Technology: Developments and Trends

Pierre-André Dubois and Arabella Hinton

Kirkland & Ellis International LLP

There is no doubt that, over the years, the technology sector has become of increasing interest to the European Commission and national competition authorities (NCAs) when examining potentially anti-competitive behaviours. This interest has clearly manifested itself in the information technology (IT) sector, which has seen numerous investigations launched over various practices; the judgment of the Court of First Instance in the Microsoft case in 2007¹ marking a halt, although only for a brief moment, in the ongoing saga between Microsoft and the Commission.² The focus of the Commission on the technology markets is arguably only in its infancy – in fact, Neelie Kroes, the European Commissioner for Competition, commented recently that:
If markets are not delivering as they should, then I want to understand the problems and find solutions. That may mean enforcement, advocacy, or specific Commission or national government policy initiatives. In technology markets, I think it means all three.³

Outside the IT sector, there are the ongoing investigations by the Commission in relation to two cases involving standard-setting organisations (SSOs)⁴ and, more recently, the sector inquiry launched by the Commission into the pharmaceutical sector.⁵ In addition, on the merger side, over the last year or so a number of transactions have been notified to the Commission that have resulted in phase II proceedings and have examined various technology markets as well as applied, for the first time, the new guidelines with respect to non-horizontal mergers (Vertical Guidelines).⁶ This article proposes an overview, albeit brief, of these recent developments and cases.

SSO and patent ambush issues

The Commission is currently conducting its first investigation of a ‘patent ambush’ case. In August 2007, the Commission issued a statement of objection to Rambus⁷ alleging breach of article 82 by the charging of unreasonable royalties for certain patents for DRAM chips⁸ subsequent to an alleged patent ambush. Rambus participated in the Joint Electron Device Engineering Council (JEDEC), which resulted in the establishment of a standard for DRAM. In its statement of objection, the Commission claims that, while participating in JEDEC, Rambus did not disclose the existence of certain essential patents that were later claimed to be relevant to the standard. The initial conclusion of the Commission in the statement of objection is that Rambus breached article 82 by claiming unreasonably royalties for the use of those patents, which royalties it would not have been able to claim without such patent ambush.⁹ At this time, the Commission has yet to issue a decision. However, the Commission has clearly stated that SSOs should take care in preventing patent ambush. Philip Lowe, the Director General for the Commission, has commented that SSOs should seek full disclosure during negotiations ‘so you don’t actually open the envelope afterwards and discover some nasty surprises in it’.¹⁰ He has also indicated that companies must be clear about royalty rates that will be charged if their patents are then incorporated into the standard.¹¹ A somewhat similar investigation is also being conducted by the Commission in the Qualcomm case,¹² although the Commission has yet to decide whether or not to issue a statement of objection. This case focuses on whether Qualcomm adopted a course of conduct which resulted in non-FRAND terms being charged with respect to the W-CDMA standard for mobile phones. While the outcome of both the Rambus and Qualcomm cases will help define how the Commission deals with the conduct of dominant companies when participating in SSOs and patent ambush cases in the future, the Commission’s interest in reviewing these cases should continue. Standards play an increasingly important role in technology markets and are supported by European policy. Illustrative of this is the Commission’s statement that it ‘encourages the [European standards organisations] to continue their efforts to make the FRAND policy effective and to develop mechanisms to prevent abuses of the standard-setting process’.¹³
National courts have also been active in the ongoing debate over patent ambush at SSOs and what constitutes ‘essential’ patents. More particularly, the English courts have been considering these issues in the (now reported settled) litigation between Nokia and InterDigital.¹⁴ In 2005, the Court of Appeal decided that it would be possible for a person to request a declaration of non-essentiality of certain patents.¹⁵ The debate between Nokia and InterDigital arose in the context of the adoption of the 2G and 3G standards by the European Technology Standards Institute (ETSI). Under ETSI’s IPR policy,¹⁶ ETSI members are required to ‘timely inform’ ETSI of their essential IPRs early on in the standards-setting process.¹⁷ An essential IPR is defined as an IPR ‘that is not possible on technical (but not commercial) grounds, taking into account normal technical practices and the state of the art generally available at the time of standardisation, to make, sell, lease, otherwise dispose of, repair, use or operate equipment or methods which comply with a standard without infringing that IPR’.¹⁸ Furthermore, ETSI members must license their essential IPRs on FRAND terms.
In this case concerning the 3G standard,¹⁹ the English High Court held that three of the relevant patents were not essential, and that the fourth patent – an apparatus claim – was not essential, although the method claim was, and therefore issued a declaration of non-essentiality.
The High Court found that, aside from the technicalities of the case, the ‘principal factor exercising the court’s discretion […] is the utility of the negative declaration sought’. The High Court referred to the Court of Appeal’s judgment, stating that it had already been established that such actions for declarations of non-essentiality may be heard where the High Court has personal jurisdiction over the defendant and sufficient facts are alleged such that the High Court might grant declaratory relief. In considering whether to issue a declaration, the High Court noted that it was important to determine whether findings by a single judge sitting in England after a full trial with competent experts would be relevant either to the scope of any licence or, given that a licence is negotiated for geographical areas encompassing many states, whether those findings would be a factor that would be taken into account in fixing the relevant royalties.
It was concluded that the declarations were genuinely useful and should be granted. In coming to this conclusion, the High Court considered the utility of such a declaration in the context of a worldwide licensing negotiation and noted that this was not primarily a question of the size of the UK market in relation to other markets, although relevant. When made part of an ETSI standard, an essential IPR is included without any geographical limitation. As such, it should be irrelevant whether the issue is considered by a UK court or for that matter, any other member state court. As a practical matter, the High Court observed that a decision on essentiality would be material to the parties’ licensing negotiations and should be determinative to the negotiations on licensing in the UK (the UK market being far from insubstantial), although perhaps not determinative across all jurisdictions. The decision highlights, that in standardisation battles, parties considering that patent abuse has occurred may not only rely on complaints before the Commission or NCAs but also use civil courts as the first port of call in order to attack the standard-setting process, although it remains to be seen what would be the ‘right’ forum for a final determination on FRAND issues and essential patents were a court to find that its ruling would not be of sufficient weight to settle the issue.

Merger cases

Syniverse/BSG²⁰

Following a referral pursuant to article 4(5), the Commission reviewed the acquisition by Syniverse Technologies, Inc (Syniverse) of the data-clearing and financial-settlement business of the BSG Group. This decision is noteworthy because this was a ‘3 to 2’ merger, which was unconditionally cleared by the Commission after phase II proceedings. Data-clearing services permit mobile network operators to exchange data related to calls between networks, allowing billing for, and therefore facilitating roaming use by, end-users. The Commission initially concluded that the proposed transaction was likely to lead to higher prices and lower quality for data clearing services. While the Commission found that the acquisition would result in the number of competitors currently active in Europe being reduced from three to two, the Commission concluded that the transaction would not result in competitive harm. First, Syniverse had not exerted strong competitive pressure on BSG’s prices, rather both parties had faced more competition from the market leader, MACH. Second, the Commission acknowledged that the market for data clearing services was a bidding market and that there were no restrictions on other well established players in neighbouring markets being considered as credible bidders going forward. As this was a bidding market, the Commission concluded that the risks of coordinated effects was extremely remote.

TomTom/TeleAtlas²¹

This case involved the merger between TomTom, a Dutch company active in navigation software and the manufacturing of personal navigation devices (PNDs), and TeleAtlas, a Dutch company producing navigable digital maps. The market for navigable maps is a duopoly shared between TeleAtlas and another company (NAVTEQ, which has now merged with Nokia).²² Navigable digital maps are embedded in PNDs and an essential components of PNDs. At the end of phase I, the Commission expressed concerns that the transaction would increase the costs of other PND manufacturers for navigable maps or limit the access to such maps. At the end of the phase II proceedings, the transaction was finally approved unconditionally.
The Commission identified three relevant markets:
• the upstream market for navigable digital map databases (upstream market);
• the intermediate market for navigation software; and
• the downstream market for PNDs (downstream market).
The upstream market was the worldwide provision of navigable map databases worldwide where the geographic coverage of the licensed database determines the scope of the relevant product market. As TomTom only provides on-board systems where the navigation software and map data are stored in the PND, the Commission left open the issue of whether separate product markets could be defined for the type of navigation software. The Commission also left open whether separate markets could be defined for the database formats and the type of PND upon which the software is installed. With respect to the downstream market, the Commission found that PNDs and mobile telephones with navigation functionality constitute separate markets, as well as PNDs and in-dash car devices. This decision therefore only considered the downstream market for PNDs in the EEA.
The Commission found that the upstream market was competitive before the announcement of the proposed transaction as well as the Nokia/NAVTEQ transaction, since competitors were able to profit from the rivalry between TeleAtlas and NAVTEQ, which resulted in significant decreases in the average selling prices.
In one of the first cases involving the application of the Vertical Guidelines, the Commission concluded as follows:
• the merged entity would likely have the technical ability to increase prices or degrade quality or delay access for some PND manufacturers and navigation software providers competing with TomTom but the presence of NAVTEQ is such that the impact and profitability of such a strategy would be doubtful;
• the merged entity would have no incentive to foreclose access to the navigable maps because the profits that the merged entity would gain in the downstream market by increasing map prices would be unlikely to compensate for losses in the upstream market;
• there were potential efficiencies resulting from the merger, such as the elimination of double marginalisation, and the likely chance that the proposed transaction would achieve ‘better maps, faster’ for end consumers;
• the proposed transaction was unlikely to significantly impede effective competition due to confidentiality concerns as the amount of information of competitive value exchanged between TeleAtlas and its customers was limited and could be further reduced. The merged entity would therefore be unlikely to obtain competitive information from its customers and use it to its advantage in the downstream market; and
• the proposed transaction was unlikely to lead to anti-competitive effects through coordination because there was no indication of coordination between TeleAtlas and NAVTEQ; map database prices were not transparent so collusion would be difficult; TeleAtlas and NAVTEQ compete in the same market so there was no geographic split; allocation of customers would be hard since the size of PND manufacturers is unstable and numerous firms have entered the market since 2004; effective monitoring and deterring mechanisms would be difficult to establish, and there was no clear evidence that the vertical integration of TomTom and TeleAtlas would increase the scope for coordination between map database producers.

The Commission has always taken a ‘liberal’ approach to vertical mergers and while the Vertical Guidelines do recognise this, they also provide a detailed framework of analysis of the possible theories of harm. It is arguable that the decisions in the TomTom/TeleAtlas and Nokia/NAVTEQ cases have applied a less stringent approach to vertical mergers than would have been expected, given the context of a duopoly market.

IBM/Telelogic²³

The Commission initiated phase II proceedings in the proposed merger between IBM and Telelogic because of concerns about the impact of the merger on markets for software development tools, in particular, to software modelling and requirements management tools. The transaction was ultimately approved unconditionally. The notifying parties were asked to provide a complete set of win/loss data for the relevant markets, whereby they each described instances where they had won new contracts or lost them, in order to assist with the assessment of the closeness of substitution between each party’s products.
The Commission concluded that:
• commercial and open-source modelling and requirements management tools directly compete only with the low end of the market for small software development projects – an interesting point to note for future cases involving software as it appears that the Commission does not necessarily view open source software as part of the same market as proprietary software;
• although competition is generally more intense between point products than between point and suite products, some suite products offer credible alternatives to modelling and requirements management point products, mainly for systems software development and systems development and the Commission expects that competition between point and suite products offering modelling or requirements management functionality will increase in the next years;
• it was not necessary to reach a conclusion as to the existence of a distinct product market for UML modelling tools; however, to a certain extent UML and non-UML tools do compete since some non-UML tools are nonetheless UML compatible and could therefore be considered substitutes;
• it could be left open as to whether distinct product markets for software development tools used for IT and systems development existed;
• the parties software modelling or requirements management tools were not substitutable, serving different customers and fulfilling different needs;
• competition between IBM and Telelogic has not been a major driver for innovation in the past; rather, innovation has been spurred on by the need to meet customer needs as well as improved standards; and
• the characteristics of the markets for modelling and requirements management tools, in particular at the top end of the markets, eliminated successful foreclosure strategies since the potential costs outweighed the benefits and therefore the merged entity would lack incentive to obscure communication protocols and hamper interoperability with its software.

In its findings, the Commission noted that the geographic market for software development tools was likely worldwide (the only difference of note between the EU and the US markets being most likely a result of currency fluctuations). The Commission also reaffirmed that, in the case of differentiated products, value-based market shares better reflect the market power of each competitor than volume-based shares.

Google/DoubleClick²⁴

The proposed merger between Google and DoubleClick also resulted in phase II proceedings as the Commission expressed concerns about the impact of the transaction on the markets for intermediation and ad-serving in online advertising. The transaction was cleared by the Commission without conditions. In addition to competition grounds, the transaction was opposed by a number of third parties with concerns over data protection issues; the merged entity would have access to the two largest databases of online user data in the world. This was a novel challenge not previously considered by the Commission. The Commission did not consider such concerns valid grounds to block the proposed merger, but noted the obligations of the parties to comply with data protection laws going forward.

Next year

The next 12 months should see the Commission’s decision in the Rambus case, as well as a decision by the Commission in the Qualcomm case to either issue a statement of objection or to close its investigation. Also, the Commission should publish its findings in the sector inquiry in the pharmaceuticals sector, which could, depending on the conclusions of the report, have a drastic impact on certain licensing practices in the pharmaceutical industry, and more broadly, patent licensing practices in the technology sector.

Notes

1 Case T-201/04, Microsoft v Commission, 17 September 2007.
2 Microsoft has appealed the decision of the Commission imposing a fine of e889 million: Case T-167/08. The Commission is also investigating further cases of potential abuses around Microsoft’s new format OpenXML: see Commission’s MEMO/08/19, 14 January 2008.
3 ‘Being open about standards’, OpenForum Europe - Breakfast seminar, Brussels, 10 June 2008.
4 Rambus, Case No. COMP/36.636; Texas Instruments/Qualcomm, Case No. COMP/39-274 and others.
5 Commission decision of 15 January 2008 initiating an inquiry into the pharmaceutical sector, Case No. COMP/D2/39.514.
6 Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings, adopted on 28 November 2007.
7 Case No. COMP/36.636.
8 Dynamic random access memory. DRAM chips are used as memory in computer systems as well as workstations, printers, PDAs and cameras.
9 In a parallel case the US, the US District Court of Columbia recently reversed the decision of the Federal Trade Commission (FTC), finding that Rambus had not engaged in conduct harming competition. A motion by the FTC for a rehearing by the District Court en banc was recently dismissed by the District Court.
10 ‘Reuters Summit-EU official wants disclosure to end patent ambush’, David Lawsky, 20 May 2008: http://in.reuters.com/article/asiaCompanyAndMarkets/idINL1656980620080520.
11 This question is one that should be examined by the Commission in the Qualcomm case.
12 Case No. COMP/39-274 and others.
13 Communication from the Commission ‘Towards an increased contribution from standardisation to innovation in Europe’, 11 March 2008.
14 InterDigital Press Release, 2 July 2008.
15 Nokia Corporation v InterDigital Technology Corporation, [2005] EWCA 614.
16 www.etsi.org/WebSite/document/Legal/ETSI_IPR-Policy.doc.
17 Article 4.1 of the ETSI IPR Policy.
18 Article 15.6 of the ETSI IPR Policy.
19 [2007] EWHC 2077.
20 Case No. COMP/M.4662, 4 December 2007.
21 Case No. COMP/M.4854, 14 May 2008.
22 Case No. COMP/M.4942, 2 July 2008. The Nokia/NAVTEQ transaction also resulted in phase II proceedings but was cleared unconditionally on similar grounds as the TomTom/TeleAtlas case.
23 Case No. COMP/M.4747, 5 March 2008.
24 Case No. COMP/M.4731, 11 March 2008.

An extract from The European Antitrust Review 2009