Implications of recent cases and likely policy developments in 2017
Rewards for innovation through the existence and protection of intellectual property (IP) rights are crucial in today’s technology-based economy, which is highly dependent on R&D. Exclusive rights conferred by patent law can, however, create tensions with goals pursued by competition laws. Indeed, competition agencies across the globe are acutely interested in matters arising at the interface of IP and competition law.
Recent enforcement in the sphere of standard essential patents (SEPs) and pharmaceuticals, in particular, is significantly affecting the legal landscape for patent owners; it is clear that patentees must now, more routinely, consider how competition law may impact on the exercise of their patent rights. Developments in 2017 will test how far the law permits competition authorities to go in this respect.
Standard essential patents
Standards are critical to innovation in many industries, especially where compatibility and interoperability between manufacturers’ products or components within a system are required. The last few years have seen antitrust agencies worldwide focus on standardisation, especially 3G/4G mobile communications standards, amid concerns that SEP owners may have been exploiting market power, and holding up innovation, through unreasonable or discriminatory licensing demands.
Considerable attention has been concentrated on the impact of a ‘FRAND’ obligation: a commitment given by patent owners in the standardisation process to license their SEPs to all third parties on fair, reasonable and non-discriminatory terms. The European Court of Justice’s landmark ruling in 2015 confirmed that, in the EU, a dominant SEP holder, which has given a FRAND commitment, would infringe competition law if it sought an injunction in patent litigation against the user of standardised technology if the user acted in a way that was consistent with being a ‘willing licensee’.
This ruling has been influential globally and many jurisdictions, including China and India, are exploring how to deal with issues as SEP owners seek injunctions and other ways to monetise the value of their patent portfolios. Disputes and private litigation between private parties are also occurring. Important further questions raised include: What does each party need to do to establish it has been engaged in good faith licensing negotiations? How should FRAND rates be determined? How does FRAND relate to the requirements of competition law in some antitrust systems that dominant firms may not charge excessive or exploitative prices for their products or discriminate in prices between their customers? Can patent portfolios be split and, if so, what impact does such a split have on FRAND licensing obligations? Can SEP holders sue not only manufacturers for infringement but also retailers? Do the same principles apply where the patent owner has not given a FRAND commitment?
Resolution of these issues will be critical to the relationship between patent owners and innovators/implementers of standards (implementers) as future standards, such as 5G, are developed and implemented.
Wolrad Prinz zu Waldeck und Pyrmont, Partner, Rhineland
In the field of pharmaceuticals, there has been, for some time, antitrust concern about practices of pharmaceutical companies that might be delaying entry of new, innovative and cheaper generic medicines onto the market – particularly product hopping, in which a pharmaceutical company makes non-therapeutic changes in drug formulation to prevent generic substitution rather than to improve the quality of the product, and settlement agreements.
Thomas Ensign, Partner, Washington DC
Settlement agreements may be designed to resolve, without recourse to costly litigation, disputes concerning the validity or scope of IP and are common in patent-intensive industries. They can be an entirely legitimate and economically rational means to settle genuine disputes in relation to rights that are uncertain. Nonetheless, competition agencies, including the US FTC and the European Commission, have made clear that such arrangements, especially where they involve payments from patentees to generics in return for not entering the market, may go beyond the legitimate exercise of patent rights to prevent alleged infringements. Although the US Supreme Court and the General Court in the EU have recognised that such ‘pay-for-delay’ or ‘reverse payment’ settlement arrangements may infringe antitrust laws, they take a different approach to the question of how a violation is to be established.
The US courts have held that, given the complexity and variability of the practices, a claimant needs to demonstrate likely anti-competitive effects. The European General Court, in contrast, affirmed the Commission’s finding in Lundbeck that a restriction of competition could be assumed without need to demonstrate restrictive effects. Consequently, in the absence of the parties demonstrating a valid efficiency defence, the conduct was prohibited.
Another emerging issue of controversy is whether pharmaceutical companies are seeking to extract ‘too high’ prices from their proprietary medicines. Competition agencies have generally been reluctant to bring excessive pricing cases in the past – such allegations are difficult to establish, cut across parties’ rights to price their products as they see fit and may create disincentives to innovation. Although the US and EU agencies have not so far been willing to intervene in this sphere, the Italian antitrust authority imposed €5m in fines for such behaviour and, in December 2016, the UK’s CMA issued its highest ever individual fines on Pfizer and Flynn Pharma (nearly £90m) for charging excessive prices to the National Health Service for an anti-epilepsy drug.
Thomas Lübbig, Partner, Berlin and Vienna
James Aitken, Partner, London
Looking ahead in 2017
Developments internationally demonstrate the importance for patent owners to take account of competition law when devising their pricing, end-of-life and patent enforcement strategies. The actions of competition authorities, and the outcome of litigation, are creating a fast-moving and challenging landscape for patentees and their customers and licensees – particularly in the areas of mobile communications and pharmaceuticals. Key developments expected during 2017 include:
Outstanding issues relating to the availability of injunctions
Clarifying FRAND terms
Splitting SEP portfolios
Patent enforcement and pricing strategies in the pharmaceutical sector
Pricing of pharmaceutical products