a distinct preference for structural (divestment) or behavioural (commitments on conduct) remedies;
2. the role of intellectual property-related remedies such as licences of know-how and patent rights, whether as standalone remedies or to support a divestment remedy;
3. the duration of any undertaking not to acquire or reacquire an interest in another company;
4. the role of agencies such as trustees or monitors in overseeing a divestment remedy or in supervising a behavioural remedy over time, considering such issues as what degree of independence is required from the merging parties for such monitors;
5. the extent to which parties offering remedies may return to the CCI to have such remedies withdrawn or modified in light of a change in market circumstances;
6. the extent to which the CCI will liaise with other authorities in India (for example, sector regulators) or worldwide (for example, where remedies imposed on the parties in India may not be an effective solution if the relevant parties are situated outside India or where global solutions may be sufficient to address competition issues in India).