Ioannis Lianos © Pre-published version of Chapter 13 in I. Lianos & V. Korah with P.

Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

Competition Law and Intellectual Property Rights: Promoting Innovation*

Ioannis Lianos

13.1. The innovation process .............................................................................................. 2

13.1.1. The economic underpinnings of innovation ..................................................... 3
13.1.2. The role of intellectual property rights ........................................................... 12
13.2. Competition law and Intellectual Property Rights: tensions and compromises ...... 18
13.2.1. Intellectual property rights and the focus of competition law on allocative
efficiency 18
13.2.2. Competition law and the more “dynamic” approach: reconciliation with IP?
22
13.2.3. Standards for the interaction between competition law and IP rights ............ 26
13.2.3.1. Formalistic standards for the IP/Competition Law interface ..................... 27
13.2.3.1.1. Standards focusing on the scope or value of the IP right .................... 27
13.2.3.1.2. Standards focusing on the intent of the IP holder ............................... 29
13.2.3.2. Economic balancing tests ........................................................................... 30
13.3. Exhaustion of IP Rights ........................................................................................... 36
13.3.1. The Principle of Exhaustion ........................................................................... 37
13.3.2. A free circulation right and/or exhaustion as regard sales within the EU ...... 39
13.3.3. Specific EU legislation on the principle of exhaustion concerning trademarks
and subsequent case law .................................................................................................. 43
13.4. Licensing of Intellectual Property Rights: the transfer of technology
Regulation/Guidelines and beyond ...................................................................................... 50
13.4.1. Historical overview ........................................................................................ 50
13.4.2. Types of licensing agreements covered by Article 101(1) TFEU .................. 53
13.4.2.1. Patent licences ............................................................................................ 53
13.4.2.2. Know-how licences .................................................................................... 55
13.4.2.3. Copyright licences ...................................................................................... 55
13.4.2.4. Software licences........................................................................................ 58
13.4.2.5. Trademark licences .................................................................................... 59
13.4.2.6. Plant breeder’s rights .................................................................................. 60
13.4.3. The scope and conditions of Block Exemption Regulation No. 316/2014 and
Guidelines on the application of Article 101(3) to technology transfer agreements ....... 61
13.3.3.1. Definitions and the scope of the Block Exemption: Articles 1 & 2.............. 62
13.3.3.2. Ceilings of market share—Article 3 ............................................................. 64

*
Many thanks to Valentine Korah, Paolo Siciliani and Marianna Filippakopoulou for comments and/or valuable
research assistance. Contact author: i.lianos@ucl.ac.uk

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13.3.3.3. Hardcore restrictions: Article 4 ..................................................................... 68

13.3.3.3.1. Competing undertakings (horizontal agreements) ................................. 68
13.3.3.3.2. Non-competing undertakings ................................................................. 70
13.3.3.4. Excluded Restrictions ................................................................................... 72
13.3.3.5. Withdrawal and Disapplication..................................................................... 73
13.3.3.6. Assessment beyond the TTBER ................................................................... 74
13.5. Technology sharing and ‘innovation commons’...................................................... 75
13.5.1. General Principles .......................................................................................... 75
13.5.2. Patent pools, cross-licensing and the complements problem ......................... 78
13.4.3. Collective licensing and copyright pools ............................................................. 80
13.6. Refusal to license and refusal to provide interoperability ....................................... 84
13.6.1. General principles .......................................................................................... 84
13.6.2. Volvo v Veng................................................................................................... 86
13.6.3. Magill ............................................................................................................. 89
13.6.4. IMS/NDC Health ............................................................................................ 95
13.6.5. Refusals to provide interoperability: Microsoft and beyond ........................ 100
13.7. Abuse of the IP system and vexatious litigation .................................................... 102
13.7.1. General principles ........................................................................................ 102
13.7.2. Vexatious litigation and EU Competition Law ............................................ 107
13.7.3. Abuse of regulatory procedures: Astra Zeneca ............................................ 111
13.8. Standard Essential Patents and FRAND licensing obligations .............................. 117
13.8.1. General Principles ........................................................................................ 118
13.8.2. Injunctions and SEPs .................................................................................... 126
13.8.3. Huawei v ZTE ............................................................................................... 133
13.9. Exploitative IP-related abuses and the meaning of FRAND ................................. 146
13.10. Reverse patent settlements: unilateral and collusive practices in the pharmaceutical
sector 156
13.10.1. General Principles ............................................................................................ 156
13.10.2. Reverse patent settlements law in EU and UK competition law ..................... 167
13.10.2.1. The European Commission’s decisional practice ..................................... 167
13.10.2.2. The General Court’s judgment in Lundbeck ............................................ 177
13.10.3. Beyond reverse patent settlements: protecting generics’ competition ............. 195

13.1.The innovation process

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13.1.1. The economic underpinnings of innovation1

As innovation is considered a major engine of growth2, public authorities play a direct

role in fostering innovation3, but also in supporting the emergence of an innovation-friendly
market environment. Historical work has duly noted the role of institutions (formal and
informal) in the promotion of innovation and creativity.4 One of the main instruments for the
State to support the emergence of an innovation-friendly market environment, is the
constitution of property rights on information, also called intellectual property rights. In his
Inquiry into the Nature and Causes of the Wealth of Nations (1776), Adam Smith noted how
patents and copyrights are ‘the easiest and most natural way in which the state can
recompense companies for hazarding a dangerous and expensive experiment, of which the
public is afterwards to reap the benefit’.5
The importance of knowledge products in the modern global economy has focused
attention on finding optimal methods to promote domestic intellectual production. These
various public policies, including intellectual property rights, aim to promote the process of
innovation. But what do we mean by “innovation” and “innovation process”?
Innovation has been traditionally defined as an ‘economic change’ or development that is
not generated by the spontaneous evolution of consumers’ needs but is instead engendered by
the inventors. Schumpeter emphasized the role of the entrepreneur and opposed the active
role she or he plays in the innovative process to the passive role of the consumer.6 His point
was that most innovation is entrepreneur-generated. This view accommodates the perception
that the main actor in the innovation process is the inventor (or more broadly the
entrepreneur) and that law should provide the right set of tools in order to enhance his or her
inventive activity this involving the protection of Intellectual Property (IP) rights. One could
compare this entrepreneur/inventor centered view of innovation to the increasing role of
consumer-generated innovation. As it has been noted in the Hargreaves report, the focus on
services instead of products is one of the major characteristics of the ‘new innovation
process’:
‘[s]ervices are usually produced at the point at which they are consumed: the act of
consumption rather than invention is the focal point for innovation […] [n]ew services are
developed using a “market facing” approach, often connected to information databases

1
Part of this section draws on I. Lianos & R. Dreyfuss, New Challenges in the Intersection of Intellectual
Property Rights with Competition Law, CLES Working Paper series 4/2013, available at
https://www.ucl.ac.uk/cles/research-paper-series/research-papers/cles-4-2013 .
2
See, I Hargreaves, ‘Digital Opportunity – A Review of Intellectual Property and Growth’ (May 2011),
available at www.ipo.gov.uk/ipreview-finalreport.pdf at 10, ‘Today’s advanced economies live or die by their
ability to get smarter. Growth comes not from competing on labour costs, raw materials or access to capital: our
competitive edge depends on our capacity to innovate, especially in the high margin, knowledge intensive
businesses which now exist across all sectors of the UK economy’.
3
This is either done through public investment in science and basic research, which can play an important role
in developing general-purpose technologies and, hence, in enabling further innovation, as well as public support
to innovative activity in the private sector, which is usually taking the form of a mix of direct and indirect
instruments such as tax credits, soft loans, direct support and well-designed public-private partnerships, support
for innovative clusters , public procurement where government purchases research from private parties, prizes
etc. On the important role of the State in supporting innovation, see M Mazucatto, The Entrepreneurial State:
debunking public vs. private sector myths (Anthem 2013).
4
J Mokyr, The Lever of Riches: Technological Creativity and Economic Progress (OUP, 1992).
5
A Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (Oxford University press, 1976) 754.
6
J Schumpeter, Capitalism, Socialism and Democracy (1942, published by Harper & Bros. in 1950).

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generated by people and organisations that articulate and express their requirements and
demands as they experience the innovation. This is sometimes described as a more
democratic approach to innovation, where companies trial different approaches – such as
beta versions of web pages – and respond to user feedback’.7
Users participate to the development of innovation in the market. 8 This should
presumably get them a better share of the surplus innovation creates (in the form of choice,
lower prices etc). Economist Joseph Schumpeter indicated the following dimensions of
innovation:
“(1) the introduction of a new good – that is one with which consumers are not yet
familiar – or of a new quality of a good. (2) The introduction of a new method of
production, that is one not yet tested by experience in the branch of manufacture
concerned, which need by no means be founded upon a discovery scientifically new, and
can also exist in a new way of handling a commodity commercially. (3) The opening of a
new market that is a market into which the particular branch of manufacture of the
country in question has not previously entered, whether or not this market has existed
before. (4) The conquest of a new source of supply of raw materials or half-manufactured
goods, again irrespective of whether this source already exists or whether it has first to be
created. (5) The carrying out of the new organization of any industry […]’.9
The growth of Total Factor Productivity (TFP)10 is often used as a measure of
innovation11. The intensity of R&D expenses has also been used as an indirect measure of
innovation, as it quantifies the resources used to promote innovation. Firm-level survey data
may also provide information on innovation, the way firms introduce new products or
processes in the market.
Innovation can take different forms. Process innovations increase productivity, free scarce
resources and expand production opportunities, while product innovations increase consumer
choice and expand demand. Both types of innovation increase employment in the long term.12
The importance of disruptive innovation in promoting growth has been a constant in the
economic theory of growth.13 However, innovation will only have a significant impact on
growth and welfare if new technologies, products and services are widely diffused. Both
incentives to innovate and the diffusion of innovation are therefore important ingredients for
innovation to have positive effects on welfare. Firms can also engage in two types of

7
I Hargreaves, ‘Digital Opportunity – A Review of Intellectual Property and Growth’ (May 2011) available at
www.ipo.gov.uk/ipreview-finalreport.pdf, 14.
8
F Gault and E von Hippel, ‘The Prevalence of User Innovation and Free Innovation Transfers: Implications for
Statistical Indicators and Innovation Policy’ MIT Sloan School of Management. Research Paper No. 4722-09
(January 2009) available at papers.ssrn.com/sol3/papers.cfm?abstract_id=1337232 ; KJ Strandburg, ‘Users as
Innovators: Implications for Patent Doctrine’ [2008] 79 University of Colorado Law Review 467.
9
J Schumpeter The Theory of Economic Development (London, Transaction Pub., 2005, first published by
Harvard Univ. Press in 1934) 66.
10
TFP corresponds to the growth of output that is not explained by the relative contributions of capital and labor
and can be considered as “technical progress in its broadest sense”. Its level is its level is determined by how
efficiently and intensely the factors of production (labour, capital) are utilized in production: R.M. Solow,
‘Technical change and the aggregate production function’ (1957) 39 The Review of Economics and Statistics,
312-320.
11
R. Gordon, The Rise and Fall of American Growth (Princeton University Press, 2016).
12
J Bessen, Learning By Doing: The Real Connection between Innovation, Wages and Wealth (Yale Univ.
Press, 2015).
13
J Schumpeter, Capitalism, Socialism and Democracy (1942, published by Harper & Bros. in 1950); P Aghion
& P Howitt, The Economics of Growth (MIT press, 2008).

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innovation: external, where they innovate on value chains managed by other firms, and
internal, where they innovate by initiating their own value chains.14
Traditionally the process of innovation has been conceived of as linear. According to
this traditional model, innovation is thought to start ‘upstream’, with fundamental scientific
insights, and moved ‘downstream’ through the discovery of technical applications of these
insights, the development of commercial embodiments and manufacturing techniques,
followed by arrangements for distribution, servicing, and sales. In Bush’s view, upstream
research—basic science—was too far removed from application to be an attractive target for
commercial investment. At the same time, however, this work is the wellspring from which
multiple technological prospects flow. The expectation was that robust competition would
function as an ‘engine’, driving industry to adapt the advances, find applications, create new
businesses and jobs, enhance productivity, and improve social welfare.15

Figure 13.116

To a large extent, this construct still characterizes the innovation policy landscape nowdays.
That said, it has become clear that the traditional model and the laws that flowed from it do
not capture many important aspects of the innovation process.
First, modern economists have questioned the linearity of innovation. Fundamental
insights are not the exclusive domain of scientists. In fact, downstream players can have a
significant role in identifying new prospects and finding commercial opportunities for their

14
A Atkenson & AT Burstein, ‘Innovation, Firm Dynamics and International Trade’ [2010] 118 Journal of
Political Economy 433.
15
J Schumpeter, The Theory of Economic Development (London, Transaction Pub 2005, first published by
Harvard University Press in 1934) and Capitalism, Socialism and Democracy (1942, published by Harper &
Bros. in 1950).
16
JA Ordover, ‘Economic Foundations and Considerations in Protecting Industrial and Intellectual Property’
(1984) 53 Antitrust Law Journal 503, 515.

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use. Conversely, upstream inventors are sometimes in the best position to guide the further
development of fundamental insights.17 Thus, for example, in 1982, the United States enacted
the Bayh-Dole Act in order to permit universities to own patent rights in the fruits of
government-supported work.18 The enactment was largely intended to bring scientists and
industry into closer alliance and facilitate greater interchange of ideas and information.19
Similarly, the emerging shift from vertical integration to value chain licensing recognizes that
every participant in the innovation process brings its own expertise to bear in taking ideas and
turning them into marketplace products.20 Since intellectual property licenses serve to
allocate rewards along the development path, rights holders require a high degree of
flexibility in the manner in which they arrange their business dealings.21
Second, dating back at least to William Nordhaus’s work22, an optimal intellectual
property (eg patent) policy design has traditionally been conceived in terms of a trade-off
between the benefit of providing incentives for the development of new technologies and the
cost of deadweight loss from higher prices during the life of the patent or of the IP
protection.23 This influential approach has traditionally modeled innovations as isolated
discoveries and predicted an unambiguously positive relationship between patent strength and
the rate of innovation. This model is not however unanimously shared and has been criticized
in recent years. In her influential work, Suzanne Scotchmer24 has stressed that many or most
innovations are cumulative - in the sense that any given discovery is also an input into later
follow-on discoveries where successive innovations build upon earlier innovations.25 In
markets where innovation is cumulative in this sense, optimal patent policy design also
depends on how patents on existing technologies affect follow-on innovation. There is
increasingly a body of empirical evidence supporting that patents may hinder follow-on
innovation.26
Third, closely related to the prevalence of cumulative innovation is the increasing
importance of knowledge sharing as a fundamental source of innovation.27 There is a lot of
evidence of knowledge sharing taking place even between ‘apparent competitors’ in various

17
See, eg, F Murray and S O’Mahony, ‘Exploring the Foundations of Cumulative Innovation: Implications for
Organization Science’ [2007] 18 Organization Science 1006.
18
35 U.S.C. §§ 200-212.
19
P Lee, ‘Transcending the Tacit Dimension: Patents, Relationships, and Organizational Integration in
Technology Transfer’ [2004] 100 California Law Review 1503.
20
SM O’Connor, ‘IP Transactions as Facilitators of the Globalized Innovation Economy’ in RC Dreyfuss, DL
Zimmerman and H First (eds), Working Within the Boundaries of Intellectual Property-Innovation Policy for the
Knowledge Society (Oxford University Press 2010) 203.
21
DJ Teece, G Pisano and A Shuen, ‘Dynamic Capabilities and Strategic Management’ (1997) 18 Strategic
Management Journal 509, 516; DJ Teece, ‘Profiting from Technological Innovation: Implications for
Integration, Collaboration, Licensing and Public Policy’ [1986] 15 Research Policy 285.
22
W Nordhaus, ‘An Economic Theory of Technological Change’ [1969] 59 The American Economic Review 18.
23
K Arrow, Economic Welfare and the Allocation of Resources for Invention in The Rate and Direction of
Inventive Activity: Economic and Social Factors (NBER, 1962) 609.
24
S Scotchmer, Innovation and Incentives (MIT press, 2004).
25
This was well understood since the times of Isaac Newton who famously wrote in a letter to Robert Hooke
that ‘[i]f I have seen further it is by standing on the shoulders of Giants”. See R Andrews et al (eds), The
Columbia World of Quotations No. 41418 (Columbia University Press 1996).
26
MA Heller & RS Eisenberg, ‘Can Patents Deter Innovation? The Anticommons in Biomedical
Research’ [1998] 280 Science 698; J Bessen & E Maskin, ‘Sequential innovation, patents, and imitation’ [2009]
40 RAND Journal of Economics 611.
27
J Bessen & A Nuvolari, ‘Knowledge Sharing Among Inventors: Some Historical Perspectives’ in D Harhoff
& KL Lakhani (eds.), Revolutionizing Innovation (MIT press, 2016) 135.

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industries, which facilitate innovation that builds cumulatively n previous advances.28 The
rise of ‘collective innovation29’ constitutes a defining moment in the new economics of
innovation and indicates that it is inevitable that, at least at the initial stages of the
development of a new technology, firms would cooperate, while competing in other aspects
of their activity, in what has be described as ‘soft rivalry’ (or co-opetition). 30 It is important
to rethink the interaction of competition law with IP rights, but also more specifically the
framework of competition law enforcement in the era of ‘collective innovation’.
Fourth, it has become evident that the pattern of technological advance is not the same
in all fields. As Richard Nelson and Robert Merges have noted, ‘at least four different generic
models are needed. The first describes discrete invention. A second concerns ‘cumulative’
technologies. Chemical technologies have special characteristics of their own. Finally, there
are ‘science-based’ technologies where technical advance is driven by developments in
science outside the industry’.31 A ‘one size fits all’ intellectual property system is therefore
not appropriate. Specifically, because intellectual property law was first developed during the
Industrial Revolution, it is largely based on stand-alone (discrete) mechanical inventions.
Thus, it has few doctrines that permit one generation of innovators to ‘stand on the shoulders’
of those who went before.32 As a result, it must be considerably revamped to deal with the
incremental (cumulative) approach that characterizes much of the innovation occurring in the
Knowledge Revolution. The emergence of the software and semiconductor sectors furnishes
two examples. Similarly, change is necessary to make the law resonate better with a science-
based sector such as biotechnology. There exists many opportunities (or as professors Dan
Burk and Mark Lemley would put it, ‘levers’) that can be used to tailor patent law to deal
with these realities.33
Fifth, classic intellectual property and innovation laws were developed with a single
jurisdiction in mind. As borders have become more permeable, capital, firms, and expertise
migrate to jurisdictions with the most favourable conditions.34 Indeed, the promulgation of

28
E von Hippel, ‘Cooperation between rivals: informal know-how trading’ [1987] 16 Research Policy 291.
29
RC Allen, ‘Collective invention’ [1983] 4 Journal of Economic Behaviour and Organization 24.
30
E von Hippel, ‘Cooperation between rivals: informal know-how trading’ (1987) 16 Research Policy 291, 299
explains this process of sharing by focusing on the ‘competitive value’ of the unit of knowledge that was
revealed to a competitor. If the competitive advantage provided by this unit of knowledge is limited, information
disclosure, in particular if reciprocated, may lead to more general welfare gains for all the firms in the industry
that participate to this knowledge sharing. If the ‘competitive value’ of that unit of knowledge/information is
however large, because it confers a considerable competitive advantage vis-à-vis other industry rivals, then there
will be less incentives to share knowledge and the firms will actively enforce their IP rights. This explains to a
large extent why knowledge sharing periods may be followed by periods when the proprietary model is
prevalent, firms relying on intellectual property rights to defend their competitive advantage. See also, J Bessen,
‘The Two Faces of Innovation’, Boston University School of Law Working Paper 10-35 (2011) available at
SSRN: ssrn.com/abstract=1698802 (observing that as technology matures firms’ willingness to share knowledge
and their use of IP and patents change, knowledge-sharing being more prevalent in the early stages of
technology or where local innovation has little effect on worldwide prices).
31
RP Merges and R Nelson, ‘On the Complex Economics of Patent Scope’ (1990) 90 Columbia Law Review
839, 880.
32
See, eg, S Scotchmer, ‘Standing on the Shoulders of Giants: Protecting Cumulative Research and the Patent
Law’ [1991] 5 Journal of Economic Perspectives 29. The phrase, ‘standing of the shoulders of giants’, derives
from a Isaac Newton's famous letter to Robert Hooke, supra n 25.
33
DL Burk and MA Lemley, The Patent Crisis and How Courts Can Solve it (University of Chicago Press
2009).
34
P Samuelson, ‘Intellectual Property Arbitrage: How Foreign Rules Can Affect Domestic Protections’ [2004]
71 University of Chicago Law Review 223.

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the TRIPS Agreement within the World Trade Organization is testament to this change. The
global nature of the innovation enterprise and the emergence of a global marketplace for
innovative products is a reality illustrated by the emergence of innovation value chains in
various industries, where multiple firms acting in various segments of the chain innovate,
thus contributing to the total surplus value of the chain.35 The increasing number of
jurisdictions worldwide having adopted and enforcing competition law statutes may
nevertheless complicate the operation of these global IP rules, in view of the divergent
positions various jurisdictions take on the intersection of competition law with IP rights and
the absence of a global competition law framework, equivalent to the TRIPS agreement.
Sixth, it has become evident that intellectual property laws are not the sole
determinants of innovation. Firms appropriate the benefits of inventiveness in a variety of
ways; for many firms, patent law is low on the list of strategies. As a survey by Alan Hughes
and Andrea Mina conducted in the United Kingdom shows, depending on the size of the firm,
lead time advantage, along with methods to perpetuate that advantage through secrecy, is first
on the list for many firms. Thus, laws protecting trade secrets and enforcing confidentiality
agreements can be as important as more formal intellectual property law.36 Indeed, Edwin
Mansfield’s work suggests that the pharmaceutical sector is alone in relying principally on
patent law to capture returns from innovation.37 Once again, a ‘one-size-fits-all’ system
makes little sense as it is clear that patent law can be manipulated to deal with differences
that arise from the technical field in which innovation is taking place, changes that occur as
an industry matures, and other variables.

Figure 13.238

35
See for instance the studies on the global supply chains of iPods and notebook computers and the question of
the distribution of financial value coming out of these chains: J Dedrick, ‘Who profits from innovation in global
value chains?: a study of the iPod and notebook PCs’ [2010] 19 Industrial and Corporate Change 81.
36
See also E Mansfield, ‘R&D and Innovation: Some Empirical Findings’ in Z Griliches (ed), R&D, Patents
and Productivity, National Bureau of National Research (The University of Chicago Press 1984) 127.
37
E Mansfield, ‘Patents and Innovation: An Empirical Study’ [1986] 32 Management Science 173. See
generally A López, ‘Innovation and Appropriability, Empirical Evidence and Research Agenda’ in The
Economics of Innovation (WIPO 2009), available at www.wipo.int/ip-
development/en/economics/pdf/wo_1012_e_ch_1.pdf.
38
I Hargreaves, ‘Digital Opportunity – A Review of Intellectual Property and Growth’ (May 2011), available at
www.ipo.gov.uk/ipreview-finalreport.pdf at 17.

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Closely related to this observation is another one: it is increasingly recognized that a

significant amount of innovation occurs in the absence of any mechanism to directly
appropriate returns. So-called ‘open innovation’ is spurred by a variety factors, including
curiosity; pleasure; the expectation of reputational benefits, professional advancement, and
prizes; and to obtain reciprocal benefits.39 These systems are often supported by ancillary
profit-based interests. For example, IBM supports Linux, a free software platform, so that it
has a base that will always be freely available to run its proprietary programs; user groups
will develop new products (such as research tools) through free exchange within their own
communities, but once these products move to the commercial stage, intellectual property
rights are needed to promote further developments. Thus far, no intellectual property or
competition law regime has made adjustments that recognize the importance of open
innovation.40
Eighth, the role of the competitive process in the promotion of innovation is well
recognized and widely accepted. Certainly, research and development requires up front
investments for uncertain rewards. Intellectual property rights were initially conceived as an
exception to the rule of competitive markets. By providing some economic rents (this is not
the same as a monopoly, see our analysis XXX), intellectual property rights ensure that the
inventor has adequate incentives to innovate at the first place.41 Although IP may provide

39
See, eg E von Hippel, Democratizing Innovation (MIT Press 2005); HW Chesbrough, Open Innovation: The
New Imperative for Creating and Profiting from Technology (Harvard Business School Press 2003); KJ
Strandburg, ‘Curiosity-Driven Research and University Technology Transfer’ in GD Libecap (ed) [2005] 16
Advances in the Study of Entrepreneurship, Innovation and Economic Growth 97; F Murray et al, ‘Of Mice and
Academics: Examining the Effect of Openness on Innovation’ (March 2009), NBER Working Paper Series, Vol.
w14819, 2009, available at ssrn.com/abstract=1369055; P Moser, ‘How Do Patent Laws Influence Innovation?
Evidence from Nineteenth-Century World’s Fairs’ [2005] 95 American Economic Review 1214;
40
But see RC Dreyfuss, ‘Does IP Need IP? Accommodating Intellectual Production Outside the Intellectual
Property Paradigm’ [2010] 31 Cardozo Law Review 1437.
41
This simple trade-off was recognized by the UK Statute of Monopolies (1623) which declared ‘all monopolies
[…] for the sole buying, selling, making, working or using of anything within this realm, or of any other
monopolies, or of power to give license or toleration to do, use or exercise anything against any law […] are

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some certainty over the ability of an undertaking to retain the benefits from the innovation it
put in place (and internalise the positive externalities thus produced), the social return to
innovation largely exceeds its private return.42 In reality, imperfect IP protection may lead the
competitors to gain some of the rewards from the rival’s innovation (the problem of limited
appropriability).43 Technological spillovers and imitation across the industry or cross-
industries may boost growth to a considerable extent, without being possible that these
indirect benefits are appropriated by the IP holder, thus illustrating the inadequacy of a policy
relying on intellectual property rights only to spur innovation and the importance of public
funding of research. It has been argued that disruptive innovation may also challenge
monopoly positions that become temporary (the process of ‘creative destruction’).44
With regard to the appropriate market structure for innovation two views oppose each
other.45 The Schumpeterian view alleges that large firms and monopolists may be more
innovative than firms in competitive markets, in view of the head start they dispose, having a
dominant position on a market, and the resources to fund large research and development. In
contrast, economist Kenneth Arrow has challenged the incentives of a monopolist to invest
on R&D in view of the fact that the new products may displace, partly or totally, the
monopolist’s products from the market (thus leading the monopolist to compete with
himself).46 Recent empirical economic studies have examined these claims attempting to link
market concentration in an industry (on the basis of the Lerner index, thought of as a proxy
for product market competition) to R&D expenditures in the same industry. They found the
existence of an ‘inverted-U’ relationship whereas the level of innovation rises in industries
with oligopolistic market structures, being relatively more modest in industries having a more
competitive market structure and industries dominated by monopolists (see Figure 13.3.).

Figure 13.3.: The relation between market structure and R&D expenditure47

contrary to the laws of this realm, and so are and shall be utterly void […]’ but also recognized an exception
from this prohibition for ‘[…] any letters patents and grants of privilege for the term of fourteen years or under,
hereafter to be made, of the sole working or making of any manner of new manufactures within this realm, to
the true and first inventor or inventors of such manufactures […]’.
42
This was highlighted by K Arrow, Economic Welfare and the Allocation of Resources for Invention in The
Rate and Direction of Inventive Activity: Economic and Social Factors (NBER, 1962) 609.
43
Ibid., 619.
44
J Schumpeter, Capitalism, Socialism and Democracy (1942, published by Harper & Bros. in 1950) 83, noting
that ‘The opening up of new markets, foreign or domestic, and the organizational development from the craft
shop and factory to such concerns as U. S. Steel illustrate the same process of industrial mutation - if I may use
that biological term - that incessantly revolutionizes the economic structure from within, incessantly destroying
the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about
capitalism. It is what capitalism consists in and what every capitalist concern has got to live in’.
45
For a critical analysis, see J Baker, ‘Beyond Schumpeter vs. Arrow: How Antitrust Fosters Innovation’ [2007]
74 Antitrust Law Journal 575; RJ Gilbert, ‘Competition and Innovation’ in WD Collins (ed) [2008] 1 ABA
Section of Antitrust Law, Issues in Competition Law and Policy 573.
46
The so called ‘replacement effect’ or ‘Arrow effect’: K Arrow, ‘Economic Welfare and the Allocation of
Resources for Invention in The Rate and Direction of Inventive Activity: Economic and Social Factors’ (NBER,
1962) 619–625.
47
P Aghion N Bloom, R Blundell, R Griffith & P Howitt, ‘Competition and Innovation: An Inverted U
Relationship’ [2005] Quarterly Journal of Economics 701.

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Ioannis Lianos © Pre-published version of Chapter 13 in I. Lianos & V. Korah with P.
Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

However, some other economists find these studies unconvincing.48 Competition law may be
aimed at fostering innovation in product markets as well as innovation and technology
markets, by taking an industry-specific approach and prioritizing restrictions to competition
that may impact the most on innovation. As it is explained by Jonathan Baker,
‘[a competition law] enforcement program crafted to promote innovation would attack
direct reductions in innovation competition; protect product market competition in
winner-take most or winner-take-all markets; protect product market competition in
markets in which probable technological or regulatory developments or rapid growth in
demand largely determine the extent of future product market competition; challenge
naked horizontal agreements to fix prices or allocate customers; prevent agreements
among rivals to engage in conduct facilitating coordination with no plausible business
justification; and challenge horizontal mergers likely to reduce product market
competition. […] There are other areas of [competition law] enforcement, including
cases challenging vertical restraints, vertical mergers, and restrictions imposed by
legitimate horizontal joint ventures in industries not characterized by winner-take-most
competition, likely technological or regulatory change, or rapid growth. In these
remaining areas, [competition law] intervention could, in theory, simultaneously
enhance pre-innovation product market competition and reduce post-innovation
competition, with the net effect on innovation incentives unclear. In practice, however,
[competition law] enforcement in these other areas is, on the whole, measured. The great
majority of such conduct will not be found to harm competition under current antitrust
standards, so these kind of cases in the aggregate would present little threat to
innovation in the economy even if the incentives at issue in the third and fourth
48
See, the discussion in J Baker, ‘Beyond Schumpeter vs. Arrow: How Antitrust Fosters Innovation’ (2007) 74
Antitrust Law Journal 575, 584–587 (suggesting some alternative measures of innovative activity).

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Ioannis Lianos © Pre-published version of Chapter 13 in I. Lianos & V. Korah with P.
Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

economic principles turned out to be particularly important in the settings for those
enforcement actions. Accordingly, it is unlikely that [competition law] enforcement to
protect product market competition in areas outside those that would be emphasized by a
policy focused on innovation would systematically affect the level of post-innovation
competition reasonably anticipated by firms conducting R&D throughout the economy’.
This discussion highlights not only the importance of intellectual property and
competition law, but also the complexity of the various trade-offs to undertake between pre-
innovation product competition, competition for the development of innovation and post-
innovation product and technology innovation, as well as of the various interests to take into
account (inventors, cumulative innovators, competitors, external or internal participants in
value chains, actual consumers and future generations of consumers), which highlight the
need for a governance system that stays abreast of technological, economic, and social
developments, and which is steeped in the economic literature.

13.1.2. The role of intellectual property rights

In part, the establishment of the World Trade Organization and its adoption of the Trade
Related Aspects of Intellectual Property Law (TRIPS) Agreement has necessitated revision of
most national intellectual property laws.49 In part, new economic theories have driven a
reassessment, particularly at the interface between competition law and intellectual property
law.
The analysis of intellectual property as a ‘property right’ has been an important
feature of the modern debate over the establishment of legal protection of information.50 The
debate over the establishment of intellectual property rights and the quest of a necessary
justification for their institution prefigures the paradox inherent in a system where social
benefits via technological progress are achieved by means of private rewards. The essence
and main objective of intellectual property rights is to direct private interest towards the
achievement of the community goal of greater innovation and increasing economic welfare.
This utilitarian explanation of intellectual property is usually opposed to the ‘natural law’
approach, which emphasizes the existence of moral rights, intrinsically attached to the
personality of the inventor.51
Utilitarianism remains the dominant explanation for intellectual property (IP) rights.
Three theories embrace the utilitarian approach.
The ‘reward’ theory is the most traditional justification for establishing a property
rights protection for ideas and is relevant to any type of IP. According to this theory, the
inventors should be rewarded for the risks and the investment of time and effort they have
made in order to develop a useful to society invention. The reward takes the form of a
property right protecting the inventors from free riders. In the absence of this exclusive right,
free riders would be able to use the invention without making the investment of time, effort,

49
Agreement on Trade Related Aspects of Intellectual Property Rights, 15 Apr. 1994, Marrakesh Agreement
Establishing the World Trade Organization, Annex 1C, Legal Instruments—Results of the Uruguay Round vol.
31, 33 I.L.M. 81 (1994) [hereinafter TRIPS Agreement].
50
For a survey see, SNS Cheung, ‘Property Rights and Invention’ (1986) 8 Res. L. & Econ. 5, 6.
51
M Fisher, ‘Classical Economics and Philosophy of the Patent System’ (2005) I.P.Q. 1, 6

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Ioannis Lianos © Pre-published version of Chapter 13 in I. Lianos & V. Korah with P.
Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

skill or money required to actually invent it. Indeed, if a firm could not recover the costs of
invention because of free riding, then we could expect a suboptimal level of innovation.52
The incentive theory goes further. The objective of granting IP rights is not only to
compensate the inventor but also, by providing a ‘spectacular prize’, to give incentives to
other potential inventors to make the necessary efforts to innovate.53 The objective of the
exclusive right will be to provide a prospect of a large reward, not a mere recoupment of
fixed costs.54 This is an argument for granting property rights on information at an earlier
stage of the inventive process. The objective is to allow patent holders to coordinate
innovative efforts within the area covered by the patent and thus develop the ‘prospect’ of
future research. These ‘prospect patents’ have a scope ‘that reaches well beyond what the
reward function would require’. However, the acquisition of an intellectual property right is
often the outcome of a race to innovation. This is particularly important concerning patents
(‘patent races’). Firms are investing in order to be the first to file an application to the Patent
Office or to have invented the particular product or process. This race may lead to rent
seeking behaviour, excessive investments and duplication of efforts that will be finally
wasted as it would have been more efficient to use these resources for other productive
activities. The risk of rent-seeking behaviour is more pronounced for intellectual property
rights than physical property rights.
Most recently, granting IP rights, in particular patents, has been justified by their
conceptualization as market instruments: patents are used as ‘an exchange currency to access
a specific third-party technology, which can only be traded against other IP rights’, or as a
means to attract private investment.55 Property rights on information were developed in order
to allow complex trade relations to form over distance. The efficient resource allocation is
established through the use of markets by which property is exchanged and transferred to
those who can make best use of it. If one follows this, IP rights as market instrument
(transaction) theory, intellectual property rights, in particular patents are an instrument to
attract private investment and therefore they should be granted, irrespective of the value of
the invention itself, which is an issue that will be decided by the capital markets.
Economic theory views property rights as a way to deal with externalities.
Externalities (or external effects) exist any time one party’s action ‘influences, or may
influence with a probability, the well-being of another person, in comparison to some
standard of reference’.56 Positive, when they have a beneficial effect on others, such as for
instance the effect of the invention of a new pharmaceutical compound on the development of
a new family of drugs change providing benefits to actual and future generations of
consumers. In this case, the new pharmaceutical compound would benefit future
patients/consumers whilst, in the absence of intellectual property protection for this new
52
KW Dam, ‘The Economic Underpinnings of Patent Law’ [1994] 23 J. Legal Stud. 247.
53
Fr a discussion, FM Scherer, ‘The Innovation Lottery’ in R Dreyfuss, H First & D Zimmerman (eds.)
Expanding the Boundaries of Intellectual Property (OUP, 2001) 3.
54
EW Kitch, ‘The Nature and Function of the Patent System’ [1977] 20 J.L. & Econ. 265 (mining or prospect
claims) noting that the prospect patent places its owner in a position ‘to coordinate the search for technological
and market enhancement of the patent’s value so that duplicative investments are not made and so that
information is exchanged among the searchers thus avoiding inefficient races to invent’. This view was
criticized by M Lemley, ‘Ignoring Patents’, (2008) available at
www.ftc.gov/sites/default/files/documents/public_events/evolving-ip-marketplace/mlemley_ip.pdf.
55
D Guellec & B van Pottelsberghe de la Potterie, The Economics of the European Patent System
(OUP, 2007) 87.
56
S Shavell, Foundations of Economic Analysis of Law (Harvard Univ. Press 2004) 76.

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Ioannis Lianos © Pre-published version of Chapter 13 in I. Lianos & V. Korah with P.
Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

compound they would not have been expected to contribute to the initial investment.
Negative, when a transaction imposes costs on a third party that the parties to the transaction
do not pay, hence the price generated by this transaction does not reflect its full social cost. A
classic example is manufacturing activities that cause pollution. Property rights are
considered as a way to deal with externalities (others include taxes, regulation, subsidies etc)
A property regime is generally opposed to open access.57 When an open access
resource becomes scarce, individuals lack the incentive to conserve it because they cannot
capture the full gains (the free rider problem) leading to adverse effects on the supply and
demand side of the market for the particular resource (the tragedy of the commons).58 The
establishment of property rights may avoid these externalities by internalizing the benefits
and the costs of the exploitation of the scarce resource, thus enhancing their more efficient
use. Exclusive property rights enable individuals to use scarce resources and exclude others
from using them. The cost for society to create property rights is explained by the great value
of the resource, which is linked to its scarcity. The value of the scarce resource is a parameter
to consider in granting property rights. If the scarce resource is of limited value, the potential
benefits resulting from the property right may not cover the costs of its creation. Open access
will in this case be the most effective regime. The main function of property rights is
therefore to internalize externalities when the gains of internalization become larger than the
cost of internalization.
The free rider justification for establishing intellectual property rights is however
weak. Indeed, it is difficult to accept on its face the idea that overuse of the intellectual
property rights by free riders will create a tragedy of the commons. Information may be
considered as a pure public good. The ‘consumption’ of information by one person does not
diminish the possibility of its consumption by another. Simultaneous (or joint) consumption
is possible. The necessity to confer property rights in order to avoid congestion externalities,
which is the usual rationale for physical property rights, is not so compelling. The
consumption of the good is non rivalrous and it is also difficult to exclude others from its use.
Developers of new information goods and technical processes cannot appropriate their full
economic value. This externality makes developers less willing to transfer proprietary
technology (this is particularly true for easily copied or imitated goods (software,
pharmaceuticals, new seed varieties)). It is a smaller deterrent for firms with complex
technologies that are harder to reverse engineer. This appropriability problem affecting
incentives to innovate constitutes the main reason for developing property rights on
information (intellectual property rights).59
Intellectual property rights on information may also make it easier for inventors to
commercialize their inventions and conclude transactions with other economic units. This
creates a market for the transformation of the inventions into commercially viable products.
In reality transaction costs are higher concerning intellectual property, because of the

57
T Eggerstsson, ‘Open access versus Common property’ in TL Anderson & FS McChesney (eds.)
Property Rights - Cooperation, Conflict, and Law (Princeton, 2003) 73.
58
G Hardin, ‘The Tragedy of the Commons’ [1968] 162 Science 1243.
59
This finding relies on the assumption that economic incentives only explain the drive of inventors to innovate.
For a different perspective, focusing on alternative sources of motivation for engaging in innovation see,Y
Benkler, ‘Sharing Nicely: On shareable goods and the emergence of sharing as a modality of economic
production’ [2004] 114 Yale L. J. 273.

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Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

difficulty to define ex ante the boundaries of the ‘property’ claim.60 This risk is particularly
important in the case of cumulative innovation, as the fragmentation of intellectual property
rights may lead to extensively complex transactions involving an important number of
parties, thus increasing the costs of bargaining.
The concept of intellectual property rights is an umbrella term that englobes a much
more diverse group of property rights, with various categories of rights being elaborated over
time and providing an array of rights and corresponding duties61.
Patents62 confer to their holders the exclusive right for a period of twenty years from
the time they filed (in Europe) their patent, to prevent third parties not having the owner's
consent from the acts of making, using, offering for sale, selling, or importing for these
purposes that product, if this is a patent on a product, or in case the patent’s subject matter is
a process, to prevent third parties not having the owner's consent from the act of using the
process, and from the acts of: using, offering for sale, selling, or importing for these purposes
at least the product obtained directly by that process. Patent holders also have the right to
assign, or transfer by succession, the patent and to conclude licensing contracts. Patents are
awarded following an administrative process at the patent office where a patent examiner
proceeds to a prior examination of the validity of the patent. Patents must meet subject
matter, novelty, inventiveness, utility (industrial application), disclosure (specification) and
claiming requirements, as a patentee should enable a person of ordinary skill in the art to
make and use the patented invention. Validity determinations can be used to deal with
problematic features of the patent system. Thus, many countries have devised doctrines to
deem inventions of extraordinary social significance not patentable subject matter. The
subject matter requirement is, however, a blunt instrument—a decision to deny protection in
a specific arena eliminates the possibility of using patents to encourage innovation. For
example, this could be a difficult issue in the biotech sector. If DNA is found unpatentable,
that would free DNA for research and diagnostic purposes, but the rejection would also mean
that there would be no patent protection on nature-based DNA products when used
therapeutically, and that might discourage promising health-related innovation.
Patents should not be infringed. For Europe, the European Patent Convention
nominally covers only the issues administered by the European Patent Office (EPO), which is
to say patent validity. A ‘European patent’ consists of a package of national patents and is
enforced, for the time being, through national courts under those courts’ domestic laws. But
because the strategy for claiming is heavily dependent on how claims are interpreted, the
EPC includes a Protocol on the Interpretation of Article 69 (the article on the scope of
protection). The Protocol cautions that interpretation must go beyond the ‘literal wording
used in the claims’. It must be conducted in a manner that ‘combines a fair protection for the
patent proprietor with a reasonable degree of legal certainty for third parties’. The Protocol
also provides that ‘due account shall be taken of any element which is equivalent to an
element specified in the claims’. The new European unitary patent protection entered into

60
For a discussion, see J Bessen & MJ Meurer, Patent Failure: How Judges, Bureaucrats, and Lawyers Put
Innovators at Risk (Princeton University press, 2009).
61
For a more elaborate introduction, see J Pila & P Torremans, European Intellectual Property Law (OUP,
2016); L Bently & B Sherman, Intellectual Property Law (4th ed., 2014).
62
The following rights are protected by Article 28 TRIPS Agreement.

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Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

force in 201363 and will apply from the date of entry into force of the Agreement on a Unified
Patent Court, the Unified Patent Court being expected to operate from early 2017.64 The UK
is already part and has ratified these international agreements. The European patent with
unitary effect (‘unitary patent’) will be another option for users besides already-existing
national patents and classical European patents, under the European Patent Convention. The
unitary patent will be granted by the EPO under the provisions of the European Patent
Convention to which unitary effect for the territory of the 26 participating states will be given
after grant, at the patentee's request. The Agreement on the Unified Patent Court addresses
the above problems by creating a specialised patent court (‘Unified Patent Court’, or UPC)
with exclusive jurisdiction for litigation relating to European patents and European patents
with unitary effect (unitary patents), while currently national courts and authorities of the
contracting states of the European Patent Convention are competent to decide on the
infringement and validity of European patents, which leads to differences in interpretation
and forum shopping. In some areas—databases65, semi-conductors (and layout designs of
integrated circuits/topographies of semi-conductors)66, plants67—sui generis regimes have
been thought as better tailored to industrial needs, as well as specially designed rights that
serve as an extension to a patent right for the pharmaceutical industry and plant protection
products.68
Copyright aims to ensure that the protected matter will not be reproduced without the
express permission of the creator or the owner of the copyright. It establishes an economic
right by which the creator (or copyright owner) is legally entitled to a share of any return that
is earned by the utilization or reproduction of the copyrighted knowledge, which, for some is
intrinsically related to the moral right of the author on his intellectual labour. Unlike a patent,
a copyright gives no exclusive right to the art disclosed; protection is given only to the
expression of the idea—not the idea itself, hence its exclusionary potential is less important.
In order to prove an infringement, one must demonstrate that the disputed item (or portion of
an item) is an actual reproduction of the original work in terms of content and that the
copying was intentional. According to the TRIPS agreement, ‘[w]henever the term of
protection of a work, other than a photographic work or a work of applied art, is calculated on
a basis other than the life of a natural person, such term shall be no less than 50 years from
the end of the calendar year of authorized publication, or, failing such authorized publication
within 50 years from the making of the work, 50 years from the end of the calendar year of
making’. The digital revolution has had a profound impact on copyright, as there are

63
Regulation No 1257/2012 of the European Parliament and of the European Council implementing enhanced
cooperation in the area of the creation of unitary patent protection [2012] OJ L 361/1.
64
Agreement on a Unified Patent Court and Statute, document 16351/12, of 11.01.2013, available at
documents.epo.org/projects/babylon/eponet.nsf/0/A1080B83447CB9DDC1257B36005AAAB8/$File/upc_agree
ment_en.pdf
65
This was harmonized by Directive 96/9/EC of the European Parliament and of the Council of 11 March 1996
on the legal protection of databases, [1996] OJ L 77/20.
66
Council Directive 87/54/EEC of 16 December 1986 on the legal protection of topographies of semiconductor
products [1987] OJ L 24/36.
67
This was harmonized by Council Regulation (EC) No 2100/94 of 27 July 1994 on Community plant variety
rights [1994] L 227/1 which constitutes the basic regulation in this area.
68
Regulation (EC) no 469/2009 of the European Parliament and of the Council of 6 May 2009 concerning the
supplementary protection certificate for medicinal products [2009] OJ L 152/1; Regulation (EC) No 1610/96 of
the European Parliament and of the Council of 23 July 1996 concerning the creation of a supplementary
protection certificate for plant protection products [1996] OJ L 198/30.

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Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

estimates that the scale of illegal digital downloads in the UK ranges between 13 per cent and
65 per cent. The EU has also extensively regulated this right.69
Trademarks distinguish the products of one company from another and can be made
up of one or more distinctive words, letters, numbers, drawing or pictures, emblems, or other
graphic representations. The registration of trademarks offers an unlimited protection, as they
can be maintained indefinitively subject to renewal every 10 years. Their main purpose is to
convey information about the character and reputation of the good or service to which they
are attached/communicate the personality of the brand. The EU has also proceeded to some
degree of harmonization of this right.70
Industrial designs cover specific appearances of products.71 Registered designs can be
maintained up to 25 years subject to the payment of a renewal fee every five years.
Unregistered designs are automatic and only protect three dimensional aspects of a design,
excluding surface ornamentation. They last for up to 15 year. The emergence of fabrication
through 3D printing raises important technological challenges for these IP rights.
Geographical indications distinguish local products from generic or other
variants/identification of specific processes with one area, even though other manufacturers
and producers also use these processes.72
Trade secrets do not constitute IP rights but provide protection for undisclosed
information.73 One may question the need for trade secrets to be dealt by competition law
with the same deference as other forms of intellectual property rights.74 Indeed, in contrast to
patents, which through disclosure enable the cumulative innovation effort, trade secrets
appear ‘to encourage an excessively proprietary approach and the creation of barriers
resulting in market inefficiency’, although it is also recognized that ‘effective legal protection
encourages efficiency and circulation of innovative information’.75 In its Microsoft decision,

69
The EU's regulatory framework for copyright and neighbouring rights (acquis) is a set of ten directives,
addressed to the EU Member States, the most important of which, for our purposes, are Directive 2009/24/EC of
the European Parliament and of the Council of 23 April 2009 on the legal protection of computer programs
[2009] OJ L 111/16; Directive 2014/26/EU of the European Parliament and of the Council of 26 February 2014
on collective management of copyright and related rights and multi-territorial licensing of rights in musical
works for online use in the internal market [2014] OJ L 84/72.
70
Council Regulation (EC) No 207/2009 of 26 February 2009 on the European Union trade mark amended by
Regulation (EU) 2015/2424 of the European Parliament and of the Council [2015] OJ L 341/21.
71
Directive 98/71/EC of the European Parliament and of the Council of 13 October 1998 on the legal protection
of designs, [1998] OJ L 289/28 proceeding to some form of harmonization. A unitary design right was
established by Regulation No 6/2002 on Community design [2002] OJ L 3/1.
72
See, for instance, Regulation (EU) No. 1151/2012 on quality schemes for agricultural products and foodstuffs
[2012] OJ L 343/1.
73
Trade secret protection has been based on a number of different legal tools in various member States: contract
law, unfair competition, laws of confidentiality. The EU harmonization process has also touched this area. See,
the recently adopted Directive of the European Parliament and of the Council on the protection of undisclosed
know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure (May
2016) available at eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CONSIL:PE_76_2015_INIT&from=EN.
74
For a contrary position, see KA Czapracka, ‘Antitrust and Trade Secrets: The U.S. and the EU Approach’
[2012] 24 Santa Clara High technology Law Journal 207.
75
See, Study on Trade Secrets and Confidential Business Information in the Internal Market (April 2013),
available at ec.europa.eu/internal_market/iprenforcement/docs/trade-secrets/130711_final-study_en.pdf. The
economic case put forward by the study is relatively weak. The study merely explains that firms think that trade
secrets are valuable to protect their innovations (and protect their competitive advantage) and that ‘the measures
required to firms to prevent disclosure of trade secrets, such as sophisticated IT controls, investments in physical
security, management of employee contract arrangements, etc., are undoubtedly costly and distract management
from the day-to-day operation of the business’. The study continues by noting that ‘trade secret protection

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the European Commission indicated that the standard of intervention in cases involving trade
secrets is lower and less favourable as compared to cases involving IP rights, in terms of any
presumption of legitimacy of a refusal to supply. On appeal in the same case, the General
Court noted that ‘the plea (of refusal to provide interoperability) must proceed on the
presumption that the protocols in question, or the specifications of those protocols, are
covered by intellectual property rights or constitute trade secrets and that those secrets must
be treated as equivalent to intellectual property rights’.76 This seems to settle the issue of the
equivalence of the level of protection from which benefit trade secrets, although it was also
noted that ‘such statement originated from the peculiarities of the Microsoft case and does not
exclude that in future cases of refusal to supply trade secrets, a different test is applied’.77
The following sections will explore the interaction of intellectual property rights
(including trade secrets) with competition law, with the aim to promote the innovation
process. The expectation is that robust competition would function as an ‘engine’, driving
industry to adapt the advances, find applications, create new businesses and jobs, enhance
productivity, and improve social welfare.78 Intellectual property and competition (antitrust)
laws would facilitate the process. Intellectual property rights would protect inventors and
investors who sunk effort and funds into development from free riders—those who would
otherwise copy the advance and low cost, and undercut the price charged by the original
inventor. (There are other justifications for intellectual property rights, but IP law has largely
been based on this utilitarian approach). Competition law would supplement intellectual
property protection and would also counterbalance it by safeguarding the public from right
holders who might otherwise prevent follow-on innovation or otherwise impose excessive
costs. This new role supposes that competition law does not only focus on static allocative
efficiency, that is the part of the trade-off involving the cost of deadweight loss from higher
prices during the life of the patent or of the IP protection, but also on dynamic efficiency
(innovation).

13.2. Competition law and Intellectual Property Rights: tensions and compromises79

13.2.1. Intellectual property rights and the focus of competition law on allocative efficiency

policies that help to reduce the resources expended by firms on such controls assist firms in maximising the
returns to innovation investments’ and thus ‘trade secret protection plays an important role in innovative
efficiency and encouraging the disclosure and dissemination of inventions beyond levels that would not be
overcome were this protection not available’. The study conflates the private costs of trade secret protection
with social costs, without taking into account the significant social costs of trade secrets, relatively to patents for
instance, in view of the lack of disclosure and the entrenchment of a competitive advantage for a significant
period of time (see for instance the formula of Coca Cola protected by trade secrets), without any possibility as
for patents of the introduction of competition (eg in pharmaceutical patents, for instance, generic entry may
reduce significantly the price of drugs).
76
Case T-201/04 Microsoft v Commission [2007] ECR II-3601, para 289.
77
Study on Trade Secrets and Confidential Business Information in the Internal Market (April 2013), supra n
75.
78
J Schumpeter, The Theory of Economic Development (London, Transaction Pub. 2005, first published by
Harvard University Press in 1934) and Capitalism, Socialism and Democracy (1942, published by Harper &
Bros. in 1950).
79
For a more detailed analysis, see I Lianos ‘Competition Law and Intellectual Property Rights: Is the Property
Rights' Approach Right?’ in J Bell and C Kilpatrick (eds) 8 The Cambridge Yearbook of European Legal
Studies (Hart Publishing 2006) 153.

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Ioannis Lianos © Pre-published version of Chapter 13 in I. Lianos & V. Korah with P.
Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

The history of IP rights highlights the fact that their conception as a form of ‘property
right’ is a recent evolution.80 One could mention the example of patents, which were initially
considered as monopoly privileges granted by the sovereign to supporters and favourites as a
reward for their loyalty.81 The excesses of these unjustified grants of privilege led to an
increasing unrest of the courts and the legislature, which sought to create boundaries for these
exercises of ‘royal prerogative’.
In the case Darcy v Allein, decided in 1602,82 the Kings Bench applying the restraints
of trade doctrine, considered that the grant of an exclusive privilege damages everyone who
wants to use the product because the monopolist will raise the price and reduce the quality of
the goods and ‘deprive other workmen of a living’.83 However, the court rendered an
exception from the prohibition limited-term patents. This rule was codified by the Statute of
Monopolies in 1623, which declared void all monopolies but explicitly excepted from the
prohibition, patents granted to the first inventor or inventors of new manufactures, if these
were not ‘contrary to the law, nor mischievous to the state, by raising prices of commodities
at home, or hurt of trade, or generally inconvenient’.
The collision between the restraints of trade doctrine (being for these purposes an
early antecedent of competition law) and what could be considered as the initial steps of
patent law has been resolved in recognising the limited circumstances in which patent
monopoly grants could be upheld. It is interesting to note that the word ‘property’ was not
used and that intellectual property rights were referred to as ‘privileges’. Patents were also to
be considered void any time they raised the price of commodities ‘at home’. Their creation
was purely motivated by mercantilist reasons (enhance technological progress and export
trade) and their negative effects on prices strictly limited to foreign trade and consumers.
The use of the term ‘property’ came later when it became clear that there should be
some kind of natural rights justification for maintaining this kind of monopoly privilege in
the period of laissez-faire that followed the mercantilist era. The evolution of the ‘monopoly’
concept has nevertheless limited the risks of conflict between competition law and
intellectual property. As a result if has enfeebled the rationale of the ‘property rights’
rhetoric.
The use of the term ‘property’ does not necessarily confer an absolute antitrust
immunity.84 One of the attributes of property rights is exclusivity. Exclusivity means that the
owner of the property has the right to exclude others from exercising their rights of use
without permission. The right to exclude was also the cornerstone of the legal conception of
‘monopoly’, before the consolidation of the more economic concept of market power. Indeed,
during the most active period of antitrust enforcement that started in United States in the
1930s and also even prior to that, the legal definition of what constituted ‘monopoly’ was still
predominant and diverged from the definition of this term by economists.85 This period also
marks the ascendancy of the competition logic after a period of peaceful co-existence
between intellectual property rights and antitrust.

80
B Bouckaert, ‘What is Property?’ [1990] 13 Harvard Journal of Law and Public Policy 775.
81
C May and SK Sell, Intellectual Property Rights – A Critical History (Lynne Reiner 2006).
82
Darcy v Allen (The Case of Monopolies) (1602), Moore (K.B.) 671; 77 Eng. Rep. 1260.
83
MJ Trebilcock, The Common Law of Restraint of Trade (Sweet & Maxwell 1986).
84
RJ Peritz, ‘The “Rule of Reason” in Antitrust Law: Property Logic in Restraint of Competition’ (1989) 40
Hastings Law Journal 285, 336.
85
ES Mason, ‘Monopoly in Law and Economics’ [1937] 47 Yale Law Journal 34.

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Ioannis Lianos © Pre-published version of Chapter 13 in I. Lianos & V. Korah with P.
Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

If monopoly is considered as a synonym for exclusive right, then by definition the

owner of a patent is a monopolist. But if the meaning of monopoly is the condition that
generates social loss, in economics this condition is only present ‘when the demand curve has
a negative slope in the region at which output is occurring’.86 This is not always the case for
intellectual property rights, as there may be substitute products or technologies, which are not
covered by the property rights and could be used instead by the consumers.87 The owners of
the intellectual property rights are therefore limited in their capacity to charge a monopoly
price as they should also take into account the competitive pressures exercised by competing
products or technologies.
One could also compare the situation with a monopolistic competition equilibrium
following some product differentiation. Consequently, terminology can be seen to have an
important significance.88 In this context, the use of the concept of economic rents is a more
suitable terminology than the concept of ‘monopoly’ because it highlights the fact that the
patent holder benefits from a cost advantage that allows him to make more profits than his
rivals but the patent does not necessarily confer him the possibility to restrict output and
therefore exercise monopoly power.89
The presumption that an intellectual property right may confer monopoly power has
been weakened and ultimately abandoned in EU competition law.90 Although there is no
presumption that IP rights confer market power, they may however reinforce in EU
competition law the inference of a dominant position if the undertaking also enjoys a high
market share.91
It is also clear that the property rights character of IP rights should not provide
competition law immunity. Indeed, being a form of property, IP rights benefit from a high
level of esteem and legal protection, which is of constitutional value. They are generally
protected by the Constitutions of the European Union Member States and by the first
additional Protocol of the European Convention of Human rights (ECHR), which is also
integrated in European Union law. The rhetoric of ‘property rights’ therefore plays an
important role in legitimating IP rights and in defining a framework for the interface between
intellectual property and competition, which is largely biased in favour of IP rights.
There are an increasing number of references, in competition law discourse, to the
need to establish an analogy between physical property rights and intellectual property. The
European Commission mentioned in its Microsoft decision that IP rights are ‘not in a
different category to property rights as such’. In addition, article 17 of the Charter of
Fundamental Rights of the European Union, which has since the Lisbon Treaty legal-binding

86
EW Kitch, ‘Patents: Monopolies or Property Rights?’ (1986) 8 Research in Law and Economics 31, 33.
87
RE Meiners and RJ Staaf, ‘Patents, Copyrights, and Trademarks: Property or Monopoly?’ [1990] 13 Harvard
Journal of Law and Public Policy 911; EW Kitch, ‘Elementary and Persistent Errors in the Economic Analysis
of Intellectual Property’ (2000) 53 Vanderbilt Law Review 1727, 1734.
88
H Greene, ‘Afterword: The Role of the Competition Community in the Patent Law Discourse’ (2002) 69
Antitrust Law Journal 841, 844.
89
K. W Dam, ‘The Economic Underpinnings of Patent Law’ (1994) 23 Journal of Legal Studies 247, 250-251.
The ability to raise prices profitably and restrict output is also a prerequisite for finding an ‘exclusionary market
power’ in situations of raising rivals’ costs strategies.
90
Case C-78/70 Deutsche Grammophon Gesellschaft mbH v Metro-SB-Grossmarketete GmbH & Co. [1971]
ECR 487, para 16. ; Joined Cases C-241/91 and C-242/91 Radio Telefis Eireann v Commission (Magill) [1995]
ECR I-743, para 46.
91
See, Case C-85/76 Hoffmann-La-Roche v Commission [1979] ECR 461, para 42D & 48; Case T-51/89 Tetra
Pak Rausing S.A. v Commission [1990] ECR II-309, para 23.

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Ioannis Lianos © Pre-published version of Chapter 13 in I. Lianos & V. Korah with P.
Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

effect, proclaims the right to property, which is based on Article 1 of the Protocol to the
ECHR.92 The guarantee laid down in subsection 1 of article 17 applies also to IP, mentioned
in subsection 2, which emphasizes the analogy drawn between property rights in goods and
property rights in ideas. One could remark that the term ‘rights’ is not used for intellectual
property, while this is the case for property. However, nothing is mentioned in the second
paragraph concerning the possible public interest limits to the scope of intellectual property
protection.
It remains however clear that property does not constitute an absolute right. European
Union law emphasises the ‘social function’ of property, according to which, property rights
can be restricted for reasons of public interest, provided that those restrictions in fact ‘do not
constitute, as regards the aim pursued, a disproportionate and intolerable interference which
infringes upon the very substance of the rights thus guaranteed’.93 Competition law
constitutes a ‘general interest’ objective that could justify a restriction on the scope of
property rights.94 The terminology of ‘property rights’ does not create an antitrust immunity
for IP rights, as their use can be restricted any time they contribute to an infringement of
competition law and act against the public interest.
The parallel drawn with physical property is consequently not helpful in determining
the adequate balance between reward and dissemination. The analogy with property rights on
tangibles is also misleading.95 First, IP rights have distinct characteristics not present in
physical property rights. Information may be considered as a pure public good as the
‘consumption’ of information by one person does not diminish the possibility of its
consumption by another. Simultaneous (or joint) consumption is also possible. The necessity
to confer property rights in order to avoid congestion externalities, which is the usual
rationale for physical property rights, is not therefore compelling.96 The overuse of the
information by free riders may nevertheless decrease the value of the resource for the
inventors who will find it more difficult to recoup their fixed costs. As a result, their
incentives to innovate will diminish and the level of provision of this good would be below
the socially efficient level.97 Granting a property right on information requires a trade-off
between the need to encourage innovation and the adequate dissemination of the
innovation.98 This is an important difference with physical property rights and highlights the
inherent instrumental character of intellectual property. Second, the intervention of the public
authorities is also more systematic and intensive for IP rights than for tangible property

92
According to article 17 of the Charter, ‘1. Everyone has the right to own, use, dispose of and bequeath his or
her lawfully acquired possessions. No one may be deprived of his or her possessions, except in the public
interest and in the cases and under the conditions provided for by law, subject to fair compensation being paid in
good time for their loss. The use of property may be regulated by law insofar as is necessary for the general
interest. 2. Intellectual property shall be protected’.
93
Case C-265/87 Herman Schräder HS Kraftfutter GmbH v Hauptzollamt Gronau [1989] ECR 2237, para 15.
94
FAG-Flughafen Frankfurt/Main AG, 98/190, OJ [1998] L 72/30, para 90. This is also a conclusion reached by
the Advocate general George Cosmas in Case C-344/98 Masterfoods Ltd. v HB Ice Cream Ltd. [2000] ECR I-
11369.
95
See, I Lianos, ‘Competition Law and Intellectual Property Rights: Is the Property Rights' Approach Right?’ in
J Bell and C Kilpatrick (eds) 8 The Cambridge Yearbook of European Legal Studies (Hart Publishing 2006)
153.
96
MA Lemley, ‘Property, Intellectual Property and Free Riding’ [2005] 83 Texas Law Review 1031.
97
PM Romer, ‘When Should We Use Intellectual Property Rights?’ [2002] 92 American Economic Review 213–
216.
98
Nordhaus, supra n 78.

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Ioannis Lianos © Pre-published version of Chapter 13 in I. Lianos & V. Korah with P.
Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

rights.99 For example, the examination of the conditions of patentability is done by a

specialised regulator, the Patent Office. This highlights the most important difference
between intellectual property rights and property rights on tangibles: the intervention of an
independent regulatory agency. By considering that certain intellectual property rights such
as patents are not common law rights but simple creations of an administrative process, it is
possible to argue that they should not benefit from the thesis of the efficiency of common law
and that they can be the outcome of a regulatory capture.100

13.2.2. Competition law and the more “dynamic” approach: reconciliation with IP?

Critics of competition law’s intervention with IP rights often note its static focus on
competitive outcomes in terms of competitive market structure, or, for more effects-based
competition law regimes, on better economic performance (measured in terms of lower
prices, better quality, and wider choice). The competition/static allocative efficiency bias of
the economic balancing test has led many authors to suggest a re-orientation of competition
law towards a more dynamic approach that would incorporate innovation as an objective of
competition law.101 The concept of ‘dynamic competition’ regroups a number of theories that
might be distinguished from the ‘static competition model’.102 A common characteristic of
these different theories of ‘dynamic competition’ is that they all focus on innovation as a key
component of the competitive process.103
The concept of ‘dynamic competition’ has been given different definitions. Some
have emphasized the time dimension of the concept arguing that ‘[d]ynamic competition
models entail the prediction of future competitive outcomes’.104 Others, have observed that
99
W Landes and R Posner, The Economic Structure of Intellectual Property Law (Harvard University Press
2003) 415; Bouckaert, supra n 77, 805 (noting that IP rights ‘are exogenous to the inner logic of private law’
and ‘the only difference (with government regulation) is that the users of the ideas compensate producers
directly without the intermediation of the government’).
100
H Hovenkamp The Antitrust Enterprise – Principle and Execution (Harvard University Press 2008), 250–251
(giving examples of interest-group capture of IP protection).
101
See, MA Carrier, Innovation for the 21st Century: Harnessing the Power of Intellectual Property and
Antitrust Law (Oxford University Press 2011).
102
See, for this opposition, A Tepperman and M Sanderson ‘Innovation and Dynamic Efficiencies in Merger
Review’ (Canada, Competition Bureau 2007), available at www.competitionbureau.gc.ca/eic/site/cb-
bc.nsf/vwapj/cra-final-report-on-efficiencies-2007-04-09-e.pdf/$FILE/cra-final-report-on-efficiencies-2007-04-
09-e.pdf, p 5, ‘Competition based on the successive introduction of new or better products over time is called
dynamic competition. Dynamic competition based on investment in R&D may be thought of as a form of
“competition for the market” in contrast to price competition which is “competition in the market.” This
characterization is overly simplistic, however. There are certainly many situations in which both forms of
competition operate—firms may compete for customers’ business by reducing price and improving quality for
existing goods, and by pursuing innovation in an effort to introduce new goods to market. Nonetheless, this way
of dichotomizing competitive rivalry serves to emphasize an important contrast. Static views of competition take
the existing set of products and market participants as given, describing the outcome of competitive behaviour
among those market participants using strategic instruments such as pricing or advertising that can be applied
and varied in the “short term”. Dynamic competition involves the creation of new products and potentially also
new markets, along with the replacement or obsolescence of older products. It also implicitly or explicitly
involves entry and exit by firms—there is no guarantee that today’s successful firms will be able to offer the
product attributes demanded by tomorrow’s consumers’.
103
J Ellig and D Lin, ‘A Taxonomy of Dynamic Competition Theories’ in J Ellig (ed), Dynamic Competition
and Public Policy – Technology, Innovation and Antitrust Issues (Cambridge University Press 2011) 16–44
outline the principal strands of dynamic competition law scholarship.
104
DH Ginsburg and JD Wright, ‘Dynamic Analysis and the Limits of Antitrust Institutions’ [2012] 78 Antitrust
Law Journal 1.

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Ioannis Lianos © Pre-published version of Chapter 13 in I. Lianos & V. Korah with P.
Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

‘dynamic is a shorthand for a variety of rigorously competitive activities such as significant

product differentiation and rapid response to change, whether from innovation or simply new
market opportunities ensuing from changes in “taste” or other forces of disequilibrium’,105
taking leave from the concept of equilibrium, at least in a non-stochastic form. As it was
often repeated, dynamic analysis ‘views competition through a broader lens and focuses less
on outcomes and more on process’.106 This view might require a complete revamp of the way
competition law addresses innovation.
Several authors have explored the implications of such dynamic analysis in
competition law. Richard Gilbert and Steven Sunshine have argued for the explicit
integration of dynamic efficiency concerns in merger control, through the concept of
‘innovation markets’.107 David Evans and Richard Schmalensee have noted that ‘firms
engage in dynamic competition for the market, through sequential winner-take-all races to
produce drastic innovations, rather than through static price/output competition in the
market’.108 They argued for a competition law analysis in ‘dynamic industries’ that would
require explicit consideration of ‘dynamic competition’, thus making a distinction between
competition law applying to the ‘new economy’ or ‘high technology’ and the ‘old economy’.
Christopher Pleatsikas and David Teece have criticized the static analytical frameworks
applied in defining markets and measuring market power without due noting that the basis for
competition in many high technology industries is fundamentally different from that in more
mature and stable industries, as there is a much greater emphasis on performance-based,
rather than price-based, competition and hence a more ‘dynamic analysis’ is required.109 Greg
Sidak and David Teece have argued for a ‘neo-Schumpeterian framework for antitrust
analysis that favors dynamic competition over static competition [that] would put less weight
on market share and concentration in the assessment of market power’.110
Michael Katz and Howard Shelanski observed the multiplier effect that innovation
may have on efficiency gains. They suggested the consideration of dynamic efficiencies, even
if these are not certain, thus breaking with the conventional hostility of competition law to
efficiency gains that are not certain, by advancing an expected value approach that would
account both the magnitudes and probabilities of potential, merger-related efficiencies.111
Competition authorities and courts should use a decision-theoretic approach under conditions
of uncertainty, which would select the course of action that yields the highest expected
payoff, ‘where the expected value of taking an action is equal to the payoffs associated with
the different possible outcomes that can follow from that action weighted by the probabilities
105
DJ Teece, ‘Favoring Dynamic over Static Competition: Implications for Antitrust Analysis and Policy’ in
GA Manne and JD Wright, Competition Policy and Patent law under Uncertainty (Cambridge University Press
2011) 203, 211.
106
Ibid., 217.
107
RJ Gilbert and SC Sunshine, ‘Incorporating Dynamic Efficiency Concerns in Merger Analysis: The Use of
Innovation Markets’ [1995] 63 Antitrust Law Journal 569.
108
DS Evans and R Schmalensee, ‘Some Economic Aspects of Antitrust Analysis in Dynamically Competitive
Industries’ in AB Jaffe, J Lerner and S Stern (eds), Innovation Policy and the Economy, Vol. 2, (MIT Press
2002). On the distinction between competition for the market and competition in the market, see PA Geroski,
‘Competition in Markets and Competition for Markets’ [2003] 3 Journal of Industry, Competition and Trade
151.
109
C Pleatsikas and D Teece, ‘The analysis of market definition and market power in the context of rapid
innovation’ [2001] 19 International Journal of Industrial Organization 665.
110
GJ Sidak and DJ Teece, ‘Dynamic Competition in Antitrust Law’ [2009] 5 Journal of Competition Law &
Economics 581.
111
HA Shelanski and ML Katz, ‘Mergers and Innovation’ [2007] 74 Antitrust Law Journal 1.

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Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

that those outcomes will occur if the action is taken’.112 Such an approach would require the
decision-makers to base their judgment on broader evidence about how competition is
evolving in the specific industry. Jonathan Baker has also suggested an industry-specific
approach in competition law enforcement by arguing that competition law authorities should
target enforcement to appropriate industries: ‘winner-take-all markets’ or markets where
future product competition remains unaffected by current product market competition, as a
result of pending technological change, growing demand or regulatory intervention.113
Other authors have challenged the view that competition law analysis is static and
does not accommodate dynamic competition concerns. Carl Shapiro criticized the view that
innovation and dynamic competition concerns should lead competition law to be extremely
cautious of imposing limits on the conduct of dominant firms or prohibiting mergers in
dynamic industries, noting that today’s market leaders may be able to maintain or extend
their dominance while slowing the pace of innovation and arguing that competition doctrine
does not actually focus on static analysis.114 More recently, Gans argued that static analyses
are not misleading and can be a good proxy for dynamic effects, with the exception of cases
where the predominant mode of commercialization by innovative entrants is via cooperation
rather than competition with incumbent firms, in which case both static and dynamic analyses
should be combined.115
Joshua Wright has expressed doubts as to the state of current theoretical apparatus and
empirical evidence in competition law to conduct the complex trade-offs required by dynamic
competition law analysis.116 Drawing on previous work by Harold Demsetz,117 Wright
highlights the complexity of the task of weighing effects on the several dimensions of
competition that might be affected by a specific conduct. In some cases one dimension of
competition (eg price) is negatively correlated to another (e.g. new products, innovation or
quality) and this negative correlation means that a policy selecting the optimal mix of
competitive forms requires knowledge of the ‘technical rates of substitution between these
forms in order to covert different forms into common units of consumer welfare’.118
However, as Wright notes, competition law analysis ‘does not provide an analytically
coherent method to equalize measures of intensity, efficiency or consumer welfare’.119
Wright argues against presumptions of anticompetitive effect in this context and an overall
guiding principle of deference to the competitive process, in the absence of clear and
convincing evidence of substantial consumer harm.120

112
Ibid.
113
J Baker, ‘Beyond Schumpeter vs. Arrow: How Antitrust Fosters Innovation’ [2007] 74 Antitrust Law Journal
575.
114
C Shapiro, ‘Antitrust, Innovation, and Intellectual Property - Testimony Before the Antitrust Modernization
Commission’ (8 November 2005).
115
JS Gans, ‘When Is Static Analysis a Sufficient Proxy for Dynamic Considerations? Reconsidering Antitrust
and Innovation’ [2011] 11 Innovation Policy and the Economy 55.
116
JD Wright, ‘Antitrust, Multidimensional Competition and Innovation – Do we Have an Antitrust-Relevant
Theory of Competition Now?’ in GA Manne and JD Wright (eds), Competition Policy and Patent law under
Uncertainty (Cambridge University Press 2011) 228–251.
117
H Demsetz, ‘100 Years of Antitrust: Should we Celebrate?’ Brent T. Upson Memorial Lecture, George
Mason University School of Law, Law and Economics Center (1991).
118
JD Wright, ‘Antitrust, Multidimensional Competition and Innovation’, supra n 116, 241.
119
Ibid., 233
120
Ibid., 251.

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It follows from these divergent points of view that there is some disagreement over
the adequate methodologies to be followed for the incorporation of innovation and ‘dynamic
competition’ in competition law analysis. Some would favour an adjustment to the existing
tools, by paying more attention to possible dynamic anticompetitive effects and taking more
into account dynamic efficiency gains, eventually biasing the economic balancing process in
favour of dynamic efficiency considerations. Others would encourage a tailored-made
approach to ‘dynamic competition’ by developing new concepts and tools,121 such as
innovation markets and an innovation-centred competition law.122
It is important here to note that whichever approach with regard to the integration of
‘dynamic competition’ is followed, this will have little implications on the relation between
competition law and IP rights. In other words, this is a different issue than the interaction
between ‘static competition’ and ‘dynamic competition’ in competition law analysis. First,
there should be no assumption that intellectual property rights promote ‘dynamic
competition’, as this depends on the nature of innovative activity in the industry (including
the degree of cumulative innovation) or the strength of IP protection, among other factors. If
that is true, the fact that competition law focuses on ‘static competition’ or ‘dynamic
competition’ is irrelevant, with regard to the interaction between these two areas of law.
Indeed, a static competition law analysis might be the least imperfect option, if it is compared
to the choice of protecting IP rights that would not advance ‘dynamic competition’ but would
restrict ‘static competition’. Protecting ‘static competition’ is better than not protecting any
form of competition. Second, even if one assumes that intellectual property rights promote
‘dynamic efficiency’ or ‘dynamic competition’,123 a rather blunt assumption with regard to
the available evidence so far, it is also unclear how that would affect the interaction between
competition law and intellectual property rights. If competition law pursues both ‘dynamic
competition’ and ‘static competition’, it would be a far superior instrument than intellectual
property law, which would sacrifice ‘static efficiency’ for ‘dynamic efficiency’, unless one
considers that ‘dynamic efficiency’ weighs more than ‘static efficiency’ and that the methods
for incorporating dynamic efficiency in intellectual property law are superior than those
available in competition law analysis.124 However, there is no reason to assume that
intellectual property law has developed a superior ‘technology’ than competition law for
incorporating dynamic efficiency concerns in the analysis.125 It is only if competition law

121
Gilbert and Sunshine, op. cit.; M Glader, Innovation Markets and Competition Analysis: EU Competition
Law and US Antitrust Law (Edward Elgar 2006).
122
MA Carrier, ‘Resolving the Patent-Antitrust Paradox Through Tripartite Innovation’ [2003] 56 Vanderbilt
Law Review 1047.
123
Assuming that innovation is the first order preference of consumers and that dynamic competition is the
process that enables consumers to maximise their utility, the concepts of ‘dynamic efficiency’ and ‘dynamic
competition’ are close to each other and can be used interchangeably.
124
Furthermore, the trade-off between static anticompetitive effects (allocative inefficiency) and dynamic
efficiencies may even be more complicated in a multi-jurisdictional setting. One may envisage a situation in
which a licensing practice affects consumers in jurisdiction A but enables a licensor established in jurisdiction B
to profit from dynamic efficiency gains. In principle, this should not pose a problem, as the consumers of
jurisdiction A would eventually benefit from the outcome of the innovation in the long run. Yet, it is possible
that the product will first be introduced in the market of jurisdiction B, thus benefiting the consumers of this
jurisdiction, without the consumers of jurisdiction A being able to enjoy within a reasonable time frame, for
different reasons, the benefits of the sacrifice of allocative efficiency for the purposes of innovation. This issue
may become a concern, from a political economy perspective, if the core of the innovation activity is
concentrated only in some jurisdictions.
125
Despite the integration of competition concerns in some IP doctrines, these are not applied systematically.

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Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

pursues exclusively ‘static efficiency’ that it would constitute an inferior alternative to

intellectual property law, should it be assumed that intellectual property promotes ‘dynamic
efficiency’. Hence, by bringing ‘dynamic competition’ and innovation to the centre of
competition law, competition law scholars may finish by transforming competition law to a
more effective regulatory instrument than intellectual property in promoting innovation. In
other words, competition law may dispose of a comparative institutional advantage, with
regard to intellectual property law, in relation to the promotion of innovation.
Certainly, dynamic analysis has made inroads into merger analysis 126 and is increasingly
considered as essential also for the competition law assessment of unilateral conduct, at least
theoretically. Practically, however, there are few instances competition law has incorporated
systematically dynamic analysis and the focus on innovation. There are many reasons for
this. First, from an institutional perspective, courts are considered as less able to conduct the
sophisticated analysis required in this context.127 The adjudicative process limits the type of
evidence heard by the court: this should relate directly to the dispute and is brought by the
parties to the dispute. This may not include the effect of the specific practice on consumers in
unrelated relevant markets, future generations of consumers or the general public.
Competition authorities, the dominant enforcement actor in Europe, are better placed than
courts to conduct this type of complex polycentric economic analysis, as they dispose of in
house economic expertise and the power to investigate different sectors of the economy
(through sector inquiries). Second, from a substance perspective, competition authorities do
not dispose of the means, tools and methods to conduct systematic dynamic competition
analysis on a case-by-case basis. Authorities operate in an adjudicatory context with strict
deadlines and a limited timeline for making decisions. In practice dynamic analysis is
occasionally added after the competition authority has completed a static analysis, but it is
not incorporated directly in their economic analysis of the competitive situation at the
outset.128 The use of the tools of dynamic efficiency analysis is not widespread among
competition authorities and the data required for doing a more sophisticated analysis are
unavailable in most cases.
The different presumptions and rules on inferences applying in competition law and IP
law operate as a second best, less costly but of course a more prone to errors, option to an
extended and complex dynamic economic analysis that the current institutional setting and
the tools at its disposal may not be ready to provide systematically. Consequently, both
competition lawyers and intellectual property lawyers should take stock of their own
imperfections in their mutual interaction with each other.

13.2.3. Standards for the interaction between competition law and IP rights

126
See, for instance, US DOJ & FTC Horizontal Merger Guidelines (2010), available at
www.ftc.gov/os/2010/08/100819hmg.pdf, Section 6.
127
GA Manne and JD Wright, ‘Innovation and the Limits of Antitrust’ [2010] 6 Journal of Competition Law &
Economics 153.
128
JA Schumpeter, History of Economic Analysis (Routledge 1986, first published in 1954) 1126, noted the
importance of sequence analysis and observing as to the history of economic thought that ‘however important
those occasional excursions into sequence analysis may have been, they left the main body of economic theory
on the “static” bank of the river; the thing to do is not to supplement static theory by the booty brought back
from these excursions but to replace it by a system of general economic dynamics into which statics would
enter as a special case’.

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13.2.3.1. Formalistic standards for the IP/Competition Law interface

13.2.3.1.1. Standards focusing on the scope or value of the IP right

Standards focusing on the scope of the IP rights have taken different forms. First, the
inherency doctrine, or scope of the patent doctrine, protects the practices inherent to the
exercise of the IP right from the application of competition law.129 For example, ‘an output
restriction imposed on licensees is encompassed by the patent holder’s right to refuse to
license to manufacturers altogether’.130
In Europe, the development of standards for the interaction between competition law
and IP rights is further complicated by the division of competence between the EU and its
Member States with regard to IP law and competition law: Competition law is mainly an EU
competence, if inter-state trade is affected, while the creation of systems of intellectual
property remains the competence of the Member States. Starting with Consten & Grundig on
the granting of a trade mark,131 the EU courts have asserted on numerous occasions that the
‘existence’ of IP rights granted under national law is not affected by the European treaties,
while the ‘exercise’ of the IP rights may fall within the scope of EU competition law. This
distinction is based first, on the drafting of the Treaty which, in the context of the free
movement of goods provisions of the Treaty, grants to Member States the possibility to
justify quantitative restrictions to trade for the protection of intellectual property rights
(Article 36 TFEU), second, on the fact that Article 345 TFEU provides that Member States’
systems of property law should be protected. The distinction between ‘existence’ and
‘exercise’ may be subject to criticism as it is difficult to distinguish between the core of the
IP right, its scope, and its exercise, unless the distinction reflects a decision over a list of
legitimate activities that can fall within the scope of the IP right, similar to the approach
followed in the US with regard to the scope of the IP rights. For example, would the sale of
the IP right fall within the scope of EU competition law or would it be part of the existence of
the right, assuming that this covers as any property right the use and sale of the right?
The European Courts have proceeded to a formalistic approach by defining the scope
of the IP rights as linked to the ‘subject matter’ and the ‘essential function’ of the specific IP
rights. The concept of the ‘specific subject-matter’ made it possible to determine what might
be covered by the legal status of any industrial or intellectual property right without
damaging the EU principles of competition or that of free movement. For instance, in the
field of patents, the ‘specific subject-matter’ consists, in the Court of Justice's view, in ‘the
exclusive right to use an invention with a view to manufacturing industrial products and
putting them into circulation for the first time […] as well as the right to oppose
infringements’.132 The Court also found that ‘the basic function of the trade mark [is] to
guarantee to consumers that the product has the same origin’,133 a definition later expanded to
cover the ability of trademark owners to oppose ‘any possibility of confusion to distinguish
that product from products which have another origin’.134 The Court referred to the purposive
129
VB Venegas, ‘Shifting Towards a Dynamic Efficiency Test?: Evaluating Licensing Agreements under
Antitrust Law’ in S Anderman and A Ezrachi (eds) Intellectual property and Competition Law – New Frontiers
(Oxford University Press 2011) 461–485.
130
Ibid., 466.
131
Joined Cases C-56/64 and 58/64 Consten and Grundig v Commission [1966] ECR 299.
132
Case C-15/74 Centrafarm BV and Adriaan de Peijper v Sterling Drug Inc [1974] ECR 1147.
133
Case C-119/75 Terrapin (Overseas) Ltd. v Terranova Industrie CA Kapferer & Co [1976] ECR 1039.
134
Case C-102/77 Hoffmann-La Roche & Co. AG v Centrafarm [1978] ECR 1139.

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Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

concept of ‘essential function’ in order to expand the specific subject matter beyond the core
rights previously identified. For example, in American Home products, the Court referred to
the ‘essential function’ of trademarks to grant to a trademark owner the right to prohibit a
reseller of its goods from repackaging the products and then applying the trademark to the
new package.135 In Windsurfing, the Court found than an obligation on the licensee only to
sell the patented product in conjunction with a product ‘outside the scope of the patent’ is not
‘indispensable to the exploitation of the patent’.136
The distinction between ‘existence’ and ‘exercise’ has also affected the enforcement
of Article 102 TFEU to IP rights. In CICCRA/Renault and Volvo/Veng, concerning the refusal
by the automobile manufacturers to deliver to independent repairers the spare parts they were
producing, the Court emphasised that ‘the right of the proprietor of a protected design to
prevent third parties from manufacturing and selling or importing, without its consent,
products incorporating the design constitutes the very subject-matter of his exclusive right’,
finding that ‘an obligation imposed upon the proprietor of a protected design to grant to third
parties in return for a reasonable royalty, a licence for the supply of products incorporating
the design would lead to the proprietor thereof being deprived of the substance of his
exclusive right, and that a refusal to grant such a licence cannot in itself constitute an abuse of
a dominant position’.137 The Court noted, however, that the ‘exercise’ of an exclusive right
could be subject to Article 102 TFEU in ‘exceptional circumstances’ if there was ‘certain
abusive conduct’ and provided three examples of situations where Article 102 TFEU could
be applicable: in this case (i) the excessive pricing of the patented products, (ii) the refusal to
supply independent repair shops and (iii) failure to continue production of parts for car
models still in circulation.138 The concepts of ‘subject matter’ and ‘essential function’ of IP
rights have been used in these cases as a shield to competition law enforcement. However, by
opening the door for ‘certain abusive conduct’ to fall under Article 102 TFEU the Court
sapped the practical relevance of the ‘existence’ /‘exercise’ distinction.
In Magill, a case involving the refusal by TV stations grant a copyright license for the
relevant information on their day programmes, thus impeding Magill from launching a
weekly TV guide, the General Court went as far as concluding that the broadcaster conduct
was outside the essential function of the copyright when, ‘in the light of the details of each
individual case, it is apparent that that right is exercised in such ways and circumstances as in
fact to pursue an aim manifestly contrary to the objectives of Article [102 TFEU]’.139
According to the Court, ‘[i]n that event, the copyright is no longer exercised in a manner
which corresponds to its essential function […] which is to protect the moral rights in the
work and ensure a reward for the creative effort, while respecting the aims of, in particular,
Article [102 TFEU]’. Indeed, ‘[i]n that case, the primacy of [EU] law, particularly as regards
principles as fundamental as those of the free movement of goods and freedom of
competition, prevails over any use of a rule of national intellectual property law in a manner
contrary to those principles’.140 Although in its judgment on appeal the Court of Justice has
135
Case C-3/78 Centrafarm v American Home products corporation [1978] ECR 1823.
136
Case C-193/83 Windsurfing International v Commission [1986] ECR 611, para 57.
137
Case C- 53/87 CICCRA v Renault [1988] ECR 6039; Case C-238/87 Volvo v Veng [1988] ECR 6211, para 8.
138
Ibid., para 9.
139
Case T-69/89 RTE v Commission [1991] ECR II-485; Case T-70/89 British Broadcasting Corporation and
BBC Enterprises Ltd v Commission [1991] ECR II-535, para 58 (British Broadcasting case); Case T-76/89 ITP
v Commission [1991] ECR II-575.
140
Ibid., British Broadcasting Case, para 58.

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not discussed this part of the General Court’s judgment and did not deal with the issue of the
‘subject matter’ of the copyright in question, Advocate General Gulmann noted in his
Opinion that ‘the right to refuse licences forms part of the specific subject-matter of
copyright’ and criticized the General Court’s conclusion for incorporating ‘the aim of the
competition rules in the determination of the essential function of copyright’ and thus for not
accepting the competition law immunity of conduct falling within the scope of the ‘essential
function’ of the copyright.141 The Court of Justice preferred instead to refer to the
‘exceptional circumstances’ that conduct involving IP rights might fall under article 102
TFEU.142 The concept of ‘exceptional circumstances’ has been interpreted broadly by the
jurisprudence of the European Courts,143 as well as national courts,144 thus suggesting that the
EU courts have abandoned their previous formalistic approach focusing on the definition of
the scope of the IP right and its core for a more open-ended approach that would involve
some form of case by case analysis.
It is noteworthy that in other occasions the EU Courts went beyond a purely
formalistic distinction between the ‘existence’, the core of the IP right, and its ‘exercise’ and
considered the value of the IP right in envisioning the interaction between competition law
and IP rights. In Erawu-Jacquery v La Hesbignonne, the Court held that a prohibition on the
sale or export of basic seeds was not within Article 101 TFEU since considerable investment
had been made in developing the basic seed.145 According to the Court, ‘a person who has
made considerable efforts to develop varieties of basic seed which may be the subject-matter
of plant breeders' rights must be allowed to protect himself against any improper handling of
those varieties of seed’ and ‘to that end, the breeder must be entitled to restrict propagation to
the growers which he has selected as licensees’.146

13.2.3.1.2. Standards focusing on the intent of the IP holder

A possible alternative standard is to focus on the intent of the monopolist.147 Some US

courts have adopted standards based on intent advancing the view that a monopolist should

141
Opinion of AG Gulman in Joined cases C-241/91 P and C-242/91 P Radio Telefis Eireann (RTE) and
Independent Television Publications Ltd (ITP) v Commission [1995] ECR I-743, paras 38 & 70.
142
Joined Cases C-241/91 P and C-242/91 P, Radio Telefis Eireann (RTE) and Independent Television
Publications Ltd (ITP) v Commission [1995] ECR I-743.
143
See, for instance ibid., Joined cases C-241/91 P and C-242/91 P, paras 10 & 50; Case C-418/01 IMS Health
GmbH & Co OHG v NDC Health GmbH & Co KG [2004] ECR I-5039 (IMS Health case), paras 35, 37 (listing
as constituting exceptional circumstances the refusal to grant license of an input the supply of which was
indispensable for carrying on the business in question, the fact that such refusal prevented the emergence of a
new product for which there was a potential consumer demand, the fact that it was not justified by objective
considerations and was likely to exclude all competition in the secondary market); Microsoft CFI case (n 183),
paras 331 and 647 (noting that prejudice may arise where there is a limitation not only of production or markets,
but also of technical development, thus extending the scope of application of Article 102 TFEU to refusals to
license) (IMS Health case).
144
See, for instance in the UK, Intel Corp. v Via Technologies Inc. [2002] EWCA Civ 1905 (Civil Division –
Court of Appeal), para 48 (noting that exceptional circumstances may extend beyond those contemplated in
Magill and IMS).
145
Case C-27/87 SPRL Louis Erauw-Jacquery v La Hesbignonne SC [1988] ECR 1919. See also, Case C-
258/78 L.C. Nungesser KG and Kurt Eisele v Commission [1982] ECR 2015.
146
Ibid., para 10.
147
MA Carrier, ‘Unravelling the Patent-Antitrust Paradox’ (2002) 150 University of Pennsylvania Law Review
761, 793.

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not ‘rely upon a pretextual business justification to mask anticompetitive conduct’.148 This
might involve some analysis of the subjective intent of the undertaking, by looking to
documents, emails or statements. However, it is unclear at what level of management the
decision-maker should look to find evidence of intent and it is quite common for executives
to use language that suggests intent to exclude a competitor.
An alternative would be to examine objective intent as this is indicated by the
behaviour of the undertaking. In its Preliminary Report of the Sector Inquiry on the
Pharmaceutical Sector, the Commission noted that ‘intention can […] be taken into account
in competition law assessments’,149 although it is clear that the intent of the applicants does
not form part of the assessment of patent claims.150 The Astra Zeneca decision of the
European Commission, confirmed by the General Court, acknowledged the importance of
evidence of anticompetitive intent in demonstrating that a conduct is liable to have
anticompetitive effects.151 The General Court found that while abuse is an objective concept,
‘[…] intention can still be taken into account to support the conclusion that the undertaking
concerned abused a dominant position, even if the abusive conduct actually took place’.152 In
any case, evidence of intent plays a limited role in Article 102 analysis.153

13.2.3.2. Economic balancing tests

Balancing tests weigh the restriction of allocative efficiency or other anticompetitive

effects of the conduct involving IP rights from one side and the possible benefits of these IP
rights in inducing innovation and dynamic efficiency on the other side. Innovation is
considered positively as it enhances competition in the market and provides a variety of
choice to consumers. Contrary to the formalistic analysis conducted under the scope or intent
tests, balancing tests involve some consideration of the economic effects of the IP rights in
the specific market configuration.
One of the most sophisticated balancing tests is Harvard professor Louis Kaplow’s
ratio test, which examines the ratio between ‘the reward the patentee receives when permitted
to use a particular restrictive practice’ and ‘the monopoly loss that results from such
exploitation of the patent’.154 According to Kaplow, ‘patentee reward’ and ‘monopoly loss’
refer, respectively, to the incremental reward and loss resulting from the practice in

148
Image Technical Services, Inc. v Eastman Kodak Co. 125 F.3d 1195 (9th Cir. 1997), 1219.
149
European Commission, Pharmaceutical Sector Inquiry, Final Report, fn 375 and 376.
150
For example, in the context of the DG Comp’s Pharmaceutical sector inquiry, the European Patent Office
argued against a scrutiny of the intent of applicants in applying for patent rights for purposes of competition law.
See, Communication from the Commission, Executive Summary of the Pharmaceutical Sector Inquiry Report,
available at ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/communication_en.pdf, p 7
151
Commission Decision, AstraZeneca, Annex A, para 13.
152
Case T-321/05 AstraZeneca AB v Commission [2010] ECR II-2805, para 334, although on appeal the Court
of Justice did not explicitly confirmed this position: Case C-457/10P AstraZeneca AB v Commission (6
December, 2012).
153
See, for instance, Case C-549/10 Tomra Systems ASA v Commission (April 12, 2012), para 19 (noting that ‘it
is clearly legitimate for the Commission to refer to subjective factors, namely the motives underlying the
business strategy in question’), paras 21 and 22 (observing that ‘the Commission is under no obligation to
establish the existence of such intent on the part of the dominant undertaking in order to render Article [102
TFEU] applicable’ and that ‘[t]he existence of an intention to compete on the merits, even if it were established,
could not prove the absence of abuse’).
154
L Kaplow, ‘The Patent-Antitrust Intersection: A Reappraisal’ (1984) 97 Harvard Law Review 1813, 1816.

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question’.155 The ratio depends on how much the reward is increased or decreased as opposed
to how much the monopoly deadweight loss is increased or decreased by each individual
licensing restriction. This ratio will be compared to an ‘optimal ratio’, which is the ratio for
increasing the patent life by one year, assuming that patent law has made the right balance of
incentives and rewards at the first place.156 If the individual ratio for the specific practice is
lower than the optimal ratio, the practice should be prohibited. If it is higher, then one should
measure whether the licensing practice costs less (in providing the incremental reward) than
the last year of patent life. If the individual ratio is higher, the practice is permitted. Contrary
to other standards, the test provides a balancing on a case-by-case basis of the possible effects
of the exercise of the IP rights on allocative and dynamic efficiency. However, the test is
resource intensive, as it requires ascribing particular numbers for patentee reward and
monopoly loss, a difficult task already for economists not to mention the courts.157 It also
focuses on total welfare and does not grant a specific weigh to the welfare of consumers,
unless we assume that the interest of the consumers long term coincide with that of the
inventor, which might be problematic in jurisdictions in which the protection of the
consumers is the primary objective of competition law. One might also object to the narrow
view of the concept of innovation in this test as it emphasizes the reward for the pioneer
inventor (standalone innovation), without considering the possibility of cumulative
innovation.158 The implicit assumption that the patent system has made the right balance of
incentives and rewards, in order to define the optimal ratio, may also be questioned.
Among the various economic balancing tests that have also been suggested, Ordover
argues that the critical trade-off is ‘between incentives for investment in knowledge creation
and the overall efficiency with which this investment is achieved’.159 For Ordover, both
competition law and intellectual property law contribute to the two stages of competition that
are ‘pertinent to the understanding of dynamic evolution of the economy’: ‘[e]x ante
competition occurs at the R&D stage (production of knowledge); [e]x post competition
occurs at the product (or service) stage’.160 The presentation of the tension between these two
areas as indicating a tension between monopoly and competition is thus incorrect:
‘First of all, inasmuch as patent, copyright and trademark laws and antitrust law are all
concerned with promoting efficient allocation of social resources, there can be no
conflict on this account. In particular, both patent and antitrust law recognize that
without clearly specified property rights the economic system is bound to collapse.
And, second of all, antitrust law itself recognizes monopoly (market power) as a
reward for innovative effort’.161

155
Ibid., 1831–1832.
156
Ibid., 1830.
157
As it has been noted by JA Ordover, ‘Economic Foundations and Considerations in Protecting Industrial and
Intellectual Property’ (1984) 53 Antitrust Law Journal 503, 514 (noting that ‘it is unlikely that the analyst will
have information that is precise enough to determine the movement of the ratio, especially in those close cases
when, as a result of relaxation, both numerator and denominator of the ratio move in the same direction, as when
a new practice increases both the innovator's reward and the monopoly loss’).
158
VB Venegas, ‘Shifting Towards a Dynamic Efficiency Test?: Evaluating Licensing Agreements under
Antitrust Law’ in S Anderman and A Ezrachi (eds) Intellectual property and Competition Law – New Frontiers
(Oxford University Press 2011) 473.
159
JA Ordover, ‘Economic Foundations and Considerations in Protecting Industrial and Intellectual Property’
(1984) 53 Antitrust Law Journal 503, 509.
160
Ibid., 510.
161
Ibid., 511.

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Hence, the conflict arises when the dynamic goals of the patent law clash with the
static allocative goals of competition law, hence the conclusion that ‘the conflict between
these two bodies of law reflects the trade-off between static and dynamic efficiency’.162 The
comparison of static allocative efficiency effects and dynamic efficiency raises the issue of
the discounting of the dynamic efficiency effects, ‘because the benefits from a given R&D
investment flow over time must be made commensurate with the up-front costs of the
investment itself’.163
Ordover conceptualizes the existence of two markets: the upstream market (of ideas,
information and knowledge) and the downstream market (of products and services) arguing
that these two markets are connected temporally but also intertemporally linked ‘in the sense
that economic events (such as the intensity of competition) that occur in the upstream market
have a prospective impact on competition and on allocative efficiency in the downstream
market’.164 He suggests the analysis of the effects of these practices and institutions in the
form of a structured rule of reason that would look to market shares, market concentration
and entry barriers at both levels of this ‘temporal vertical chain’. The analysis is more
complicated than for other vertical agreements in the licensing context as the firm that sells
the license participates both in the upstream (R&D) market as well as in the downstream
(product or services) market, which suggests that the anticompetitive effect is more likely in
the licensing context if the restriction is employed by a firm that operates in both markets. A
practice is deemed efficient ‘if it leads to a lower cost of “producing” the same “quantity” of
knowledge, new information or ideas’.165 Should it be necessary to weigh the pro-competitive
effects in one market to the anti-competitive effects in the other, Ordover suggests giving a
greater weight to expansions of the R&D output than to expansions (or contractions) of
outputs of goods and services. In essence, his approach advances the following components
in the structured rule of reason analysis: ‘(i) [t]he finegrain structure of both the downstream
and upstream markets, (ii) [t]he actual legal interpretations of the patent, copyright and trade-
mark laws: for example, are patents interpreted broadly or narrowly? (iii) [t]he strength of
incentives for the creation of intellectual and industrial property provided by other tools of
social policy that have an impact on knowledge and information creation, (iv) [t]he nature of
the R&D activity itself. For example, are R&D expenditures being devoted to a “patent race”
towards a major breakthrough where there can be (temporarily) only one winner, or are these
expenditures being devoted to minor process or product improvements that allow a number of
winners to coexist as rivals in the marketplace’.166
Other economic balancing tests focus on the IP side of the equation and suggest an
adjustment of the scope and strength of IP rights as a possible solution to the problem.167
The EU Guidelines on Transfer of Technology Agreements (interpreting the TTBER)
seem to be inspired by the principle of an economic balancing test.168 Their starting
standpoint is that there is no inherent conflict between intellectual property rights and EU
competition rules. According to the Commission,
162
Ibid
163
Ibid., 514.
164
Ibid.
165
Ibid., 517.
166
Ibid., 518.
167
Eg L Kaplow, ‘The Patent-Antitrust Intersection: A Reappraisal’ [1984] 97 Harvard Law Review 1813.
168
European Commission, Guidelines on the application of Article 101 of the Treaty on the Functioning of the
European Union to technology transfer agreements, [2014] OJ C 89/3.

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‘[…] both bodies of law share the same basic objective of promoting consumer
welfare and an efficient allocation of resources. Innovation constitutes an essential
and dynamic component of an open and competitive market economy. Intellectual
property rights promote dynamic competition by encouraging undertakings to invest
in developing new or improved products and processes. So does competition by
putting pressure on undertakings to innovate. Therefore, both intellectual property
rights and competition are necessary to promote innovation and ensure a competitive
exploitation thereof’.169
The Guidelines refer to the concept of ‘dynamic competition’,170 but it is important
here to note that although there is no presumption that intellectual property rights and licence
agreements as such give rise to competition concerns, any eventual anticompetitive concerns
will be assessed with an eye on the possible pro-competitive efficiencies, which ‘must be
considered under Article 101(3) and balanced against the negative effects on competition’.171
The EU Guidelines also create a safe harbour for licensing arrangements that do not impose
any hardcore restriction, such as a cartel, a resale price maintenance clause, restrictions on the
exploitation and development of the licencee's own technology. 172 In the current version of
the EU Regulation, the market share threshold to be applied for the purpose of the safe
harbour depends on whether the agreement is concluded between competitors or non-
competitors. In the case of agreements between competitors, which do not include a hardcore
restriction, the market share threshold is 20 % and in the case of agreements between non-
competitors it is 30 %, as in the latter case the activities of the parties are usually
complementary to each other. Outside the safe harbour created by the market share thresholds
individual assessment is required. The fact that market shares exceed the thresholds does not
give rise to any presumption that the agreement is caught by Article 101 TFEU. In order to
promote predictability beyond the application of these thresholds and to confine detailed
analysis to cases that are likely to present real competition concerns, the Commission adds a
second safe harbor, again with the exception of hardcore restrictions, when there are four or
more independently controlled technologies in addition to the technologies controlled by the
parties to the agreement that may be substitutable for the licensed technology at a comparable
cost to the user.173 According to the Guidelines, in assessing whether the technologies are
sufficiently substitutable, the relative commercial strength of the technologies in question
must be taken into account.
In the context of Article 102 TFEU, the European Commission seems to have been
inspired by the balancing approach in its Microsoft decision.174 The specific characteristics of
intellectual property rights were not prima facie taken into account. The Commission
observed that ‘there is no persuasiveness to an approach that would advocate the existence of
an exhaustive checklist of exceptional circumstances and would have the Commission
disregard a limine other circumstances of exceptional character that may deserve to be taken

169
Ibid., para 7.
170
Ibid., paras 7- 8.
171
Ibid., para 9.
172
Commission Regulation (EC) No 772/2004 of 27 April 2004 on the application of Article 81(3) of the Treaty
to categories of technology transfer agreements [2004] OJ L23, art 4.
173
European Commission, Guidelines on the application of Article 101 of the Treaty on the Functioning of the
European Union to technology transfer agreementspara 157.
174
Microsoft/W2000 (Case COMP/C-3/37.792) Commission Decision [2004], available at
http://ec.europa.eu/competition/antitrust/cases/dec_docs/37792/37792_4177_1.pdf.

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into account when assessing a refusal to supply’.175 Microsoft has put forward the same
justification as in the US litigation: the need to protect its own incentives to innovate by
preserving its intellectual property rights.176 The Commission rejected that claim by affirming
that intellectual property rights ‘cannot as such constitute a self-evident objective justification
for Microsoft’s refusal to supply’.177 It followed in that respect the position of the Federal
Circuit in the US Microsoft case.178
The Commission considered that innovation is an objective for both intellectual
property and competition law179 and adopted a balancing test focused on innovation
incentives concluding that
‘[…] a detailed examination of the scope of the disclosure at stake leads to the
conclusion that, on balance, the possible negative impact of an order to supply on
Microsoft’s incentives to innovate is outweighed by its positive impact on the level of
innovation of the whole industry (including Microsoft). As such the need to protect
Microsoft’s incentives to innovate cannot constitute an objective justification that
would offset the exceptional circumstances identified’.180
On examination, the test seems broader than the ‘new product’ rule. First, the
Commission takes into account the incentives of the competitors of the dominant firm to
innovate in the future. This was not an issue considered in Magill and IMS/NDC Health
where the question was about products which, absent the refusal to supply, have been sold or
were to be offered in the market. Second, the Commission included in its analysis the
incentives of Microsoft to innovate. In Magill and IMS/NDCHealth the Court only referred to
the dominant firm’s competitors, which had the intention to enter the secondary market in
order to offer a new product and were excluded by the dominant firm. However, in Microsoft,
the Commission took also into account Microsoft’s incentives to innovate in comparing the
situation where article 102 applies with the alternative situation where Microsoft’s anti-
competitive behaviour remains unfettered.181 According to the Commission,
‘Microsoft’s research and development efforts are […] spurred by the innovative steps
its competitors take in the work group server operating system market. Were such
competitors to disappear, this would diminish Microsoft’s incentives to innovate’.182
Because of the nature of the market, Microsoft’s incentives to innovate were maintained,
while those of its competitors were also preserved.
The analysis of the incentives of a dominant firm or of its rivals in the secondary
market to innovate extends the scope of article 102 TFEU in comparison with the new
product rule. This is based on the assumption that competitive pressure increases the
dominant firm’s incentives to innovate. This is also linked to the belief that a competitive
market is the optimal structure for innovation.
The Commission’s DG Comp Staff Discussion paper on Article 102 TFEU, adopted
in 2005, suggested the adoption of two tests: the ‘new product rule’ and the ‘incentives to

175
Ibid., para 555.
176
Ibid., para 709.
177
Ibid., para 710.
178
U.S. v Microsoft Corp., 253 F.3d 34, 63 (Microsoft’s argument that the exercise of an intellectual property
right cannot give rise to antitrust liability ‘borders on the frivolous’) (US Microsoft Case).
179
Supra n 174, Microsoft Commission Decision, para 712.
180
Ibid., para 783.
181
Ibid., para 725.
182
Ibid., para 725.

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innovate’ test.183 First, in order to constitute an infringement, the refusal to grant a licence
should prevent: ‘the development of the market for which the licence is an indispensable
input, to the detriment of consumers. This may only be the case if the undertaking which
requests the licence does not intend to limit itself essentially to duplicating the goods or
services already offered on this market by the owner of the IPR, but intends to produce new
goods or services not offered by the owner of the right and for which there is a potential
consumer demand’.184 Second, ‘a refusal to licence an IPR protected technology which is
indispensable as a basis for follow-up innovation by competitors may be abusive even if the
licence is not sought to directly incorporate the technology in clearly identifiable new goods
and services. The refusal of licensing an IPR protected technology should not impair
consumers’ ability to benefit from innovation brought about by the dominant undertaking’s
competitors’.185
The implementation of this test in practice would, however, raise important
difficulties. The courts are not generally well equipped to conduct the type of prospective
cost-benefit analysis that would be necessary in order to balance the incentives of the
dominant firm and its rivals to innovate. In that respect, Microsoft was a relatively easy case.
The Commission did not undertake the difficult task to balance incentives to innovate, as it
assumed that the incentives of Microsoft were not hampered by the prohibition of the refusal
to supply interoperability. However, if the dominant firm’s incentives to innovate were
affected by the prohibition of the refusal to licence, it would have been necessary to conduct
a proper cost-benefit analysis, which may prove a difficult task for the judiciary.
In its Microsoft judgment, the General Court rephrased the condition of the ‘new
product rule’ by considering that prejudice to consumers may arise where there is limitation
of technical development.186 The Court did not however balance Microsoft’s incentives to
innovate with those of its competitors, thus focusing on a version of the balancing test that
would compare static allocative inefficiencies to dynamic efficiency benefits. This version of
the test may lead to an extension of the scope of Article 102 TFEU, as it takes into account
only the incentives of the rivals of the dominant firm to innovate without considering those of
the dominant firm.
The Commission followed up with its Guidance on its enforcement priorities with
regard to exclusionary abusive practices by integrating the ‘new product rule’ to the
consideration of consumer harm in the context of Article 102 TFEU in the form of dynamic
effects, advancing that ‘consumer harm may, for instance, arise where the competitors that
the dominant undertaking forecloses are, as a result of the refusal, prevented from bringing
innovative goods or services to market and/or where follow-on innovation is likely to be
stifled’.187 The Commission seems however to subject dynamic efficiency gains to a more
demanding analysis, than anticompetitive dynamic effects: as for all types of objective
justifications, ‘the dominant undertaking will generally be expected to demonstrate, with a

183
DG Competition discussion paper on the application of Article [102] of the Treaty to exclusionary abuses
(hereinafter referred as DG Staff Discussion Paper) December 2005, available at
http://ec.europa.eu/competition/antitrust/art82/discpaper2005.pdf, paras 237–242.
184
Ibid., para 239.
185
Ibid., para 240.
186
Case T-201/04 Microsoft v Commission (2007) ECR II-3601, para 647.
187
Communication from the Commission — Guidance on the Commission's enforcement priorities in applying
Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings [2009] OJ C 45/7, para
87 (Guidance Paper).

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sufficient degree of probability, and on the basis of verifiable evidence, that the following
cumulative conditions are fulfilled: (i) the efficiencies have been, or are likely to be, realised
as a result of the conduct […] (ii) the conduct is indispensable to the realisation of those
efficiencies: there must be no less anti-competitive alternatives to the conduct that are
capable of producing the same efficiencies […], (iii) the likely efficiencies brought about by
the conduct outweigh any likely negative effects on competition and consumer welfare in the
affected markets […] (iv) the conduct does not eliminate effective competition, by removing
all or most existing sources of actual or potential competition’.188 The Commission further
notes that ‘rivalry between undertakings is an essential driver of economic efficiency,
including dynamic efficiencies in the form of innovation’, thus requiring a residual degree of
competition to be maintained in all cases.189 The current approach does not take into account
efficiencies with low probability of being realized or passed on to consumers. A similar
approach is followed in the context of article 101(3) TFEU.190
The risk of the economic balancing approach is that in practice courts and competition
authorities may emphasize more restrictions to allocative efficiency than dynamic efficiency
benefits. The possibility that these economic balancing tests might lead in practice to weigh
more static efficiency as opposed to dynamic effects has led to the view that competition law
should turn to dynamic analysis and embrace the goal of innovation.

13.3. Exhaustion of IP Rights

While patents produce dynamic benefits by encouraging innovation, they also produce
allocative inefficiencies.191 An exclusive right holder seeking to maximize returns will tend to
raise prices over the competitive price and decrease output. This produces a deadweight loss,
in that there are potential consumers who forego purchase at the ‘monopoly’ price even
though they could put the invention to good use (and thus raise social welfare). The patentee
does not make the sale, and thus earns less than the full potential return. The exhaustion
doctrine mitigates the first problem. Once a patentee sells an embodiment of the invention (or
authorizes such a sale), his interest in that embodiment is deemed to be exhausted. The buyer
can resell, creating a secondary market where goods are available at lower cost. Those who
would not pay the original price can purchase in the secondary market and enjoy the benefit
of the invention. The exhaustion doctrine is also said to fulfill purchasers’ expectations in
that it limits restraints on alienation.

188
Ibid., para 30.
189
Ibid.
190
European Commission, Notice - Guidelines on the application of article [101](3) [2004] C 101/97para 51,
noting that ‘[a]ll efficiency claims must […] be substantiated so that the following can be verified: (i) the nature
of the claimed efficiencies, (ii) the link between the agreement and the efficiencies, (iii) the likelihood and
magnitude of each claimed efficiency and (iv) how and when each claimed efficiency would be achieved’.
According to the Commission, the parties should describe and explain in detail what is the nature of the
efficiencies and how and why they constitute an objective economic benefit and substantiate any projections as
to the date from which the efficiencies will become operational so as to have a significant positive impact in the
market. Unsubstantiated efficiency claims are rejected. These requirements also apply in the context of Article
102 TFEU.
191
On the complex economics of parallel trade, see KE Maskus, Private Rights and Public Problems – The
Global Economics of Intellectual property in the 21 st Century (Peterson Institute for International Economics,
2012) 172–188.

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There are, however, numerous issues raised by the exhaustion doctrine. First, exhaustion
does not fully mitigate the first problem. Instead, it can increase the patentee’s loss in that the
secondary market can compete with the primary market for the patentee’s products. This
exerts a downward pressure on price and reduces incentives to innovate. Patentees thus prefer
to deal with deadweight loss by segmenting markets and charging differential prices,
depending on what that market can pay. The exhaustion doctrine interferes with this strategy
because buyers can purchase in the low-cost segment of the market and resell to the high-cost
segment. In particular, patentees use international boundaries for this purpose. As a result,
prices in some countries will be significantly lower than prices in other countries. Patentees
do not believe that their interest in selling where the price is high is ‘exhausted’ by sale where
the price is low.
IP holders (in particular patent holders) also have other interests in the fate of the
embodiments they sell. Some products are dangerous if not refurbished correctly. In these
cases, the patent holder needs to control resale in order to assure quality (and protect itself
from tort liability).
We will examine the principle of exhaustion and then its implementation in Europe, by
primary and secondary law.

13.3.1. The Principle of Exhaustion

The concept of exhaustion generally in relation to IP law is well-established in the laws of

many Member States of the World Trade organization (WTO).192 Whether supplied explicitly
by legislative provisions or established through judicial precedent in all countries that
recognize it, exhaustion is a tool to advance certain public policy goals by limiting the scope
of the exclusive rights granted to IP owners.193 For some countries, exhaustion serves
explicitly to regulate competitive conditions in the interest of consumer welfare. 194 For other
countries and regions, the public policy rationale is to facilitate trade and the free movement
of goods.195 Practically speaking, most countries seem likely to reflect some combination of
these two objectives in the national legal framework within which the goals of the IP system
are administered.196
The doctrine of exhaustion is potentially applicable to all categories of intellectual
property rights (IPRs), although its operation can and does differ across IP subject matter.
Exhaustion determines the point at which an intellectual property right holder’s control over
192
As of June 26, 2014 there are 160 Member States of the WTO. With respect to patents, at least 76 members
of the World Intellectual Property Organization (WIPO), who also are WTO Members, confirmed the existence
of exhaustion in their national patent laws. See Exceptions and Limitations to Patent Rights: Exhaustion of
Patent Rights, Standing Committee on the Law of Patents, Twenty-First Session, November 3-7, 2014, SP/21/7,
at 2. [Hereinafter, WIPO SCP Report 2014].
193
See, eg, I Avgoustis, ‘Parallel Imports and Exhaustion of Trade Mark Rights: Should Steps Be Taken
Towards an International Exhaustion Regime?’ [2012] 34 E.I.P.R. 108 (reporting an estimated $7 to $10 billion
dollars of parallel trade in the U.S. as of 2009, and substantial shares of varying market segments in the E.U.).
194
WIPO SCP Report 2014, supra n 189 (describing various policy objectives for exhaustion as reported by
Member States
195
Ibid. See also, V Korah, Intellectual Property Rights and the EC Competition Rules (Hart Publishing 2006)
6, (stating that Article 30 of the EC Treaty ‘confirms that the authors of the Treaty thought that industrial and
commercial property rights could have an equivalent effect to quantitative restrictions’ on trade between
Member States).
196
Like other limitations and exceptions, the doctrine of exhaustion is a tool to advance the public welfare by
seeking an appropriate balance of interests between owners and consumers.

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protected goods or services expires. The typical point of exhaustion for present purposes is
the first sale, that is, the placing on the market of the IPR-protected good or service.197 The
doctrine then enables the purchaser or transferee to use and dispose of that good or service
without further restriction. 198 Absent an exhaustion doctrine, the original intellectual
property right holder could ‘perpetually exercise control over the sale, transfer or use of a
good or service embodying an IPR’, and thus prolong economic control indefinitely at the
expense of the free transfer of goods and services.199 Put simply, the termination of an IP
owner’s control is a critical aspect of a well-functioning market economy.
It is important to emphasize that exhaustion concerns rights in the physical product that
is purchased or transferred, not the intangible intellectual property rights embodied in that
product. Some authorities conceptualize exhaustion as an ‘implied license’ to use the
purchased product, with the seller’s ability to limit that implied license contractually subject
to competition law.200 The implied license justification for exhaustion, however, appears to
be in tension with the idea that there are inherent limits on the exclusive rights of IP owners
and that exhaustion constitutes just one of those limits. 201 For countries or regions in which
the freedom of competition and freer trade are principal policy objectives animating efforts to
craft an appropriately balanced IP system, the common-law implied license approach is
arguably a less relevant juridical and policy premise for an exhaustion regime.202
Commentators have identified three types of exhaustion regimes: national exhaustion,
regional exhaustion and international exhaustion.203
Under a national exhaustion regime, an IP owner’s exclusive rights are exhausted once
the IP owner or licensee places the product in the ordinary stream of commerce (marketed or
first sold) in the country in which the IP right is protected. Under this regime, the exhaustion
of an owner’s IP rights in one nation does not exhaust those rights in another nation. From a
trade perspective, therefore, national exhaustion impedes the movement of goods and
services more significantly than its counterparts;204 it facilitates the IP owner’s ability to
segment geographic markets and to price differentiate within them, thus allowing ‘consumers

197
See generally I Calboli, ‘Trademark Exhaustion in the European Union: Community-Wide or International?
The Saga Continues’ [2002] 6 Marquette Intell. Prop.Rev. 47 (citing authorities).
198
The circumstances under which an IPR is considered ‘exhausted’ in a country may also differ widely, with
considerations of whether the product was advertised or sold, whether the ‘first sale’ occurred directly by the
owner or indirectly by a licensee, whether it occurred with or without the owner’s consent, and with or without
remuneration. With regard to international exhaustion, an additional consideration is whether putting the product
into circulation, directly or indirectly, was subject to a contractual restriction at the point of sale. See D Gervais,
The TRIPS Agreement: Drafting History and Analysis (Sweet and Maxwell 3rd ed, 2008) 198 (stating that ‘[t]he
question which goods are “legitimate” is not answered in TRIPS’.).
199
UNCTAD-ICTSD Resource Book on TRIPS and Development (2005) 93 (hereinafter, UNCTAD-ICTSD
Resource Book)
200
NP De Carvalho, The TRIPS Regime of Patents and Test Data (Kluwer Law International 4th ed, 2014) 140–
141(citing authorities).
201
C Heath, ‘Exhaustion and Patent Rights’ in RL Okediji and MA Bagley (eds.) Patent Law in Global
Perspective (OUP 2014) 419, 421–422.
202
Ibid. at 423 (identifying the US first sale doctrine as ‘closer to the doctrine of implied license’ and thus
narrower than exhaustion, at least in its historical formulation in Germany). See also I Calboli, ‘Market
Integration and (the Limits of) the First Sale Rule in North American and European Trademark Law’ (2011) 51
Santa Clara L.Rev 1241, 1242–46.
203
See, eg, supra n 199, UNCTAD-ICTSD.
204
See Heath, supra note 201 at 482 (observing that ‘a consistently applied rule of domestic exhaustion would
make a mockery of international trade’); Calboli (2002) supra n 197, 48–49.

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in different countries to be played off against each other’.205 The economic benefits from
such a regime are contested.206
In a regime of regional exhaustion, the IP right in the product is exhausted once the
product is lawfully placed in the ordinary stream of commerce (marketed or first sold)
anywhere in the region. The EU offers the best example of a regional exhaustion regime. 207
Finally, in a regime of international exhaustion, the IP right in the product is exhausted
once the product is lawfully placed in the ordinary stream of commerce (marketed or first
sold) anywhere in the world.208
Under any of these regimes, the IP right, once exhausted, means that anyone may use, re-
sell, rent, and, certainly in the case of international exhaustion, import the goods in question
without the permission of the IP owner. International exhaustion thus facilitates parallel
imports of genuine goods, limiting the possibility of segmenting geographic markets with
price discrimination.

13.3.2. A free circulation right and/or exhaustion as regard sales within the EU

Following the constitution of the ‘common market’, and in the absence of EU-wide
intellectual property rights, it was realised that IP rights in different Member States could
divide what should be a common market. Companies tried to use IP rights to keep old
national markets distinct – maintaining higher prices in some countries than others. Traders
naturally tried to parallel import products from low to high price countries.
The European Court of Justice put an end to this by a series of cases involving
trademarks, patents and copyright. There was no express provision about exhaustion of IP
rights in the Treaty on the European Economic Communities (EEC Treaty), but the Court
interpreted the Rome Treaty to achieve it for goods or services put on the common market.
Art 30 EEC Treaty, as it then was numbered (now Article 34 TFEU), prohibited ‘quantitative
restrictions on importation and all measures with equivalent effect’ on trade between Member
States. An exception to this was permitted by Art 36 EC Treaty (now Article 30 TFEU) in
the case of, inter alia, ‘the protection of industrial or commercial property’. However, the
exception cannot apply if there is an ‘arbitrary discrimination or a disguised restriction on
trade between member States’.
The first issue to be brought in front of the Court was the legality of parallel imports
and the relation between the national IP rights and the material scope of the Treaty of Rome,
in particular its competition law rules. In Consten & Grundig the Court examined the legality
of a European Commission decision that had found that an agreement on the registration and
the exclusive use of a trademark in a Member State concluded between an exclusive
distributor and a supplier that prevented trademarked goods from being imported in parallel
infringed Article 85 EC (now Article 101 TFEU), prohibiting collusion with the object or

205
H Ullrich, ‘Technology Protection According to TRIPS: Principles and Problems’ in F-K Beier and G
Schricker (eds.) From GATT to TRIPS (1996) 357, 385.
206
UNCTAD-ICTSD Resource Book, supra n 199, at 116 (citing sources); Gervais, supra note 198 at 200–201
(noting the debate); Heath, supra note 198 at 474 (summarizing the legal reasons against international
exhaustion); JD Sarnoff, ‘The Patent System and Climate Change’ (2001) 16 Va. J. of Law and Technology 301,
359 (noting costs of international exhaustion); C Stothers Parallel Trade in Europe (OUP 2007) 17–24
(summarizing the policy debate).
207
See, infra Part IV.B discussing the EU regional exhaustion regime.
208
Calboli (2011), supra n 197, at 1245–46.

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effect to restrict competition in the Common Market. The applicants argued that Articles 36
EEC and 222 EEC209 (now Articles 30 and 345 TFEU) excluded industrial property from the
scope of the EU treaty and thus it was not possible to prevent a trademark right to be used
even if this would lead to a situation of absolute territorial protection, thus reinstating through
private means barriers to trade between Member States. The Court rejected this argument,
noting that Article 36 EEC cannot limit the scope of Article 101 TFEU and that Article 222
EEC (now Article 345 TFEU), ‘does not affect the granting of (trademark rights) but only
limits their exercise to the extent necessary to give effect to the prohibition under Article
85(1) of the EEC Treaty [now Article 101(1) TFEU]’.210
Until the early 1970s, competition rules were the main provisions of the Treaty
applied with regard to restrictions to parallel imports. This case law relating to the interaction
between competition law rules and IP rights, the Court of Justice of the EU examined in
subsequent case law the legality of parallel imports of trademarked goods in the light of the
free movement of goods rules of the Treaty. The Court of Justice found that the free
movement rules of the Treaty applied to industrial property rights in the following way:
‘As a result of the provisions of the Treaty relating to the free movement of goods,
and in particular Article 30 [of the EEC Treaty, now Article 34 of the TFEU],
quantitative restrictions on imports and all measures having equivalent effect are
prohibited between Member States. Under Article 36 [of the EEC Treaty, now Article
36 of the TFEU] those provisions nevertheless do not preclude prohibitions or
restrictions on imports justified on grounds of the protection of industrial and
commercial property. However, it is clear from that same Article, in particular its
second sentence, as well as from the context, that whilst the Treaty does not affect the
existence of rights recognized by the laws of a Member State in matters of industrial
and commercial property the exercise of those rights may nevertheless, depending on
the circumstances, be restricted by the prohibitions contained in the Treaty. Inasmuch
as it creates an exemption to one of the fundamental principles of the common
market, Article 36 in fact admits of exceptions to the rules on the free movement of
goods only to the extent to which such exemptions are justified for the purpose of
safeguarding the rights which constitute the specific subject-matter of that
property’.211
In essence, with this case law the Court found that the strict territorial nature of the
exclusive protection of national industrial property rights constitutes a quantitative restriction
to trade, which although incompatible with Article 30 EEC (now Article 34 TFEU) could be
justified under Article 36 EEC (now Article 30 TFEU). In order to assess how the prohibition
of parallel imports of trademarked products could fall within the scope of the prohibition of
209
According to this provision, ‘This Treaty shall in no way prejudice the rules in Member States governing the
system of property ownership’.
210
Joined Cases C-56/64 and 58/64 Consten and Grundig v Commission of the EEC [1966] ECR 299.
211
Case C-192/73 Van Zuylen fre`res v. Hag AG [1974] ECR 731, paras 8 and 9; Case C-15/74 Centrafarm BV
and Adriaan de Peijper v Sterling Drug Inc [1974] ECR 1147, paras 7 and 8; Case C-16/74 Centrafarm BV and
Adriaan de Peijper v Winthrop BV [1974] ECR 1183, paras 6 and 7; Case C-119/75 Terrapin (Overseas) Ltd. v
Terranova Industrie CA Kapferer & Co [1976] ECR 1039, para 5; Case C-102/77 Hoffmann-La Roche & Co.
AG v Centrafarm Vertriebsgesellschaft Pharmazeutischer Erzeugnisse mbH [1978] ECR 1139, para 6; Case C-
3/78 Centrafarm BV v American Home Products Corporation [1978] ECR 1823, paras 7–10; Case C-1/81 Pfizer
Inc. v Eurim-Pharm GmbH [1981] ECR 2913, para 6. For an extensive analysis, see L Grigoriadis, Trademarks
and Free Trade: A Global Analysis (Springer, 2014), chapter 7; C Stothers, Parallel trade in Europe:
intellectual property, Competition and Regulatory Law, (Hart, Oxford 2007) Chapter 2.

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Article 34 TFEU, the Court made use of the following operational doctrines in order to
balance the conflicting interests of protecting industrial property rights but also ensuring
market integration and the constitution of a common market: the existence/exercise of the
right distinction, the doctrine of the specific subject matter of the right and that of the
essential function of the right, the doctrine of common origin of the right, and most
importantly for our purposes the doctrine of the Community exhaustion of the rights.
The Court’s bold rulings were to the following effect:
(1) An IP right was a measure with equivalent effect to a quantitative restriction on
importation;
(2) There is a distinction between the existence of an IP right and its exercise 212, the
exercise being subject to regulation by EU law.
(3) The distinction between existence and exercise of the right being not clear, as one
may expect for tangible property rights for instance, the Court of Justice was forced to
develop operational criteria by turning to the doctrines of the ‘specific subject matter
of the right’ and that of ‘the essential function of the right’, the latter doctrine being
essentially indistinguishable to the first one, or at least an important part of the first
doctrine. The CJEU employed the doctrine of the ‘specific subject matter of the right’
for trade-marks in the 1970s and defined the ‘specific subject matter’ of trade-marks
as following: ‘the specific subject-matter of the industrial property is the guarantee
that the owner of the trade mark has the exclusive right to use that trade mark, for the
purpose of putting products protected by the trade mark into circulation for the first
time, and is therefore intended to protect him against competitors wishing to take
advantage of the status and reputation of the trade mark by selling products illegally
bearing that trade mark’.213 The specific subject matter was interpreted as including
the right to affix the trademark to a good, to put into circulation the good under the
trademark for the first time, to re-affix the trademark to the good, if this was put on
the market without the trade-mark owner’s consent, which relate to the ‘origin
function’ of the trademark, the need to ensure, for the benefit of the trade-mark owner
but also consumers, that the trade-mark provides information on the origin of the good
(and its status or reputation), as well as, to a more limited extent, of the advertising
function of trade-marks, that is the possibility of the trade-mark owner to be protected
against the possibility that the reputation of the trademark is unfairly exploited by a
parallel importer, in particular for luxury products.214
(4) If it is permissible for the owner of an IP right in a Member State to prevent imports
of products embodying his right that had been put on the market in another Third
State, this is not the case for products that had been put on the market in another
Member State of the EEC (now EU) by the owner of the IP right or his consent, as
this would be incompatible with the EEC Treaty. The rationale of this rule may be
that it operates as a limit set in order to avoid the multiple reward of the IP holder and
thus restricts the possibility of the trademark owner to increase the economic value of
the trademark by opposing to the price arbitrage of parallel importers. Yet, it may also
be related more prosaically to the need to ensure the free movement of goods between

212
Case C-78/70 Deutsche Grammophon Gesellschaft mbH v Metro-SBGroßmärkte GmbH & Co. KG [1971]
ECR 487.
213
Case C-16/74 Centrafarm BV and Adriaan de Peijper v Winthrop BV [1974] ECR 1183, para 8.
214
Case C-324/09 L’Oreal SA and Others v eBay International AG and Others [2011] ECR I-6011.

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Member States of the EU and to increase the opportunities of intra-EU trade. As the
Court noted in IHT Internationale Heiztechnik v Ideal-Standard, ‘Articles 30 and 36
[EEC, now Articles 34 and 30 TFEU] debar the application of national laws which
allow recourse to trade-mark rights in order to prevent the free movement of a product
bearing a trade mark whose use is under unitary control’.215
The effect of this case law was summarized in Merck v Stephar,216 re-affirmed in Merck v
Primecrown (which although cases concerning patents provide interesting insights on the
rationale of the rule).217 In the latter the Court held:
‘Articles 30 and 36 of the EC Treaty preclude application of national legislation
which grants the holder of a patent for a pharmaceutical product the right to oppose
importation by a third party of that product from another Member State in
circumstances where the holder first put the product on the market in that State after
its accession to the European Community but before the product could be protected
by a patent in that State, unless the holder of the patent can prove that he is under a
genuine, existing legal obligation to market the product in that Member State’.
This policy decision (which applies equally to other IP rights, including trademarks)
actually goes beyond IP exhaustion. For in both cases the IP owner had sold his goods in
countries (Italy in the first case, Spain in the second) in which he did not have (and by reason
of the laws in force at the time, could not have had) any patent. He had no ‘right’ to exhaust
but nonetheless he could not prevent the circulation of the products into other member states
where he did have patent rights. So within the EU the rule is one of free circulation, hence
broader than just ‘Community’ exhaustion.
In contrast, for products put on the market in a Third State, the prevention of parallel
imports is not considered as constituting a measure having equivalent effect and prohibited
under Article 34 TFEU. In EMI Records v CBS United Kingdom, the Court held that ‘the
exercise of a trade-mark right in order to prevent the marketing of products coming from a
third country under an identical mark, even if this constitutes a measure having an effect
equivalent to a quantitative restriction, does not affect the free movement of goods between
Member States and thus does not come under the prohibitions set out in Article 30 et. seq. of
the Treaty’ as ‘in such circumstances the exercise of a trade-mark right does not in fact
jeopardize the unity of the Common Market which Article 30 et seq. of the Treaty are
intended to ensure’.218 The same principle applies if the products were put on the market of
the Third State without the consent of the trade-mark owner. The possibility for the trade-
mark owner to oppose parallel imports originating in third (non EU) countries distinguishes
the EU exhaustion regime from that of international exhaustion and was re-affirmed
following the implementation of the trademark directive by the CJEU in Silhouette
International Schmied v Hartlauer Handeslsgesellschaft.219

215
Case C-9/93 IHT Internationale Heiztechnik GmbH and Uwe Danzinger v Ideal-Standard GmbH and Wabco
Standard GmbH [1994] ECR I-2789.
216
Case C-187/80 Merck & Co. Inc. v Stephar BV and Petrus Stephanus Exler [1981] ECR 2063
217
Joined Cases C-267/95 and C-268/95 Merck & Co. Inc., Merck Sharp & Dohme Ltd and Merck Sharp &
Dohme International Services BV v Primecrown Ltd, Ketan Himatlal Mehta, Bharat Himatlal Mehta and
Necessity Supplies Ltd and Beecham Group plc v Europharm of Worthing Ltd [1996] ECR I-6285.
218
Case C-51/75 EMI Records Limited v CBS United Kingdom Limited [1976] ECR 811, paras 10-11.
219
Case C-355/96 Silhouette International Schmied GmbH & Co. KG v Hartlauer Handelsgesellschaft mbH
[1998] ECR I-4799.

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One should, however, also keep in mind the possibility for the EU to have concluded
association agreements with some other countries. Most often, these agreements include
provisions equivalent to Articles 34 and 36 TFEU and establish a free trade area. In this case,
the legality of preventing parallel imports originating from the state with which the EU has
signed an association or free trade agreement will depend on the interpretation of the
provisions of that agreement and of its purpose, which might be different from that of the EU
treaties.220 It will also depend on reciprocity. As it was indicated in the Commission’s
Explanatory Memorandum to the Amended Proposal for a Council Regulation on the
Community trade mark,
‘[o]n the question of international exhaustion of the rights conferred by a Community
trade mark, the Commission has formed the opinion that the Community legislator should
refrain from introducing this principle and make do with the rule of Community-wide
exhaustion. The Community must, however, be empowered to conclude, at some future
time with important trading partners, bilateral or multilateral agreements whereby
international exhaustion is introduced by the contracting parties. The restriction to
Community-wide exhaustion, however, does not prevent national courts from extending
this principle in cases of a special nature, in particular where, even in the absence of a
formal agreement, reciprocity is guaranteed’.221
Hence, there remains at least an argument that the EU may allow international exhaustion
where there is a guarantee of reciprocity on exhaustion.222

13.3.3. Specific EU legislation on the principle of exhaustion concerning trademarks and

subsequent case law

After the free circulation rule was established by the Court, a number of EU Directives223
and Regulations224 concerned with IP were passed, namely with regard to trademarks the
Trade Marks Directive in 1989225 and the Community Trade Mark Regulation in 1994.226
Each of these contains a provision headed ‘exhaustion of rights’ as follows:

220
See the position adopted by the CJEU in Case C-270/80 Polydor Limited and RSO Records Inc. v Harlequin
Records Shops Limited and Simons Records Limited [1982] ECR 329, with regard to copyright and the refusal
to extend the application of the Community exhaustion principle to products originating in the Third country in
view of the fact that the agreement in question (with Portugal when this was not a Member of the EU) although
making provision for the abolition of restrictions of trade, did not ‘seek to create a single market reproducing as
closely as possible the conditions of a domestic market’. The implementation of the Trademark Directive and
the fact that this does not provide in its Article 7(1) for parallel imports originating in jurisdictions with which
the EU has concluded association or free trade agreements indicate that trademark owners may prevent parallel
imports in this case. For a similar conclusion, see L Grigoriadis, supra n 211, 185.
221
Commission’s Explanatory Memorandum to the Amended Proposal for a Council Regulation on the
Community trade mark, Com (84) 470 final, 31 July 1984, vi–vii.
222
C-4/98 Calvin Klein v Cowboyland (case withdrawn and never decided).
223
Requirements upon member states to align their respective national laws.
224
Measures which take effect as law throughout the EU without further enactment.
225
First Council Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States
relating to trade marks [1989] OJ L 40/1 repealed by the Directive 2008/95/EC of the European Parliament and
of the Council of 22 October 2008 to approximate the laws of the Member States relating to trade marks [1999]
OJ L 299/25.
226
Council Regulation (EC) No 40/94 of 20 December 1993 on the Community trade mark [1994] OJ L 11/1,
now replaced by Council Regulation (EC) No 207/2009 on the Community trade mark [2009] L 78/1.

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Trade Marks Directive

Article 7 Exhaustion of the rights conferred by a trade mark
1. The trade mark shall not entitle the proprietor to prohibit its use in relation to goods
which have been put on the market in the Community under that trade mark by the
proprietor or with his consent.
2. Paragraph 1 shall not apply where there exist legitimate reasons for the proprietor to
oppose further commercialization of the goods, especially where the condition of the goods
is changed or impaired after they have been put on the market.

Trade Marks Regulation

13. Exhaustion of the rights conferred by a Community trade mark

1. A Community trade mark shall not entitle the proprietor to prohibit its use in relation to
goods which have been put on the market in the Community under that trade mark by the
proprietor or with his consent.
2. Paragraph 1 shall not apply where there exist legitimate reasons for the proprietor to
oppose further commercialisation of the goods, especially where the condition of the goods
is changed or impaired after they have been put on the market.

As it was earlier noted, although these are described as ‘exhaustion’ rules they are
really rules about first marketing within the European Union. And in essence they are
codifications of the pre-existing case law. Note that in the case of trademarks there is a
limited exception – where there are ‘legitimate reasons’ – for instance selling trade-
marked goods as new when they are second-hand or out of date.
Article 7 of the Trade Mark Directive was interpreted by the CJEU as denying any
competence to the Member States to choose the option of international exhaustion. Assessing
an Austrian rule enabling international exhaustion of the trade-mark, the Court held in
Silhouette International Schmied v Hartlauer Handelsgesellschaft that
‘National rules providing for exhaustion of trade-mark rights in respect of products
put on the market outside the EEA under that mark by the proprietor or with its
consent are contrary to Article 7(1) of First Council Directive 89/104/EEC of 21
December 1988 to approximate the laws of the Member States relating to trade marks,
as amended by the Agreement on the European Economic Area of 2 May 1992’.227
In arriving to this conclusion, the CJEU relied on the wording, overall scheme and
purpose of Article 7 (1) of Directive 89/104/EEC (now Article 7 (1) of Directive
2008/95/EC), which was found to provide for a complete harmonization of the rules relating
to the rights conferred by a trade mark. Trademark owners can therefore prohibit parallel
imports of trade-marked goods that have not been put on the market in the EEA by them or
with their consent.228

227
Case C-355/96 Silhouette International Schmied GmbH & Co. KG v Hartlauer Handelsgesellschaft mbH
[1998] ECR I-4799, para 31.
228
See also Case C-173/98 Sebago Inc. and Ancienne Maison Dubois & Fils SA v G-B Unic SA [1999] ECR I-
4103; Joined Cases C-414/99 to 416/99 Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. and
Others v Tesco Stores Ltd and Others [2001] ECR I-8691 confirming this interpretation of Article 7(1) of the
Trade-mark Directive.

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The position for trade-marks is settled. An owner of a registered trade-mark

can rely upon his EU trade-mark rights (whether registered as a national trade mark or
as a Community Trade Mark) to prevent importation into the EU. Only if he has clearly
and unambiguously consented to the importation under challenge will there be a
defence.
The leading case is Davidoff v A & G Imports.229 It is sufficient to quote the
Court’s final ruling:
1. On a proper construction of Article 7(1) of First Council Directive
89/104/EEC of 21 December 1988 to approximate the laws of the Member
States relating to trade marks, as amended by the Agreement on the
European Economic Area of 2 May 1992, the consent of a trade mark
proprietor to the marketing within the European Economic Area of products
bearing that mark which have previously been placed on the market outside
the European Economic Area by that proprietor or with his consent may be
implied, where it follows from facts and circumstances prior to,
simultaneous with or subsequent to the placing of the goods on the market
outside the European Economic Area which, in the view of the national
court, unequivocally demonstrate that the proprietor has renounced his right
to oppose placing of the goods on the market within the European Economic
Area.
2. Implied consent cannot be inferred:
— from the fact that the proprietor of the trade mark has not communicated
to all subsequent purchasers of the goods placed on the market outside the
European Economic Area his opposition to marketing within the European
Economic Area;
— from the fact that the goods carry no warning of a prohibition of their
being placed on the market within the European Economic Area;
— from the fact that the trade mark proprietor has transferred the ownership
of the products bearing the trade mark without imposing any contractual
reservations and that, according to the law governing the contract, the
property right transferred includes, in the absence of such reservations, an
unlimited right of resale or, at the very least, a right to market the goods
subsequently within the European Economic Area.
3. With regard to exhaustion of the trade mark proprietor's exclusive right, it is
not relevant:
— that the importer of goods bearing the trade mark is not aware that the
proprietor objects to their being placed on the market in the European
Economic Area or sold there by traders other than authorised retailers, or
own purchasers contractual reservations setting out such opposition, even
though they have been informed of it by the trade mark proprietor.
The result is what has been called ‘fortress Europe’ for trade-marks. The
application of Article 7(1) of Directive 2008/95/EC and Article 13(1) of Regulation 9EC)
207/2009 stipulating a regime of Community exhaustion requires that the trade mark

229
Joined Cases C-414/99 to C-416/99 Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. and
Others v Tesco Stores Ltd and Others [2001] ECR I-8691.

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proprietor has put on the market in the EU under that trade mark an item of product or has
consented to putting this product on the market. It remains important therefore to determine
what is meant by ‘putting on the market’ and ‘consent’.
In Peak Holding the CJEU noted that the need for a uniform protection of trade-mark
owners across the EU requires the term ‘putting on the market’ to be determined by EU law,
and not by national law.230 This may be of particular importance in the context of an
exhaustion regime integrated in a regional trade agreement, such as that of the Eurasian
Economic Union. The CJEU noted that the Directive is intended in particular to ensure that
the proprietor has the exclusive right to use the trade mark for the purpose of putting the
goods bearing it on the market for the first time and consequently ‘[a] sale which allows the
proprietor to realise the economic value of his trade mark exhausts the exclusive rights
conferred by the Directive, more particularly the right to prohibit the acquiring third party
from reselling the goods.’231 The CJEU made a distinction between putting the products on
the market, defined as allowing the realization of the economic value of the trade-mark, and
the preparatory actions of importing the products with a view to selling them in the EEA or
offering them for sale in the EEA, which are not considered as equivalent of putting them on
the market within the meaning of Article 7(1) of the Directive. Indeed, ‘[s]uch acts do not
transfer to third parties the right to dispose of the goods bearing the trade mark’ and, in
particular, ‘they do not allow the proprietor to realise the economic value of the trade mark’,
as ‘[e]ven after such acts, the proprietor retains his interest in maintaining complete control
over the goods bearing his trade mark, in order in particular to ensure their quality’.232
Some authors interpret this case law as requiring that the economic value of the
trade-mark be realized with respect to the product, for instance, ‘through the shifting of the
profit or loss, namely the economic risk, of any onward sale of a trademarked good from the
trademark proprietor to a third party […] who, […] may have assumed a contractual
obligation to resell the good’.233 This may not only include the sale of the trade-marked
products based on the free will of the trade-marked proprietor, but also a forced sale by court
order, or the donation of the trade-marked good, as long as this does not aim to promote the
sale of other products.234 In contrast, in addition to the preparatory acts referred to above, do
not constitute a ‘putting on the market’ within the meaning of Article 7(1) of Directive
2008/95/EC, ‘the transfer of ownership of a trademarked good by way of security, when the
assignor remains in possession of the good in question’, ‘the sale of a trademarked good to an
undertaking that has its own legal personality but belongs to the same group as the trademark
proprietor’, ‘the internal transit of a trademarked good’, ‘the offer for sale or the sale of a
trademarked good after the good in question has entered physically but not legally the
territory of the EU’ (for instance the non-EU good entered in the EU and was placed under
the external transit procedure or a customs warehousing procedure, ‘the distribution, free of
charge, of trademarked items intended to promote the sale of other goods because such items
are not distributed in any way with the aim of them penetrating the market’.235 In these

230
Case C-16/03 Peak Holding AB v Axolin-Elinor AB [2004] ECR II-11313.
231
Case C-16/03 Peak Holding AB v Axolin-Elinor AB [2004] ECR II-11313, para 40.
232
Case C-16/03 Peak Holding AB v Axolin-Elinor AB [2004] ECR II-11313, para 42.
233
L Grigoriadis, supra n 211, 219.
234
L Grigoriadis, supra n 211,, 221.
235
L Grigoriadis, supra n 211,, 221-224.

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circumstances the trade-mark proprietor may oppose the offer for sale or sale of the
trademarked products, on the basis of Article 5(3) of Directive 2008/95/EC.
It also follows from this case law that the trade-mark proprietor will be deemed to
have put the product on the market even if he/she sells the product to an undertaking based in
the EU, which has undertaken a contractual obligation to resell the goods outside the
European Economic Area, thus pushing the trade mark owners to sell directly to the
distributors established outside the EU in order to avoid the Community exhaustion of their
rights.236 As the Court held in Peak Holding, ‘[a]ny stipulation, in the act of sale effecting the
first putting on the market in the EEA, of territorial restrictions on the right to resell the goods
concerns only the relations between the parties to that act’ and ‘cannot preclude the
exhaustion provided for by the Directive’.237 The same would apply even in case the
trademark owner entrusted a commercial agent to sell the goods in the EU, given that the
commercial agent acts in the name of and for the account of the principal, in this case the
trade-mark owner.238
The concept of ‘consent’ is also considered an EU law concept, and is not interpreted
according to national law, basically for the same reasons than led to an EU law definition of
the concept of ‘putting on the market’. Otherwise, it would have been possible to easily
deviate from a regime of regional exhaustion to a regime of international exhaustion, simply
by adopting a wide definition of ‘consent’ in the respective national law.239 Consent may be
established through an express statement. In its leading case law Zino Davidoff SA and Levi
Strauss the CJEU noted that the consent of the trade-mark owner to the good bearing his
trademark to be put on the market, within the meaning of Article 7(1) of the Trade-mark
Directive may also be inferred implicitly from some facts or circumstances ‘prior to,
simultaneous with or subsequent to the placing of the goods on the market outside the EEA
which, in the view of the national court, unequivocally demonstrate that the proprietor has
renounced his rights’.240 However, consent cannot be inferred from the mere silence of the
trade-mark owner. According to the CJEU, ‘[a] rule of national law which proceeded upon
the mere silence of the trade mark proprietor would not recognise implied consent but rather
deemed consent’ and ‘[t]his would not meet the need for consent positively expressed
required by Community law’.241 Furthermore,
‘[…] implied consent cannot be inferred from the fact that a trade mark proprietor has
not communicated his opposition to marketing within the EEA or from the fact that
the goods do not carry any warning that it is prohibited to place them on the market
within the EEA.
Finally, such consent cannot be inferred from the fact that the trade mark proprietor
transferred ownership of the goods bearing the mark without imposing contractual
reservations or from the fact that, according to the law governing the contract, the
property right transferred includes, in the absence of such reservations, an unlimited

236
Case C-16/03 Peak Holding AB v Axolin-Elinor AB [2004] ECR II-11313, para 56.
237
Case C-16/03 Peak Holding AB v Axolin-Elinor AB [2004] ECR II-11313, paras 54-55.
238
L Grigoriadis, supra n 211, 282.
239
Joined Cases C-414/99 to C-416/99 Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. & Others
v Tesco Stores Ltd and Others [2001] ECR I-8691.
240
Joined Cases C-414/99 to C-416/99 Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. & Others
v Tesco Stores Ltd and Others [2001] ECR I-8691, para 46.
241
Joined Cases C-414/99 to C-416/99 Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. & Others
v Tesco Stores Ltd and Others [2001] ECR I-8691, para 58.

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right of resale or, at the very least, a right to market the goods subsequently within the
EEA’.242
It is important to note that ‘the rights conferred by the trade mark are exhausted only
in respect of the individual items of the product which have been put on the market with the
proprietor's consent in the territory there defined. The proprietor may continue to prohibit the
use of the mark in pursuance of the right conferred on him by the Directive in regard to
individual items of that product which have been put on the market in that territory without
his consent’.243 Hence, the exhaustion of the right does not extend to the whole of the
production line of a product.244
It seems, therefore, that the EU exhaustion rule leaves a margin of discretion to the
trade-mark owner who may avoid the Community exhaustion of her rights, by avoiding
putting the product in the EU market, in the various ways contemplated by the case law
interpreting Article 7(1) of the Trade-mark Directive, or by taking care not to provide her
consent to such market penetration in the EU. The case law provides guidance as to the
criteria for identifying consent, in particular by establishing presumptions of consent in
certain circumstances. Although it is not the purpose of this Section to provide an exhaustive
analysis of this jurisprudence, it seems that the marketing of a trademarked good by an
undertaking of the same group than the trade-mark owner is assumed to have gained the
consent of the trade-mark owner. A similar presumption applies for the marketing of a trade-
marked product by a trade-mark licensee, or by an authorized (exclusive or selective)
distributor or the forced sale of the trade-marked product in the European Economic Area
following a court order.245 According to Article 8(2) of the Trade-mark Directive, the
proprietor of a trade mark may invoke the rights conferred by that trade mark against a
licensee who contravenes any provision in his licensing contract, among other things, the
quality of the goods manufactured or of the services provided by the licensee. Although this
provision concerns the relations between the trademark proprietor and the licensee, an erga
omnes effect and thus the possibility to object to parallel trade may be possible, on the basis
of that provision of the Directive, if the licensor made the decision to control the licensee by
including provisions in the agreement requiring the licensee to comply with his instructions
and giving the licensor the possibility to verify such compliance. Yet, ‘[w]here the proprietor
of the mark refrains from controlling distribution or does not avail himself of contractual
means of exercising such control, there is no reason to grant him trade mark rights in respect
of third parties’.246 Similarly, where the licensor ‘tolerates the manufacture of poor quality
products, even though he has contractual means of preventing it, he must bear responsibility
for it’.247 Although the Directive stays silent as to the burden of proof of these different
factual allegations, the issue depending on the evidence law of the Member States, the CJEU
242
Joined Cases C-414/99 to C-416/99 Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. & Others
v Tesco Stores Ltd and Others [2001] ECR I-8691, paras 56–57.
243
Case C-173/98 Sebago Inc. and Ancienne Maison Dubois & Fils SA v G-B Unic SA [1999] ECR I-4103, para
19.
244
L Grigoriadis, supra n 211, 291.
245
L Grigoriadis, supra n 211, 293–296.
246
Opinion of AG Kokott in Case C-59/08 Copad SA v Christian Dior couture SA, Vincent Gladel and Société
industrielle lingerie (SIL) [2009] ECR I-3421, para 51.
247
Opinion of AG Kokott in Case C-59/08 Copad SA v Christian Dior couture SA, Vincent Gladel and Société
industrielle lingerie (SIL) [2009] ECR I-3421, para 50. Interpretation supported by the judgment of the CJEU in
Case C-59/08 Copad SA v Christian Dior couture SA, Vincent Gladel and Société industrielle lingerie (SIL)
[2009] ECR I-3421, para 47.

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recognized in Zino Davidoff and Levi Strauss that the consent must be proved by the trader
alleging it.248 The national evidence rules should not render the task of the parallel importer
exceedingly difficult, as it was also recognized by the CJEU in Van Doren.249
In practice, the typical case will take the following form:
‘The trademark proprietor bears the initial burden of proving the general elements of
infringement, i.e. that the parallel importation of goods bearing the trademark infringes his
right.
– In reply to the claim of the trademark proprietor on trademark infringement, the
independent trader (parallel importer—independent reseller) will have to either:
a) prove the existence of a positively expressed consent of the trademark
proprietor for putting the goods on the market in the EEA where the trademark
proprietor challenges only the existence of such consent, or
b) where the trademark proprietor challenges in general the exhaustion of his
right:
(i) prove that the goods were initially put on the market in the EEA by the
trademark proprietor or with his consent, if so required by the
applicable national procedural rules; or
(ii) allege a risk of market partitioning between Member States as a
consequence of the fact that he bears the burden of proving that the
right flowing from the trademark borne by the goods he sells has been
exhausted. […] a real risk of partitioning of national markets will exist
in the following cases:
aa) where it is impossible or excessively difficult for the
independent trader to prove exhaustion of the trademark right. […]
bb) where the trademark proprietor puts products on the market
within the EEA through an exclusive distribution system, so there is
the possibility of the trademark proprietor acting on the facts revealed
by the independent trader in meeting the burden to eliminate the source
of supply.
In both the above cases, the independent trader must establish
all the following facts and circumstances:
aa) that he purchased the goods he sells within the EEA, so
there is a presumption that Article 7 (1) of Directive 2008/95/EC or
Article 13 (1) of Regulation (EC) 207/2009 applies;
bb) that price differences exist for the goods bearing the
trademark of the trademark proprietor between the EU Member States,
regardless of whether those differences can be justified (e.g., on the
basis of a difference of costs of production between Member States),
so there is a presumption that the trademark proprietor tries, by
prohibiting the parallel importation, to maintain those differences;
cc) that there is no clear difference between the goods bearing
the trademark of the trademark proprietor sold within and outside of

248
Joined Cases C-414/99 to C-416/99 Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co. & Others
v Tesco Stores Ltd and Others [2001] ECR I-8691, paras 53–54.
249
Case C-244/00 Van Doren + Q. GmbH v Lifestyle sports + sportswear Handelgesellschaft mbH and Michael
Orth [2003] ECR I-3051.

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the market of the EEA if the trademark proprietor argues that the
independent trader ought to have known, based on the nature or the
particular marking of the goods he sells, that the goods he sells were
not intended to be marketed in the EEA.’250
One should also not forget the possibility offered by Article 7(2) of the Trade-mark
Directive to the proprietor of the trade-mark to oppose the commercialization of the products
bearing the mark where there exist ‘legitimate reasons’, ‘especially where the condition of the
goods is changed or impaired after they have been put on the market’. This provision has also
led to an extensive jurisprudence of the EU courts in order to define the terms employed by
the Directive.251

13.4.Licensing of Intellectual Property Rights: the transfer of technology

Regulation/Guidelines and beyond

13.4.1. Historical overview

In 1962, the Commission issued a notice stating that patent licences limited in space to
part of a Member State, or in time, field of use, etc., did not infringe what is now Art 101(1),
as it was the patent that restrained rather than the licence.252 The Commission also took the
view that exclusive licences did not infringe Art 101, as they were unlikely to affect trade
between Member States.
By the time it adopted its first decisions in 1972, however, the Commission no longer
took this view. It treated a licence for part of the Single Market as a licence for the whole,
subject to contractual restrictions which required appraisal under Art 101. Subject to a de
minimis rule of unclear ambit, any significant licence other than a non-exclusive one for the
whole Single Market was caught by the prohibition of Article 101(1).253 The Commission
condemned and refused to exempt manufacturing exclusivity for the first time in AOIP/
Beyrard.254 This case law concerned, however, licences that were granted to competitors. So,
the relationship was horizontal. The Commission exempted exclusive territories in several
individual decisions, although it would have been arguable in a national court that such an
agreement was not caught by Article 101(1) and the court should enforce the provisions
without waiting for the Commission to grant an exemption.
In contrast to the Commission’s practice, the CJEU held in Nungesser v Commission
that an ‘open exclusive licence’ is not in itself contrary to Article 101(1).255 The
Commission’s decision condemned a series of contracts enabling Eisele to become the holder
of plant breeders’ rights in Germany for a very important new variety of F1 hybrid maize
seed developed by INRA in France.256 The arrangement was treated as an exclusive licence.
Indeed, INRA, a research institute financed by the French Minister of Agriculture, had

250
L Grigoriadis, supra n 211, 322-323.
251
For an extensive analysis, see L Grigoriadis, supra n 211, Chapter 10, 338 seq.
252
[1962] OJ C139/2922. This Notice was withdrawn by the Commission in 1984, when the Commission
adopted Block Exemption Regulation 2349/84 regarding patent licensing agreements.
253
Davidson Rubber (Case COMP IV/17.545) Commission Decision 72/237/EEC [1972] OJ L143/31 (paras 39
& 40).
254
[1976] OJ L6/8.
255
Case C- 258/78 L.C. Nungesser KG and Kurt Eisele v Commission [1982] ECR 2015.
256
Breeders' rights - maize seed (Case IV/28.824) Commission Decision 78/823/EEC [1978] OJ L286/23.

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developed a commercially important F1 hybrid maize seed that could be grown in the colder
climate of Northern Europe. For a few years the variety was a great success, but was finally
superseded by other varieties. INRA was not permitted by French law to exploit its
discoveries commercially, so it licensed selected farmers in France to grow certified seed to
be placed on the market. To exploit the German market, INRA made contracts in 1960 and
1965 with Eisele and later his firm, Nungesser (to be treated as a single undertaking),
enabling Eisele to acquire the plant breeders’ rights in the Federal Republic of Germany.
INRA promised that it would try to prevent the seed grown in France from being exported to
Germany save to Nungesser, and there were various other restrictions condemned by the
Commission, such as minimum prices to be charged by Nungesser on the German market and
an obligation to take two-thirds of its requirements of basic seed from the French growers.
Nungesser arranged for the seeds to be grown and tested in Germany, and approved by a
public authority for general sale. By 1972, the variety was already being superseded in
France, and two dealers in Germany bought surplus quantities of certified seed from dealers
in France. Eisele used the plant breeders’ rights to restrain the sale in Germany by dealers of
seed produced in France.257 Eisele persuaded a German court to restrain one of them from
doing so, although it would now appear that any intellectual property rights must have been
exhausted by the French grower’s sale of the certified seed to a dealer.
The Commission condemned the agreement without analysing the transaction to
ascertain whether INRA could have arranged for the sale of its seed in Germany without
granting what the Commission and Court treated as an exclusive licence. The Commission
stated that exclusive licences might in theory be exempted, but that an exemption was not
appropriate here as the product was not new and Eisele had been granted absolute territorial
protection.
After dealing with a formal objection to the Commission’s decision and deciding that
Reg 26/62, which applies to agricultural products258, was not applicable, the CJEU,
pronouncing itself on appeal to the Commission’s decision, considered whether plant
breeders’ rights were so different from other industrial property rights that Art 101 did not
apply to them. Breeders’ rights are fragile in that they endure only so long as the variety is
distinct, uniform, stable and commercially useful. The CJEU nevertheless did not find it
correct to consider that breeders’ rights are a species of commercial or industrial property
right which characteristics of so special a nature as to require, in relation to the competition
rules, a different treatment from other commercial or industrial property rights. According to
the CJEU, ‘that conclusion does not affect the need to take into consideration, for the
purposes of the rules on competition, the specific nature of the products which form the
subject-matter of breeders’ rights’ (para 43). The CJEU then proceeded in applying Article
101(1) TFEU to exclusive licences. The CJEU distinguished an open exclusive licence from
one where absolute territorial protection is conferred (para 53). ‘Open exclusive licence’ is a
novel term coined by the Court. It means an agreement
‘[…] whereby the owner merely undertakes not to grant other licences in respect of
the same territory and not to compete himself with the licensee in that territory’ (para
53).

257
That was long before the CJEU had decided in Case C-15/74 Centrafarm v Sterling [1974] ECR 1147.
258
Council Regulation No 26/62 of 4 April 1962 applying certain rules of competition to production of and
trade in agricultural products, English special edition: Series I Chapter 1959-1962 P. 0129.

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The Court referred to its case law in Consten & Grundig noting that absolute
territorial protection granted to a licensee in order to enable parallel imports to be controlled
and prevented results in the artificial maintenance of separate national markets are contrary to
Article 101 TFEU. The CJEU found that the contracts in question were intended to restrict
competition from third parties on the German market and were seeking to prevent third
parties who purchase INRA seeds in France from exporting them to Germany. Consequently,
the Court quashed the Commission’s decision insofar as it condemned an obligation upon
INRA or those deriving rights through INRA to refrain from having the relevant seeds
produced or sold by other licensees in Germany, and an obligation upon INRA or those
deriving rights through INRA to refrain from producing or selling the relevant seeds in
Germany themselves (para 67). With regard to the possible application of Article 101(3)
TFEU to the absolute territorial protection from which benefitted Nungesser, the CJEU held
that ‘[a]s it is a question of seeds intended to be used by a large number of farmers for the
production of maize, which is an important product for human and animal foodstuffs,
absolute territorial protection manifestly goes beyond what is indispensable for the
improvement of production or distribution or the promotion of technical progress, as is
demonstrated in particular in the present case by the prohibition, agreed to by both parties to
the agreement, of any parallel imports of INRA maize seeds into Germany even if those seeds
were bred by INRA itself and marketed in France’, this absolute territorial protection
conferred on the licensee, being ‘a sufficient reason’ for refusing to grant an exemption under
Article 101(3) TFEU (paras 77–78).
The Court went much further in accepting export restrictions in relation to a licence of
performing rights in Coditel II.259 It ruled that even absolute territorial protection may not
infringe Article 101(1) in light of the commercial practice in the particular industry and the
need for a film producer to obtain an adequate return. The Court went further, again in
relation to plant breeders’ rights in basic seed, in Erauw-Jacquéry.260
A group exemption for exclusive and other pure patent or mixed patent and know-
how licences was eventually adopted by the Commission in 1984.261 After being renewed
retroactively twice, it expired at the end of 1996. In 1989 another group exemption for pure
know-how, or mixed patent and know-how, licences that permitted rather more provisions
was adopted262. The third group exemption, for technology transfer agreements263, expired at
the end of April 2004, the Commission adopting the fourth group exemption for technology
transfer and guidelines on agreements inside and outside its scope.264 In March 2014 the
Commission adopted the fifth group exemption for technology transfer, Regulation
No 316/2014 and Guidelines265, which are still in force.266

259
Case C-262/81 Coditel v Ciné Vog Films SA (Coditel II) [1982] ECR 3381.
260
Case C-27/87 Louis Erauw-Jacquéry Sprl v La Hesbignonne SC [1988] ECR 1919.
261
Commission Regulation (EEC) No 2349/84 of 23 July 1984 on the application of Article 85 (3) of the Treaty
to certain categories of patent licensing agreements [1984] OJ L 219/15.
262
Commission Regulation (EEC) 556/89 on categories of know how licensing agreements [1989] OJ L61/1.
263
Commission Regulation (EC) No 240/96 on categories of technology transfer agreements [1996] OJ L31/2.
264
Council Regulation 772/2004/EC of 27 April 2004 on the application of Article 81(3) of the Treaty to
categories of technology transfer agreements [2004] OJ L123/11
265
Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to
technology transfer agreements [2014] OJ C 89/3 (TTBER Guidelines).
266
Commission Regulation (EU) No 316/2014 of 21 March 2014 on the application of Article 101(3) of the
Treaty on the Functioning of the European Union to categories of technology transfer agreements [2014] OJ L
93/17.

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Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

13.4.2. Types of licensing agreements covered by Article 101(1) TFEU

Article 101(1) TFEU may apply to various licences of IP rights:

13.4.2.1. Patent licences

In principle, restrictions involving territorial exclusivity do not infringe Article 101(1)

TFEU, unless the agreement includes an export prohibition or absolute territorial protection,
by nature anticompetitive by object. As we have indicated above, the CJEU took a lenient
position towards ‘open exclusive licences’ that do not affect the position of third parties, such
as parallel traders, and are not deemed to have an anticompetitive object, while it considered
that ‘closed exclusive licences’ conferring an absolute territorial protection upon a licensee
may be caught by Article 101(1) TFEU, and it is unlikely that they may be justified by
Article 101(3) TFEU.267 This case law on territorial restrictions notwithstanding, the CJEU
has accepted in various judgments that territorial exclusivity leading to absolute territorial
protection or an export ban may not fall within Article 101(1) TFEU, in view of the special
circumstances of the specific IP right and the risk(s) incurred by the IP holder.268 Regulation
316/2014 recognizes the positive and negative effects to competition of territorial restrictions
included in patent licences.269
Non-territorial restrictions included in patent licences may fall under Article 101(1)
TFEU. In Windsurfing, the Court found incompatible with Article 101(1) TFEU a patent
licensing agreement containing obligations placed on the licensees only to use components
approved by the licensor and to sell the patented product in conjunction with a product

267
Case C-258/78 L.C. Nungesser KG and Kurt Eisele v Commission [1982] ECR 2015, paras 53, 57–58, 60–63
and 68–79 (concerning plant breeder’s rights).
268
See, for instance, Case 262/81 Coditel v Ciné Vog Films (Coditel I) [1982] ECR 3381 (regarding broadcast
diffusion rights from copyright –performing rights, the copyright holder and its assigns having a legitimate
interest in calculating royalties on the basis of the number of performances by the licensee and thus in limiting
the transmission of a film in another Member State); Case C-27/87 Louis Erauw-Jacquéry Sprl v La
Hesbignonne SC [1988] ECR 1919 (regarding plant breeder’s righs on ‘basic seeds’), where the CJEU noted
that
‘the development of the basic lines may involve considerable financial commitment. Consequently, a
person who has made considerable efforts to develop varieties of basic seed
which may be the subject-matter of plant breeders’ rights must be allowed to protect himself against
any improper handling of those varieties of seed. To that end, the breeder must be entitled to restrict
propagation to the growers which he has selected as licensees. To that extent, the provision prohibiting
the licensee from selling and exporting basic seed falls outside the prohibition contained in Article
101(1) TFEU’ (para 10).
See also the Opinion of AG Mischo, in Case C-27/87 paras 11–12, where he highlighted that ‘[t]he breeder (or
his agent) must […] remain in a position to control the destination and the use of the basic seed; otherwise he
would risk the de facto loss of the exclusive rights granted to him in respect of the new varieties which he has
developed’, noting that ‘[t]he Commission is right to point out that the propagation agreement is an agreement
where the identity of the other party is essential’. AG Mischo referred to the CJEU’s judgment in Case C-161/84
Pronuptia de Paris v Schillgalis [1986] ECR 353, para 16), where the CJEU held that the franchisor may
impose territorial restrictions to his franchisees as he ‘must be able to communicate his know-how to the
franchisees and provide them with the necessary assistance in order to enable them to apply his methods,
without running the risk that know-how and assistance might benefit competitors, even indirectly’. However,
this lenient regime for Article 101(1) TFEU purposes applies only to provisions which are ‘essential in order to
avoid that risk’, and as long as the business name or symbol of the franchise is not well known (para 24).
269
TTBER Guidelines [2014], paras 189–203.

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outside the scope of the patent clauses.270 Windsurfing argued that the purpose of the
requirement was solely to ensure that the products sold by the licensees were not of inferior
quality and did not infringe the rights of other licensees, hence, they were covered by the
specific subject-matter of the licensed patent rights. The Court found that such quality
controls do not come within the specific subject-matter of the patent unless they relate to a
product covered by the patent since their sole justification is that they ensure 'that the
technical instructions as described in the patent and used by the licensee may be carried into
effect’.271 The Court found the ‘arbitrarily placed’ obligation on the licensee only to sell the
patented product in conjunction with a product ‘outside the scope of the patent’ as not being
“indispensable to the exploitation of the patent’.272 Some non-territorial restrictions in patent
licences may not fall under Article 101(1) TFEU or may benefit from the exemption under
BER 316/2014, while others may infringe Article 101(1) TFEU and be targeted by Articles 4
and 5 of BER 316/2004.
Of particular interest is with regard to patent licences and Article 101 TFEU is the
recent Genentech Inc. v Hoechst judgment of the CJEU, on a preliminary reference from the
Paris Court of Appeal regarding a disputed arbitration award between Genentech and Sanofi-
Aventis (Hoechst being a subsidiary of Aventis) over unpaid royalty payments under a patent
licence where one of the underlying patents had been revoked with retroactive effect273. The
arbitrator’s award was that the licensee should continue to pay royalties, notwithstanding the
revocation of the patent, in view of the commercial objectives of the parties which were to
allow Genentech to use Hoechts’ technology, something that was contested by the licensee in
front of the Paris Court of Appeal, which sent a preliminary ruling asking the CJEU if Article
101 TFEU must be interpreted as precluding effect to a patent licence agreement which
requires the licensee to pay royalties for the sole use of the rights attached to the licensed
patent where patents have been revoked retroactively, as such payments for a revoked patent
may have put the company at a competitive disadvantage to competitors that have not been
required to pay for the technology, these additional costs amounting to €169 million). Citing
some previous case law of the CJEU on the obligation to pay a royalty (Ottung274) AG
Wathelet argued that an obligation to pay royalties in a licensing agreement after the
expiration of the patent ‘may infringe Article 101(1) TFEU where the licence agreement
either does not grant the licensee the right to terminate the agreement by giving reasonable
notice, or seeks to restrict the licensee’s freedom of action after termination’.275 However,
that was not the case here, as Genentech was able to terminate the agreement with a very
short notice and its freedom of action was not restricted in any way during the period after
termination. Reflecting the approach of the TTBER Guidelines, which view royalty
arrangements in technology licences as generally outside the scope of Article 101 TFEU276,
AG Wathelet concluded that ‘the mere use of the technology at issue during the term of the

270
Case C-193/83 Windsurfing International v Commission [1986] ECR 611.
271
Ibid., para 45.
272
Ibid., para 57.
273
Case C-567/14 Genentech Inc. v Hoechst GmbH, formerly Hoechst AG, Sanofi-Aventis Deutschland GmbH,
[2016] ECLI:EU:C:2016:526.
274
Case C-320/87 Kai Ottung v Klee & Weilbach A/S and Thomas Schmidt A/S [1989] ECR 1177.
275
Opinion of AG Wathelet in Case C-567/14, para 88.
276
TTBER Guidelines [2014], para 184.

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licence agreement was sufficient to trigger the obligation to pay’.277 The CJEU followed his
AG and previous case law noting that,
‘[…] Article 101(1) TFEU does not prohibit the imposition of a contractual
requirement providing for payment of a royalty for the exclusive use of a technology
that is no longer covered by a patent, on condition that the licensee is free to terminate
the contract. That assessment is based on the finding that that royalty is the price to be
paid for commercial exploitation of the licensed technology with the guarantee that
the licensor will not exercise its industrial-property rights. As long as the licence
agreement at issue is still valid and can be freely terminated by the licensee, the
royalty payment is due, even if the industrial-property rights derived from patents
which are granted exclusively cannot be used against the licensee due to the fact that
the period of their validity has expired. In the light of such circumstances, in
particular the fact that the licence may be freely terminated by the licensee, the
contention may be rejected that the payment of a royalty undermines competition by
restricting the freedom of action of the licensee or by causing market foreclosure
effects’.278
This solution applies not only for the payment of a royalty after the expiration of the patent,
but also ‘a fortiori’ before the validity of those rights has expired.

13.4.2.2. Know-how licences

Know how is different from patents as it is not an IP righ as such, in the sense that it
does not constitute a property right and does not benefit from statutory protection, but its
essence is more of a liability rule, as its protection relies on the law of obligations. Know how
must be transferred to another party and for this reason the know how licence should define it
as well as its transfer (through documentation, training or technical support). Know how
licences include a confidentiality clause. According to Article 1(1)(i) of Regulation 316/2014,
the know how transferred must be secret and substantial. The licensee has also an obligation
to use the transferred know how.

13.4.2.3. Copyright licences

There is little case law on the application of competition law to copyright licences.
Initially, the CJEU had treated far more favourably copyright in the exhibition of films,
broadcasts and other performing rights—the right to reproduce the protected work in public,
than other forms of copyright. In Coditel v Ciné Vog Films (Coditel II)279, a Belgian cable
television company picked up the transmission of a film from Germany and relayed it to
clients in parts of Belgium. The exclusive licensee in Belgium objected and sued the cable
company to protect itself. The cable firm counter-claimed that the exclusive right granted by
the licensor was incompatible with Article 101 TFEU. The CJEU noted that ‘the
characteristics of the cinematographic industry and of its markets, especially those relating to
dubbing and subtitling for the benefit of different language groups, to the possibilities of

277
Opinion of AG Wathelet in Case C-567/14, para 74.
278
Case C-567/14 Genentech Inc. v Hoechst GmbH, formerly Hoechst AG, Sanofi-Aventis Deutschland GmbH
[2016] ECLI:EU:C:2016:526, para 40.
279
Case -262/81 Coditel v Ciné Vog Films SA (Coditel II) [1982] ECR 3381.

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television broadcasts, and to the system of financing cinematographic production in Europe

serve to show that an exclusive exhibition licence is not, in itself, such as to prevent, restrict
or distort competition’.280 The CJEU nevertheless held that the exercise of copyright in a film
and the right deriving from it, namely that of exhibiting the film, may come within the scope
of Article 101 TFEU, where there are economic or legal circumstances the effect of which is
to restrict film distribution to an appreciable degree or to distort competition on the
cinematographic market, regard being had to the specific characteristics of that market.
National courts should therefore ‘establish whether or not the exercise of the exclusive right
to exhibit a cinematographic film creates barriers which are artificial and unjustifiable in
terms of the needs of the cinematographic industry, or the possibility of charging fees which
exceed a fair return on investment, or an exclusivity the duration of which is disproportionate
to those requirements, and whether or not, from a general point of view, such exercise within
a given geographic area is such as to prevent, restrict or distort competition within the
common market’.281 The evaluation of whether a restriction in connection with a copyright
licence falls under Article 101(1) TFEU generally depends on whether the restriction is
necessary to protect the ‘specific subject matter’ of the copyright. This was deemed the case
in Coditel II with regard to the exclusive right to show a film in cinemas.282 This was the
case, even if AG Reischl observed that for the specific fact pattern such a conclusion would
result in absolute territorial protection. As the CJEU clarified in Coditel II, an exclusive
copyright licence may only fall within Article 101(1) if it involves the charging of fees
exceeding a fair return on investment, or if the duration of the exclusivity is disproportionate
to the needs of the industry in question. Field of use restrictions (limiting the exhibition of a
film in cinemas or television), limitations on sub-licensing or the assignment of the licence,
the obligation to pay royalties for each performance are generally accepted, under similar
conditions. However, Article 101 TFEU will apply if the copyright licences agreements are
used with the aim to share the market.283
In PMI/DSV, the Commission rejected a complaint by Ladbroke Racing Ltd against a
licence limited territorially. Through PMU and its subsidiary, PMI, the organisers of horse
races in France granted a licence of performing rights in live film of the races for West
Germany and Austria to Deutscher Sportverlag Kurt Stoof GmbH & Co (‘DSV’). DSV
received the signal by satellite and, with the aid of decoders, transmitted it to betting shops in
Germany as then constituted and Austria. The licence was limited thereto. DSV was
restrained from granting sub-licences. Ladbroke complained that these provisions infringed
Arts 101 and 102 and requested the Commission to compel either PMI or DSV, on its
instructions, to make films available to Ladbroke Deutschland on a non-discriminatory basis.
The Commission found (para 12) that
‘Such a clause could not be caught by Article [101 TFEU], since the licensor remains
free, under such Community rules, to choose his licensee and the size of the territory
which he grants him. If such a clause were not included, the licence would become a
European licence under which the licensor would no longer be free, in particular, to
choose his sub-licensee for the other Member States for business or financial reasons,
or on the grounds of honesty. The omission of such a clause might also deprive the

280
Ibid., para 16.
281
Ibid., para 19.
282
Ibid., para 20.
283
Decca Navigator System [1989] OJ L43/27, paras 100 & 104.

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licensor of the right to check the subcontractor’s technical capacities, such as his
capacity to relay properly the sound and pictures sent to him, bearing in mind in
particular the fact that the authorisation conferred on FCR (the licensee for Germany)
for the relay of such sound and pictures stops at the boundaries of the territory granted
under the agreement […] If such a clause were not included, therefore, the licensor
would be unable to coordinate the management of all the relays of sound and pictures
to the otherMember States […]’.
This view was confirmed by the General Court in Tiercé Ladbroke v Commission, an appeal
from the rejection of another complaint that was never published.284
The CJEU took a more restrictive position than Coditel II and PMI/DSV in Football
Association Premier League v QC Leisure285, where it held that a system of licences for the
retransmission of football matches, which grants broadcasters territorial exclusivity per
Member State and which prohibits television viewers from watching these broadcasts with a
decoder card in other Member States, leading to an absolute prohibition on the cross-border
supply of satellite decoder cards, either included in national legislation or contract, in relation
to satellite broadcast services will not be permitted under EU competition law. The rights
holders are able to prohibit the active marketing and sales of such services, but not passive
sales in response to unsolicited requests from customers. The case was triggered by the sale
of Greek decoder cards to pubs located in the UK, which enabled the viewing of life Premier
League football matches in the UK, the leading professional league competition for football
clubs in England, without paying for an UK subscription. The decoder cards were not pirated
copies but were sold by an official Greek Premier League licensee. However, the license that
the Premier League had given was limited to enabling access to Premier League broadcasts in
Greece. The Premier League argued that both the sale of Greek decoder cards in the UK and
the display of the matches by UK pubs, without UK subscription, represented a violation of
the Premier League’s UK copyrights. The defendants, on the other hand, took the position
that by granting a license for Greece and receiving royalty payments for the Greek decoders,
the Premier League had exhausted its rights. It is in this context that the High Court of Justice
of England and Wales referred several questions to the Court of Justice, some relating to the
broadcasting of Premier League matches and others relating to the use of the broadcasts
following their reception.
With regard to the second issue, the CJEU found that a prohibition on the use of
foreign decoder cards would go beyond what is necessary to ensure appropriate remuneration
for the rights holders concerned. When examining the issue from the perspective of free
movement law, the CJEU pointed out that the object of intellectual property rights is to
ensure for their holders the right to exploit commercially the protected subject-matter and
therefore not to obtain the highest possible remuneration, but appropriate remuneration from
them. However, it held that appropriate remuneration cannot include the payment of a
premium by the television channels to reserve absolute territorial exclusivity, as this may in
fact result in artificial price differences between the partitioned national markets, these being
irreconcilable with the completion of the internal market.286 With regard to competition law,
the CJEU noted that ‘where a licence agreement is designed to prohibit or limit the cross-

284
Case T-504/93 Tiercé Ladbroke SA v Commission [1997] ECR II–923, paras 151 & 160.
285
Case C-403 & 429/08 Football Association Premier League Ltd and Others v QC Leisure and Others &
Karen Murphy v Media Protection Services Ltd [2011] ECR I-9083.
286
Ibid., para 115.

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border provision of broadcasting services, it is deemed to have as its object the restriction of
competition, unless other circumstances falling within its economic and legal context justify
the finding that such an agreement is not liable to impair competition’.287 The Court found
that the actual grant of exclusive licences for the broadcasting of Premier League matches did
not cause concern, but that the clauses by which the rights holders oblige broadcasters not to
provide decoding devices with a view to their use outside the territory covered by the licence,
which were designed to ensure compliance with the territorial limitations upon exploitation of
those licences, were contrary to the competition rules of the Treaty as they prohibited the
broadcasters from effecting any cross-border provision of services that relates to the sporting
events at issue.288 This enables each broadcaster to be granted absolute territorial exclusivity
in the area covered by its licence and, thus, all competition between broadcasters to be
eliminated.
The TTBER does not cover licensing of copyright other than software copyright, with
some limited exceptions.289 According to the Transfer of Technology Guidelines, as a general
rule the Commission will apply the principles set out in the TTBER and the guidelines when
assessing licensing of copyright for the production of contract products under Article 101 of
the Treaty,290 However, as it is also explained in the Guidelines, ‘the licensing of rental rights
and public performance rights protected by copyright, in particular for films or music, is
considered to raise particular issues and it may not be warranted to assess such licensing on
the basis of the principles developed in these guidelines’. The Commission notes that ‘in the
application of Article 101 the specificities of the work and the way in which it is exploited
must be taken into account’ and that it will therefore ‘not apply the TTBER and the present
guidelines by way of analogy to the licensing of these other rights’.291 There were a few
informal decisions on copyright other than software reported many years ago in the
Competition Policy Reports, but the law and policy had not been fully worked out. Where
copyright rights are granted, the best advice probably is to establish a file to show that only
the minimum number of restrictive provisions necessary to ensure that the transaction is
viable have been accepted and hope that a national court or the EU Court might decide that
the licence promotes rather than restricts competition, at least in the absence of significant
market power.
Copyright licences have also been examined in the context of the case law on
copyright collecting societies, which we will examine in a separate Section.

13.4.2.4. Software licences

Software licences either of proprietary form, or Free/Libre and Open Source Software
(FLOSS) licence of the type of GNU General Public License (copyleft licences) may in
principle fall within the scope of Article 101(1) TFEU.292 It is also important to have in mind
the limitations to IP holders introduced by Directive 2009/24/EC setting out the rights

287
Ibid., para 141.
288
Ibid., para 142.
289
TTBER Guidelines, paras 47–48..
290
Ibid., para 48.
291
Ibid., para 49.
292
On FLOSS and competition law, see M Valimaki, ‘Copyleft Licensing and EC Competition Law’ [2006] 27
European Competition Law Review 130.

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enjoyed by the owners of copyright in software (Software Directive).293 For instance,

restrictions on the licensee from making copies of the software do not infringe Article 101(1)
TFEU, while tying clauses, clauses restricting decompilation, or clauses introducing a
prohibition on advertising competitor’s technology may fall under Article 101 TFEU. Any
restrictions of competition under Article 101(1) TFEU may be exempted by Regulation
316/2014, which applies to software copyright licences, if the conditions for the exemption
are satisfied.294

13.4.2.5. Trademark licences

In its seminal Consten & Grundig case, the CJEU held that exclusive grant of trade
mark rights for the purpose of preventing parallel imports and thus maintaining absolute
territorial protection falls within Article 101(1) TFEU.295 The CJEU has not yet considered
the possibility of extending its more favorable to territorial restrictions and ‘open exclusive
licences’ jurisprudence in Nungesser and its progeny to trademark licences. In Campari, a
decision adopted prior to the Nungesser, the Commission considered that certain restrictions
included in an open exclusive trademark licence, such as a) the exclusivity commitment
whereby the licensor engaged not to appoint other licensees or to manufacture itself the
products bearing the trade mark in the allocated territory, b) a restriction on the licensees to
market competing products, c) a prohibition against active sales by the licensees outside their
respective territories, d) restrictions as to the group of customers to which the licensee
engaged to supply only products manufactured by the licensor, could infringe Article 101(1)
TFEU, although it also accepted that the restrictions could benefit from an individual
exemption under Article 101(3) TFEU.296 Other restrictions, such as such as a ban on exports
outside the EU, an obligation to follow the licensor's instructions relating to the manufacture
of the product and the quality of the ingredients, an obligation not to divulge the
manufacturing processes to third parties, or an obligation to spend minimum amounts on
advertising, were not found to infringe Article 101(1) TFEU.
The Commission did not override this position in Moosehead/Whitbread concerning a
trademark licence agreement between Moosehead and Whitbread, whereby Whitbread
acquired the exclusive right to manufacture, promote market, and sell the popular Moosehead
beer brand, in the UK, the Channel Islands, and the Isle of Man.297
Using secret know-how and a specific Canadian yeast, Moosehead produced a
Canadian lager under the mark ‘Moosehead’. It wanted to enter the English market, but there
were barriers to entry at the retail level. Most beer was sold in draft and in pubs. Pubs
required a licence from the justices, which was rarely given if there were other pubs in the
neighbourhood. Many pubs were owned by, or tied to, a particular brewer. Other barriers
were that brewers distributed most of their beer themselves, so no large-scale independent

293
Directive 2009/24/EC of the European Parliament and of the Council of 23 April 2009 on the legal protection
of computer programs [2009] OJ L 111/16.
294
Article 1, Reg. 316/2014.
295
Case C-56/64 Établissements Consten S.à.R.L. and Grundig-Verkaufs-GmbH v Commission [1966] ECR
429.
296
Campari (I) (Cases IV/117, 171, 172, 856, 28.173) Commission Decision 78/253/EEC [1978] OJ L70/69.
297
See also C-28/77 Tepea BV v Commission [1978] ECR 1391, where the CJEU refused to grant an exemption
under Article 101(3) TFEU to an oral trademark licensing agreement as the agreements granted an absolute
territorial protection to the licensee.

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wholesale distribution facilities exist. It was therefore very much easier for a foreign brewer
to enter the market with the help of an established brewer. Moosehead, therefore, entered into
a contract with Whitbread, one of the six large brewers in the UK. Under this contract, in
return for a royalty, Whitbread would be instructed how to make the beer, be given the
specific yeast and the exclusive right to sell and promote the beer under the mark Moosehead
in the British Isles. The mark in the UK was assigned jointly to Whitbread and Moosehead.
Whitbread acknowledged that the mark belonged to Moosehead. Whitbread also agreed that
the quality of the beer should comply with Moosehead’s specifications and not actively to
seek customers outside its territory. A businessman might describe this type of contractual
relationship as an industrial franchise, a lawyer as a trademark licence.
The Commission found that the clause providing exclusivity for the production and
marketing of the beer in the UK, the prohibition of active sales by Whitbread outside the
territory and the non-compete obligation on Whitbread not to produce or promote any other
beer identified as a Canadian beer within the contractual territory constituted restrictions of
competition under Article 101(1), although they were exempted under Article 101(3) TFEU.
The Commission took no issue, under Article 101(1) TFEU, with the no-challenge clauses, as
this could not appreciably restrict competition, the brand being comparatively new in the UK,
the non-exclusive grant of know-how and the ancillary restrictions to the grant of the trade
mark licence that enabled the licence to take effect, the obligation to purchase yeast only
from Moosehead, which was justified because it was necessary to ensure a technically
satisfactory exploitation of the licensed technology and guarantee a similar identity between
the beer produced by Moosehead and the beer produced under the licence by Whitbread.
Explain why did the exclusive territory infringe Art 101(l) TFEU ? Was this finding
consistent with (a) Pronuptia (XX) and (b) Delimitis (XX)? Can industrial franchises come
within the group exemption for vertical agreements? (see Chapter XX)
If trademark licences contain restrictions of competition, these may be exempted by
Regulation 316/2014, which applies to software copyright licences, if the conditions for the
exemption are satisfied. Alternatively, as these licences are often granted in the context of
distribution agreements, they may benefit from the block exemption conferred by Regulation
330/2010, when the trademark licensing agreement is ancillary to a vertical distribution
agreement (see Chapter XX).

13.4.2.6. Plant breeder’s rights

Plant variety rights include all acts relating to the production, reproduction,
conditioning, putting up for sale, marketing, export, import, and stocking of the protected
variety of seeds. One should distinguish here between licences restrictions concerning ‘basic
seeds’ from licensing restrictions concerning ‘derivative seeds’ (second, third and n-
generation seeds, the seeds reproduced from the basic seeds, which are used in making
crops). Following CJEU’s case law in Nungesser, there are certain licensing restrictions
which, in light of their necessity in protecting the investments of licensees, fall altogether
outside of Article 101(1) TFEU, if these restrictions concern ‘basic seeds’, in view of the
investment needed to develop basic seed.298 Indeed, once a plant variety ceases to be distinct,
uniform and stable, the intellectual property right is lost. In Louis Erauw-Jacquιry, the Court

298
Case C-258/78 L.C. Nungesser KG and Kurt Eisele v Commission [1982] ECR 2015.

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distinguished the basic seed supplied to propagators from the ‘certified’ seed sold to farmers
in order to develop crops. Even absolute territorial protection for the basic seed sent to
propagating establishments for multiplication before sale to farmers was cleared, whereas in
Nungesser such a clause in relation to certified seed was held to go too far even for an
exemption.299 Article 101(1) applies, however, as usual to licences covering ‘derivative’ or
‘certified’ seeds, which in case they include restrictive to competition conditions these need
to be assessed under Regulation 316/2014.300 According to the Commission, even when the
existing technology transfer block exemption is not strictly applicable because an agreement
falls outside of its provisions, it can nevertheless provide criteria that may be used in the
context of an individual decision.301

13.4.3. The scope and conditions of Block Exemption Regulation No. 316/2014 and
Guidelines on the application of Article 101(3) to technology transfer agreements

The structure of the Block Exemption Regulation 316/2014 is similar to that of all
new generation block exemption regulations adopted after 2000.
Article 2 exempts ‘technology transfer agreements entered into between two
undertakings permitting the production of contract product’. They are exempt as long as the
last intellectual property right has not expired or the know-how remains confidential. The

299
Case C-27/87 SPRL Louis Erauw-Jacquery v La Hesbignonne SC [1988] ECR 1919, paras 9–10. See also,
Sicasov (Case IV/35.280) Commission Decision 1999/6/EC [1999] OJ L 4/27, paras 53–55, noting that the
breeder has the right to restrict the movement of basic seed. With regard to prohibitions of export, the CJEU
stated that the owner of the breeder right or his assignee ‘must be recognised as having the right to restrict the
destination of basic seed in order to avoid any wrongful handling of the varieties’. Similarly, with regard to the
prohibition on imports of basic seeds the Commission noted that
‘[…] [I]n the case of basic seed, the breeder arranges for its production and distribution on the basis of
a network of multipliers who cannot freely dispose of the seed. It is therefore permissible for the
breeder to underpin that system by means of a prohibition on each licence holder from importing basic
seed. That clause should accordingly not be regarded as being covered by Article [101(1) TFEU]’.
This lenient regime does not, however, expand to minimum RPM clauses imposed by breeders to growers, even
for ‘basic seeds’, which may fall under Article 101(1) TFEU in case there is an appreciable effect on intra-EU
trade, the CJEU noting that ‘they have the same effects as a price system fixed by a horizontal agreement’: see,
Case C-27/87 SPRL Louis Erauw-Jacquery v La Hesbignonne SC [1988] ECR 1919, para 15.
300
See, ibid., Sicasov Commission Decision, para 51, noting that
‘the breeder's right of control ceases to apply only after he produces (or authorises the production of)
seeds which, by virtue of the public provisions applicable, can no longer be lawfully reproduced and
after he puts them (or authorises them to be put) into circulation. The seeds may no longer be used to
produce other seeds; they may only be sold (direct or via an intermediary) to farmers for the production
of consumption goods. The seeds must in such cases be regarded as goods that are comparable to
finished industrial products.
Any agreement aimed at restricting the production or marketing of the seeds can be scrutinised in the
light of Article [101 TFEU].
[…] [T]he legal position of a breeder does not differ from that of a holder of a patent or trade mark on a
product subject to control by the public authorities (such as a pharmaceutical product). There are
therefore no grounds for regarding seeds protected by plant-variety rights as having specific
characteristics which require them to be treated differently from products protected by other industrial
property rights. This does not affect the need to take the specific nature of seeds into consideration for
the purposes of applying the competition rules’.
See also paras 62–64 (regarding the obligation on licence holders not to export certified seeds) & paras 73–77
(the Commission eventually accepting that these restrictions could be justified under Article 101(3) TFEU).
301
Ibid., Sicasov Commission Decision, para 73.

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simplicity is only apparent. There are complex definitions in Article 1 to which we will
return.
Article 3 provides ceilings of market share above which the exemption does not
apply: 20% of the combined market share of the parties if they are competing undertakings
and 30% each if they are not. Both the market for the products and the technology market are
relevant, but potential competition is not relevant to the technology market. This makes the
application of the regulation more predictable, as almost anyone in an industry might be
looked upon as a potential entrant. The Commission states at paragraph 157 of the TTBER
Guidelines [2014] (G) that, in the absence of hard-core restraints, it will rarely consider that
Article 101 is infringed if there are at least four or more independently controlled (by other
undertakings than the parties to the agreement) technologies, in addition to the technologies
controlled by the parties to the agreement, that can be substituted for the licensed technology
at a comparable cost to the user. According to the Commission,
‘[i]n assessing whether the technologies are sufficiently substitutable the relative
commercial strength of the technologies in question must be taken into account. The
competitive constraint imposed by a technology is limited if it does not constitute a
commercially viable alternative to the licensed technology. For instance, if due to
network effects in the market consumers have a strong preference for products
incorporating the licensed technology, other technologies already on the market or
likely to come to the market within a reasonable period of time may not constitute a
real alternative and may therefore impose only a limited competitive constraint’.
Article 4(1) contains the black list of hard-core restrictions that prevent the application
of the exemption if the parties are competing undertakings, and Article 4(2) a list, adapted
from Regulation 330/2010 exempting vertical distribution agreements, of restrictions that
prevent the application of the regulation if the parties are not competing.
Article 5 lists provisions to which the exemption does not apply, but they are severable
and do not prevent the regulation applying to other provisions.
Articles 6 and 7 provide for withdrawal of the exemption.
If the specific restriction and/or agreement falls under Article 101(1) and is not covered,
or not exempted, by Regulation 316/2014, an individual assessment is required under Article
101(3) TFEU. The Commission’s TTBER Guidelines provide an analysis of a general
framework of analysis of the agreements as well as a detailed analysis of various types of
agreements, from the point of view of both Articles 101(1) and 101(3) TFEU, thus enhancing
legal certainty.302

13.3.3.1. Definitions and the scope of the Block Exemption: Articles 1 & 2
Technology Transfer Agreements’ Definition: According to Article 2(1) & 2(2) of Reg
316/2014, the exemption applies to restrictions of competition falling within the scope of
Article 101(1) TFEU included in ‘technology transfer agreements’. The technology transfer
agreements exempted by Article 2(1) of the regulation are defined in Article 1(1)(b) as know-
how and the following rights, or combinations thereof, ‘including applications for or
applications for registration of those rights’
 patents,

302
TTBER Guidelines [2014], paras 156–180 (general principles) & paras 181–273 (application to specific
types of agreements).

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 utility models,
 design rights,
 topographies of semiconductor products,
 supplementary protection certificates for medicinal products or other products for
which such supplementary protection certificates may be obtained,
 plant breeder’s certificates and
 software copyrights;
The block exemption is not available for licensing agreements relating to other IPRs, such as
trademarks or copyright licences) with the exception of the extent that these are directly
related to the production or sale of the contract products. However, according to the
Commission’s TTBER Guidelines, as a general rule the Commission will apply to licences of
traditional copyright the principles set out in the regulation and guidelines.
As with the previous Reg. 772/2004, which it replaced, the coverage of this group
exemption is wider than that of the previous generation BER in 1996 in that it embraces
licences not only of patent and know-how but also of copyright in software and designs, as
well as mixed agreements.
As for ‘Technology transfer agreements’ these are defined by Article 1(1)(c) as
englobing ‘a technology rights licensing agreement entered into between two undertakings
for the purpose of the production of contract products by the licensee and/or its sub-
contractor(s)” and , “an assignment of technology rights between two undertakings for the
purpose of the production of contract products where part of the risk associated with the
exploitation of the technology remains with the assignor’, for instance where royalties rather
than a lump sum are payable.
Ancillary provisions in relation to other IP rights: Article 2(3) continues by also
including within the scope of the exemption ‘provisions, in technology transfer agreements,
which relate to the purchase of products by the licensee or which relate to the licensing or
assignment of other intellectual property rights or know-how to the licensee, if, and to the
extent that, those provisions are directly related to the production or sale of the contract
products’.303 Provided the licensee is permitted to produce contract products, as required by
Article 2(1), restraints on how it may buy or sell products, not only contract products, are also
exempted: restrictions applying to purchases, sales or licences by the licensee or licensor are
exempt. Restraints on licensing other intellectual property rights, such as trademarks, to third
parties, are also exempt. They are, however, exempt only if they are ancillary.
Bilateral agreements: The exemption is also applicable only in the case of bilateral
transfer of technology agreements, in contrast to the vertical block exemption regulation,
which applies to multilateral agreements.304 However, as it is explained in Recital 6 of Reg.
316/2014 the exemption covers agreements concluded between a licensor and a licensee,
even if the agreement contains conditions relating to more than one level of trade, for
instance requiring the licensee to set up a particular distribution system and specifying the

303
See also TTBER Guidelines [2014], paras 46–50. Regulation 772/2004 used a more restrictive approach
exempting these restrictions only if they were ancillary, which also required that the restrictions did not
constitute the primary object of the agreement, as well as being directly related to the production of the contract
products.
304
The Commission had no powers under Reg 19/65 of the Council, conferring it the power to adopt a block
exemption regulation for transfer of technology agreements, to exempt agreements between more than two
undertakings.

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obligations the licensee must or may impose on resellers of the products produced under the
licence. In this case the agreement between the licensor and the licensee will be subject to
Reg. 316/2014, while supply and distribution agreements between a licensee and any
distributor(s) will not be covered by Reg. 316/2014 but should comply with the competition
rules applicable to supply and distribution agreements set out in Commission Regulation
(EU) No 330/2010.
Relation with Article 101(1) TFEU and with other block exemptions: The Regulation
and its exemption covers technology transfer agreements that infringe Article 101(1) TFEU.
Indeed, as the Commission explains paragraph 42 of the Guidelines, ‘many licence
agreements fall outside Article 101(1) of the Treaty, either because they do not restrict
competition at all or because the restriction of competition is not appreciable’. Hence, if an
agreement or specific clause is not prohibited by Regulation 316/2014, it is permitted.
Recital 7 of Reg. 316/2014 further specifies that
‘[t]his Regulation should only apply to agreements where the licensor permits the
licensee and/or one or more of its sub-contractors to exploit the licensed technology
rights, possibly after further research and development by the licensee and/or its sub-
contractors, for the purpose of producing goods or services. It should not apply to
licensing in the context of research and development agreements which are covered
by Commission Regulation (EU) No 1217/2010 [see Chapter XX] or to licensing in
the context of specialisation agreements which are covered by Commission
Regulation (EU) No 1218/2010 [see Chapter XX]. It should also not apply to
agreements, the purpose of which is the mere reproduction and distribution of
software copyright protected products as such agreements do not concern the
licensing of a technology to produce but are more akin to distribution agreements. Nor
should it apply to agreements to set up technology pools, that is to say, agreements for
the pooling of technologies with the purpose of licensing them to third parties, or to
agreements whereby the pooled technology is licensed out to those third parties.
“for as long as the licensed technology rights have not expired, lapsed or been
declared invalid or, in the case of know-how, for as long as the know-how remains
secret. However, where know- how becomes publicly known as a result of action by
the licensee, the exemption shall apply for the duration of the agreement’.
The relationship of this Regulation with other Block Exemption Regulations is explained in
detail in the TTBER Guidelines (paras 69–78).
Duration: According to the Guidelines305, the TTBER 316/2014 expires on April 30,
2016 and ‘applies for as long as the licensed property right has not lapsed, expired or been
declared invalid’, while in the case of know-how it applies as long as the licensed know-how
remains secret, except where the know-how becomes publicly known as a result of action by
the licensee, in which case the exemption applies for the duration of the agreement.
Naturally, the BER ceases to apply on the date of expiry, invalidity or the coming into the
public domain of the last technology right within the meaning of the TTBER.

13.3.3.2. Ceilings of market share—Article 3

305
TTBER Guidelines [2014], paras 67–68.

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No presumption the agreement infringes Article 101(1) TFEU: The group exemption
does not apply if the market shares of the parties exceed the ceilings imposed by Article 3.
The market share cap is related to the idea that market shares may operate as proxies for
market power306. Nevertheless, there is no presumption that their licences infringe Article
101(1) (Recital 13 Reg. 316/2014). They are outside the safe harbour of the regulation.
Market share thresholds: According to Art 3(1) Reg. 316/2014, ‘[w]here the
undertakings party to the agreement are competing undertakings, the exemption provided for
in Article 2 shall apply on condition that the combined market share of the parties does not
exceed 20 % on the relevant market(s). The market share threshold of Art. 3(1) is applicable
if the parties are actual competitors or potential competitors on the product market(s) and/or
actual competitors on the technology market.307 As the Commission explains in the TTBER
Guidelines, potential competition on the technology market is not taken into account for the
application of the market share threshold or the hardcore list relating to agreements between
competitors, although outside the safe harbor of the TTBER potential competition on the
technology market may be taken into account, without that however leading to the application
of the hardcore list relating to agreements between competitors.308 According to Art 3(2) Reg.
316/2014, the market share threshold goes up to 30% where the undertakings party to the
agreement are not competing undertakings. An important issue is therefore to determine the
nature of the agreements and in particular if these constitute agreements between competitors
or agreements between non-competitors.
The market share thresholds have been controversial for two reasons for transfer of
technology agreements. First, it is difficult to predict what market will be identified as
relevant by a court or NCA in the future. In the case of medicines it will probably be all the
drugs used for treating a particular ailment, possibly subdivided according to the method of
administration, such as injection or capsule. In other industries the selection may be more
difficult. For medicines, the alternative criterion of four independent poles of research (G
157) is likely to work well, as the long period needed for clinical trials enables us to know
what new drugs are in the pipeline. They may work less well for other products, but it is the
pharmaceutical companies who really need their patents and licences, because it is so easy to
copy a medicine once the exact formulation is disclosed in accordance with safety rules.
The second possible objection by some is that the permissible market shares are low.
Where R & D are expensive, they may be commercially worthwhile only if a large part of the
market can be supplied. Consequently many technology markets are concentrated. The only
possible licensors and licensees may have large market shares.
Relevant markets: According to Art 1(1)(m), “‘relevant market’ means the
combination of the relevant product or technology market with the relevant geographic
market”. The Commission explains in the TTBER Guidelines that ‘[t]echnology is an input,
which is integrated either into a product or a production process’ and technology right
licensing may therefore affect competition ‘both upstream in input markets and downstream
in output markets’.309
Relevant product markets: This comprises the contract products (incorporating the
licensed technology) and products regarded by the buyers as interchangeable with or

306
TTBER Guidelines [2014], para 25.
307
TTBER Guidelines [2014], para 82.
308
TTBER Guidelines [2014], para 83.
309
TTBER Guidelines [2014], para 20.

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substitutable for the contract products, by reason of the products’ characteristics, their prices
and their intended use. These can be either final and/or intermediary products.310 The
licensee’s market share is calculated on the basis of the licensee’s sales of products
incorporating the licensor’s technology and competing products, that is to say, the total sales
of the licensee on the product market in question.311 Sales made by other licensees are not
taken into account.
Relevant technology markets: According to the Commission’s TTBER Guidelines
‘[t]he relevant technology markets consist of the licensed technology rights and its
substitutes, that is to say, other technologies which are regarded by the licensees as
interchangeable with or substitutable for the licensed technology rights, by reason of the
technologies' characteristics, their royalties and their intended use’312. Indeed, ‘[s]tarting from
the technology which is marketed by the licensor, it is necessary to identify those other
technologies to which licensees could switch in response to a small but permanent increase in
relative prices, that is to say, to the royalties’. An alternative approach is to look at the
technology’s ‘footprint’ on the product market, that is the market for products incorporating
the licensed technology rights313, this figure being calculated on the basis of both the
licensor’s and the licensee’s sales.314
Competing and Non-Competing Undertakings. Until 2004, the Commission treated
undertakings as competing once both parties were producing. This was to look ex post, after
the technology has been successfully undertaken. It is at the time the commitment is made to
invest in it, however, that the US agencies decide whether parties are competing. When the
intellectual property right is being licensed, the need to induce the investment in R & D is
usually water under the bridge. The main justification for restrictive terms has thus ceased to
be relevant.
The Commission has been convinced when drafting former Reg. 7772/2004 to include
a new definition of ‘competing undertakings’, which is also adopted by Reg. 316/2014 in
Article 1(1)(n). According to this provision, ‘competing undertakings’ means
‘undertakings which compete on the relevant market, that is to say:
(i) competing undertakings on the relevant market where the technology rights are
licensed, that is to say, undertakings which license out competing technology rights
(actual competitors on the relevant market),
(ii) competing undertakings on the relevant market where the contract products are
sold, that is to say, undertakings which, in the absence of the technology transfer
agreement, would both be active on the relevant market(s) on which the contract
products are sold (actual competitors on the relevant market) or which, in the absence
of the technology transfer agreement, would, on realistic grounds and not just as a
mere theoretical possibility, in response to a small and permanent increase in relative
prices, be likely to undertake, within a short period of time, the necessary additional
investments or other necessary switching costs to enter the relevant market(s)
(potential competitors on the relevant market)’.

310
TTBER Guidelines [2014], para 21.
311
TTBER Guidelines [2014], para 91.
312
TTBER Guidelines [2014], para 22.
313
TTBER Guidelines [2014], paras 25, 87–88. See also Art 8(d) of Reg. 316/2014.
314
TTBER Guidelines [2014], para 86.

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Former TTBER Guidelines adopted in the context of Reg. 7762/2004 described undertakings
as competing only if they could have done so in the absence of the licence without infringing
the other’s intellectual property rights. The result was that most licences will now be treated
as vertical, subject to the higher ceiling of market share and to the less stringent list of hard-
core restraints in Article 4(2). This is now omitted by Regulation 316/2014.
When an agreement is not horizontal, because it is not concluded between two
competing undertakings, it is characterized as a vertical agreement and is subject to the
higher market share threshold of Art. 3(2) Reg 316/2014. According to the Commission,
‘[i]n principle, the parties to an agreement are not considered competitors if they are
in a one-way or two- way blocking position. A one-way blocking position exists
where a technology right cannot be exploited without infringing upon another valid
technology right, or where one party cannot be active in a commercially viable way
on the relevant market without infringing the other party's valid technology right. This
is, for instance, the case where one technology right covers an improvement of
another technology right and the improvement cannot be legally used without a
licence of the basic technology right. A two-way blocking position exists where
neither technology right can be exploited without infringing upon the other valid
technology right or where neither party can be active in a commercially viable way on
the relevant market without infringing the other party's valid technology right and
where the parties thus need to obtain a licence or a waiver from each other’.315
This is not going, however, always to be clear as there may be uncertainty as to
whether a particular technology is valid and infringed. In this case, where there is no final
court decision that a blocking position exists, the Guidelines explain that ‘the parties, when
addressing the question whether they are potential competitors, will have to base themselves
on all the available evidence at the time, including the possibility that intellectual property
rights are infringed and whether there are effective possibilities to work around existing
intellectual property rights’.316 A recent preliminary reference by the Italian Council of State
to the CJEU in the Hoffmann-La Roche/Novartis case may provide further information on the
characterization of “competitor” and horizontal agreement in the context of a licensing
agreement if the licensee company operates on the relevant market concerned solely by virtue
of that agreement317. Of particular interest is also the recent judgment of the General Court in
Lundbeck, which addresses the question of the existence of a relation of potential competition
between a patent holder and a generic that disposes of real concrete possibilities and the
capacity to enter the market, even if there is a possibility that the patent may be infringed and
that the patent holder may have brought an action for infringement (see our analysis in
Section 13.10.2.2.).
Drastic innovation: The Commission also accepts that it may be possible that while
the licensor and the licensee produce competing products, they may be considered non-
competitors on the relevant product market and the relevant technology market where the

315
TTBER Guidelines [2014], para 29.
316
TTBER Guidelines [2014], para 33. Substantial investments already made or advanced plans to enter a
particular market, can support the view that the parties are at least potential competitors, even if a blocking
position cannot be excluded. According to the Commission, ‘[p]articularly convincing’ evidence of the
existence of a blocking position may be required where, among other situations, there is a significant financial
inducement from the licensor to the licensee (eg a pay for delay settlement).
317
Case C-179/16 (pending).

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licensed technology represents such a drastic innovation that the technology of the licensee
has become obsolete or uncompetitive.318 The agreement will in this case be subject to the
higher threshold of Art. 3(2) and the list of hardcore restrictions for agreements between non-
competitors. According to the Guidelines, in such cases the licensor's technology either
creates a new market or excludes the licensee's technology from the existing market. The
emergence of a disruptive technology may nevertheless not be obvious at the time of the
conclusion of the agreement but may only become apparent some years later. The Guidelines
accept that the classification of the relationship between the parties may change into a
relation of non-competitors, if at a later point of time the licensee’s technology becomes
obsolete or uncompetitive on the market.
Article 8 contains some provisions concerning the calculation of market share.
Article 10 provides for a very short transitional period.

13.3.3.3. Hardcore restrictions: Article 4

A hard-core restraint is not only illegal and void in itself, but it prevents the
application of the block exemption to other provisions in the licence. The classification of
these restrictions as ‘hardcore’ is based ‘on the nature of the restriction and experience
showing that such restrictions are almost always anti-competitive’.319
Article 4 now distinguishes between licences between competitors, which are dealt
with by Article 4(1), and those between non-competitors, dealt with in Article 4(2). The new
definition of competing undertakings in the absence of a licence is very important, as most
licences become horizontal when looked at ex post. The introductory words to both Article
4(1) and Article 4(2) are very broad and black list agreements which ‘directly or indirectly, in
isolation or in combination with other factors under the control of the parties, have as their
object’ the classic cartel provisions.
In some cases the parties may become competitors subsequent to the conclusion of the
agreement because the licensee develops or acquires and starts exploiting a competing
technology. According to Art 4(3) Reg. 316/2014, the list of hardcore restrictions applying to
agreements between competitors will not be applied to such agreements unless the agreement
is subsequently amended in any material respect after the parties have become competitors.320
The list of hardcore restrictions is of course different for agreements concluded between
competitors than for vertical agreements. The block exemption ceases to apply to the entire
agreement, and not just the clause of the agreement including a hardcore restriction. The
agreements need therefore to be individually assessed. The Commission explains in the
Guidelines that the hardcore restrictions are considered restrictions by object under Article
101(1) TFEU and unlikely to satisfy the conditions of Article 101(3), even if such possibility
is not completely excluded as the Commission noted that the undertakings can ‘always plead
an efficiency defence’ in an individual case.321

13.3.3.3.1. Competing undertakings (horizontal agreements)

318
TTBER Guidelines [2014], para 37.
319
TTBER Guidelines [2014], para 94.
320
TTBER, Guidelines [2014], para 38.
321
TTBER, Guidelines [2014], para 94.

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Article 4(1) include a list of the hardcore restrictions for agreements between
competing undertakings. The first three black listed clauses are the classic cartel provisions,
which most antitrust systems condemn between competitors: price fixing, limitation of output
and the allocation of markets. Additional hardcore restrictions included in Article 4(1)
concern the allocation of customers and restrictions to the exploitation by the licensee of its
own technology.
There are several exceptions to characterization of the restriction as being hardcore
for limitation of output or the allocation of markets where the licence is not reciprocal. The
concept of ‘Reciprocal agreement’ is defined in Article 1(1)(d) as the situation where A
licences B and B licenses A, in the same or separate contracts (cross licensing agreements) to
exploit a patent, know-how or software copyright etc., where the licensed technologies are
competing technologies or can be used for the production of competing products. A non-
reciprocal agreement is an agreement where only one of the parties is licensing its technology
rights to the other party or where, in the case of cross licensing, the licensed technologies
rights are not competing technologies and the rights licensed cannot be used for the
production of competing products. A grant-back clause does not make the licences reciprocal,
but a licence may become reciprocal if at a later date a cross licence is granted. According to
the Commission, ‘[t]he hardcore list is stricter for reciprocal agreements than for non-
reciprocal agreements between competitors’. The Commission further explains that ‘[w]here
a non-reciprocal agreement subsequently becomes a reciprocal agreement due to the
conclusion of a second licence between the same parties, those parties may have to revise the
first licence in order to avoid the agreement containing a hardcore restriction’.322 In the
assessment of the individual case the Commission will take into account the time lapsed
between the conclusion of the first and the second licence.

Price fixing – Art 4(1)(a) & G99-102: The first black listed provision is terms ‘that
have as their object’ the fixing of prices for products sold to third parties. It does not prevent
the parties from agreeing the royalty to be paid for the licence unless this varies according to
whether suggested prices to third parties are complied with. It is immaterial whether the
agreement concerns fixed, minimum, maximum or recommended prices. Price fixing can also
be implemented indirectly by applying disincentives to deviate from an agreed price level, for
example, by providing that the royalty rate will increase if product prices are reduced below a
certain level. However, an obligation on the licensee to pay a certain minimum royalty does
not in itself amount to price fixing. Where royalties are calculated on the basis of all product
sales whether or not the licensed technology is used, the agreement is caught by Article
4(1)(a). Indeed, competitors may use in this case cross licensing with reciprocal running
royalties as a means of coordinating and/or increasing prices on downstream product
markets. The Guidelines state that the Commission will only treat cross licences with
reciprocal running royalties as price fixing where the agreement is devoid of any pro-
competitive purpose and therefore does not constitute a bona fide licensing arrangement, as in
such cases where the agreement does not create any value and therefore has no valid business
justification, there is high likelihood that the arrangement is a sham and amounts to a cartel.

322
TTBER, Guidelines [2014], para 98.

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Output limitation – Art 4(1)(b) & G103-104: Limitations on output except limitation
on the output of contract products imposed on the licensee are forbidden only if the
restriction is reciprocal and, even then, not if it is imposed in relation to the licensed product
on only one licensee. One-way restrictions are less likely to result in lower output.

Market allocation—Art 4(1)(c) & G105-114: The allocation of markets or customers

excludes the agreement from the regulation, irrespective of whether the licensee is free to use
its own technology. The Commission is concerned by the cost of setting up separate
production facilities for different areas or customers. To this item there are many exceptions
where the licence is not reciprocal. For instance, under Article 4(1)(c)(ii) the holder may
grant an exclusive licence or a licence for a particular field of use or product. This may give
the licensee an incentive to invest. For this reason, too, Article 4(1)(c)(iv) allows non-
reciprocal agreement not to sell actively or passively into the exclusive territory or customer
group reserved for the other party.

Restriction on using others’ technology- Art 4(1)(d) & G116: —A restriction on the
licensee using its own technology is treated as hard-core. Both parties must be free to carry
on their own R & D, whether or not in the field covered by the licence. They may, however,
agree to provide each other with future improvements. They may restrict R & D with third
parties when necessary to preserve the secrecy of know-how, but not to ensure that the
technology is not stultified. If a Chinese wall will preserve confidentiality, the exemption will
not apply if collaborative R & D is restricted.

13.3.3.3.2. Non-competing undertakings

The black list of Article 4(1) does not apply when the parties are not competing undertakings.
The contracts of sale or purchase may come within the group exemption for vertical
distribution agreements, but the limitation by one party to a licence of the other’s sales or
purchases are exempted under this regulation. In Article 4(2), therefore, the Commission has
adapted the black list from the vertical restraints regulation (9.6.4 above) with some changes.
As in the regulation for vertical restraints, the introductory words are very broad: ‘agreements
which, directly or indirectly, in isolation or in combination with other factors under the
control of the parties, have as their object’ the various forms of restriction of competition
included in Art 4(2).323

Resale price maintenance of IP protected goods – Art. 4(2)(a) & G118: The first item
is similar to that for vertical agreements, a restriction on a party’s ability to determine its
prices when selling products to third parties. Again maximum prices are permitted, as are
recommended prices, provided that they do not amount to fixed or minimum prices as a result
of pressure or incentives by the parties. While EU competition law does not provide for the
possibility of per se prohibitions, as article 101(3) may provide an exception for any
restriction of competition, if the four conditions of this article are fulfilled, it is highly
unlikely that RPM might benefit from an individual exception under Article 101(3), because

323
TTBER Guidelines [2014], para117.

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often such restrictions are not the only way to achieve efficiency gains, other less restrictive
to competition alternatives offering an additional option to attain them.

Vertical territorial limitations- Art 4(2)(b), Art 4(2)(c) & G119-127: Article 4(2)(b)
black lists territorial restrictions on passive sales relating to the territory into which, or the
customers t whom, the licensee may passively sell. Hence, the licensee may not be restrained
from responding to unsolicited orders. According to Art 4(2)(c) restrictions on active or
passive sales by licensees to end-users are also prohibited if the licensees are members of a
selective distribution system operating at the retail level of supply (with the exception of a
clause prohibiting a licensee from operating out of an unauthorised place of establishment).
The exemption of restrictions on active sales in licences is justified by the greater sunk costs
normally accepted by a licensee which has to establish a production line as well as a market.
‘Passive sales’ are not defined in the regulation or guidelines, but are widely described in the
guidelines on vertical agreements to exclude an advertisement on the internet with various
languages on which to click. The licensor may accept restrictions on active or passive sales
until one of the parties reaches the market share ceiling of 30%.
The exceptions to the prohibition of vertical territorial limitations by Article 4(2)(b)
are the following:

(i) the restriction of passive sales into an exclusive territory or to an exclusive

customer group reserved for the licensor up to the market share threshold
(30%);
(ii) an obligation to produce the licensed products only for the license’s own use
(as long as the licensee is not restricted in selling the contract products as
spare parts for its own product) up to the market share threshold (30%).
So, the licensor may protect its own exclusive territory or customer group from even
passive sales,
(iii) the obligation to produce the contract products only for a particular customer,
where the licence was granted in order to create an alternative source of
supply for that customer;
(iv) the restriction of sales to end-users by a licensee operating at the wholesale
level of trade,
(v) the restriction of sales to unauthorised distributors by the members of a
selective distribution system;
The older Reg. 772/2004, which provided an exception for a restriction on passive
sales by licensees to exclusive territories or customer groups reserved to another licensee for
two years from the time when the licensee protected first put the product on the market, and
possibly protected the territory of an exclusive distributor. The new Guidelines go further and
indicate that ‘restrictions on passive sales by licensees into an exclusive territory or customer
group allocated to another licensee, while normally a hardcore restriction, may fall outside
Article 101(1) of the Treaty for a certain duration if the restraints are objectively necessary
for the protected licensee to penetrate a new market’.324 According to the Commission, ‘[t]his
may be the case where licensees have to commit substantial investments in production assets
and promotional activities in order to start up and develop a new market’, taking into account

324
TTBER Guidelines [2014], para 126.

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the fact that ‘the risks facing a new licensee may […] be substantial, in particular since
promotional expenses and investment in assets required to produce on the basis of a particular
technology are often sunk, that is to say, that upon leaving that particular field of activity the
investment cannot be used by the licensee for other activities or sold other than at a
significant loss’.325 Furthermore, the Commission noted that ‘[w]here substantial investments
by the licensee are necessary to start up and develop a new market, restrictions of passive
sales by other licensees into such a territory or to such a customer group fall outside Article
101(1) for the period necessary for the licensee to recoup those investments’ and indicates
that ‘in most cases a period of up to two years from the date on which the contract product
was first put on the market in the exclusive territory by the licensee in question or sold to its
exclusive customer group would be considered sufficient for the licensee to recoup the
investments made’. However, the Commission recognizes that in an individual case a longer
period of protection for the licensee might be necessary in order for the licensee to recoup the
costs incurred.
Article 4(3) provides that if the parties to the licence were not competing when the
licence was granted but later come to be ‘competing undertakings’ the licence is subject to
the less extensive list in Article 4(2) rather than that in Article 4(1). This provision applies
only to Article 4 and not to Article 3.

13.3.3.4. Excluded Restrictions

Article 5 lists the restrictions that are not exempted by this regulation, but which do not
prevent the regulation applying to other provisions. These restrictions may or may not
infringe Article 101(1). If they do not, they create no problem. Article 5 is more important
than the similar list of conditions in the vertical distribution regulation, because some of the
provisions in this regulation are more likely to infringe Article 101(1) TFEU. The presence of
excluded restrictions does not prevent the TTBER applying to the rest of the agreement
provided that the excluded restrictions can eb severed as a matter of law. The Commission
lists the following two excluded restrictions:

(a) exclusive grant-backs by the licensee – Art 5(1) & G129-132: any direct or indirect
obligation on the licensee to grant an exclusive licence to the licensor or to a third party
designated by the licensor in respect of its own severable improvements to or its own
new applications of the licensed technology;
The Commission has long been concerned about strong grant-back clauses of
intellectual property rights. It has permitted an obligation to feed or grant back non-
exclusively when it is reciprocal, but not an exclusive licence or assignment of the
rights. Article 5(1)(a) and (b) is concerned with exclusive grant back or assignment to
the licensor of severable improvements of the licensed technology or new
applications. An improvement is severable if it can be exploited without infringing the
licensed technology. Strong grant-back clauses reduce the incentive for the licensee to
innovate, since they restrain it from exploiting the results through licensing. Non-
exclusive grant back is, however, permitted. If the licensor grants a package licence it
has no chance of getting a technical lead over its licensees, and cannot afford to let

325
Ibid.

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them gain a lead on it. There would be less licensing if grant-back obligations were
not permitted. The payment of compensation for grant back is not relevant under the
Technology Transfer regulation, but Guideline 110 states that it may be relevant
under Article 101, as it may increase the incentive to innovate.

(b) No-challenge clauses – Art 5(1) & G 133-140: any direct or indirect obligation on a
party not to challenge the validity of intellectual property rights which the other party
holds in the Union, without prejudice to the possibility, in the case of an exclusive
licence, of providing for termination of the technology transfer agreement in the event
that the licensee challenges the validity of any of the licensed technology rights.
The Commission has long objected to no challenge clauses on the ground that they
stifle innovation. The Commission has given way to the extent of permitting the
possibility of withdrawing the licence once the intellectual property right is
challenged. It permits a clause protecting know-how because of its fragility.

(c) Limiting the licensee's use or development of its own technology – Art 5(2) & G141-143:
any direct or indirect obligation limiting the licensee’s ability to exploit its own
technology rights or limiting the ability of any of the parties to the agreement to carry out
research and development, unless such latter restriction is indispensable to prevent the
disclosure of the licensed know-how to third parties
This is a hardcore restriction for agreements between competitors and an excluded
restriction for agreements between non competitors.

13.3.3.5. Withdrawal and Disapplication

Article 6(1) provides that the Commission may withdraw the exemption when a
technology transfer agreement has effects that do not merit exemption. An NCA may do so
only where an agreement has effects incompatible with Article 101(3) in its territory or part
of it, which has all the characteristics of a distinct geographic market. It may do so only in
respect of that territory. According to the same provision, withdrawal may be warranted in
the following circumstances:
(a) access of third parties' technologies to the market is restricted, for instance by the
cumulative effect of parallel networks of similar restrictive agreements prohibiting
licensees from using third parties' technologies;
(b) access of potential licensees to the market is restricted, for instance by the
cumulative effect of parallel networks of similar restrictive agreements preventing
licensors from licensing to other licensees or because the only technology owner
licensing out relevant technology rights concludes an exclusive license with a licensee
who is already active on the product market on the basis of substitutable technology
rights. In order to qualify as relevant, the technology rights need to be both technically
and commercially substitutable in order for the licensee to be active on the relevant
product market
By virtue of Article 7, where parallel networks of similar technology transfer
agreements cover more than half of the relevant market, the Commission may disapply the
exemption by regulation. However, the Commission does not have an obligation to act where

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the 50 % market- coverage ratio is exceeded and will only do so where it is likely that access
to the relevant markets or competition is appreciably restricted.326

13.3.3.6. Assessment beyond the TTBER

If an agreement falls outside the scope of the block exemption regulation (eg it is an
agreement between more than two parties or the market share thresholds are exceeded) an
individual assessment is required. This involves, first, an assessment under Article 101(1) and
in case the agreement falls under this provision, an assessment under Art 101(3) TFEU.
Recall the additional safe harbour of the existence of four independent technologies in
addition to and substitutable to the ones controlled by the parties to the agreement, under
paragraph 157 of the TTBER Guidelines. The Commission also notes in the Guidelines that it
will therefore only exceptionally intervene against exclusive licensing in agreements between
non-competitors, irrespective of the territorial scope of the licence, because ‘[t]he right to
grant an exclusive licence is generally necessary in order to induce the licensee to invest in
the licensed technology and to bring the products to market in a timely manner’, which is ‘in
particular the case where the licensee must make large investments in further developing the
licensed technology’.327
Agreements between competitors are more likely to infringe Article 101(1) TFEU and
their assessment requires careful analysis of a number of factors in the context of a general
framework set by the Commission’s Guidelines (G156-180):
 The nature of the agreement
 The market position of the parties
 The market position of competitors
 The market position of buyers of the licensed products
 The existence (and extent of) any entry barriers; and
 The maturity of the market
The Commission’s TTBER Guidelines go on providing an overview of the assessment of
the type of restraints commonly contained in licence agreements. Some of these are briefly
examined below.
Royalty obligations (G:184-188): parties to a licence agreement are normally free to
determine the royalty payable by the licensee and its mode of payment without being caught
by Article 101(1). Royalties may take the form of a) lump sum payments, b) a percentage of
the selling price or c) a fixed amount for each product incorporating the licensed technology,
the number of users calculated on a per machine basis (for software). These are all
compatible with Article 101(1) TFEU. The parties can normally agree to extend royalty
326
TTBER, Guidelines [2014], para152.
327
TTBER, Guidelines [2014], paras 194–195. The Commission therefore considers that these agreements are
likely to fulfil the conditions of Article 101(3). It also notes, however, that if the licensee already owns a
substitutable technology used for in-house production, the exclusive license might not be necessary in order to
give incentives to the licensee to bring a product to the market and in case licensee has market power on the
product market, this may be caught under Article 101(1) TFEU. The main situation in which intervention may
be warranted is where a dominant licensee obtains an exclusive licence to one or more competing technologies.
Such agreements are likely to be caught by Article 101(1) and unlikely to fulfil the conditions of Article 101(3).
However, for Article 101(1) to apply entry into the technology market must be difficult and the licensed
technology must constitute a real source of competition on the market. In such circumstances an exclusive
licence may foreclose third party licensees, raise the barriers to entry and allow the licensee to preserve its
market power.

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obligations beyond the period of validity of the licensed intellectual property rights without
falling foul of Article 101(1) of the Treaty in case after expiration of the IP right third parties
can legally exploit the technology in question and compete with the parties to the agreement.
If however competitors provide for reciprocal running royalties in circumstances where the
licence is a sham, in that its purpose is not to allow an integration of complementary
technologies or to achieve another pro-competitive aim, these may constitute a hardcore
restriction. The Commission also noted that in the case of agreements between non
competitors if royalties are paid not just on products produced with the licensed technology
but also on products produced with third party technology, then the royalties may increase the
cost of the latter products and reduce demand for third party technology, thus causing
foreclosure effects.
Various Use restrictions (G208-220): Under a field of use restriction the licence is either
limited to one or more technical fields of application or one or more product markets or
industrial sectors. The Guidelines note that these may have pro-competitive effects by
encouraging the licensor to grant licences outside its main area of activity. The main
competition concern is that the licensee may cease to exist as a competitive force outside the
licensed field of use. There is a higher risk of anticompetitive effect in the case of cross
licensing between competitors where the agreement provides for asymmetrical field of use
restrictions. A field of use restriction is asymmetrical where one party is permitted to use the
licensed technology within one industrial sector, product market or technical field of use and
the other party is permitted to use the other licensed technology within another industrial
sector, product market or technical field of use. Captive use restrictions impose an obligation
on the licensee to limit its production of the licensed product to the quantities required for the
production of its own products and for the maintenance and repair of its own products. These
may have serious negative effects when the licensor has a significant degree of market power
on the component market in agreements between competitors. In the case of licence
agreements between non- competitors there are two main competitive risks stemming from
captive use restrictions: a restriction of intra-technology competition on the market for the
supply of inputs and an exclusion of arbitrage between licensees enhancing the possibility for
the licensor to impose discriminatory royalties on licensees. These restrictions may
nevertheless be pro-competitive if the licensor is itself a supplier of components.
Packaged licensing and tying (G221-225): The Guidelines recognize the potential
precompetitive benefits of package licensing and state that a package license is likely to
violate Article 101 TFEU only if the market share is above the level required by the market
share thresholds. Above the market share thresholds it is necessary to balance the anti-
competitive and pro-competitive effects of tying.
The Guidelines also provide quite detailed guidance on settlement agreements, in
particular pay-for-delay, per for restriction clauses in settlement agreements (G234-243), and
technology pools (G244-273), which we will examine in separate Sections of this Chapter.

13.5. Technology sharing and ‘innovation commons’

13.5.1. General Principles

In some key industries, such as semi-conductors, computer software, biotechnology,

nanotechnology, electronics, amongst others, the fuzzy boundaries of individual IPRs, the

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development of complex products requiring a variety of inputs and complementary assets, the
importance of litigation following up disputes over appropriability and the need to organize
the sharing of benefits between the actors present at different stages of the innovation
process, has led to the development of ‘innovation commons’, enabling the sharing of
information protected by IPRs and avoiding the problem of blocking patents. When licenses
from too many individual IP holders are required, firms might under invest in the
commercialization of downstream technologies, thus impeding R&D activity by making it
difficult for firms to operate without extensive licensing of complementary technologies. The
fragmentation of IPRs may impede the development and commercialization of new products
or may increase considerably their cost. Focusing on the biotechnology industry, Heller and
Eisenberg have discussed the ‘tragedy of the anti-commons’ that may arise when there are
multiple gatekeepers, each of whom must grant permission before a resource can be used:
when IPRs are fragmented, the resource is likely to be underused and thus innovation will be
stifled.328 There is empirical evidence of this ‘anti-commons’ problem and the resulting
fragmentation of IPRs in various industries. For example, Hall and Ziedonis have examined
patenting in the semi-conductor industry and found that this was higher in the presence of a
low concentration of patent rights among rival firms, that is, a situation of greater
fragmentation of patent rights. These empirical studies indicate that firms attempt to defend
themselves from the anti-commons problem by developing strategies of defensive patenting
in order to strengthen their bargaining position, thus at the same time increasing the
likelihood of a ‘tragedy of anti-commons’.329
Innovation commons may take different forms: those working within the framework
of IPRs include patent pools and cross-licensing arrangements, blanket licensing, cooperative
standard setting and settlement of IP related disputes. The management of common resources
provides benefits in comparison to the organization of the activity within a firm, as it enables
the public to benefit from communal development, but also competition. In certain
circumstances it can be a superior alternative than individual IPRs, dealing with the problem
of ‘excessive or misaligned’ IPRs and the constitution of ‘patent thickets’. Patent thickets are
particularly common in technology areas that are densely populated by patents having
overlapping claims relating to similar technology.330 This overlapping set of patent rights
requires that those seeking to commercialise new technology obtain licenses from multiple
patentees. This leads first to increased transaction costs associated with negotiating with
multiple patent owners if a license is needed to avoid infringement. Second, producers may
infringe patents inadvertently, because it is difficult to identify overlapping patents or
because the patent boundaries are hard to determine prior development of the invention.
Third, inventors may face potential litigation from upstream firms that do not practice their
patents and hence keep them in relative obscurity, thus increasing litigation costs. Fourth,
when multiple patents cover complementary components of a technology, patentees may
exclude each other from using the technology as produce will have to navigate a ‘thicket’ of

328
MA Heller and RS Eisenberg, ‘Can Patents Deter Innovations? The Anticommons in Biomedical Research’
[1989] 280 Science 698.
329
BH Hall and RH Ziedonis, ‘The Patent Paradox Revisited: An Empirical Study of Patenting in the U.S.
Semiconductor Industry, 1979-1995’ [2001] 32 Rand Journal of Economics 101.
330
I Hargreaves Report, ‘Review of Intellectual Property and Growth, Patent Thickets, Licensing and
Standards’, available at webarchive.nationalarchives.gov.uk/20140603093549/http:/www.ipo.gov.uk/ipreview-
finalreport.pdf.

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conflicting rights to use their invention. The risk of exclusion may be intensified if patent
holders strategically engage in building thickets of patents in order to force innovators to
share rents under cross licenses or to develop a patent portfolio for defensive purposes. Small
and medium enterprises (SME) may also be at disadvantage than large incumbents disposing
of strong patent portfolios, which may conclude between them cross-licensing arrangements
excluding SMEs from entering markets.
Patent thickets may produce negative welfare effects. It is well known in economics
that when firms with market power sell complementary goods, their combined price will
typically be higher than if both were sold by a single monopolist. This phenomenon called
double marginalization may be particularly acute in high technology fields. In high-tech
fields where innovation is rapid and cumulative, a large number of patents may touch on the
same new technology. Double marginalization can make the technology expensive to
commercialize, harming downstream producers and consumers as well as the innovators the
patent system was designed to reward. This complements problem may even become worse if
the downstream firms using the various inputs truly require the IPRs controlled by the
upstream firm to make their products. First, the downstream producer will have to pay
royalties to multiple patent owners, leading to the increase of the total amount of royalties
paid, leading to high royalty overcharges that act as a tax on new products incorporating the
patented technology, thereby impeding rather than promoting innovation (royalty
stacking).331 Second, it would have been possible for the downstream producer to invent
around the blocking patents if that manufacturer were aware of the patent and disposed of the
time to do so.
However, the situation is different if the downstream producer becomes aware of the
patent after the downstream product has been designed and placed into large-scale
production. In this case, the manufacturer would have incurred asset specific investments for
the use of the specific technology and would be in a far weaker negotiating position. The
patent holder could thus seek far greater royalties, backed up with the threat that he/she may
interrupt the productive activity of the manufacturer. The producer’s only options in this case
would be either to negotiate in a weak bargaining position with the patent holder or go back
and redesign the product, re-launch its production, solve any compatibility problems there
might exist between the different versions of the product, activities that would impose a huge
cost. Consequently, the downstream producer is highly susceptible to hold up by the patent
holder (the hold-up problem)332. Hold up may also arise if the downstream producer needs
multiple complementary IPRs which are procured in a sequenced fashion, but patent holders
strategically delay the start of the negotiation and thus get the greatest surplus because of the
increased bargaining power that would result from their position as the last bidding seller (the
hold-out or reverse hold-up problem)333. The hold-up problem may be particularly acute in IT
industries, in particular relating to Standard Essential Patents, because of the great number of
patents that may be used to ‘hold up’334.
331
MA Lemley & C Shapiro ‘Patent Holdup and Royalty Stacking’ (2007) 85 Texas Law Review 1991, 1993.
332
There is some debate on the empirical evidence regarding the prevalence of the hold-up problem: see, for a
recent survey A. Galetovic, S. Haber, & R. Levine, ‘An Empirical Examination of Patent Hold-Up’, (2015)
11(3) Journal of Competition Law & Economics, 549–578;.
333
RP Merges, ‘Contracting into Liability Rules: Intellectual property Rights and Collective Rights
Organizations’ [1996] 84 California Law Review 1293.
334
J. Farell, J. Hayes, C. Shapiro, T. Sullivan, ‘Standard Setting, Patents and Hold-up’, (2007) 74(3) Antitrust
Law Journal 603. Note however that there is some debate on the empirical evidence regarding the prevalence of

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Hold out (or reverse hold up) can also arise if it is the implementer and not the patent
holder that disposes of the largest bargaining power in licensing negotiations, for instance
because of a monopsony situation, with the result that the implementer will be able to reduce
the royalty payments made to the patent holder below a fair (FRAND level). Hence, in these
cases, the patent holder may end up receiving lower revenues than the value of their patent335.
A possible solution to the double marginalization problem is the vertical integration of
the companies controlling complementary assets. Such a solution may however decrease
competition more than what is necessary for the resolution of the problem and might be less
optimal than a solution that enables firms to cooperate while maintaining some degree of
competition between them. Alternatively, the undertakings controlling these assets may
coordinate their activities in a cooperative setting that would enable them to deal with the
complements and the hold-up problems by cross-licensing their IPRs. Any cooperation and
cross-licensing would be superior to a world in which patent holders fail to cooperate. Such
cooperation may however face obstacles with regard to competition law’s sensitivity to the
cooperation of undertakings that might be potential competitors in different circumstances.
As a matter of public policy, coordination will certainly generate benefits to the parties, but
one cannot assume that it will always be compatible with the public interest to promote
competition and protect the consumers. We will examine the application of competition law
in Europe and the US to patent pools and cross-licensing agreements, which constitute some
of the most important coordination mechanisms put in place in order to deal with the
complements and the hold-up problems.

13.5.2. Patent pools, cross-licensing and the complements problem

Patent pools and cross-licensing arrangements constitute a natural solution to the

complements problem.336 Under a patent pool, an entire group of patents is licensed in a
package, either by one of the patent holders or by a new entity established for this purpose,
offering a ‘one stop shop’ to all members of the pool to have access to the desired patents.
Patent pools also enable non-members to have access to the patented technology at a royalty
rate established by the members of the pool. Patent pools go back a long time and in some
cases their creation was initiated by the State.337 In 1917, during the First World War, US
aircraft manufacturers were asked by the US government to participate to a patent pool
because ongoing litigation between the company established by the Wright brothers had led

the hold-up problem: see, for a recent survey A. Galetovic, S. Haber, & R. Levine, ‘An Empirical Examination
of Patent Hold-Up’, (2015) 11(3) Journal of Competition Law & Economics, 549–578.
335
On a discussion of both situations of hold up and hold out arising in equilibrium, see G. Langus, V. Lipatov
& D. Neven, ‘Standard-Essential Patents: Who is really holding up and when?’, (2013) 9(2) Journal of
Competition Law & Economics 253-284, finding that “despite the availability of injunctions, the holder of a
sufficiently weak patent will end up accepting below FRAND rates, in particular when litigation cost are high”.
336
Cross-licensing arrangements take the form of bilateral agreements under which two firms license large
blocks of their respective patents to one another so as to avoid infringement litigation. That removes the need of
patent-by-patent licensing and reduces transaction costs. Patent pools intervene in situations in which a firm
requires licenses to a small number of patents held by each of many firms.
337
On the first patent pool, see, A Mossof, ‘The Rise and Fall of the First American Patent Thicket: The Sewing
Machine War of the 1850s’ [2011] 53 Arizona Law Review 165.

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aircraft production to a stalemate.338 Patent pools are often developed in conjunction with
technological standards (eg, the MPEG-2 video and DVD standards in the late 1990s).
When patents in a pool are complements, the pool can lower their combined price,
reduce transaction costs by limiting the number of individual licensing agreements required
to make use of the technology) and thus increase licensing revenues. Pools may also reduce
costs by reducing the occurrence of infringement litigation. Patent pools may however also be
used to eliminate competition between rival technologies and facilitate cartelization.
Participants in a patent pool might be able to use it as an opportunity to exchange
competitively sensitive information on prices, output, marketing strategies etc. While
recognizing the benefits of patent pools, competition authorities at both sides of the Atlantic
have subjected patent pools to competition law scrutiny, in particular with regard to their
formation, the selection of the included technologies and their operation.
Recital 7 of Regulation 316/2014 indicates that it does not apply to “agreements for
the pooling of technologies with the purpose of licensing them to third parties”.
With regard to patent pools, the EU Transfer of Technology Guidelines distinguish
between complement and substitute technologies339. Two technologies are complements
when they are both needed for the production of the product or for carrying out the process to
which the technologies relate. Two technologies are substitute when either technology
enables the downstream manufacturer to produce the product or carry out the process to
which the technologies relate. Pools composed of pure substitute technologies are more likely
to harm competition and social welfare than are pools of complementary technologies. A
further distinction is made between essential and non-essential technologies. Pools which are
only composed of essential technologies are always precompetitive. All essential
technologies are by definition considered complementary as well. Pools with complementary
non-essential technologies may raise some competition concerns and there should be pro-
competitive reasons to include non-essential technologies to the pool. Patent pools limiting
competition among entities that would have been actual or likely potential competitors in a
relevant market in the absence of the license have the greatest potential to restrict
unreasonably competition. Vertical license restrictions may also harm competition if they
foreclose access or raise the price of an important input or if they facilitate horizontal
coordination.
Categorizing technologies as being complements or substitutes is not an easy task as
in some cases technologies may display characteristics of both. There is also some discussion
over the essential or non-essential character of the technology, as different tests to define
whether the patent is essential to a standard or technology have been put forward.340 Recent
patent pools have all been limited to essential patents and provide for independent experts to
determine which patents should be included on this basis as a competitive safeguard to ensure
that patent pools will not produce any anticompetitive effects.

338
For an analysis of the emergence of patent pools, see R Merges, ‘Institutions for Intellectual Property
Exchange: The Case of Patent Pools’ in R Dreyfuss, Intellectual Products: Novel Claims to Protection and
Their Boundaries (Oxford Univ. Press, 2001) 123.
339
TTBER Guidelines [2014], paras 250-255.
340
One could distinguish between an ‘economic’ test and a ‘technically essential’ test.

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The EU Transfer of Technology Guidelines provides some guiding principles on the

competition assessment of technology pools.341 Patent pools composed of essential
technologies do not fall within the scope of Article 101(1) TFEU. The inclusion of substitute
technologies brings the patent pools within the prohibition principle of Article 101(1) and it is
highly unlikely that it will benefit from the legal exception of article 101(3) TFEU, at least
not if the substitute technologies constitute a significant part of the pooled technology, even if
parties remain free to grant individual licenses, as this is unlikely to occur. If complementary
patents of a non-essential nature are included, article 101(1) becomes applicable because of
collective bundling, yet article 101(3) may apply if the nature of the pooled technology is
ambivalent (complementary in part, substitute in part) or it changed over time (from essential
to non-essential). Market dominating pools are required to practice fair and non-
discriminatory terms of licensing and they may not grant exclusive licenses. The EU
Guidelines on transfer of technology also contain detailed analysis on the institutional
framework governing the pool, noting that ‘the way in which a technology pool is formed,
organised and operated can reduce the risk of it having the object or effect of restricting
competition and provide assurances to the effect that the arrangement is pro-competitive’.342
Open pools are considered more competition-compatible than pools set up by a limited group
of technology owners. The involvement of independent experts to the creation and operation
of the pool and for the consideration of whether or not a technology is essential also reduce
the likelihood of the pool being found anticompetitive. The likelihood of sensitive
information being exchanged in an oligopolistic setting and the competitive safeguards put in
place to avoid this from happening are also examined by the Commission. The Guidelines
also establish a ‘safe harbour’ under Article 101(1) TFEU, with regard to the creation and
operation of the pool, including the licensing out, irrespective of the market position of the
parties, if seven cumulative conditions are satisfied, including that participation in the pool
creation process is open to all interested technology rights owners, the pooled technologies
are licensed into the pool on a non-exclusive basis and the pooled technologies are licensed
out to all potential licensees on FRAND terms. The parties contributing technology to the
pool and the licensee remain free to develop competing products and technology.343

13.4.3. Collective licensing and copyright pools

Collective licensing has long been common in the music industry. There are many
forms of copyright and kindred rights, and individual holders could not enforce so many
rights individually in each Member State in relation to each protected item. In each country
there are copyright collection societies, each of which monitors the exploitation of its
members’ copyright for a particular kind of right (such as author’s rights or performing
rights) and collects the fees for them.

341
As technology pools include more than two parties, the Block exemption Regulation 316/2014 on transfer of
technology agreements does not apply. However, the Commission provides information on the analytical
framework in its Guidelines on transfer of technology agreements.
342
TTBER Guidelines [2014], para 248.
343
TTBER Guidelines [2014], para 261.

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In BRT v SABAM344, the CJEU held that the contract in standard form that authors
make with a collecting society is subject to the competition rules. BRT was the only
collecting society managing a particular class of copyright in Belgium and, consequently, in a
dominant position. The CJEU stated that BRT was formed to protect the rights and interests
of its individual members against, in particular, major exploiters and distributors of musical
material, such as radio stations and record manufacturers. To do this effectively it was
necessary that member should assign their rights to BRT, but the contracts should not exceed
what was essential for that purpose. Whether the assignment should cover all works, present
and future, worldwide for life was a matter for the national court to decide (paras 9–15).
Earlier, in GEMA345, the Commission had held that some provisions were excessive
and unfair, and infringed Article 102(a). The collecting societies each operated in only a
single Member State but made reciprocal representation contracts with those for other
territories, under which the latter would enforce the rights of its members. This enabled the
monitoring for a particular territory to be done for all authors by a single collecting society
which transmitted the fees to the author’s collecting society. The Commission ensured that
each society could collect its own royalties individually, but none did.
In the SACEM cases346 the CJEU did not object to the reciprocal representation
agreements, but held that the prices each charged might be unfair and contrary to Article
102(a) if they were excessive. This might be the case if administration was unnecessarily
costly, because monitoring was too detailed.
The Commission approved standard form collective agreements for simulcasting in IFPI347.
Simulcasting makes sound recordings transmitted by radio and TV stations immediately
available on the internet. IFPI, a trade association representing record and music-video
producers, which were members of national collecting societies worldwide, notified to the
Commission a draft model Reciprocal Agreement between the collecting societies for
licensing simulcasting. Effective protection of producers’ rights through territorial reciprocal
agreements would be impracticable for simulcasting since the internet is global. Multiple
licences would need to be negotiated for each country. The reciprocal agreement enabled
collecting societies to grant multi-territorial and multi-repertoire ‘one-stop’ licences. It
provided an alternative for simulcasters to obtaining separate licences from the local society
in each country. Each collecting society agreed to grant the others the right to license
simulcasting or claim equitable remuneration in its territory, on a non-exclusive basis. The
licence fees for IP holders would be based on the country-of-destination principle: each
collecting society charging the fees based on those of the society operating in the place where
the consumer downloaded the programme on behalf of all the member societies. The
Commission found (para 62) that the agreement would create a new product that could not
realistically be created without some cooperation between the collecting societies, so it
looked favourably at the agreement, scrutinising only certain clauses. The reason for adopting
the country of destination was that, if the origin of the simulcast were adopted, there would
be ‘forum shopping’ throughout the world to simulcast from countries where the protection

344
Case C-127/73 Belgische Radio en Televisie (BRT) v Société Belge des Auteurs Compositeurs et Editeurs
(SABAM) and NV Fonior [1974] ECR 313.
345
GEMA (Case IV/26.760) Commission Decision 71/224/EEC [1971] OJ L134/15.
346
Case C-395/87 Ministère public v Jean-Louis Tournier (1989) ECR 2521 & Case C-110/88 Lucazeau v
SACEM (1989) ECR 2811.
347
IFPI-simulcasting (Case COMP/C2/38.014) Commission Decision 2003/300/EEC [2003] OJ L107/58.

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of the copyright etc was weakest or the fees lowest. The agreement finally approved specified
that the level of fees should be those normally charged in the country of destination, but did
not specify what that charge should be. The global tariff would be a small proportion of the
sum of the national tariffs. The simulcasting licensor would not be free to set its charges as it
wished. In practice, the copyright societies competed, and charged less than they were
entitled to do. There was almost perfect competition and the copyright holders obtained less
than expected.
In the Santiago Agreement, the European Commission has warned sixteen
organisations that collect royalties on behalf of music authors that their so-called Santiago
agreement is potentially in breach of European Union competition rules. This is because the
cross-licensing arrangements that the collecting societies have between themselves lead to an
effective lock up of national territories, transposing into the Internet the national monopolies
the societies have traditionally held in the offline world.
The Commission believed that there should be competition between collecting
societies to the benefit of companies that offer music on the Internet and to consumers that
listen to it. The Santiago Agreement was notified to the Commission in April 2001 by the
collecting societies of the UK (PRS), France (SACEM), Germany (GEMA) and the
Netherlands (BUMA), which were subsequently joined by all societies in the European
Economic Area (except for the Portuguese society SPA) as well as by the Swiss society
(SUISA).348 The purpose of the agreement is to allow each of the participating societies to
grant to online commercial users ‘one-stop shop’copyright licenses which include the music
repertoires of all societies and which are valid in all their territories. The loss of territoriality
brought about by the Internet, as well as the digital format of products such as music files, are
difficult to reconcile with traditional copyright licensing schemes which are based on purely
national procedures. The traditional licensing framework would require a commercial user
wishing to offer to its clients such musical work to obtain a copyright license from every
single relevant national society.
The Commission supported the ‘one-stop shop’ principle for online licensing
enshrined in the Santiago Agreement and acknowledged the need to ensure adequate
copyright protection and enforcement, in line with its IFPI Simulcasting decision. However,
the Commission also considered that such crucial developments in online related activities
must be accompanied by an increasing freedom of choice by consumers and commercial
users throughout Europe as regards their service providers, such as to achieve a genuine
European single market. The structure put in place by the parties to the Santiago Agreement
results in commercial users being limited in their choice to the monopolistic collecting
society established in their own Member State. The Commission considers that the territorial
exclusivity afforded by the Santiago Agreement to each of the participating societies is not
justified by technical reasons and is irreconcilable with the world-wide reach of the Internet.
The Agreement expired end of 2004 and was not renewed, given the Commission’s concerns.
In another case, the Cannes Agreement, five major music publishers and 13 mechanical rights
collection societies concluded in 1977 an agreement in relation to the administration of
phono-mechanical rights in the EEA. The Agreement expired in 2002 and was to be extended
in the Cannes Extension agreement notified to the Commission in 2003. The extension
agreement contained some clauses a) relating to the granting of rebates by collecting societies

348
Santiago Agreement (Case COMP/C2/38.126) Notice of notification [2001] OJ C 145/2

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to record companies in the context of central licensing agreements, which are multi-repertoire
one-stop-shop licenses for the whole EEA and b) relating to the ability of collecting societies
to undertake commercial publishing or record producing activities. The Commission argued
that the first clause would require the consent of other collecting societies' members or other
collection societies before granting of a rebate and can have the effect of preventing the
granting of rebates by a collecting society that negotiates a Central Licensing Agreement with
a record company. In addition, the Commission found that the second clause had the object
and potential effect of crystallizing current market structure and preventing future potential
competition.349 The parties, following the Commission's assessment offered commitments to
reformulate the wording of the rebate clause and to delete and never re-implement the second
clause.
In CISAC350 the collecting societies managed copyright – in particular performance
rights – on behalf of composers and lyricists of musical works, ensuring that they receive the
remuneration due for exploitation of their work. Many EU countries have just one national
collecting society. All the collecting societies operated under the umbrella of CISAC, the
International Confederation of Societies of Authors and Composers.
CISAC developed a non-binding model contract (‘Model Contract’), which the
collecting societies used as the basis for reciprocal representation agreements (‘RRAs’),
giving each other the right to grant licenses for their authors' works in their respective
territories.
Broadcasters RTL, in 2000, and Music Choice, in 2003, complained to the
Commission that they were unable to obtain EU-wide licenses from CISAC collecting
societies for public performance rights, but instead had to negotiate multiple licenses to
provide their services. The Commission's investigation focused on the Model Contract and
the RRAs and whether the collecting societies had infringed Article 101 of the Treaty on the
Functioning of the European Union (TFEU).
The Commission identified two anticompetitive agreements arising from Model
Contract clauses: a) The ‘membership clause’, which prevented authors from switching to
another collecting society; and b) the ‘exclusivity clause’, under which collecting societies
refrained from offering licenses to commercial users outside their domestic territory by
granting other collecting societies in those territories exclusivity to license those rights. The
exclusivity clause had been removed from the Model Contract in 1996, and the membership
clause in 2004, but for the most part had been retained in the RRAs.
The Commission also identified the existence of a concerted practice among the
collecting societies, according to which each collecting society restricted the scope of the
license granted to other societies to the national territory of each licensee society. The
Commission found that this restriction, together with the membership restriction, prevented
any society from awarding a multi-territorial, multi-repertoire license. The Commission
acknowledged that the national territorial limitations themselves could be justified by the
need to ensure that collecting society licensees had the ability to monitor unauthorized
exploitation of the rights they license. However, the Commission concluded that the
presence of national territorial limitations in all the RRAs could only be explained by a
concerted practice between the societies.

349
Cannes Agreement (Case COMP/C2/38.681) Commission Decision 2007/735/EC [2007] OJ C 296/27.
350
CISAC Agreement (Case COMP/C2/38.698) Commission Decision [2008] OJ C 323/12.

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Although CISAC and the collecting societies proposed commitments offering to

create a multi-territorial, multi-repertoire license for internet, satellite transmission, and cable
transmission, the Commission decided to issue an infringement decision. The Commission
did not impose fines but required that the collecting societies remove the clauses in question
from the RRAs and bring to an end the concerted practice.
Most of the collecting societies and CISAC brought an action before the General
Court against the Commission's decision, but many of the applicants chose to challenge only
the allegation of a concerted practice.351The Court agreed with the Commission's analysis in
respect of the membership and exclusivity clauses. However, it overturned the Commission's
finding of a concerted practice, for lack of sufficient evidence.
Finally it’s worth noting that the European Union has adopted Directive 2014/26/EU
on collective rights management and multi-territorial licensing of rights in musical works for
online uses.352 One of the Directive’s core objectives is to ensure that collective management
organisations (‘CMOs’) act in the best interests of the right holders they represent. Placing
minimum standards of governance, financial management and transparency on all European
Union (EU) CMOs, are some of the ways in which the Directive aims to do this. Another of
the Directive’s key objectives is to improve market conditions for the take up of online music
services across the EU. The Directive does this by supplementing the level playing field for
those EU CMOs that wish to engage in the supply of multi-territorial licences in musical
works for online use.353

13.6. Refusal to license and refusal to provide interoperability

13.6.1. General principles

Both EU and UK competition law start from the general rule that a duty to deal with a
competitor should be rarely imposed to dominant undertakings (see Chapter XX).
Consequently, there is no obligation for the IP holder to license the use of their IPRs to
others. This rule may be explained for four main reasons, all accepted as significant in both
EU and UK competition law, the first three relating to any type of refusal to deal, the fourth
one being specific for a refusal to deal/license of an IP right. First, undertakings should have
the right to choose their trading partners and to dispose freely of their property. 354 Second,
existence of an obligation to license, even for a fair remuneration, ‘may undermine

351
Case T-442/08 CISAC v Commission [2013] ECLI:EU:T:2013:188.
352
Directive 2014/26/EU of the European Parliament and of the Council on collective management of copyright
and related rights and multi-territorial licensing of rights in musical works for online use in the internal market
Text with EEA relevance [2014] OJ L 84/72.
353
The UK implemented the Directive through the Collective Management of Copyright (EU Directive)
Regulations 2016, SI 2016/221. See also UK Guidance on the UK Regulations implementing the Collective
Rights Management (CRM) Directive (February 2016) available at
www.gov.uk/government/uploads/system/uploads/attachment_data/file/518555/Guidance_on_CRM_Directive_i
mplementing_regulations.pdf.
354
Communication from the Commission — Guidance on the Commission's enforcement priorities in applying
Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings [2009] OJ C 45/7
(hereinafter Guidance Paper), para 75; See also in US antitrust law, United States v Colgate & Co., 250 U.S.
300, 307 (1919) ‘[i]n the absence of any purpose to create or maintain a monopoly, the [Sherman Act] does not
restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to
exercise his own independent discretion as to parties with whom he will deal’.

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undertakings' incentives to invest and innovate and, thereby, possibly harm consumers’.355
Third, this cautious approach may also be explained by a concern over the administrability of
competition law. As AG Jacobs put it in Oscar Bronner, a duty to deal will lead Community
and national authorities and courts into ‘detailed regulation of the Community markets,
entailing the fixing of prices and conditions for supply in large sectors of the economy’, the
AG noting that ‘such intervention on that scale would not only be unworkable but would also
be anti-competitive in the longer term and indeed would scarcely be compatible with a free
market economy’.356 The same concern animates US antitrust law regarding refusals to deal,
the Supreme Court noting in Trinko that ‘an antitrust court is unlikely to be an effective day-
to-day enforcer of these detailed sharing obligations’, should a duty to license be imposed
more frequently.357 Fourth, economists generally believe that Coasesian bargaining over
licensing produces efficiency by creating a market to transfer intellectual property rights
(IPR) to the actor who values them most, as determined by a party’s ability to use the right
productively. Forced licensing has the potential to reduce efficiency by altering the
incentives of IP owners: Compulsion to license on equal or fair terms reduces the incentive to
license at all.

US antitrust law on refusals to license

US antitrust law has emphasized that an intellectual property (IP) owner generally has no
duty to license or even use its IPR.358 In § 271(d)(4) of the U.S. Code, Congress mandated
that a patent owner has no obligation to use a patent; patent misuse does not include refusing
to use or license a patent.359 In a refusal to deal (as opposed to licensing) context, the U.S.
Supreme Court strongly has discouraged such claims.360 Unilateral refusals to license have
been dealt under the following three broad standards in US antitrust law.361 In Data General
Corp. v Grumman Systems, the First circuit although it noted that ‘exclusionary conduct can
include a monopolist’s unilateral refusal to license a copyright’, it created a rebuttable

355
Guidance Paper, para 75; See also in US antitrust law, Verizon Communications Inc. v Law Offices of Curtis
V. Trinko, LLP, 540 U.S. 398, 407 (2004) (hereinafter Trinko) (‘Firms may acquire monopoly power by
establishing an infrastructure that renders them uniquely suited to serve their customers. Compelling such firms
to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it
may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial
facilities’).
356
Opinion of AG Jacobs, in Case C-7/97 Oscar Bronner GmbH & Co KG v Mediaprint Zeitungs- und
Zeitschriftenverlag GmbH & Co KG [1998] ECR I-7791, para 69.
357
In Trinko, the Court was cautious in finding exceptions to the general rule of no duty to aid a rival, precisely
‘because of the uncertain virtue of forced sharing and the difficulty of identifying and remedying
anticompetitive conduct by a single firm’.
358
See H Hovenkamp, MD Janis & MA Lemley, ‘Unilateral Refusals to License in the U.S.’, in F Lévêque & H
Shelanski, Antitrust, Patents & Copyright ( eds, 2005) 13.
359
See ibid.
360
See ibid. at 220 (quoting Verizon Communications Inc. v Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398,
407 (2004) (protecting the freedom to operate a business promotes competition because it induces investment
and innovation; courts cannot bear the administrative costs of overseeing the terms of dealing; forced dealing
can lead to collusion)).
361
H Hovenkamp, MD Janis and MA Lemley, ‘Unilateral Refusals to License’ [2006] 2 Journal of Competition
Law & Economics 1.

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presumption that unilateral refusals to license is a ‘presumptively valid business justification

for any immediate harm to consumers’.362 In Image Technical Services v Eastman Kodak, the
Ninth circuit modified slightly that presumption to emphasize more market reality. 363 The
court recognized that, although intellectual property owners are not immune from antitrust
liability, ‘patent and copyright holders may refuse to sell or license protected work’. Yet, it
also noted that intellectual property justifications in this case were pretextual, hence bringing
forward the role of intent in the analysis, noting that ‘neither the aims of intellectual property
law, or the antitrust laws justify allowing a monopolist to rely upon a pretextual business
justification to mask anticompetitive conduct’.364 Finally, in Re Independent Service
Organizations Antitrust Litigation, the Federal Circuit rejected the presumptive legality
approach for one that would extend antitrust immunity to refusals to license, in the absence of
any indication of illegal tying, fraud in the Patent and Trademark Office or sham litigation.365
The Federal Circuit created a rule of per se legality for refusals to license, even in cases in
which the refusal to license would have the effect to influence a market other than that
covered by the relevant IPR.366 Following the Supreme Court’s judgment in Verizon
Communications v Law Offices of Curtis V Trinko, it looks highly unlikely that a unilateral
refusal to deal (and even more a unilateral refusal to license) would be found to violate
Section 2 of the Sherman Act.367 Courts are more willing to compel licensing when an IP
owner has granted a license but then later revokes it. The willingness still qualifies as
infrequently, however. A record of dealing better-equips courts to identify profit sacrifice
and reduces the administrative burden of calculating remedies.

In the context of EU competition law, the application of article 102 TFEU, prohibiting
the abuses by an undertaking of its dominant position, to unilateral refusals to license IP
rights has been an important issue since the judgments of the CJEU in Volvo v Veng and
CICRA v Renault, both cases presenting a similar pattern of facts.368

13.6.2. Volvo v Veng

Case C-238/87 Volvo v Veng [1988] ECR 6211

In the UK, Volvo held a registered design for the front wing panels of Volvo series
200 cars. Veng imported these panels, made without Volvo’s authority, and Volvo sought to
restrain Veng from importing them from another Member State, where Volvo did not hold an
IPR covering the panels, and marketing them in the UK. Veng stated that it was prepared to
pay a reasonable royalty, but did not suggest how it might be determined. The High Court in

362
Data General Corp. v Grumman Systems, 36 F2d 1147, 1187 (1st Cir. 1994) (‘an author’s desire to exclude
others from use of its copyrighted work is a presumptively valid business justification for any immediate harm
to consumers’).
363
Image Technical Services v Eastman Kodak, 125 F3d 1195 (9th Cir. 1997).
364
Ibid., pp 1219–1220.
365
Re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322 (Fed. Cir. 2000).
366
Ibid, pp 1327–1328. The Court held that patents could entitle the patent holder to control secondary markets:
in this case Xerox’s part patents enabled Xerox to control the market for service of Xerox copiers as well.
367
The Supreme Court noting ‘the few existing exceptions from the proposition that there is no duty to aid
competitors’.
368
Case C-53/87 CICCRA v Renault [1988] ECR 6039; Case C-238/87 Volvo v Veng [1988] ECR 6211.

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England asked the CJEU to answer three questions that would help it decide whether this
amounted to an infringement of Art 102 TFEU.
In his Opinion, Advocate General (AG) Mischo pointed out that although motorists
might take the cost of spare parts into account when buying a vehicle, once the car was
bought there were no substitutes for a front wing panel that did not infringe Volvo’s
registered design. Consequently, Volvo clearly enjoyed a dominant position over them. He
went on to state that the exclusive right was the substance of a registered design. AG Mischo
concluded that the holder of intellectual property rights is dominant over the products they
protect only if it is in a position to prevent the maintenance of effective competition over a
considerable part of the relevant market. He added, however, that since there were no
substitute parts, Volvo enjoyed a dominant position over the body parts once it began to
exercise its design rights, a view slightly narrower than that in Hugin (see Chapter XX),
which was not mentioned by the CJEU. The AG continued noting that
‘[t]he refusal to grant a licence—in other words the straightforward exercise of the right
associated with the registered design—cannot therefore in itself constitute abuse of a
dominant position. In addition to the dominant position and the intellectual property right
there must be a further circumstance or element. That element might for example be
discriminatory conditions of sale (refusal to supply spare parts to independent repairers, for
instance), or refusal to continue to manufacture spare parts for a vehicle no longer in
production even though many vehicles of that type were still in use. But the case which comes
most readily to mind is that of applying ‘unfair prices’ within the meaning of subparagraph
(a) of the second paragraph of Article [102]. Veng in fact contends that the front wings of
Volvo series 200 cars are sold by Volvo concessionaires at exaggeratedly high prices […]’.
He went on to consider Parke Davis, noting that ‘the inventor is entitled to recover not only
his production costs in the strict sense and a reasonable profit margin but also his research
and development expenditure’ (para 32).
The Court avoided considering the question of a dominant position but, assuming it
might exist, went straight to the question of abuse. After repeating that before intellectual
property rights are harmonised it is for national law to determine their scope, it held:

8. It must also be emphasized that the right of the proprietor of a protected design to prevent
third parties from manufacturing and selling or importing, without its consent, products
incorporating the design constitutes the very subject-matter of his exclusive right. It follows
that an obligation imposed upon the proprietor of a protected design to grant to third parties,
even in return for a reasonable royalty, a licence for the supply of products incorporating the
design would lead to the proprietor thereof being deprived of the substance of his exclusive
right, and that a refusal to grant such a licence cannot in itself constitute an abuse of a
dominant position.
9. It must however be noted that the exercise of an exclusive right by the proprietor of a
registered design in respect of car body panels may be prohibited by Article [102 TFEU] if it
involves, on the part of an undertaking holding a dominant position, certain abusive conduct
such as the arbitrary refusal to supply spare parts to independent repairers, the fixing of prices
for spare parts at an unfair level or a decision no longer to produce spare parts for a particular
model even though many cars of that model are still in circulation, provided that such
conduct is liable to affect trade between Member States.

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10. In the present case no instance of any such conduct has been mentioned by the national
court. Accordingly, and having regard to the answer given to the second question, it is
unnecessary to give an answer to the first and third questions.
11. It must therefore be stated in reply to the second question submitted by the national court
that the refusal by the proprietor of a registered design in respect of body panels to grant to
third parties, even in return for reasonable royalties, a licence for the supply of parts
incorporating the design cannot in itself be regarded as an abuse of a dominant position
within the meaning of Article [102 TFEU].

Notes and Questions on Volvo

1. The CJEU held in the Volvo and the Renault cases that the right of the proprietor of a
protected design to prevent third parties from manufacturing and selling or importing
without its consent products incorporating the design does not constitute an abuse of a
dominant position. Otherwise, the IP holder would be deprived of the substance of his
exclusive right. However, the Court did not go as far as to create an irrebutable
presumption for the exercise of IP rights. A refusal to license may constitute an abuse
if the exercise of the IP right would involve, in the part of the undertaking, ‘certain
abusive conduct’, such as an arbitrary refusal to supply spare parts to independent
repairers, the fixing of prices at an unfair level or a decision no longer to produce
spare parts for a particular model.369 In subsequent decisions, the Court extended the
scope of article 102 TFEU to cover the acquisition by a dominant firm of an exclusive
patent license of an alternative technology370 or a refusal to license IP rights in order
to defend an existing monopoly power.371
2. Would Volvo be constrained to charge low prices for spare parts despite the lack of
substitutes in order to maintain the reputation of its cars? Would many motorists have
sufficient knowledge to make lifecycle cost assessments before selecting a vehicle to
buy? Would Volvo be free to change a policy of cheap replacement parts once a
particular model of vehicle was no longer being sold? Such opportunistic behaviour
might pay a brand owner with a large installed base that was intending to stop
supplying the original equipment. How would a reasonable royalty be set? Where
there are common costs, it is important that the operator should expect to be able to
recover them all or he will not invest. The actual expenditure may have to be
multiplied by a factor to compensate for the risk that the expenditure may not pay off.
What would be the considerations to take into account in setting a reasonable royalty?
3. Demand for vehicles is very elastic to price but demand for spare parts is not, because
after a crash one must have a Volvo fitting part. At that time, the motorist will pay
several times the amount charged for initial equipment. Consequently, component
manufacturers tend to charge little for original equipment and significantly more in
the replacement market. Vehicle manufacturers who design and produce their own
components may also want to recover most of their common costs in the replacement

369
Id., para 9
370
Case T-51/89 Tetra Pak Rausing SA v Commission [1990] ECR II-309.
371
Case T-504/93 Tiercé Ladbroke SA v. Commission [1997] ECR II-923 (the objective of the French race
courses was not to extent their monopoly in Belgium (leverage theory) but to protect their monopoly in the
French market, which could be threatened if the Belgian companies were able to take bets for French races).

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market, especially in relation to spare parts in which they hold industrial property
rights and that need frequent replacement. Is this a fair apportionment? Is it efficient?
Does it help consumers? Should the national court be expected to go into these sorts
of issues?
4. (para 9). Is the CJEU only referring to the exclusionary potential of the specific IP
right, or is it also indicating that the abuse may be constituted by an exploitative
conduct? It seems that the proprietor of an exclusive right who is held to enjoy a
dominant position may be required either to license third parties or to supply them
with the protected product on terms that are not ‘unfair’. What is the meaning of
‘unfair’ in this context?

The case law has moved subsequently to develop a standard which takes into
consideration the specificity of intellectual property rights.

13.6.3. Magill

In Magill the CJEU held that the exercise of an exclusive right by the intellectual
property owner may, in ‘exceptional circumstances’, involve abusive conduct.372

Joined Cases C-241/91 P and C-242/91 P Radio Telefis Eireann v Commission (Magill)
[1995] ECR I-743

The three television stations that could be heard in Ireland and Northern Ireland each
published its own weekly guide of programmes in advance. Each also permitted newspapers
to publish weekly highlights of the programmes and daily lists. When Magill started to
publish a comprehensive guide to the three stations, however, each sued it successfully for
copyright infringement. The Commission adopted a decision stating that this amounted to an
abuse of a dominant position and required each to provide Magill with the information and
to permit it to publish. This decision was affirmed by the General Court.
The CJEU confirmed that mere ownership of an intellectual property right does not
confer a dominant position (para 46), but that, since the stations were the only source of
programme information to a company publishing a comprehensive guide to television
programmes, they each enjoyed a dominant position over that information. The CJEU also
confirmed (in para 49) that, in the absence of standardisation or harmonisation, the scope of
intellectual property rights was a matter for national law, but added that ‘the exercise of an
exclusive right by the proprietor may, in exceptional circumstances, involve abusive
conduct’. It then went through the various criteria mentioned by the CFI and found that the
exercise of copyright against Magill was abusive. There were no substitutes for the
information; the General Court had found that the weekly highlights and daily programmes
or the individual guides published by the stations were not sufficient substitutes. The CJEU
has no jurisdiction on questions of fact. The producer of a comprehensive weekly guide was
dependent on the stations.

372
Joined Cases C-241/91 P and C-242/91 P Radio Telefis Eireann v Commission (Magill) ECR [1995] I-743.

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50. […] it is […] clear from [Case 238/87 Volvo, para. 9) that the exercise of an exclusive
right by the proprietor may, in exceptional circumstances, involve abusive conduct.
51. In the present case, the conduct objected to is the appellants’ reliance on copyright
conferred by national legislation so as to prevent Magill—or any other undertaking having
the same intention—from publishing on a weekly basis information (channel, day, time and
title of programmes) together with commentaries and pictures obtained independently of the
appellants.
52. Among the circumstances taken into account by the General Court in concluding that
such conduct was abusive was, first, the fact that there was, according to the findings of the
General Court, no actual or potential substitute for a weekly television guide offering
information on the programmes for the week ahead. On this point, the Court of First Instance
confirmed the Commission’s finding that the complete lists of programmes for a 24-hour
period—and for a 48-hour period at weekends and before public holidays—published in
certain daily and Sunday newspapers, and the television sections of certain magazines
covering, in addition, ‘highlights’ of the week’s programmes, were only to a limited extent
substitutable for advance information to viewers on all the week’s programmes. Only weekly
television guides containing comprehensive listings for the week ahead would enable users to
decide in advance which programmes they wished to follow and arrange their leisure
activities for the week accordingly. The [General Court] also established that there was a
specific constant and regular potential demand on the part of consumers
53. Thus the appellants—who were, by force of circumstance, the only sources of the basic
information on programme scheduling which is the indispensable raw material for compiling
a weekly television guide—gave viewers wishing to obtain information on the choice of
programmes for the week ahead no choice but to buy the weekly guides for each station and
draw from each of them the information they need to make comparisons.
54. The appellants’ refusal to provide basic information by relying on national copyright
provisions thus prevented the appearance of a new product, a comprehensive weekly guide to
television programmes, which the appellants did not offer and for which there was a potential
consumer demand. Such refusal constitutes an abuse under heading (b) of the second
paragraph of Article [102 TFEU].
55. Second, there was no justification for such refusal either in the activity of television
broadcasting, or in that of publishing television magazines […]
56. Third, and finally, as the Court of First Instance also held, the appellants, by their
conduct, reserved to themselves the secondary market of weekly television guides by
excluding all competition on that market […] since they denied access to the basic
information which is the raw material indispensable for the compilation of such a guide.
57. In the light of all those circumstances, the Court of First Instance did not err in law in
holding that the appellants’ conduct was an abuse of a dominant position within
the meaning of Article 82 of the Treaty.
58. It follows that the plea in law alleging misapplication by the [General Court] of the
concept of abuse of a dominant position must be dismissed as unfounded […]

1. Did the Court consider that each copyright holder was dominant over the information
or over the way in which the programmes are set out?

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2. Would you be happier with the judgment if the Court had said that there were limits to
the extent to which national laws might protect the information in a list? Do you think
the judgment would have been the same had the decision concerned an anthology of
poetry, some of which was still subject to copyright? Would the compiler have a
dominant position?
3. Is the holder of a basic patent required to grant a licence to the holder of an
improvement patent, which cannot exploit its improvement without a licence? If so, is
he entitled to a cross-licence to the improvement even if the holder of that patent does
intend to exploit it?
4. (Paras 51, 54, 55 and 56). Note that sunk costs are required to make television
programmes, and that to make their investment profitable the producers may rely on
income from several products downstream: both from the licence fee which the BBC
obtains or from the advertising fees of IPC and RTE and from the profits of the
weekly guide. Is there anything anti-competitive in the possibility of double recovery
in either the TV production or listings market? See point 33 of the Advocate
General’s opinion in Volvo, above. Was the possibility of double recovery relevant to
the ability of the television companies to enforce their copyright?
5. Would you expect sales of Magill’s comprehensive guide to affect the sales of the
individual guides produced by the television companies?
6. (Paras 52 and 53). Should the existence of substitutes be considered when deciding
whether there is a dominant position or abuse? Why is the existence of ‘a specific,
constant and regular potential demand’ relevant? Does it follow that the market
foreclosed should be important and if so what is the test of importance? Would the
answer have been the same if Magill had never published its comprehensive guide
and could not establish the existence of demand?
7. Is every firm on which another undertaking is dependent in a dominant position?
8. (Para 54). Would the answer have been different had each copyright holder obtained a
licence from the other two and was publishing a comprehensive guide, or if the three
had arranged a joint venture which published such a guide?
9. (Para 55). Is the statement that there was no justification of the refusal to license a
reason or a conclusion? Was the desire to maintain the profitability of each single
weekly guide a justification?
10. Do you consider that this judgment is consistent with that in Volvo v Veng? If a
refusal to license is part of the specific subject matter of copyright, what additional
anti-competitive conduct is relevant in Magill?
11. Could each copyright holder have produced a comprehensive guide without the
consent of the others? Should the copyright holders have been given the option either
to form a joint venture to produce a comprehensive guide or to license Magill?
12. If a licence be given to Magill, does a further licence have to be given to someone else
who wants to produce a comprehensive guide in electronic form?
13. In Magill, the CJEU adopted the ‘new product’ rule where it held that the exercise of
an exclusive right by the intellectual property owner may, in ‘exceptional
circumstances’, involve abusive conduct.373 Exceptional circumstances consist of the
following: (i) access is indispensable, (ii) the refusal to license prevented the

373
Joined Cases C-241/91 P and C-242/91P Radio Telefis Eireann v Commission (Magill) ECR [1995] I-743.

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appearance of a new product for which there was potential consumer demand, (iii)
there was no justification for such refusal, (iv) the refusal to license excluded all
competition on the secondary market. By insisting on the requirement that the refusal
to license prevented the sale of a new kind of product for which there was unsatisfied
demand, the ECJ appeared to consider the necessity to protect innovation in the
market. In Magill, the refusal to license had impeded the emergence of a new product,
a composite TV guide, which the holders of the intellectual property right did not
offer and for which there was a potential demand. The weak and questionable nature
of the IP right that was involved in this case, a copyright protection granted on simple
TV listings under a ‘sweet of the brow’ standard, may explain the position of the
Court, in particular as access to these data was indispensable for the emergence of the
new product. The judgment was not also clear as to the cumulative or alternative
character of these exceptional circumstances and some confusion resulted from a
subsequent case of the General Court, which treated conditions (i) and (ii) of Magill
as alternative rather than cumulative.374
14. Should UK and Irish law protect the information in a list by copyright law? Note that
in Magill where intellectual property rights were granted to simple data without any
inventive effort having been made. The European Community’s Directive on the
Legal Protection of databases, which provides high levels of protection for databases
may illustrate the side-effects of a careless intellectual property protection.375 The
Directive was adopted following an intense effort of lobbying by database companies
and is a compromise between the lower ‘sweat of the brow’ copyright protection that
was granted to databases in some EU Member States (eg UK, Ireland) and the higher
standard of copyright protection granted by other Member States (eg France). The
directive established a legal framework giving a high level of copyright protection to
‘original’ databases, which ‘by reason of the selection or arrangement of their
contents constitute the author’s own intellectual creation’376 and a new form of ‘sui
generis’ protection to non-original databases if the ‘maker’ of the database showed
‘that there has been qualitatively and/or quantitatively a substantial investment in
either the obtaining, verification or presentation of the contents’ of the database.377
The Directive protects a simple compilation of existing basic information,
which is the result of some kind of investment. The objective of this form of IP
protection is therefore not to protect innovation but to protect the investments of the
database ‘makers’ against the ‘parasitic behaviour’ of free riders.378 The sui generis
protection granted has the potential to produce important anticompetitive effects.
Contrary to a copyright protection, which distinguishes between the idea, which stays
in the public domain, and the expression of the idea, which is protected, the database
directive gives the possibility to exclude the re-utilisation of the data by others. This is

374
Case T-504/93 Tierce Ladbroke SA v Commission [1995] ECR II-923.
375
Parliament and Council Directive 96/9/EC of 11 March 1996 on the legal protection of databases [1996] OJ
L077/20
376
Ibid., Art 3 (1).
377
Ibid., Art 7 (1).
378
Commission of the European Communities- First evaluation of Directive 96/9/EC on the legal protection of
databases (Brussels, 12 December 2005), available at
ec.europa.eu/internal_market/copyright/docs/databases/evaluation_report_en.pdf. One could remark the ‘free
riders’ property rights rhetoric used by the Commission.

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particularly risky for competition, ‘in cases, where a database is the only possible
source of the data contained therein, such as telephone directories, television program
listings or schedules of sporting events’ and may result in ‘an absolute downstream
information monopoly in derivative information products and services’.379
In response to this risk, article 16 of the Directive required the Commission to
submit a report examining whether the application of the sui generis right ‘has led to
abuse of a dominant position or other interference with free competition which would
justify appropriate measures being taken, including the establishment of non-
voluntary licensing arrangements’.” Indeed, while the first proposal of the Database
Directive provided for the possibility of compulsory licensing in order to limit the risk
of anti-competitive effects, these provisions have been removed from the final version
of the Directive, which only limited the right of the database ‘maker’ in exceptional
circumstances.380 This is probably why recital 47 provides that the Directive is
without prejudice to the application of Community or national competition rules,
making it therefore possible to limit the rights of the database ‘makers’ through
competition law. The application of competition law can therefore be seen to be
triggered by the failure of the text of the database Directive to take properly into
account the protection of cumulative innovation and competition.
It is remarkable that the national courts and the CJEU have interpreted the
‘quantitative substantial investment’ requirement of the Directive restrictively in order
to avoid the emergence of anticompetitive effects.381 Indeed, the CJEU curtailed the
scope of the protection by explicitly refusing to adopt the ‘spin off’ doctrine,
developed by some Dutch courts, which would make it possible to provide sui generis
protection for databases generated as ‘by-products’ of the main activities of the
Database ‘maker’ on which the later has a de facto monopoly (eg television program
listings, railway schedules etc), which is the situation that arose in Magill.382 The
CJEU distinguished between creating and obtaining data in order to assemble the
contents of a database.383 It also considered that the activity of creating materials that
make up the content of a database did not constitute substantial investment in the
sense of the directive and that therefore a single-source database was not protected
under sui generis rights.384

379
PB Hugenhotz ‘Abuse of Database Right: Sole-Source Information Banks under the EU Database Directive’
in F Lévêque and H Shelanski (eds), Antitrust, Patents and Copyright - EU and US Perspectives (Edward Elgar,
2005) 203.
380
Proposal for a Council Directive on the Legal Protection of Databases, COM (92) 24 final, OJ 1992 C 156/4,
art 8(1) and 8(2).
381
Case C-46/02 Fixtures Marketing Ltd. v Oy Veikkaus Ab [2004] ECR I-10365; Case C-203/02 The British
Horseracing Board Ltd and Others v William Hill Organisation Ltd [2004] ECR I-10415; Case C-338/02
Fixtures Marketing Limited v AB Svenska Spel [2004] ECR I-10497; Case C-444/02 Fixtures Marketing Ltd v
Organismos Prognostikon Agonon Podosfairou AE – OPAP [2004] ECR I-10549. For an analysis of national
courts’ decisions, see First Evaluation of Directive 96/9/EC, supra n 378, p 11.
382
E Derclaye, ‘Databases Sui Generis Right: Should We Adopt the Spin-off Theory’ [2004] 26 European
Intellectual Property Review 402.
383
Case C-46/02 Fixtures Marketing Ltd. v Oy Veikkaus Ab (s 302) para 34 (‘the expression “investment in […]
the obtaining […] of the contents’ of a database must […] be understood to refer to the resources used to seek
out existing independent materials and collect them in the database, and not to the resources used for the
creation as such of independent materials’).
384
Case C-203/02 The British Horseracing Board Ltd and Others v William Hill Organisation Ltd [2004] ECR
I-10415, para 35; MJ Davison and PB Hugenholtz ‘Football Fixtures, Horseraces and Spin Offs: The ECJ

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By adopting a narrow interpretation of the scope of the Directive the Court

avoided the situation where single-source databases would benefit from the sui
generis protection and as a result enable the database ‘makers’ to abuse their
dominant position on the information they create. The recent evaluation report of the
Database directive also considers the risk of potential anticompetitive effects and
examines different options, ranging from the simple repeal of the Directive to the
preservation of the status-quo. While the Commission notes the ‘attachment’ of the
EU database industry to the sui generis protection for factual compilations and their
‘considerable resistance’ to any reform (an indication of the ‘specific-interest group’
character of this legislation), it also remarks on the weak empirical support for such a
system of protection.385 Less restrictive to competition alternatives for protecting the
investments made exist. Indeed, the United States opted for a system of liability and
not of property rights in protecting the investments of the database ‘makers’.386 The
US approach is based on unfair competition principles which protect the database
‘maker’ against misappropriation only if, as a result, there will be market harm.387
15. Tiércé Ladbroke388—The Commission’s Legal Service has been construing the
judgment in Magill narrowly, as have the General Court and the CJEU. In Tiércé
Ladbroke v Commission, the General Court held that the judgment did not apply to
the refusal by the copyright holders in horse races to enable Ladbroke to screen the
films in its Belgian betting shops. Ladbroke was not endeavouring to enter a market:
it was the largest operator of betting shops in Belgium (para 130). A licence was not
essential, nor were betting shops a new product (para 131). Nevertheless, the General
Court construed paragraph 54 of Magill to contain alternative rather than cumulative
conditions. This was not necessary to its judgment, nor argued, so is but a weak
precedent as the General Court has no jurisdiction to go beyond the pleadings.
Moreover, the General Court observed that the copyright holders were not protecting
their own activities in Belgium by not exploiting their copyright. This hostility to
discrimination downstream seems to amount to the protection of competitors.
Consumers, those betting on the horse races, would be better off with one firm
providing the excitement of live films than with no one.

In the meantime, the Court of Justice in Oscar Bronner, a case which did not involve a
refusal to license but the refusal by a dominant firm to share its distribution network with a
competitor (see Chapter XX), interpreted the four conditions of Magill as being cumulative
and narrowed down the duty to deal doctrine in EU competition law, by interpreting the
indispensability condition as requiring evidence from the undertaking requesting access that
it should not be economically viable for an undertaking with a comparable size with the

Domesticates the Database Right' [2005] European Intellectual Property Review 113; E Derclaye, ‘The Court of
Justice Interprets the Database Sui Generis Right for the First Time’ [2005] European Law Review 420.
385
First Evaluation of Directive 96/9/EC, p 5.
386
Feist Publications v Rural Telephone Service Company, 499 U.S. 340 (1991) [The Supreme Court refused to
accept that information contained in a telephone directory could be protected under copyright laws. A database
may only be copyrighted if it possesses some ‘minimal degree of creativity’].
387
G Westkamp ‘Protecting Databases under US and European Law: Methodical Approaches to the Protection
of Investments between Unfair Competition and Intellectual Property Concepts’ [2003] 34 International Review
of Industrial Property and Copyright Law 772.
388
Case T-504/93 Tierce Ladbroke SA v Commission [1995] ECR II-923.

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dominant firm to develop its own facility or input.389 A plaintiff likely will satisfy the
indispensability prong if the state originally invested in the essential facility. 390 High
switching costs also suggest indispensability.391
The CJEU had to opportunity to revisit the application of the Magill doctrine in its
IMS/NDC Health judgment.

13.6.4. IMS/NDC Health

Case C-418/01 IMS Health GmbH & Co OHG v NDC Health GmbH & Co KG [2004]
ECR I-5039

IMS and NDC engaged in tracking sales of pharmaceutical and healthcare products.
IMS provides data on regional sales of pharmaceutical products in Germany to
pharmaceutical laboratories formatted according to the brick structure. Since January 2000,
it has provided studies based on a brick structure consisting of 1860 bricks, or a derived
structure consisting of 2847 bricks, each corresponding to a designated geographic area.
Those bricks were created by taking account of various criteria, such as the boundaries of
municipalities, postcodes, population density, transport connections and the geographical
distribution of pharmacies and doctors’ surgeries. NDC tried to enter the market in
competition with IMS but its customers were unwilling to have NDC’s data based on different
geographic areas. So it used the zones worked out by IMS Health and its customers. IMS had
set up a working group in which undertakings in the pharmaceutical industry, which are
clients of IMS, participated. That working group made suggestions for improving and
optimising market segmentation. The extent of the working group’s contribution to the
determination of market segmentation was a subject of dispute between IMS and NDC. IMS
did not only marketed its brick structures, but also distributed them free of charge to
pharmacies and doctors’ surgeries. Arguably, that practice had helped those structures to
become the normal industry standard to which its clients adapted their information and
distribution systems
IMS obtained an interim injunction against copyright infringement from a German
trial court, which also sent a number of preliminary questions to the CJEU. Meanwhile NDC
complained to the Commission. An interim decision of the Commission required IMS to
license its copyright in what was claimed to be a de facto industry standard, a set of maps on
the basis of which IMS provided localised data to its clients, the pharmaceutical laboratories.
IMS had obtained an interim injunction from a German court to restrain NDC and another
firm from infringing its copyright in the maps. The decision suggested that where a de facto
industry standard is protected by an IPR and prevents all competition in a neighbouring
market, the holder is required to grant a licence. Where an industry standard necessary for a
newcomer to enter a market is protected by an IPR it may be sensible to require a licence.
Often there is no way around an industry standard.

389
Case C-7/97 Oscar Bronner GmbH & Co KG v Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co
KG [1998] ECR I-7791.
390
See V Korah, Intellectual Property Rights & the EC Competition Rules (Hart Publishing 2006) 143 (citing
Case C-7/97 Oscar Bronner (Opinion of AG Jacobs) para 66).
391
See ibid., p 144.

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The appeal of the Commission’s decision to the General Court was suspended and
later set aside when the injunction from the German Court was quashed on appeal on the
grounds that IMS was not the sole holder of the copyright, but entitled only to restrain slavish
imitation. The Commission withdrew its decision and the General Court abandoned the case.
The German trial court that had granted the injunction has sought guidance from the
CJEU on various preliminary questions relating to the application of Article 102 TFEU.

28. It is clear from paragraphs 43 and 44 of Bronner that, in order to determine whether a
product or service is indispensable for enabling an undertaking to carry on business in a
particular market, it must be determined whether there are products or services which
constitute alternative solutions, even if they are less advantageous, and whether there are
technical, legal or economic obstacles capable of making it impossible or at least
unreasonably difficult for any undertaking seeking to operate in the market to create, possibly
in cooperation with other operators, the alternative products or services. According to
paragraph 46 of Bronner, in order to accept the existence of economic obstacles, it must be
established, at the very least, that the creation of those products or services is not
economically viable for production on a scale comparable to that of the undertaking which
controls the existing product or service.
29. It is for the national court to determine, in the light of the evidence submitted to it,
whether such is the case in the dispute in the main proceedings. In that regard […] account
must be taken of the fact that a high level of participation by the pharmaceutical laboratories
in the improvement of the 1860 brick structure protected by copyright, on the supposition that
it is proven, has created a dependency by users in regard to that structure, particularly at a
technical level. In such circumstances, it is likely that those laboratories would have to make
exceptional organisational and financial efforts in order to acquire the studies on regional
sales of pharmaceutical products presented on the basis of a structure other than that
protected by the intellectual property right. The supplier of that alternative structure might
therefore be obliged to offer terms which are such as to rule out any economic viability of
business on a scale comparable to that of the undertaking which controls the protected
structure.
30. […] [F]or the purposes of examining whether the refusal by an undertaking in a dominant
position to grant a licence for a brick structure protected by an intellectual property right
which it owns is abusive, the degree of participation by users in the development of that
structure and the outlay, particularly in terms of cost, on the part of potential users in order to
purchase studies on regional sales of pharmaceutical products presented on the basis of an
alternative structure are factors which must be taken into consideration in order to determine
whether the protected structure is indispensable to the marketing of studies of that kind.

The CJEU then proceeded in answering the first question of the referring court relating to
the refusal to grant a license.

34. According to settled case-law, the exclusive right of reproduction forms part of the rights
of the owner of an intellectual property right, so that refusal to grant a licence, even if it is the
act of an undertaking holding a dominant position, cannot in itself constitute abuse of a
dominant position. […]

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35. Nevertheless, as is clear from that case-law, exercise of an exclusive right by the owner
may, in exceptional circumstances, involve abusive conduct […]
36. The Court held that such exceptional circumstances were present in the case giving rise to
the judgment in Magill, in which the conduct of the television channels in a dominant
position which gave rise to the complaint consisted in their relying on the copyright conferred
by national legislation on the weekly listings of their programmes in order to prevent another
undertaking from publishing information on those programmes together with commentaries,
on a weekly basis.
37. According to the summary of the Magill judgment made by the Court at paragraph 40 of
the judgment in Bronner, the exceptional circumstances were constituted by the fact that the
refusal in question concerned a product (information on the weekly schedules of certain
television channels), the supply of which was indispensable for carrying on the business in
question (the publishing of a general television guide), in that, without that information, the
person wishing to produce such a guide would find it impossible to publish it and offer it for
sale […] the fact that such refusal prevented the emergence of a new product for which there
was a potential consumer demand […], the fact that it was not justified by objective
considerations […], and was likely to exclude all competition in the secondary market. […]
38. It is clear from that case-law that, in order for the refusal by an undertaking which owns a
copyright to give access to a product or service indispensable for carrying on a particular
business to be treated as abusive, it is sufficient that three cumulative conditions be satisfied,
namely, that that refusal is preventing the emergence of a new product for which there is a
potential consumer demand, that it is unjustified and such as to exclude any competition on a
secondary market. […]
40. In that regard, it is appropriate to recall the approach followed by the Court in the
Bronner judgment, in which it was asked whether the fact that a press undertaking with a
very large share of the daily newspaper market in a Member State which operates the only
nationwide newspaper home-delivery scheme in that Member State refuses paid access to that
scheme by the publisher of a rival newspaper, which by reason of its small circulation is
unable either alone or in cooperation with other publishers to set up and operate its own
home-delivery scheme under economically reasonable conditions, constitutes abuse of a
dominant position. […]
42. […] [T]he Court held [in Oscar Bronner] that it was relevant, in order to assess whether
the refusal to grant access to a product or a service indispensable for carrying on a particular
business activity was an abuse, to distinguish an upstream market, constituted by the product
or service, in that case the market for home delivery of daily newspapers, and a (secondary)
downstream market, on which the product or service in question is used for the production of
another product or the supply of another service, in that case the market for daily newspapers
themselves.
43. The fact that the home-delivery service was not marketed separately was not regarded as
precluding, from the outset, the possibility of identifying a separate market.
44. It appears, therefore […] that, for the purposes of the application of the earlier case-law,
it is sufficient that a potential market or even hypothetical market can be identified. Such is
the case where the products or services are indispensable in order to carry on a particular
business and where there is an actual demand for them on the part of undertakings which seek
to carry on the business for which they are indispensable.

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45. Accordingly, it is determinative that two different stages of production may be identified
and that they are interconnected, inasmuch as the upstream product is indispensable for the
supply of the downstream product.
46. Transposed to the facts of the case in the main proceedings, that approach prompts
consideration as to whether the 1860 brick structure constitutes, upstream, an indispensable
factor in the downstream supply of German regional sales data for pharmaceutical products.
47. It is for the national court to establish whether that is in fact the position, and, if so be the
case, to examine whether the refusal by IMS to grant a licence to use the structure at issue is
capable of excluding all competition on the market for the supply of German regional sales
data on pharmaceutical products.

The CJEU then examined the first condition, relating to the emergence of a new product

48. […] [T]hat condition relates to the consideration that, in the balancing of the interest in
protection of the intellectual property right and the economic freedom of its owner against the
interest in protection of free competition, the latter can prevail only where refusal to grant a
licence prevents the development of the secondary market to the detriment of consumers.
49. Therefore, the refusal by an undertaking in a dominant position to allow access to a
product protected by an intellectual property right, where that product is indispensable for
operating on a secondary market, may be regarded as abusive only where the undertaking
which requested the licence does not intend to limit itself essentially to duplicating the goods
or services already offered on the secondary market by the owner of the intellectual property
right, but intends to produce new goods or services not offered by the owner of the right and
for which there is a potential consumer demand
50. It is for the national court to determine whether such is the case in the dispute in the main
proceedings.

As to the second condition, relating to whether the refusal was unjustified, the CJEU held:

51. As to that condition, on whose interpretation no specific observations have been made, it
is for the national court to examine, if appropriate, in light of the facts before it, whether the
refusal of the request for a licence is justified by objective considerations.

The CJEU concluded:

52. […] [T]he refusal by an undertaking which holds a dominant position and owns an
intellectual property right in a brick structure indispensable to the presentation of regional
sales data on pharmaceutical products in a Member State to grant a licence to use that
structure to another undertaking which also wishes to provide such data in the same Member
State, constitutes an abuse of a dominant position within the meaning of Article [102 TFEU]
where the following conditions are fulfilled:
—the undertaking which requested the licence intends to offer, on the market for the supply
of the data in question, new products or services not offered by the owner of the intellectual
property right and for which there is a potential consumer demand;
—the refusal is not justified by objective considerations;
—the refusal is such as to reserve to the owner of the intellectual property right

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the market for the supply of data on sales of pharmaceutical products in the Member State
concerned by eliminating all competition on that market.

Questions and Notes

1. Note the help provided by IMS’s customers. The zones were created in order to
reflect the commercial realities perceived by the customers. This made the latter more
dependent on the use of the zones. They had become an industry standard. To switch
would be disrupting for the pharmaceutical companies.
2. (Paras 28–30, 37 and 46). Do you think this is a sufficiently strict test of
indispensability? Suppose you have a patent over product A and I find a new
application of A: it can be used also to make a valuable medicine, X. Am I entitled to
use A to make and sell X if there is no other way of making X or curing the ailment
for which X is a cure?
3. (Para 40). Does the earlier case law refer to excluding a particular complainant, or all
competition on the market?
4. (Paras 44 and 45: the second market). It has been argued by some commentators that
if only the dominant firm was allowed to exploit the invention, etc., protected, there
was no market downstream and no abuse. AG Tizzano and the CJEU have stated that
the second market may be potential or hypothetical. It is important that incentives are
not unduly reduced by a duty to supply, but the position is worse if no one is given
access than if someone is. On this point as on many others, the judgment in IMS
follows Magill closely.
5. (Paras 48–50). How new must the new product be? The ECJ leaves the national court
to decide. Will this result in different standards in different Member States? Will we
be able to advise clients on this so as to avoid litigation? Would it have been better to
decide whether the market was important with newness being one of the relevant
factors? Novelty is not always desirable, for instance when parts must fit the whole.
Note that the Commission has never found that an open exclusive licence would have
affected a new product, even if it is the best in the field. See Nungesser (LG) KG and
Kurt Eisele v Commission (C-258/78), 8 June 1982, OJ 1978, L286/23, [1982] ECR
2015.
6. The CJEU followed Magill reaffirming the cumulative character of these conditions
and explained that the ‘new product or service’ rule limits the finding of abuse for a
refusal to licence ‘only where the undertaking which requested the licence does not
intend to limit itself essentially to duplicating the goods or services already offered on
the secondary market by the owner of the copyright, but intends to produce new
goods or services not offered by the owner of the right and for which there is a
potential consumer demand’.392 Note that in Renault and Volvo, both of which
involved rights of design on spare parts, the exceptional circumstances were held to
exist even if the refusal to license did not impede the emergence of a new product.
The CJEU noted in paragraph 42 that the duty to supply arises only if there are
separate markets, one upstream and the other downstream, but it followed AG
Tizzano (paras 56–59), adding in paragraph 44 that ‘it is sufficient that a potential

392
Ibid., para 49 (emphasis added).

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market or even hypothetical market can be identified’: a question for the national
court to answer. The identification of two different but interconnected stages of
production is also important, as it is only if the upstream products or services are an
indispensable input for the supply of the downstream product that a refusal to licence
may fall within the scope of article 102 TFEU. Yet, as the Court noted, it is sufficient
to identify a captive, potential or hypothetical input market, for example by
distinguishing between the different stages of the innovation process, the intellectual
property right being one of them.393 The CJEU stated that it was also for the national
court to decide whether access to the brick structure was essential.
7. (Para. 51). Note that the Court accepts that there may be justifications, but does not
give any examples. Can you think of any?
8. As it was highlighted in Chapter XX, in its recent Enforcement Priorities’ Guidance
on exclusionary abuses,394 the Commission considers unilateral or ‘constructive’395
refusals to deal as an enforcement priority if all the following circumstances are
present: (i) the refusal relates to a product or service that is objectively necessary to be
able to compete effectively on a downstream market, (ii) the refusal is likely to lead to
the elimination of effective competition on the downstream market, and (iii) the
refusal is likely to lead to consumer harm.396 The third condition did not exist as such
in the case law of the EU courts. Preventing innovation, in particular stifling follow-
on (cumulative) innovation constitutes an example of possible consumer harm. The
Guidance also takes a more liberal view of the condition of indispensability, as the
fact that the licensee does not intend to limit herself essentially to duplicating the
goods or services already offered on the secondary market is not the only instance in
which cumulative innovation may be considered as likely to be stifled. The
Commission adopts instead a wider interpretation of the restrictive effect on
innovation. With regard to possible objective justifications, the Guidance recognizes
two instances which may give rise to such claims by IPR holders: the need to allow
the dominant undertaking to realize an adequate return on the investment required for
the development of its input business and the need for the undertaking to generate
incentives to invest in the future, taking the risk of failed projects into account.397
These efficiency gains should however be examined under the four conditions test for
efficiencies, set in the Priorities’ Guidance.

13.6.5. Refusals to provide interoperability: Microsoft and beyond

Refusals to provide interoperability are assessed in the EU competition law under the
broader category of refusals to supply.398 The Commission applied Article 102 TFEU to the
refusal by Microsoft to supply Sun Microsystems the necessary information to establish

393
Ibid., paras 44–45.
394
Communication from the Commission — Guidance on the Commission's enforcement priorities in applying
Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings [2009] OJ C 45/7
(Guidance Paper).
395
For example, unduly delaying or otherwise degrading the supply of the product or imposing unreasonable
conditions in return for the supply.
396
Guidance paper, para 81.
397
Guidance paper, para 89
398
Ibid., para 78.

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interoperability between their work group server operating systems and Microsoft’s PC
operating system Windows399 (see Chapter 14). Microsoft was ordered to disclose
interoperability information in a reasonable, non-discriminatory and timely way. While the
Commission did not contemplate compulsory disclosure of the source code of Windows and
the disclosure measure only covered interface specifications, it acknowledged that “it cannot
be excluded that ordering Microsoft to disclose such specifications and allow such use of
them by third parties restricts the exercise of Microsoft’s intellectual property rights”.400
Microsoft’s conduct was not necessarily impeding the emergence of an identifiable new
product. Microsoft’s conduct had nevertheless, according to the Commission, the effect of
reducing the incentives of its competitors to innovate (and produce new products in the
future) and therefore to limit consumer choice.
The Commission affirmed that intellectual property rights cannot as such constitute a
‘self-evident objective justification’ for Microsoft’s refusal to supply and employed a
balancing test examining if the possible negative impact of an order to supply on Microsoft’s
incentives to innovate could be outweighed by its positive impact on the level of innovation
of the whole industry (including Microsoft). Taking the view that ‘Microsoft’s research and
development efforts are […] spurred by the innovative steps its competitors take in the work
group server operating’ system market that ‘were such competitors to disappear, this would
diminish Microsoft’s incentives to innovate’, the Commission concluded that the costs
outweighed the benefits in this case.
The General Court (at the time the Court of First Instance) confirmed the Commission’s
Microsoft decision in 2007.401 While it reaffirmed the four criteria of the CJEU in Magill and
NDC Health it also adopted a more open-ended interpretation for some of these conditions.
First, the Court used language that implied that these conditions were not the only
exceptional circumstances in which the exercise of the exclusive right by the owner of the
intellectual property rights may give rise to such an abuse, although it noted that the
requirement ‘that the refusal prevents the appearance of a new product for which there is
consumer demand is found only in the case-law on the exercise of an intellectual property
right’.402 Second, the Court gave also a broad interpretation to the ‘new product rule’ of
IMS/NDC Health, finding that consumer injury may arise where there is a limitation not only
of production or markets, but also of technical development.403 The expansion of the ‘new
product’ prong to incorporate technological efficiency perhaps has collapsed this element into
indispensability.404 A new product finding generally might follow a determination of
indispensability and the fact that the plaintiff requests a license.405
Contrary to Magill and IMS, Microsoft’s conduct did not impede the emergence of
identifiable new products but affected the competitive process that would have brought about
these new products in the future. Third, the Court interpreted ‘consumer harm’ broadly noting

399
Microsoft/W2000 (Case COMP/C-3/37.792) Commission decision (24 March 2004), available at
ec.europa.eu/competition/antitrust/cases/dec_docs/37792/37792_4177_1.pdf .
400
Ibid., para 546 & para 1004.
401
Case T-201/04 Microsoft v Commission [2007] ECR II-3601.
402
Ibid., paras 332–334.
403
Ibid., para 647.
404
See V Korah, Intellectual Property Rights & the EC Competition Rules (Hart Publishing 2006) 147.
405
See BC Gallego, ‘Unilateral Refusal to License Indispensable Intellectual Property Rights – U.S. & EU
Approaches’ in J Drexl (ed) Research Handbook on Intellectual Property & Competition Law (Edward Elgar
2008) 226.

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that consumer choice would be affected if rival products of equal or better quality would not
be able to compete on equal terms at the market.406
The General Court would not sanction the approach of balancing the incentives of various
market participants to innovate, but it nevertheless considered the following factors relevant
to the objective justification inquiry: ‘the value of the underlying investment, the value of the
information concerned for the organization of the dominant undertaking and the value
transferred to competitors in the event of disclosure’.407
A licensee still must pay consideration for the right to use the IPR. The level of this
royalty theoretically could encourage or discourage innovation. The result further may
depend on the productive capability of the licensor and who else licenses the technology408.
By contrast, when a court finds patent misuse, it issues a compulsory license ‘freely available
to everyone’.409 The patentee loses the right to continue to enforce the patent. This result
clearly represents a more severe and costly penalty than ordering ‘a paid compulsory license
to only one party’.410

13.7. Abuse of the IP system and vexatious litigation

13.7.1. General principles

Corporations may abuse of the IP and regulatory system with the aim to maintain or extend
their market power and to exclude competitors. This may take different forms: (i) a collusive
conduct, relating to patent litigation settlements between brand name and generic drug
manufacturers involving so called ‘reverse payments’ (see Chapter 13.9); (ii) unilateral
practices by dominant firms which by abusing the regulatory and litigation system aim to
raise the costs of their competitors, exclude competition and ultimately harm consumers. This
Section will focus on the second type of conduct.
This type of practices is particular salient in the context of IP rights litigation. The
abuse may take the form of (i) a fraudulent litigation or some form of misrepresentation in the
context of the regulatory process, in particular at patent offices, (ii) or it might also consist in
instigating litigation with the collateral purpose of inflicting an anticompetitive injury. In the
context of patent litigation, this conduct may take the form of competition law (antitrust)
counterclaims to patent infringement claims, what is generally referred to as ʻsham litigationʼ
in the US or ʻvexatious litigationʼ in Europe. Another possibility is that patent holders may
(abusively) play the patent system so as to increase their revenues and/or harm their rivals.
It is important here to note that what constitutes a restriction of competition in these
cases is not the use of the regulatory or litigation process itself but the abuse of that process.
As the US Supreme court nicely put it in its seminal jurisprudence on sham litigation City of
Columbia v Omni Outdoor Advertising, ‘the use (of) the governmental process as opposed to
the outcome of that process as an anticompetitive weapon’.411 The restriction of competition

406
Case T-201/04 Microsoft v Commission (2007) ECR II-3601, para 652.
407
Case T-201/04 Microsoft v Commission (2007) ECR II-3601, para. 207.
408
See D Kallay, The Law & Economics of Antitrust & Intellectual Property: An Australian Approach (Edward
Elgar 2004) 125.
409
Ibid.
410
Ibid.
411
City of Columbia v Omni Outdoor Advertising, 499 U.S. 365 (1991).

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flows directly from a ʻprivateʼ action, as the injury would have happened no matter what the
government official or judge would have decided. Had the defendant not any discretion on
instigating the action at the first place, the practice would fall under the state compulsion
exception (XXX) and/or it would have been possible for the complainant to attack directly
the anti-competitive state action through the joint use of Article 4(3) TEU and Articles 101
and/or 102 TFEU (XXX). What is important is to establish criteria enabling the decision-
maker to distinguish a legitimate use of the regulatory process or the courts from the abuse of
these processes. This is particularly important, as there is evidence that corporations
increasingly rely on investing on the use of governmental processes in order to harm
competitors and increase their profitability. James Bessen has noted the higher aggregate
profits in what he calls the ‘rent-seeking sector’, such as pharma/chemicals, petroleum
refining, transportation equipment/defense, utilities, communication, in comparison to sectors
that are less regulated, noting that for each dollar spent lobbying for a tax break, firms
received returns in excess of $220.412 This makes rent seeking and lobbying the second most
important driver of firms’ profitability, before even R&D spending. In other words,
corporations achieve more returns per pound sterling if this is spent on lobbying and rent
seeking regulation than on R&D. These empirical findings may of course be related to the
specific US context, but arguably the situation may not be that different in Europe. However,
it becomes clear that the cost of engaging in such activity typically is minimal, the likelihood
of generating efficiencies rather small, while the anticompetitive effects resulting from it
often are significant and durable.413
This ‘rent seeking’ activity may take different forms. Political rent seeking, that is the
attempt to influence legislation in order to harm rivals, may fall outside the radar of
competition authorities. In the US, such conduct has been granted immunity from
competition law liability, regardless of the extent of anticompetitive effects, because of the
need to prevent Congress from abridging ‘the right of the people […] to petition the
government for a redress of grievances’, following the first Amendment to the US
Constitution (the so called Noerr Pennington doctrine).414 The First amendment to the US
Constitution guarantees citizens freedom of speech, of assembly, and ‘to petition the
government for a redress of grievances’. The Noerr Pennington doctrine ensures that non-
competition values protected by these fundamental rights of US citizens are not impinged by
antitrust law, by limiting, if need be, the enforcement of the antitrust laws against certain
private acts urging government action.415

412
J Bessen, ‘Accounting for Rising Corporate Profits: Intangibles or Regulatory Rents?’ (May 11, 2016).
Boston Univ. School of Law, Law and Economics Research Paper No. 16-18. Available at SSRN:
ssrn.com/abstract=2778641.
413
SA Creighton, DB Hoffman, TG Krattenmaker & EA Nagata, ‘Cheap Exclusion’ (2005) 72 Antitrust Law
Journal 975, 977–987, 990–992, including these practices under the category of ‘cheap exclusion’.
414
The doctrine takes its name from the first two cases of the Supreme Court in this jurisprudential line: E. R.R.
Presidents’ Conference v Noerr Motor Freight, Inc., 365 U.S. 127 (1961), and United Mine Workers of America
v Pennington, 381 U.S. 657 (1965).
415
See, FTC Staff Report, ‘Enforcement Perspectives on the Noerr Pennington Doctrine’ (2006), 4, available at
www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-report-concerning-enforcement-
perspectives-noerr-pennington-doctrine/p013518enfperspectnoerr-penningtondoctrine.pdf providing a non-
exhaustive list of three types of conduct that can use government processes to seek anticompetitive rewards: (i)
requests for ministerial government acts; (ii) misrepresentations to a government decision maker in a non-
political context; and (iii) repetitive requests for government action filed regardless of merit solely to use the
government process to suppress competition.

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Similar concerns over the protection of the citizens’ right to participate to the political
process are included in Articles 20 and 227 of the TFEU, as well as Article 44 of the Charter
of Fundamental Rights of the EU, which provide EU citizens, including any natural or legal
person that is resident or has a registered office in a Member State, either individually or in
association with others, the right to petition to the European Parliament on matters which fall
within the EU’s fields of activity and which affect the petitioners directly, the latter condition
being interpreted very broadly. These provisions do not establish an as broad claim for the
protection of the political process, as the First Amendment of the US Constitution. They may
also relate to anticompetitive activities generated by legislation voted by the European
Parliament, which may set limits to an eventual implementation of a form of Noerr
Pennington doctrine in EU competition law, as most of the EU legislation emanated from the
co-decision procedure, with the participation of the Council of the EU, which is not listed in
the above provisions. EU competition law also provides more tools to go after anti-
competitive activity by public authorities than in US law, where the State action doctrine may
immunize some anticompetitive conduct from antitrust law, and EU institutions are not
exempted from the obligation to comply with the competition law provisions of the Treaty.
Notwithstanding these developments, there has not been, to our knowledge, any case
involving the application of EU competition law to conduct resulting from the participation to
the political process.
The competition immunity, as a result of the Noerr Pennington doctrine is, however,
narrower when it comes to influencing the adjudicatory process.416 In this case, the restriction
of competition is deemed to flow directly from a ‘private’ action, that of abusing the specific
governmental process. In this case the harm to competition would have happened no matter
what the government official would have decided. This situation should therefore be
distinguished from that in which a disinterested accountable decision-maker makes a
substantive decision in favor of the restriction to competition.
With regard to the abuse of the regulatory process, the US Supreme Court held in
Walker Process Equipment that a defendant in a patent suit may bring an antitrust
counterclaim where the allegedly infringed patent was obtained by fraud on the US Patent
and Trademark Office (PTO).417 He must show by clear and convincing evidence that there is
some fraud or ʻinequitable conductʼ from the patent holder. Not any misrepresentation from
the patent holder in the patent application process is sufficient to make a patent
unenforceable. The US courts require high standards for the proof of ʻinequitable conductʼ:
this includes a misrepresentation of a material fact, the falsity of that representation, the intent
to deceive, a justifiable reliance upon the representation by the party deceived and a showing
of ʻmaterialityʼ, that is injury to the party deceived as result of the misrepresentation (the
patent examiner would not have issued the patent if the misrepresentation was not made). 418
The important question to ask, once the infringement action is filed is whether the
infringement plaintiff knew or should have known that the action is improper. In addition to

416
California Motor Transport Co. v Trucking Unlimited, 404 U.S. 508 (1972).
417
Walker Process Equipment v Food Mach. & Chem Corp., 382 US 172 (1965).
418
Nobelpharma AB v Implant Innovations, Inc., 141 F 3d 1059 (Fed Cir 1998). For a critical analysis of this
case law see, H Hovenkamp, ʻThe Walker Process Doctrine: Infringement Lawsuits as Antitrust Violationsʼ
(September 01, 2008). U Iowa Legal Studies Research Paper No. 08-36. Available at SSRN
ssrn.com/abstract=1259877.

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ʻfraudʼ or ʻinequitable conductʼ element of the offense, which has been broadly interpreted419,
US courts require, as in all Section 2 Sherman Act cases, evidence that the conduct is
reasonably capable of maintaining or extending monopoly power by impairing the
opportunities of rivals.
In the EU, the Commission and the EU Courts may also apply Article 102 TFEU to
fraudulent misrepresentations by a dominant undertaking to a Patent Office (during
opposition and appeal procedures) or a national court (during patent litigation) in order to
procure IP rights (see Chapter 13.6.3.).
A further possibility of ‘abuse’ of the IP system is ‘product hopping’ (also called
‘evergreening’ or ‘line extension’), by which we mean a situation in which a brand-name
pharmaceutical company switches from one version of a drug (eg capsule, injection) to
another (eg tablet, syrup), or any other reformulation of the drug (changing molecule parts or
combine two or more drug compositions that had previously been marketed separately),
while encouraging doctors to prescribe the reformulated rather than the original product, with
the main purpose to shift (‘migrate’) the market to the reformulated drug and thus impair the
entry of generics.420 These practices may go as far as slightly changing an active ingredient
and presenting an old medicine as a new product and registering a new patent, thus extending
well beyond the protection period of the patent covering the active ingredient of the
previously marketed product.421
Similar concerns may emerge in situations where the process of litigation is abused
for anticompetitive aims. The fundamental right to be protected in this case consists in the
right to access to the court (Art 6 ECHR and Art 47 of the EU Charter of Fundamental
Rights). Competition authorities in Europe and the US have found that the commencement of
litigation may be abusive in limited circumstances (see Section 13.6.2.). The reasons pushing
the competition authorities to intervene against this type of conduct are not hard to imagine.
First, litigation of IPRs is particularly significant in some economic sectors, such as the
pharmaceutical industry, as originator companies use a variety of instruments to extend the
commercial life of their medicine, including litigation.422 Second, litigation costs are
important. The European Commission found in its recent Pharmaceutical Sector Inquiry that
the average duration of opposition and appeal proceedings averages 2,8 years (from 6 months
to 6 years in some Member States), litigated infringement proceedings could take about 7
years, the average duration of interim injunctions granted was 18 months and litigation costs
significant in view of the fact that patent infringers (in this case generics) face multiple

419
H Hovenkamp, ibid, p 4, noting that ʻinfringement actions can also be qualifying exclusionary practices […]
when they are based on valid patents that are known by the infringement plaintiff to be unenforceable as a
result of improprieties in procurement, or on valid patents but where the infringement plaintiff knew or should
have known that the infringement defendant was not an infringerʼ or ʻwhen the infringement plaintiff bases its
cause of action on unreasonable and clearly incorrect interpretations of questions of lawʼ.
420
MA Carrier & S Shadowen, ‘Product Hopping: A New Framework’ (August 3, 2016). Notre Dame Law
Review, Forthcoming. Available at SSRN: ssrn.com/abstract=2747526.
421
European Commission, Pharmaceutical Sector Enquiry – Final Report (2009), available at
ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/staff_working_paper_part1.pdf .
422
European Commission, Executive Summary of the Pharmaceutical Sector Inquiry Report (2009), available at
ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/communication_en.pdf, noting that ʻ[t]he number of
patent litigation cases between originator and generic companies increased by a factor of four between 2000 and
2007ʼ.

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actions in multiple states, given the absence of a unified EU patent system. 423 Third, there has
been a considerable increase in recent years of litigation by Patent Assertion Entities (PAEs),
that do not develop technologies but whose business model is to generate revenues by
asserting their patents or those of third parties. Patent Assertion Entities form part of the
larger category of Non-Practising Entities (NPEs) that develop patent portfolios either by
patenting their inventions (eg Universities, research institutes) or by acquiring patents from
other entities but which, to the difference of Practising Entities, do not practise their patents,
but simply derive revenues from licensing them.424 These PAEs typically initiate licensing
negotiations with manufacturers alleging that they have infringed their patents and file a
patent infringement lawsuit against them in case the negotiations fail. Some of them use this
strategy as a way to extract revenue from producers that do not want to enter in litigation and
for this reason they are often referred to as patent “‘trolls’.425 PAEs are ‘pure’ when they
acquire patents from a variety of sources with the aim to make a revenue by asserting them,
and ’hybrid’ when there is some relationship between the entities that transferred their IP
rights to the PAEs (the operating company) and the PAEs, for instance through a revenue-
sharing agreement or the fact that the PAE is authorized by the operating company to attack
other competing operating companies (the latter practice being called ‘privateering’, product-
-producing entities behaving as patent trolls).426 As it has been noted by some commentators,
‘pure’ PAEs may create risks of exploitation, while “hybrid” PAEs create exclusionary
concerns, as they can be used by operating companies to harm their rivals on downstream
product markets.427
There are various business models for these ‘patent trolls’. Lemley and Melamed cite
three: (i) ‘Lottery tickets trolls’ which is the ‘most traditional troll model’ and refers to ‘a
company that owns a patent and hopes to strike it big in court’, as the patent covers a
significant area of the technology; (ii) ‘bottom-feeder trolls’, which are interested in quick
and valuable settlements regarding a variety of patents of variable quality; (iii) ‘patent
aggregators’ that collect hundreds or thousands of patents and demand royalties to license
their portfolio, threatening to sue those that do not pay, the scale of their portfolio inducing
operators to enter into licensing agreements and to not challenge some of the patents included
in the portfolio through litigation.428
Patent ‘trolls’ or PAEs account for a large and growing percentage of patent litigation
in particular in the IT industry, in the US, but also in Europe. It is reported that 2/3 of patents
cases in the US are now brought by patent ‘trolls’ and that the number of defendants in suits
initiated by patent ‘trolls’ increased six fold from 2003 to 2013. This increases considerably

423
European Commission, Pharmaceutical Sector Inquiry – Final Report (2009), ibid., pp 202–253 and 394–
415.
424
For a useful clarification of the terminology, see D Geradin, ‘Patent Assertion Entities and EU Competition
Law’, (February 6, 2016). George Mason Law & Economics Research Paper No. 16-08. Available at SSRN:
ssrn.com/abstract=2728686 or dx.doi.org/10.2139/ssrn.2728686.
425
On these strategies, see FS Morton & C Shapiro, ‘Strategic Patent Acquisitions’ [2014] 79 Antitrust Law
Journal 463. On the role of ‘trolls’ in general in IP transactions, see, Federal Trade Commission, The Evolving
IP Marketplace (March 2011), available at www.ftc.gov/sites/default/files/documents/reports/evolving-ip-
marketplace-aligning-patent-notice-and-remedies-competition-report-federal-trade/110307patentreport.pdf .
426
M Lemley & AD Melamed, ‘Missing the Forest for the Trolls’ [2013] 113 Columbia Law Review 2117.
427
D Geradin, ‘Patent Assertion Entities and EU Competition Law’, (February 6, 2016). George Mason Law &
Economics Research Paper No. 16-08. Available at SSRN: ssrn.com/abstract=2728686 or
dx.doi.org/10.2139/ssrn.2728686 .
428
M Lemley & AD Melamed, ‘Missing the Forest for the Trolls’ [2013] 113 Columbia Law Review 2117.

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the costs for technological start-ups, these costs being estimated by some studies to $20
billion in Venture Capital Investment.429 The problem seems to be less prevalent in Europe,
in view of the fewer software patents, which constitute the bulk of the cases brought in the
US by patent trolls, and, at least in the UK, the ‘loser pays principle’ for litigation costs and
the more conservative approach of the UK courts vis-á-vis injunctive relief. Yet, as some
recent empirical studies revealed, PAEs are increasingly active in Europe, accounting for
roughly ten percent of patent suits filed in Germany and the UK.430.
We will explore in turn these two possible categories of abusive conduct by a
dominant undertaking.

13.7.2. Vexatious litigation and EU Competition Law

‘Vexatious’ (or ‘sham’) litigation refers to the predatory use of adjudicative

procedures to achieve anticompetitive goals. It is a typical case of non-price predation: the
predator uses legal processes to impose expenses and delay, at little cost to itself. In the
United States, an exception to Noerr-Pennington immunity431 exists where one uses the
governmental process, rather than its outcome, as a sham to cover anticompetitive conduct.432
In Industrie des Poudres Sphériques v Commission, the General Court found that
participation by an undertaking in an investigation conducted by the EU institutions in an
antidumping proceeding cannot be deemed, of itself, to be contrary to Article 102 TFEU as
ʻto assert that mere recourse to such a procedure is, of itself, contrary to Article [102 TFEU]
amounts to denying undertakings the right to avail themselves of legal instruments
established in the interest of the EUʼ.433 However, vexatious litigation may constitute an
abuse of a dominant position, contrary to article 102 TFEU.434 The key piece of evidence in
identifying sham litigation is the absence of genuine interest in receiving judicial relief.
Establishing the genuine motive of the plaintiff, therefore, has been the central issue to much
of the case law on sham litigation in Europe and in the United States.
In practice, courts adopt two different approaches to identify sham claims. Some took
a narrow view and defined sham litigation as a pattern of baseless claims made without
regard to their merits, and designed to delay and tie up the judicial process. Others based
their assessment of the real motive of the plaintiff on a cost-benefit analysis of his economic
interest to bring suit.
With regards to the first approach, the existence of a predatory intent is clearly
demonstrated in situations of misrepresentations of facts or law to tribunals, perjury, fraud or

429
JE Bessen & MJ Meurer, ‘The Direct Costs from NPE Disputes’ [2014] 99 Cornell L. Rev. 387 ; JE Bessen,
JL Ford & MJ Meurer, ‘The Private and Social Costs of Patent Trolls’ (January 9, 2012). Regulation, Vol 34,
No. 4, p 26, Winter 2011-2012. Available at SSRN: ssrn.com/abstract=1982139.
430
BJ Love, C Helmers, F Gaessler & M Ernicke, ‘Patent Assertion Entities in Europe’ (November 12, 2015) in
D Sokol (ed.), Patent Assertion Entities and Competition Policy (Cambridge University Press, 2016,
forthcoming). Available at SSRN: ssrn.com/abstract=2689350.
431
Noerr-Pennington immunity holds that, efforts to influence public officials through lobbying, publicity, and
other contact are protected by the petition clause and are not a violation of antitrust law even when the
petitioning activity is undertaken for a disfavored motive, such as eliminating competition. (See, eg United Mine
Workers v Pennington 381 US 657 (1965); Eastern Railroad Presidents Conference v Noerr Motor Freight 365
US 127 (1961).
432
Walker Process Equipment v Food Machinery and Chemical Corp (1965) 382 US 172.
433
Case T-5/97 Industrie des Poudres Sphériques v Commission [2000] ECR II-3755.
434
Case T-111/96 ITT Promedia NV v Commission (1998) ECR II-2937.

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bribery. However, the courts also consider as sham litigation actions that are manifestly
unfounded or without probable cause. In assessing the existence of probable cause the courts
examine the situation existing when the action in question was brought. Probable cause to
institute civil proceedings requires no more than a reasonable belief that there is a chance that
a claim may be held valid upon adjudication. This approach makes virtually conclusive the
presumption that a successful suit cannot be a sham. It requires as a first step of the analysis
of the claim of sham litigation by the courts, the proof that the lawsuit is objectively baseless,
in the sense that no reasonable litigant could realistically expect success on the merits.
However, there are important reasons to object to this test. Probable cause may be absent if
the claim is not supported by the adequate factual evidence. It is also possible that a claim is
considered baseless because of a misconceived interpretation of the law. However, in this
some courts may consider baseless an action that other courts will consider meritorious. This
risk is particularly present in situations in which the concept of what constitutes a baseless
claim may be influenced by the court's conception of the adequate balance to achieve
between allocative and dynamic efficiency. The establishment of a bright-line rule may lead
to an important risk of false negatives. Furthermore, it might not be objectively reasonable to
bring a lawsuit just because there is a probability of some success on the merits, no matter
how insignificant the value of the claim might be.
The second approach is broader. The fact that the claim is not baseless does not
preclude the finding that the use of litigation constitutes an antitrust violation. Rather, the
existence of sham litigation is evaluated by a purely objective test focusing on the economic
interest of the plaintiff to bring legal action435. What counts is whether the suit's expected
value to the plaintiff exceeds its costs. The economic test for sham litigation is essentially a
predation test, as it requires the proof of a profit sacrifice, which cannot be recouped by the
plaintiff at a later stage in the event his legal action is successful. The application of this test
raises numerous questions. For instance, information with respect to relative legal merits of
the opposing parties and the amount of recovery may be privately held. The parties must
learn about each other before they can identify suitable settlement terms. This learning is
difficult because of incentives to misrepresent private information. Further, economies of
scale in legal services may prompt large or dominant firms to follow anticompetitive rent-
seeking strategies. As a result, some anticompetitive rent-seeking cases may be wrongly
identified as non-predatory. The forgoing leads us to the question as to what is a workable
standard for establishing the existence of sham litigation. Unlike the vast literature on
predatory pricing, economists have had little to say on the issue of predatory sham litigation.
Economic literature has yet to produce an objective examination of the incentives for sham
(vexatious) litigation actions.
In US antitrust law, the Supreme Court has adopted a two parts test, combining an
objective with a subjective approach: (i) the lawsuit must be objectively baseless, no
reasonable litigant could realistically expect success on the merits; (ii) only if the challenged
litigation is objectively meritless may a court examine the litigant’s subjective motivation (his

435
In defence of such a position, see Judge Posner in Grip-Pak, Inc. v Illinois Tool Works, Inc., 694 F.2d 466,
472 (7th Cir.1982), cert. denied, 461 U.S. 958 (1983), writing that ‘if the expected value of a judgment is
$10,000 (say, a 10% chance of recovering $100,000) the case is not “groundless”; yet if it costs $30,000 to
litigate, no rational plaintiff will do so unless he anticipates some other source of benefit. If the other benefit is
the costs litigation will impose on a rival, allowing an elevation of the market price, it may be treated as a
sham’.

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bad faith).436 Thus, motive alone cannot make viable a Section 2 Sherman Act case for
infringement or misappropriation of intellectual property simply because the IPR turns out to
be invalid.437 Similarly, because of the additional subjective requirement, objective
baselessness alone, although necessary, is not by itself a sufficient element of a competition
law claim.438 It is not sufficient that the underlying claim is objectively baseless; the claimant
(in the IP infringement case) must know or believe that it is.
In Boosey & Hawkes, the European Commission found that, when its distributor
started to make its own brass band instruments439, Boosey & Hawkes abruptly ceased supply,
started vexatious litigation and adopted other harassing tactics while the distributor’s
production arrangements were still vulnerable. The Commission adopted a decision under
what is now Article 102 imposing interim measures requiring supplies to be provided.
In Promedia, ITT v Commission, the Commission repeated that: in principle the
bringing of an action, which is the expression of the fundamental right of access to a judge,
cannot be characterised as an abuse [unless] an undertaking in a dominant position brings an
action (i) which cannot reasonably be considered as an attempt to establish its rights and can
therefore only serve to harass the opposite party, and (ii) which is conceived in the
framework of a plan whose goal is to eliminate competition440. Promedia did not challenge
this view, only its application. The General Court confirmed the Commission’s cumulative
tests.

Case T-111/96 ITT Promedia NV v Commission [1998] ECR II-2937

56. According to the Commission, under the first of the two criteria the action must, on an
objective view, be manifestly unfounded. The second criterion requires that the aim of the
action must be to eliminate competition. Both criteria must be fulfilled in order to establish an
abuse. The fact that unmeritorious litigation is instituted does not in itself constitute an
infringement of Article [102 TFEU] unless it has an anti-competitive object. Equally,
litigation which may reasonably be regarded as an attempt to assert rights vis-à-vis
competitors is not abusive, irrespective of the fact that it may be part of a plan to eliminate
competition.
57. It is clear from the documents before the Court that the applicant is challenging the
application in this case of the two cumulative criteria, but does not challenge the
compatibility of those criteria as such with Article [102 TFEU].
72. According to the first of the two cumulative criteria set out by the Commission in the
contested decision, legal proceedings can be characterised as an abuse, within the meaning of
Article [102 TFEU], only if they cannot reasonably be considered to be an attempt to assert
the rights of the undertaking concerned and can therefore only serve to harass the opposing
party. It is therefore the situation existing when the action in question is brought which must
be taken into account in order to determine whether that criterion is satisfied.

436
Professional Real Estate Investors, Inc v Columbia Pictures Indus, Inc, 508 US 49 (1993).
437
Ibid., p 66.
438
Ibid., pp 61–62.
439
BBI/Boosey & Hawkes [1988] 4 CMLR 67. Boosey & Hawkes submitted settled?, so no final decision on the
merits was required.
440
Case T-111/96 ITT Promedia NV v Commission [1998] ECR II-2937, para 30.

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73. Furthermore, when applying that criterion, it is not a question of determining whether the
rights which the undertaking concerned was asserting when it brought its action actually
existed or whether that action was well founded, but rather of determining whether such an
action was intended to assert what that undertaking could, at that moment, reasonably
consider to be its rights. According to the second part of that criterion, as worded, it is
satisfied solely when the action did not have that aim, that being the sole case in which it may
be assumed that such action could only serve to harass the opposing party.

Notes and questions

1. According to the General Court, bringing legal proceedings may constitute an abuse only
in ‘exceptional circumstances’, namely (i) where the action cannot reasonably be
considered as an attempt to establish the rights of the undertaking concerned and would
therefore serve only to ʻharassʼ the opposite party and (ii) the action is part of a plan
whose aim is to eliminate competition.441 This test seems to be more geared towards the
intent of the claimant than the US antitrust two parts test, yet focusing on an objective
definition of that intent by inferring it from the absence of any other plausible explanation
for the claim than a harassment strategy by the other party.
2. Note that the vexatious litigation abuse of a dominant position category has recently been
confirmed by the General Court in Protégé International Ltd v Commission, noting that
the two conditions of the ITT Promedia case law should be interpreted restrictively in
order not to jeopardize the application of the general principle of EU law on access to
justice and that the conditions are cumulative.442
3. Note that the two limbs of the test are to be interpreted and applied restrictively in a
manner that does not frustrate the general rule of access to courts. Indeed, according to
the first criterion the only purpose of the action should be to harass the opposing party.
Any alternative explanation therefore trumps the finding of an abuse. The parties may
rely for establishing this condition on direct documentary evidence or, if the more
advanced US case law on sham litigation may be a source of inspiration, on an inference
resulting, for instance, from the fact that the action is objectively unreasonable or
manifestly unfounded, is devoid of any basis in law (eg the patentee concealed previous
invalidation by a patent office during the suit), or that it goes beyond the asserted rights
etc. Similarly, the second criterion is satisfied solely when it forms part of a plan whose
aim is to eliminate competition, that being the sole case in which it may be assumed that
such action could only serve to harass the opposing party. As for evidence that the act of
bringing legal proceedings forms part of a larger plan whose goal is to eliminate
competition, the claimant may rely on the existence of a pattern of exclusionary measures
(e.g. the defendant started proceedings in other jurisdictions). It is unclear if vexatious
litigation may also be used for the purposes of exploitation, for instance force the
potential licensee to concede higher royalties or otherwise onerous terms.
4. The application of these criteria in practice presents a number of difficulties, in particular
with regard to the complex patent environment in certain industries (eg pharma). In the
441
Case T-111/96 ITT Promedia NV v Commission [1998)] ECR II-2937, paras 55 and 57.
442
Case T-119/09 Protégé International Ltd v European Commission, ECLI:EU:T:2012:421 (available only in
French), paras 49 and 63. On the restrictive interpretation of the two ITT Promedia conditions, see Case T-
119/09, paras 53–80.

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context of this industry, litigation almost always raises disputes on seemingly genuine or
reasonable issues about infringement, sometimes involving secondary patents filed by the
originator some years after the grant of a primary or base patent raising material issues as
to the scope of the patent and the ability of the generic firms to invent around the claimed
patent.443 Patent litigation in this area is also initiated in an important proportion by
generics firms seeking declarations of non-infringement or declarations of invalidity, thus
breaking with the ʻmouldʼ envisaged by the test.444 It has also been noted that a dominant
undertaking initiating the IP litigation would be required to show, as a defence to the
antitrust counterclaim, that it believed at the time of initiating this litigation that it had
good prospects of success, by disclosing privileged information the undertaking received
from its counsel on the success of the litigation or internal documents on the perceived
value of patent or IPR.445
5. Note that the enforcement of competition law is conceived as a necessary correction to
the failure of IP law and other areas of law to deal with frivolous litigation. However, it is
not the only means to achieve that purpose. For instance, model rules of professional
conduct may oblige patent counsel to carefully examine the merits of the case, interpret
the asserted patent claims and to avoid filing an action, unless there is a basis in law and
in fact for doing so. One may also envision civil procedure rules establishing a duty of
due diligence, prior to initiating or maintaining an action, so as to ensure that it is not
filed for improper purposes, such as with the sole purpose to harass competitors and
increase the cost of litigation.

13.7.3. Abuse of regulatory procedures: Astra Zeneca

In 2005, the European Commission found Astra Zeneca guilty of having abused
dominance by using its IPRs and the pharmaceutical regulatory system to prevent or delay the
marketing of generic versions of its ulcer treatment drug, Losec.446 Astra Zeneca had
submitted misleading information to national patent offices in order to acquire supplementary
protection certificates (SPCs) which would extent the patent protection for Losec and then
defending those in court and for misusing national rules by launching a tablet form of the
drug and withdrawing authorizations for the original version of its drug Losec in certain
national markets where patents or SPCs were due to expire.
The General Court upheld the decision of the Commission finding that the misleading
nature of representations made to public authorities must be assessed on the basis of objective
factors, proof of the deliberate nature of the conduct and of the bad faith of the undertaking in
a dominant position not being required for the purposes of identifying an abuse of a dominant
position.447 The GC distinguished the case from the vexatious litigation type of abuse of ITT
Promedia rejecting the second condition of this test relating to the existence of a plan whose
aim is to eliminate competition. According to the General Court, the misleading nature of

443
S Priddis and S Constantine, ʻThe Pharmaceutical Sector, Intellectual Property Rights, and Competition Law
in Europeʼ in S Anderman and A Ezrachi (eds.), Intellectual Property and Competition Law (Oxford University
Press, 2011) 267.
444
Ibid.
445
Ibid., 268.
446
AstraZeneca (Case COMP/A.37.507/F3) Commission Decision 2006/857/EC [2006] OJ L 332/24.
447
Case T-321/05 Astra Zeneca v Commission [2010] ECR II-2805, para 356.

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representations made to public authorities must be assessed on the basis of objective factors
and proof of the deliberate nature of the conduct and of the bad faith of the undertaking in a
dominant position is not required for the purposes of identifying an abuse of a dominant
position.448 The limited discretion of public authorities or the absence of any obligation on
their part to verify the accuracy or veracity of the information provided may be relevant
factors to be taken into consideration for the purposes of determining whether the practice in
question is liable to raise regulatory obstacles to competition.449 Hence, when the discretion
of the administrative authority is limited, the cause of the anticompetitive effect resulting
from a decision based on inaccurate information is not State action, but the
misrepresentations by the parties, thus leading to the possible application of Article 102 TEU
against the dominant undertaking engaging in the abovementioned conduct.
However, the CJEU held that intention was a relevant factor in the assessment of
abuse in this case, the Court also emphasizing that dominant companies do not need to be
ʻinfallibleʼ in their dealings with regulatory authorities and each objectively wrong
representation will not necessarily be an abuse.450 As a result of this case dominant
companies would not be considered to have engaged in abusive conduct simply because a
patent application was struck down when challenged. Indeed, ʻinnovative companies should
not refrain from acquiring a comprehensive portfolio of intellectual property rights, nor
should they refrain from enforcing themʼ.451

Case C-457/10P Astra Zeneca v Commission [2012] ECLI:EU:C:2012:770

The Commission defined the market as limited to PPIs, a new class of treatments for
hyperacidity, on which Astra Zeneca held a dominant position and did not include in the
relevant market an older type of medicine, histamine receptor antagonists (ʻH2 blockersʼ), as
it was asked by Astra Zeneca. Both the GC and the CJEU confirmed the analysis of the
Commission with regard to the relevant market. The CJEU agreed with the GC which had
taken into account the ʻinertiaʼ which characterised the prescription of PPIs by the doctors,
which was a result not of the therapeutic qualities of the H2 blockers, which were far inferior
to those of the PPIs, but of uncertainty concerning the side-effects of PPIs. Consequently the
two products were not substitutable. In particular the CJEU insisted on the need for a close
analysis of the therapeutic use of a medicine for the purpose of market definition and
considered that price does not constitute the most important element, in view of the fact that
doctors and patients had limited sensitivity to prices and that the regulatory systems in force
in the relevant Member States were not designed in such a way as to enable the prices of H2
blockers to exert downward price pressure on PPIs.452 In any case, H2 blockers were not
able to exercise significant competitive constraint over PPIs, having regard to the weight
given by doctors and patients to the therapeutic superiority of PPIs.453 In conclusion,
therapeutic considerations are key for the definition of relevant markets in the
pharmaceutical industry. The CJEU confirmed the finding of a dominant position for Astra

448
Case T-321/05 Astra Zeneca v Commission [2010] ECR II-2805, para 356.
449
Case T-321/05 Astra Zeneca v Commission [2010] ECR II-2805, para 357.
450
Case C-457/10P Astra Zeneca v Commission [2012] ECLI:EU:C:2012:770.
451
Case C-457/10P Astra Zeneca v Commission [2012] ECLI:EU:C:2012:770, para 188.
452
Case C-457/10P Astra Zeneca v Commission [2012] ECLI:EU:C:2012:770, para 57.
453
Case C-457/10P Astra Zeneca v Commission [2012] ECLI:EU:C:2012:770, para 58.

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Zeneca in the market for PPIs, agreeing with the GC’s finding that AZ’s market power was
not excluded or mitigated on account of the State’s role as price regulator and buyer with a
monopsonist power in respect of medicinal products issued on prescription. Indeed,
ʻalthough the price or reimbursement level are the result of a decision adopted by the public
authorities, the capacity of a pharmaceutical undertaking to obtain a higher price or
reimbursement level varies according to the added and innovative value of the product,
which enabled AZ, as the first producer to offer a PPI whose therapeutic value was much
higher than that of H2 blockers, to obtain from the public authorities a higher price as
against existing products and ‘me-too’ productsʼ.454 AZ was able to maintain much higher
market shares than those of its competitors while charging prices higher than those charged
for other PPIs, a further indication of a dominant position. The CJEU then examined the
analysis by the GC of the two heads of abuse of a dominant position
With regard to the first type of abuse, the non-disclosure by AZ to the public
authorities of its interpretation of the law with regard to the reference date on which it based
its Supplementary Protection Certificate (ʻSPCʼ) applications (the date of the publication of
prices as opposed to the date of the technical authorisation), AZ argued that the GC had
wrongly applied Article 102 TFEU and had misinterpreted the concept of ʻcompetition on the
meritsʼ by considering that the mere fact that an undertaking in a dominant position seeks a
right without disclosing the elements on which it bases its opinion constitutes an abuse.
According to the applicants, a ʻlack of transparencyʼ cannot suffice for an abuse and found
that there were ʻcompelling political and legal reasons why deliberate fraud or deceit should
be a requirement for a finding of abuse in circumstances such as those of the present caseʼ.455

Misrepresentations at the patent offices and national courts

74. As a preliminary point, it must be noted that it is settled case-law that the concept of
‘abuse’ is an objective concept referring to the conduct of a dominant undertaking which is
such as to influence the structure of a market where the degree of competition is already
weakened precisely because of the presence of the undertaking concerned, and which,
through recourse to methods different from those governing normal competition in products
or services on the basis of the transactions of commercial operators, has the effect of
hindering the maintenance of the degree of competition still existing in the market or the
growth of that competition (judgments in Case 85/76 Hoffman-La Roche v Commission
[1979] ECR 461, paragraph 91; Case C-62/86 AKZO v Commission [1991] ECR I-3359,
paragraph 69; Case C-52/07 Kanal 5 and TV 4 [2008] ECR I-9275, paragraph 25; and Case
C-52/09 TeliaSonera Sverige [2011] ECR I-527, paragraph 27).
75. It follows that Article 82 EC prohibits a dominant undertaking from eliminating a
competitor and thereby strengthening its position by using methods other than those which

454
Case C-457/10P Astra Zeneca v Commission [2012] ECLI:EU:C:2012:770, para 179. The CJEU also agreed
with the GC’s finding that for undertakings which enjoy first-mover status, ʻthe reimbursements paid by social
security systems, first, are set at relatively high levels in comparison with ‘me-too’ products, despite the
attempts by public authorities to reduce health costs with a view to compensating for the limited sensitivity of
prescribing doctors and patients to the high prices of medicinal products and, secondly, enable the
pharmaceutical company which enjoys such status to set its price at a high level without having to worry about
patients and doctors switching to other less costly productsʼ (para 180).
455
Case C-457/10P Astra Zeneca v Commission [2012] ECLI:EU:C:2012:770, para 71.

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come within the scope of competition on the merits (AKZO v Commission, paragraph 70, and
Case C-202/07 P France Télécom v Commission [2009] ECR I-2369, paragraph 106). […]
98. Regarded in the light of the facts found by the General Court, which the appellants have
expressly stated that they are not calling into question, the third ground of appeal raised by
them is tantamount to an argument that where an undertaking in a dominant position
considers that it can, in accordance with a legally defensible interpretation, lay claim to a
right, it may use any means to obtain that right, and even have recourse to highly misleading
representations with the aim of leading public authorities into error. Such an approach is
manifestly not consistent with competition on the merits and the specific responsibility on
such an undertaking not to prejudice, by its conduct, effective and undistorted competition
within the European Union.
99. Lastly, contrary to what the EFPIA submits, the General Court did not hold that
undertakings in a dominant position had to be infallible in their dealings with regulatory
authorities and that each objectively wrong representation made by such an undertaking
constituted an abuse of that position, even where the error was made unintentionally and
immediately rectified. It is sufficient to note in this connection that, first, that example is
radically different from AZ’s conduct in the present case, and that, secondly, the General
Court pointed out, at paragraphs 357 and 361 of the judgment under appeal, that the
assessment of whether representations made to public authorities for the purposes of
improperly obtaining exclusive rights are misleading must be made in concreto and may vary
according to the specific circumstances of each case. It thus cannot be inferred from that
judgment that any patent application made by such an undertaking which is rejected on the
ground that it does not satisfy the patentability criteria automatically gives rise to liability
under Article [102 TFEU]. […]
105. […] [T]he General Court examined in the present case whether, in the light of the
context in which the practice in question had been implemented, that practice was such as to
lead the public authorities wrongly to create regulatory obstacles to competition, for example
by the unlawful grant of exclusive rights to the dominant undertaking. It held in this
connection that the limited discretion of public authorities or the absence of any obligation on
their part to verify the accuracy or veracity of the information provided could be relevant
factors to be taken into consideration for the purposes of determining whether the practice in
question was liable to raise regulatory obstacles to competition.
106. Contrary to what the appellants submit, that examination by the General Court is not in
any way based on the assumption that the practice in question constitutes an ‘abuse in itself’,
regardless of its anti-competitive effect. On the contrary, the General Court expressly pointed
out […] that representations designed to obtain exclusive rights unlawfully constitute an
abuse only if it is established that, in view of the objective context in which they are made,
those representations are actually liable to lead the public authorities to grant the exclusive
right applied for. […]
111 So far as concerns the fact that the misleading representations did not enable AZ to
obtain SPCs in Denmark and that in Ireland and the United Kingdom the SPCs were
ultimately issued on the basis of the correct date, it must be stated that the General Court did
not err in law in holding […] that that fact does not mean that AZ’s conduct in those
countries was not abusive, since it is established that those representations were very likely to
result in the issue of unlawful SPCs. In addition, as the Commission has pointed out, in so far
as the impugned conduct forms part of an overall strategy seeking to unlawfully exclude

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manufacturers of generic products from the market by means of obtaining SPCs in breach of
the regulatory framework which established them, the existence of an abuse is not affected by
the fact that that strategy did not succeed in some countries.
112. Lastly, as regards the circumstances which, according to the appellants, must be present
in order to be able to find that the misleading representations were such as to restrict
competition, it is sufficient to note that in actual fact they amount to a requirement that
current and certain anti-competitive effects be shown. However, it follows from the Court’s
case-law that, although the practice of an undertaking in a dominant position cannot be
characterised as abusive in the absence of any anti-competitive effect on the market, such an
effect does not necessarily have to be concrete, and it is sufficient to demonstrate that there is
a potential anti-competitive effect [..].

Deregistration of the marketing authorisations

The General Court had confirmed the Commission’s finding that AstraZeneca’s withdrawal
of the marketing authorizations for the original version of Losec was abusive as it delayed
access to the market of generic producers and restricted parallel trade in the original capsule
version of Losec. Indeed, because of the withdrawal, generic applicants were prevented from
relying upon test data used in the original patent in their simplified application. The General
Court found that the withdrawal of the marketing authorization did not involve the legitimate
protection of an investment that came within the scope of competition on the merits because
AstraZeneca's exclusive right to make use of the data on its tests and clinical trials had
expired. AstraZeneca had also failed to establish an objective justification for the withdrawal
because it did not show that the continued maintenance of the marketing authorization would
result in a significant burden. Finally, the fact that AstraZeneca was entitled under the
relevant pharmaceutical legislation to withdraw the marketing authorization was irrelevant
to the assessment of whether the withdrawal constituted an abuse.

129. As a preliminary point it must be stated that, as the General Court observed […] the
preparation by an undertaking, even in a dominant position, of a strategy whose object it is to
minimise the erosion of its sales and to enable it to deal with competition from generic
products is legitimate and is part of the normal competitive process, provided that the conduct
envisaged does not depart from practices coming within the scope of competition on the
merits, which is such as to benefit consumers.
130. However, contrary to what the appellants submit, conduct like that impugned in the
context of the second abuse – consisting in the deregistration, without objective justification
and after the expiry of the exclusive right to make use of the results of the pharmacological
and toxicological tests and clinical trials granted by Directive 65/65, of the MAs for Losec
capsules in Denmark, Sweden and Norway, by which AZ intended, as the General Court held
[…] to hinder the introduction of generic products and parallel imports – does not come
within the scope of competition on the merits.
131. In this connection, it must in particular be stated that, as the General Court observed […]
after the expiry of the period of exclusivity referred to above, conduct designed, inter alia, to
prevent manufacturers of generic products from making use of their right to benefit from
those results was not based in any way on the legitimate protection of an investment which

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came within the scope of competition on the merits, precisely because, under Directive 65/65,
AZ no longer had the exclusive right to make use of those results.
132. Furthermore, the General Court was correct to hold, at paragraph 677 of that judgment,
that the fact, relied on by the appellants, that under Directive 65/65 AZ was entitled to request
the withdrawal of its MAs for Losec capsules in no way causes that conduct to escape the
prohibition laid down in Article [102 TFEU]. As that court pointed out, the illegality of
abusive conduct under Article [102 TFEU] is unrelated to its compliance or non-compliance
with other legal rules and, in the majority of cases, abuses of dominant positions consist of
behaviour which is otherwise lawful under branches of law other than competition law.
133. Moreover, as the Advocate General observes […] the primary purpose of Directive
65/65 is to safeguard public health while eliminating disparities between certain national
provisions which hinder trade in medicinal products within the Union, and it therefore does
not, as claimed by the appellants, pursue the same objectives as Article [102 TFEU] in such a
way that the application of the latter is no longer required for the purposes of ensuring
effective and undistorted competition within the internal market.
134. It is important to point out, in this context, that an undertaking which holds a dominant
position has a special responsibility in that latter regard (see Case C-202/07 P France
Télécom v Commission [2009] ECR I-2369, paragraph 105) and that, as the General Court
held […] [in] the judgment under appeal, it cannot therefore use regulatory procedures in
such a way as to prevent or make more difficult the entry of competitors on the market, in the
absence of grounds relating to the defence of the legitimate interests of an undertaking
engaged in competition on the merits or in the absence of objective justification.
135. As regards the appellants’ argument that maintaining an MA would impose onerous
pharmacovigilance obligations on it, it must be noted that such obligations may in fact
constitute an objective justification for the deregistration of a MA.
136. However, as the General Court observed […] that argument was raised for the first time
at the stage of the proceedings before that Court and the burden arising from those
obligations was never mentioned in AZ’s internal documents relating to its commercial
strategy, which casts doubt on the fact that the deregistration of the MAs was due in this case
to those obligations.
137. The General Court, moreover, found […] that, in so far as AZ had not requested the
deregistration of its MAs in Germany, Spain, France, Italy, the Netherlands and Austria, the
appellants had failed to demonstrate that the additional burden on AZ, had it not deregistered
its MAs in Denmark, Sweden and Norway, would have been so significant that it would have
constituted an objective ground of justification. […]
140. Lastly, contrary to what the appellants claim, the General Court did not in any case
exceed its jurisdiction in holding […] that, although the Commission defined the second
abuse as resulting from the combination of the deregistrations of the MAs for Losec capsules
with the conversion of sales of those capsules to Losec MUPS, the central element of that
abuse consists in those deregistrations, as the Commission indeed confirmed during the
proceedings, that conversion constituting the context in which those deregistrations were
carried out, and that it is the deregistration alone which is liable to produce the anti-
competitive effects challenged by the Commission and thus to be regarded as an abuse. […]
148. It must be stated, however, that this ground of appeal is unfounded. The situation which
characterises the second abuse is not in any way comparable to a compulsory licence or to the
situation which gave rise to the judgment in IMS Health, relied upon by the appellants, which

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concerned the refusal by an undertaking in a dominant position, which was the owner of an
intellectual property right in a ‘brick structure’, to grant its competitors a licence for the use
of that structure.
149. In fact, the possibility provided for in Directive 65/65 of deregistering a MA is not
equivalent to a property right. Consequently, the fact that, in the light of its special
responsibility, an undertaking in a dominant position cannot make use of such a possibility in
such a way as to prevent or render more difficult the entry of competitors on the market,
unless it can, as an undertaking engaged in competition on the merits, rely on grounds
relating to the defence of its legitimate interests or on objective justifications, does not
constitute either an ‘effective expropriation’ of such a right or an obligation to grant a licence,
but a straightforward restriction of the options available under European Union law.
150. The fact that the exercise of such options by an undertaking in a dominant position is
limited or made subject to conditions in order to ensure that competition already weakened by
the presence of that undertaking is not subsequently undermined is in no way an exceptional
case and does not justify a derogation from Article [102 TFEU], unlike a situation in which
the unfettered exercise of an exclusive right awarded for the realisation of an investment or
creation is limited.

Notes and questions on Astra Zeneca

1. The assessment of AZ’s position of dominance flows directly from the stage of
market definition, specifically, with respect to the exclusion of H2 blockers,
considered to be an inferior alternative. However, it could be argued that this is only
because doctors and patients are not exposed to the price-quality trade-off, in that the
price of the more expensive PPI option is reimbursed under the social security system.
Had doctors and patients been exposed to the price signal instead, AZ’s position of
dominance may have been called into question, that is, to the extent that the cheaper
but inferior alternative had exercised a stronger competitive constraint. Therefore,
both the definition of the relevant market and the dominance assessment are the result
of this staged purchasing process. Which party are the alleged abuses detrimental to,
doctors/patients or the public authority? How would detriment have been prevented to
arise in the counterfactual scenario absent the abuses?
2. The CJEU agreed with the GC that AZ was intent on misleading the public authority
in order to forestall potential entrants. The need to establish that the misleading
practice was deliberate is aimed at preventing false convictions where a dominant
company is found to have infringed art 102 only because it has committed a
misrepresentation. Whereas in the case of the withdrawal of the original marketing
application, the burden was on the defendant to establish the case for an objective
justification notwithstanding the fact that the contested conduct was in compliance
with Directive 65/65. What underpins this apparent reversal of the burden of proof?
How long should have AZ waited before withdrawing the original Market
Authorization? How many new entrants would have sufficed?

13.8. Standard Essential Patents and FRAND licensing obligations

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13.8.1. General Principles

As a result of greater technological sophistication, in particular in ICT industries,

standards are ubiquitous as they enable the interoperability between the various technologies
included in each product, in particular as products develop by integrating new functionalities
and applications that go beyond just communication (eg smartphones). In particular, modern
smartphones integrate successive generations of wireless communication standards (GSM,
UMTS, EDGE, WCDMA, LTE), which require a constant updating of standards and
extensive interoperability, as telecommunications hardware and software needs to be ‘multi-
mode’ or ‘backwards compatible’, thus enabling the use of 2G, 3G and 4G standards as
necessary. Standard setting may take different forms: technical standards may be the
consequence of regulatory intervention, cooperative standards may be established through
voluntary standard setting organizations or de facto standards set by the market place may
emerge following an intense competition between firms engaged in a winner-take-all
standards war. One might think of Microsoft’s Window operating system or the QWERTY
keyboard layout as illustrations of the emergence of the latest type of standard, the firm’s
position as market leader enabling it to select the standard (protected by IPRs) and force
rivals to obtain a license. Standards provide increased compatibility between different
products, increased interoperability, thus enabling the launch of a network. The role of
interface standards is particularly significant in communication technologies, such as cell
phones, personal digital assistants, laptops. A standard implemented before the development
of a patent thicket may alleviate some of the complements and hold up concerns related to
patent thickets. At the same time, standardization may impose costs, as it locks in consumers
to a legacy system, enables hold up in cases “essential” IPRs have not been declared prior the
standard or may enable dominance by big players. The way the industry standard emerges is
of particular importance in order to assess its effects on competition. A cooperative standard
is likely to enable multiple firms to be active in the industry, while the development of a de
facto standard may lead to a single, proprietary product, controlled by a dominant firm.
Cooperative standard setting involves collaboration between competitors in the
context of a Standard Setting Organization (SSO). SSOs adopt IP-related rules so as to
promote cooperation and the development of standards: disclosure rules require participants
to the SSO to inform the SSO members of any IP rights they held on technologies; SSOs are
also based on transparency rules enabling members to be kept informed of ongoing and
finalized standardization work. Licensing rules ensure that all members have effective access
to the standard on fair, reasonable and non-discriminatory terms (FRAND). As these rules
engage actual or potential competitors, they may infringe, in certain circumstances, the
provisions of Section 1 Sherman Act in US antitrust law or Article 101 TFEU in EU
competition law. The examination of standard-setting agreements under Article 101 TFEU is
further examined in Chapter X.
Once a standard is adopted, it is impossible to manufacture products compliant with
the standard without infringing the IPRs covering that standard. Hence, once a patented
technology is incorporated as an essential part of a standard, the industry gets locked in this
standard as switching to an alternative technology may be particularly costly.456 These

456
ETSI defines standard essential patents as following: ‘if it is not possible on technical (but not commercial)
grounds, taking into account normal technical practice and the state of the art generally available at the time of

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standard essential patents (SEPs) are increasingly important in the ICT industry, because of
the technological complexity of the industry and the strategies of the main actors for
defensive patenting, in order to enhance their bargaining position vis-à-vis their competitors.
Licensing practices in the industry also evolved from the 1990s, where relatively few
vertically integrated companies, all from industrialized countries, were typically engaging in
cross-licensing their patent portfolios. This is no longer the case.

Y Ménière, Fair, Reasonable and Non-Discriminatory (FRAND) Licensing Terms, JRC

Science and Policy Report, European Commission (2015), pp 10–11 (references omitted)

The pattern has changed radically over the last decade with the entry of new actors and more
vertical specialization on both sides of the market for SEPs licenses. The increasing
complexity of standards brought in a number of R&D-oriented companies whose interest was
the wider propagation of their standard essential technology. At the other end of the industry,
the successful entry of new manufacturers– many of which were from developing Asian
countries –induced a severe erosion of incumbent manufacturers in markets for standard
compliant products.
As compared with the 1990s, the presence of more SEP holders (n) and implementers (m)
mathematically results in an even larger number (n*m) of licensing contracts per standard. In
practice, these licensing agreements frequently encompass broad patent portfolios and may
thus not be restricted to SEPs. The variety of licensing practices has also increased, due in
particular to discrepancies between the patent positions of companies and their respective
weights in downstream markets:
- Bilateral (one-way) licensing has become more frequent due to vertical specialization on
both sides of the market. Licensing represents a key source of revenue for technology
developers – including SMEs – which tend to specialize in upstream R&D. In some cases,
different patent owners may also create patent pools in order to jointly license their SEPs in
order to save transaction costs and foster the adoption of the standard.
- Cross-licensing remains frequent between vertically-integrated companies and can still
generate significant cost advantages for patent-rich incumbents with respect to new entrants.
This in turn creates an incentive for new entrants to build or strengthen their own portfolios in
order to obtain more balanced licensing agreements.
- In recent years, patent-rich incumbent companies facing the loss of market share have also
started seeking quicker monetization of their patents by selling part of their portfolios to third
parties. Buyers include new entrants that seek to strengthen their IP positions but also non-
practicing entities that specialize in extracting settlement agreements or court-awarded
damages from allegedly infringing operating companies.
These developments show that patents in general, and SEPs in particular, are now more
clearly perceived as a direct and significant source of profit and/or competitive advantage. At

standardization, to make, sell, lease, otherwise dispose of, repair, use or operate equipment or methods which
comply with a standard without infringing that ipr”. See, ETSI, Intellectual Property Rights (IPRs); Essential,
Or Potentially Essential, IPRs Notified to ETSI in Respect of ETSI Standards, ETSI SR 000 314 V2.13.1, p 6
(2012). Defining essentiality is not however among the tasks of SSOs and is something subject to interpretation,
as the essentiality refers to the claims in the patent, and some claims of the same patent may be considered as
essential for the standard, while others not. See, JG Sidak, ‘The Meaning of FRAND, Part I: Royalties’ [2013] 9
Journal of Competition Law and Economics 931.

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the same time, the variety of licensing practices has made it more difficult to identify a
consensual approach to FRAND licensing. In recent years, patent litigation has also
significantly increased (especially in the US) in highly competitive and fast moving areas
such as the smartphone ecosystem.

This may raise the following competition policy problems:

Y Ménière, Fair, Reasonable and Non-Discriminatory (FRAND) Licensing Terms, JRC

Science and Policy Report, European Commission (2015), pp 12–13 (references omitted)

- Royalty stacking. This concept claims that FRAND commitments are not sufficient to keep
cumulative royalty rates at reasonable levels when there are several licensors of essential
patents on the same standard. Each licensor is expected to seek too high a royalty rate,
ignoring the fact that stacking high royalties would hamper the demand for standard
compliant products. For example, using public license demands and information from patent
disputes, a recent study estimates the potential patent royalty stack on a hypothetical $400
smartphone at $120 – which approximately equals the cost of the components. Economic
theory predicts that royalty stacking leads not only to excessive prices for users but also profit
losses for licensors. It recommends patent pools as a way for SEP holders to profitably
address this problem by charging a unique royalty rate for the whole SEP package.
- Patent hold-up. This concept claims that FRAND commitments made during the standard
setting process are too loose to effectively prevent SEP owners from unduly leveraging
market power when the time comes to negotiate a license. Ex-post market power stems from
the essentiality of patents that irrevocably ties them to the standard and also stems from
implementers locking themselves into investments (e.g. in R&D and/or manufacturing
equipment) in standard related equipment/knowledge before licensing-in the SEPs. It may
thus enable the SEP holder to leverage a position acquired as a result of the standard setting
process to negotiate royalty rates higher than the technology would have been worth ex ante
when competing with other alternatives. If so, another important consequence is that the risk
of hold-up can undermine ex-ante incentives for implementers to adopt and invest in
standards.
- Patent hold-out. A more recent counter argument put forward by SEP owners is that
FRAND commitments in fact deprive licensors of the market power that patents usually
confer. SEP holders are bound by their commitment to concede a licence and therefore they
cannot easily threaten to refuse a licence. Against this background, the worst possible
outcome for an infringer is to be sued and obligated by a court to pay the same FRAND rate
that would have been charged for licensing in the first place. The licensor, however, will miss
the timely availability of royalties. Knowing this, some implementers may commit “hold out”
or “reverse hold-up”, not only by using essential technology without a license but also by
deliberately choosing not to seek a license. If this happens, patent “hold out” can induce
royalty losses for SEP holders, and significantly reduce their incentives to invest in the
development of standards. Typically, hold-out practices are combined with the challenge of
validity and essentiality of SEPs in front of a court.

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The existence of credible empirical evidence on the existence of hold up, hold out and royalty
stacking is a debated issue. However, it is important to note that EU (and UK) competition
law does not require evidence of actual affects (for instance, actual hold up or actual royalty
stacking, ie evidence of the aggregate rates that implementers pay) in the context of an abuse
of a dominant position claim, but likely (potential) effects, on the basis of a credible theory of
harm (and an economic model) that would be sufficient for the purposes of applying Article
102 TFEU. From this perspective there may be some divergence between EU and US
competition law with regard to this issue.
This Section will focus on situations of hold up and reverse hold up and how
competition law may apply in this context. Royalty stacking will be explored in the next
Section on the meaning of FRAND and exploitative abuses.
First, competition authorities in Europe (and the US) have focused on deceptive
conduct in the context of a SSO. Patent holders disclosing information on their patents and
patent applications prior to the adoption of a given standard can at most demand a royalty that
corresponds to the marginal value of their patented technology. However, there are instances
in which a patent holder may adopt the strategy to conceal during the standard-setting process
this information, let the other stakeholders agree on a standard incorporating a patented
technology and reveal the information that the technology is covered by a patent after the
standard has gained widespread acceptance, when the negotiating position of the other
stakeholders will be weakened as they would have made standard specific investments and
will be kept hostage. The patent holder will then be able to demand a royalty that will far
exceed the marginal value of the patented technology (the so called “patent ambush”
strategy).
In Rambus an order by the US Federal Trade Commission (FTC) found Rambus’s
deceit, for concealing its patents and patent applications, for making outright
misrepresentations and giving misleading responses to questions about its conduct in the
context of the Joint Electron Device Engineering Council (JEDEC) SSO a violation of
Section 2 of the Sherman Act and Section 5 of the FTC Act, noting even that deceptive
conduct might be found in the absence of an express obligation to disclose. 457 The FTC relied
on the fuzzy disclosure obligations imposed to JEDEC members concluding that these
incorporated an underlying duty of good faith and inferred from this that JEDEC members
had reason to believe that the standard setting process will be cooperative and free from
deception. The FTC also argued that Rambus’s conduct prevented JEDEC from extracting a
commitment from Rambus to license in Reasonable and Non-Discriminatory terms (RAND).
Rambus deceit had the effect of distorting JEDEC’s choice of technologies and provided
Rambus monopoly power. The DC Circuit vacated the order as the FTC failed to prove that
but for Rambus’s deceptive conduct the SSO would have adopted a competing technology
(thus there was no exclusionary element)..458 The Court found that had Rambus disclosed the
information prior the adoption of the standard, JEDEC would have either excluded Rambus
technologies, or require from Rambus a RAND commitment. As to the first issue, the FTC
had found evidence in its investigation that, had Rambus disclosed the information, JEDEC
would have incorporated anyway Rambus’s technologies. As to the second issue relating to

457
In the matter of Rambus, Inc. (August 2, 2006), Docket No. 9302, pp 34–35 available at
www.ftc.gov/os/adjpro/d9302/060802commissionopinion.pdf.
458
Rambus Inc. v FTC, 522 F3d 456 (DC Cir. 2008), cert. denied, 129 S. Ct. 1318 (2009).

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the RAND commitment, the Court advanced that exploitative abuses are not considered as
producing an antitrust harm in US antitrust law.459 The Court also expressed reservations as
to the standalone use of Section 5 FTC Act in this context and developed limiting principles
for its use.
Another case involved an action against US chipset manufacturer Qualcomm, holder
of IP rights in mobile telephone standards. Qualcomm made a promise before the adoption of
the standard to license essential proprietary technology on RAND terms. The Third Circuit in
Broadcom Corp. v Qualcomm, found that intentionally deceiving the SSO with respect to a
royalty commitment could constitute a monopolization cause of action under the following
conditions: (1) in a consensus-oriented private standard setting environment, (2) a patent
holder’s intentionally false promise to license essential proprietary technology on RAND
terms, (3) coupled with an [Standard Determining Organization’s] reliance on that promise
when including the technology in a standard, and (4) the patent holder’s subsequent breach of
that promise, is actionable anticompetitive conduct.460 The Broadcom decision relies heavily
on the FTC’s analysis in Rambus, emphasizing that deception becomes an antitrust concern
only where rival technologies are excluded from the market and consequently consumer
welfare is harmed.
In Europe, the focus on these deception cases has not been much on the exclusionary
dimension of the case, but emphasized exploitation. In Rambus, the European Commission
found that Rambus had engaged in a ‘patent ambush’ based on the same behavior examined
by the FTC in this case, but reaching a different conclusion than the US competition
authority.461 The Commission turned the patent ambush claim into one that Rambus had
charged excessive royalties for its patents and applied Article 102(a). An Article 9
commitment decision capped the licensing fees Rambus could charge for its SEPs.462
Second, the holder of a standard essential patent may seek a court injunction to block
companies from producing any products compliant with the standard and to ask for higher
royalties than what he would have asked prior to the adoption of the standard. The infringers
would have in this case to remove their infringing products from the market and no other
choice than to accept licensing terms that they would not have accepted otherwise (hold up).
The intervention of competition law in this context should strike a balance between the
interest of implementers to produce the product compliant to the standard and the interest of
the SEP owners who should be protected from a situation of hold out (or reverse hold up).
The issue may arise if the standard essential patent holders have made a commitment
to license in (F)RAND terms.463 An often related issue is what constitutes (F)RAND from a
competition law perspective. However, even in presence of (F)RAND licensing the level of
royalties required may be higher than otherwise would be the case, in particular if the
standard essential patents (SEP) are owned by upstream companies that are not active in both

459
Ibid., pp 464–467.
460
Broadcom Corp. v Qualcomm, 501 F.3d 311 (3d Cir. 2007).
461
Rambus (Case COMP/38.636) Commission decision of 9 December 2009, available at
ec.europa.eu/competition/antitrust/cases/dec_docs/38636/38636_1203_1.pdf
462
See also the statement of objections sent to Qualcomm by the European Commission for the fact that its
licensing terms and conditions for its patents essential to the standard did not comply with its own FRAND
commitment and had led to excessive royalties. The Commission abandoned the case.
463
In Europe, the term Fair and Reasonable Non-Discriminatory Prices is used. In the US, the term RAND
(Reasonable and Non Discriminatory terms) is preferred, as US antitrust law does not deal with exploitative
practices and hence ‘fair’ prices. See our analysis below.

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R&D and the supply of products or services (the so called ‘non-practising entities’). These
may sometimes contribute to the R&D effort upstream (eg universities and companies
actively investing in R&D but choosing a licensing IPRs business model) but also ‘patent
trolls’, companies that do not contribute to R&D and product development but instead
purchasing companies with large patent portfolios, then waiting until an industry is locked
into a SEP they own and then taxing the industry participants with substantial royalty
demands. The risk of hold up is particularly important in complex technically markets in
which detailed standards have been developed cooperatively by many companies. As it was
explained below, non-practising entities are not constrained by the need to guarantee cross-
licensing arrangements, as most vertically integrated companies active in the supply of goods
and services do: they can ask for injunctive relief against other companies knowing that they
are not exposed to the risk of being subject to similar actions. For similar reasons they do not
fear that SSOs may be reluctant to accept in the future their technologies, as they are not
active inventors in the specific industry. Hence, in a case opposing NTP, a non-practising
entity holding SEP in wireless email technology and Research In Motion (RIM), the
manufacturer of blackberry, NTP’s threat of an injunction ceasing the operation of all
Blackberry services by RIM led the later to agree to settle for a sum of $612,5 million.
SSOs, such as the European Telecommunications Standards Institute (ETSI), the
Institute of Electrical and Electronics Engineers (IEEE), the International
Telecommunications Union (ITU), the International Organization for Standardization (ISO),
the International Electrotechnical Commission (IEC) have developed IPR policies to which
the SEP owner should consent to, and requiring their members to disclose relevant patents
and to agree to license them on reasonable terms. These policies may be considered as a
source of binding obligations for SEP owners under contract law. Concerns over the market
power of SEP holders may require some action from the part of SSOs in reforming their IP
policies and more generally their organization. There have been some suggestions to
introduce ex-ante competition between rival technologies during the standard-setting process
by asking patent holders to bid on royalty rates.464 Others, put forward the idea of price caps,
taking the form of a price commitment made prior to standard selection: after a discovery
phase, IP holders without proceeding to cooperation will announce price caps on their
offerings, were their IP to be included into the standard, the SSO then selecting the standard
considering the price caps to which IP owners are committed.465 SSOs have drafted their IP
policies so as to take into account the possibilities of hold up and reverse hold up. For
instance, ETSI IPR Policy Rule 6.1. states that
‘[w]hen an essential IPR relating to a particular standard or technical specification is
brought to the attention of ETSI, the Director-General of ETSI shall immediately
request the owner to give within three months an irrevocable undertaking in writing
that it is prepared to grant irrevocable licences on fair, reasonable and non-
discriminatory (‘FRAND’) terms and conditions under such IPR to at least the
following extent:

464
DG Swanson & WJ Baumol, ‘Reasonable and Nondiscriminatory (RAND) Royalties, Standards Selection,
and Control of Market Power’ [2005] 73 Antitrust Law Journal 51.
465
J Lerner & J Tirole, ‘Standard Essential Patents’ [2015] 123 Journal of Political Economy 547. According to
the authors, this solution involves, in case of forum shopping by IP owners to SSOs, the possibility of imposing
mandatory structured price commitments on SSOs.

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- Manufacture, including the right to make or have made customized components and
sub-systems to the licensee's own design for use in Manufacture;
- sell, lease, or otherwise dispose of equipment so manufactured;
- repair, use, or operate equipment; and
- use methods.
The above undertaking may be made subject to the condition that those who seek
licences agree to reciprocate’.
In view of the vagueness of the FRAND formula, some SSOs have tried to provide
more content to the meaning of FRAND: For instance, the IEEE, a SSO operating in the
electronics and information technology sectors, has recently updated its Patent policy to
indicate the need to charge ‘reasonable rates’, these being defined as ‘appropriate
compensation to the patent holder for the practice of an Essential Patent Claim excluding the
value, if any, resulting from the inclusion of that Essential Patent Claim’s technology in the
IEEE Standard’, the Policy providing for evaluation methodologies, and to limit injunctive
relief available to SEP owners.466
The litigation strategies employed in the context of SEP have been subject to
competition law scrutiny. Directive 2004/48 of the European Parliament and of the Council
on the enforcement of intellectual property rights aims to ‘ensure a high, equivalent and
homogeneous level of protection’ of IP rights in all Member States, and provides for a
remedial toolbox for the benefit of IP rights holders:
 Article 9 of Directive 2004/48 provides for an interlocutory injunction
intended to prevent any imminent infringement of an IP right
 Article 10(1) of Directive 2004/48, entitled ‘corrective measures’, stipulates
that ‘[w]ithout prejudice to any damages due to the rightholder by reason of
the infringement, and without compensation of any sort, Member States shall
ensure that the competent judicial authorities may order, at the request of the
applicant, that appropriate measures be taken with regard to goods that they
have found to be infringing an intellectual property right and, in appropriate
cases, with regard to materials and implements principally used in the creation
or manufacture of those goods. Such measures shall include: (a) recall from
the channels of commerce; (b) definitive removal from the channels of
commerce; or (c) destruction’.
 Article 11 of the Directive 2004/48 stipulates that ‘Member States shall ensure
that, where a judicial decision is taken finding an infringement of an
intellectual property right, the judicial authorities may issue against the
infringer an injunction aimed at prohibiting the continuation of the
infringement’. In case of non-compliance with an injunction a recurring
penalty payment may be imposed, with a view to ensuring compliance.
 Article 12 of the Directive 2004/48 provides that ‘in appropriate cases and at
the request of the person liable to be subject to the measures provided for in
this section, the competent judicial authorities may order pecuniary
compensation to be paid to the injured party instead of applying the measures
provided for in this section if that person acted unintentionally and without
negligence, if execution of the measures in question would cause him/her

466
See, standards.ieee.org/develop/policies/bylaws/sect6-7.html.

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disproportionate harm and if pecuniary compensation to the injured party

appears reasonably satisfactory’. This provision provides some discretion to
national judges in deciding IP remedies.
 Article 13 of the Directive 2004/48 provide that an infringer who ‘knowingly,
or with reasonable grounds to know, engaged in an infringing activity’, may
be asked to pay the rightholder damages appropriate to the actual prejudice
suffered by him/her as a result of the infringement. These damages may cover
all negative economic consequences, including lost profits and eventually
elements other than economic factors, such as the moral prejudice caused to
the rightholder by the infringement.
Article 211 of the new Rules of Procedure for the Unified Patent Court also
provide that :
‘1. The Court may in particular order the following provisional measures:
(a) injunctions against a defendant;
(b) the seizure or delivery up of the goods suspected of infringing a patent
right so as to prevent their entry into or movement within the channels of
commerce;
(c) if an applicant demonstrates circumstances likely to endanger the recovery
of damages, a precautionary seizure of the movable and immovable property
of the defendant, including the blocking of his bank accounts and other assets;
(d) an interim award of costs.
2. In taking its decision the Court may require the applicant to provide
reasonable evidence to satisfy the Court with a sufficient degree of certainty
that the applicant is entitled to commence proceedings pursuant to Article 47,
that the patent in question is valid and that his right is being infringed, or that
such infringement is imminent 3. In taking its decision the Court shall in the
exercise of its discretion weigh up the interests of the parties and, in particular,
take into account the potential harm for either of the parties resulting from the
granting or the refusal of the injunction.
4. The Court shall have regard to any unreasonable delay in seeking
provisional measures.
5. The Court may order the applicant to provide adequate security for
appropriate compensation for any injury likely to be caused to the defendant
which the applicant may be liable to bear in the event that the Court revokes
the order for provisional measures. The Court shall do so where interim
measures are ordered without the defendant having been heard unless there are
special circumstances not to do so. The Court shall decide whether it is
appropriate to order the security by deposit or bank guarantee. The order shall
be effective only after the security has been given to the defendant in
accordance with the Court’s decision’.
Injunctive relief is widely used as the presumptive remedy for patent infringement, in
particular in Germany, which is the home of ‘at least half of all patent infringement suits
within Europe’, and to a certain extent in the Netherlands.467 In the UK, the situation is

467
TF Cotter, ‘Comparative Law and Economics of Standard-Essential Patents and FRAND Royalties’ (2014)
22 Texas Intellectual Property Law Journal 311, 323.

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somehow different. Injunctions are a remedy at the discretion of the judge. According to the
criteria set in Shelter v City of London Electric Lighting Co., as a ‘general working rule’
damages in substitution for an injunction may be given when (a) the injury to the claimant’s
legal right is small, (b) the injury is one capable of being estimated in money, (c) the injury is
one which can be adequately compensated by a small money payment, (d) the case is one in
which it would be oppressive to the defendants to grant an injunction.468 According to the
case law of the UK courts, ‘it is clear […] that it would have to be a very strong case for an
injunction to be withheld’, the word ‘oppressive’ being interpreted by UK courts as indicating
that ‘the effects of the grant of the injunction would be grossly disproportionate to the right
protected’.469 These rules place the ‘burden of overcoming the presumption in favor of
injunctive relief on the defendant’, although the requirement of a ‘gross disproportionality’
does not take into account the broader public interest and avoids any suggestion that all that
has to be done is a balance of convenience, as this is the case in the US eBay rule.470 The
general principle of ‘loser-pays’ in the English litigation costs regime, may disincentive
patent litigation requesting injunctive relief, in particular by the so called ‘patent trolls’. The
situation may be different in Continental Europe, in view of the importance of injunctive
relief and a more favorable litigation costs regime for patent holders brining actions for
infringement.471

13.8.2. Injunctions and SEPs

The use of injunctions by IP holders of Standard Essential Patents has been

considered, in some circumstances, as constituting a competition law infringement, in
particular an abuse of a dominant position. The issue arose in some merger investigations and
antitrust cases brought by the European Commission, but also in the context of private
enforcement, as implementers of technology opposed counterclaims to patent infringement

468
Shelter v City of London Electric Lighting Co., [1895] 1 Ch. 287.
469
Virgin Atlantic v Premium Aircraft [2009] EWCA Civ 1513.
470
In view of the problems arising out of injunctive relief, in particular in the context of complex products such
as smartphones, the US the Supreme Court has shifted in its eBay Inc. v MercExchange, L.L.C., 547 U.S. 388
(2006) judgment to a set of rules limiting the previously automatic recourse to permanent injunctive relief.
According to the eBay rule, the prevailing plaintiff must show that ‘(1) it has suffered an irreparable injury, (2)
that remedies available at law, such as monetary damages, are inadequate to compensate for that injury, (3) that,
considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted, and
(4) that the public interest would not be disserved by a permanent injunction’. This case law led to reduce the
likelihood the patent holder will obtain permanent injunction, from 100% of cases to about 75% of cases: see,
TF Cotter, ‘Comparative Law and Economics of Standard-Essential Patents and FRAND Royalties’ (2014) 22
Texas Intellectual Property Law Journal 311, 320. See also, K Gupta & JP Kesan, ‘Studying the Impact of eBay
on Injunctive Relief in Patent Cases’ (July 31, 2016). Available at SSRN: ssrn.com/abstract=2816701. However,
patent holders may still obtain injunctive relief quite easily in a parallel special tribunal, the International Trade
Commission, which hears complaints arising under 19 U.S.C. § 1337 with regard to importation, the sale for
importation, or the sale in the US after importation of articles infringing a valid and enforceable US patent.
471
For instance, in Germany, the loser pays principle applies but the costs are strictly calculated according to a
system of fixed recoverable costs, which prescribes a statutory fee for lawyers on the basis of the value of the
claim. These fees are the basis for the reimbursement of costs which the winner of a case can demand from the
loser and they usually represent the lower end of the bound. The average costs in a patent litigation in Germany
are between 40–100,000 euros, while in the UK costs often range between £1million and £6million: see, K
Cremers et al, ‘Patent Litigation in Europe’, Discussion Paper No. 13-072 (2013), available at
ftp.zew.de/pub/zew-docs/dp/dp13072.pdf .

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cases brought against them by patent holders, claiming that by bringing such patent claims
the patent holders infringed competition law and in particular Article 102 TFEU.
In 2012, the Commission examined the merger between Google and Motorola
Mobility (MMI). Google had acquired MMI, including MMI’s patent portfolio of over
24,000 patents and patent applications with a number of patents essential to industry
standards used to provide wireless connectivity and for internet-related technologies (eg
smartphones, gaming systems, operating systems, devices offering wireless connectivity or
high definition video). In response to Google’s argument that the new entity would not have
the ability to significantly impede effective competition post-merger, as it will be constrained
by the FRAND commitment which has been given by Motorola Mobility, the Commission
noted that FRAND commitments ‘cannot be considered as a guarantee that a SEP holder will
not abuse its market power’.472 According to the Commission, a SEP holder can certainly
threaten to seek or seek injunctions at any time and nothing ensures that a national court in
question may grant an injunction without a detailed examination of whether FRAND and
Article 102 TFEU have been respected, leaving the SEP holder free to enforce the injunction
and corrective measures.473 The Commission noted that ‘[d]epending on the circumstances, it
may be that the threat of injunction, the seeking of an injunction or indeed the actual
enforcement of an injunction granted against a good faith potential licensee, may
significantly impede effective competition by, for example, forcing the potential licensee into
agreeing to potentially onerous licensing terms which it would otherwise not have agreed
to’.474 Indeed, ‘[t]hese onerous terms may include, for example a higher royalty than would
otherwise have been agreed’, or the possibility that ‘the SEP holder may force a holder of
non-SEPs to cross-license those non-SEPs to it in return for a license of the SEPs’ and
finally, ‘[t]o the extent that injunctions are actually enforced, this furthermore may have a
direct negative effect on consumer if products are excluded from the market’.475 The
Commission took ‘a prudent position’ as ‘while it does not suggest that patent holders who
have made a FRAND commitment should always be prohibited from seeking injunctions
(which would be an excessive position), it recognizes that there may be circumstances where
the seeking of an injunction may be abusive, especially when such injunctions are used to
coerce “good faith” licensees to accept licensing terms that it would not accept but for the
injunction’.476 The approach followed by the Commission raises the issue of identifying what
makes someone a ‘willing’ (good faith) licensee.
The Commission also examined similar SEPs concerns in the acquisition by
Microsoft of Nokia’s mobile phone business.477 Microsoft adopted later than its rival Apple
the mobile developer ecosystem and ‘app store’ strategies which had led to the phenomenal
success of the iPhone. After launching the Windows phone, Microsoft needed Original
Equipment Manufacturers to take the risk of trying a new software platform. Nokia, an OEM

472
Google/Motorola Mobility (Case COMP/M.6381) Commission decision of 13 February 2012, available at
ec.europa.eu/competition/mergers/cases/decisions/m6381_20120213_20310_2277480_EN.pdf.
473
Ibid., para 113.
474
Ibid., para 107.
475
Ibid.
476
D Geradin, ‘Ten Years of DG Competition Effort to Provide Guidance on the Application of Competition
Rules to the Licensing of Standard-Essential Patents: Where Do We Stand?’ ( 21 January 2013), available at
SSRN: ssrn.com/abstract=2204359> or dx.doi.org/10.2139/ssrn.2204359.
477
Microsoft/Nokia (Case COMP/M.7047) Commission decision (2013), available at
ec.europa.eu/competition/mergers/cases/decisions/m7047_687_2.pdf .

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based in Finland, became Microsoft’s partner producing Windows smartphones. However, by

2013, Nokia was under pressure by rival OEMs Samsung and Apple and considered to switch
to a different OS platform, Google’s Android, having even built prototypes with Google’s
software. This move would have left Microsoft without any OEM partner in the European
market. These concerns led Microsoft to buy Nokia’s mobile business. This acquisition raised
competition concerns which might arise from the conduct of Nokia, following the transaction,
in the licensing of the patent portfolio for smart mobile devices which it had retained. The
Commission examined if the proposed transaction created or strengthened Nokia's dominant
position in patent licensing, both regarding its SEPs and non-SEPs, by eliminating the
restraints on Nokia that resulted from its activity in the mobile phone business. Indeed, Nokia
was previously constrained in exploiting its market power with regard to SEPs and non-SEPs
in several ways.478 First, it had to enter into cross-licensing with its competitors that also hold
patents in order to avoid findings of patent infringement. Second, it was vulnerable to
counter-attack if it aggressively enforced its patents (‘mutually assured destruction’). Thirdly,
it had a general incentive to seek reasonable royalties so as to keep consumer prices for its
products low and not to hamper demand in the downstream devices market. Fourthly, it had
an incentive not to outsource patent enforcement to so-called Patent Assertion Entities
(‘PAEs’), so as to discourage other mobile phone manufacturers from also using such entities
against Nokia’s mobile device business. By separating Nokia’s patent portfolio from the
mobile phone business, the merger would have eliminated these restraints as it would
increase, post-transaction, Nokia’s ability and incentive to exploit the market power derived
from its patent portfolio, in view of the imbalance resulting from the fat that Nokia would no
longer have its own operations in the field of mobile devices. The Commission nonetheless
found that the possible post-transaction conduct of Nokia falls outside the scope of the
Commission’s assessment of the proposed transaction under the Merger Regulation.479
The Commission also opened antitrust investigations against two SEP holders active
in the mobile device industry (Samsung Electronics and Google MMI) alleging that by
seeking and enforcing injunctions in various Member States’ courts against competing
manufacturers based on alleged infringement of certain SEPs, the companies have failed to
honor their irrevocable commitments to license any SEP on FRAND terms, that behavior
being an abuse of a dominant position.480 These cases took place in the context of the
smartphones ‘patent wars’ raging between several global technology companies active in this
sector starting in the late 2000s, each company suing and counter-suing each other for
infringement of their patents, in particular involving Apple and Samsung.481
Samsung482 had sought injunctions against Apple alleging infringement of standard
essential patents (SEPs) related to Universal Mobile Telecommunications Service (UMTS)

478
Ibid., para 197.
479
Ibid., para 224.
480
European Commission, Commission opens proceedings against Samsung, IP/12/89 (January 31, 2012),
available europa.eu/rapid/press-release_IP-12-89_en.htm; European Commission, Commission opens
proceedings against Motorola, IP/12/345 (April 3, 2012), available at europa.eu/rapid/press-release_IP-12-
345_en.htm.
481
The US Supreme Court is yet to pronounce itself in the Apple-Samsung patent war saga: See,
www.washingtonpost.com/news/the-switch/wp/2016/03/21/the-smartphone-patent-war-between-apple-and-
samsung-is-headed-to-the-supreme-court/ and cacm.acm.org/magazines/2016/7/204025-apple-v-samsung-and-
the-upcoming-design-patent-wars/abstract.
482
Samsung- Enforcement of UMTS Standard Essential Patents, Case AT.39.939, C(2014) 2891.

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technology. Samsung had committed to license the SEPs on fair, reasonable, and non-
discriminatory (FRAND) terms during the standard-setting process before the European
Telecommunications Standards Institute (ETSI).483 The rules of ETSI imposed two main
obligations on companies participate in a standard-setting process: (i) to inform ETSI of their
essential intellectual property rights in a timely fashion before the adoption of the standard,
and (ii) to give a commitment to make their IP available on FRAND terms and conditions.
Although Samsung had committed to license its UMTS SEPs on FRAND terms and
conditions, thus indicating that it expected ‘to obtain remuneration for its UMTS SEPs by
means of licensing revenue rather than using these patents to seek to exclude others’, in 2011
it changed course of action and sought preliminary and permanent injunctions against Apple
before courts in France, Germany, Italy, the Netherlands and the United Kingdom, on the
basis of certain of its UMTS SEPs.
Apple sells various tablet computers and smart-phones that implement the UMTS
standard.484 ETSI does not check the validity of declared SEPs or their relevance to an ETSI
standard. Only a court can determine validity and whether a standard-compliant product
infringes a patent deemed essential to a standard.485 UMTS represents a third generation
mobile and wireless communications system.486 The relevant market encompassed the
licensing of technologies as specified in the UMTS standard technical specifications.487
The Commission found that Samsung’s conduct raised competition law concerns. It found
that Samsung maintained dominance in this market, given that it held a 100% market share
and that UMTS essentially represented the only 3G standard in the EEA. Manufacturers of
mobile devices had to comply with the UMTS standard.488 Industry participants were locked-
in to the UMTS standard.489 4G standards did not constrain Samsung’s dominant position. At
least over the medium-term, such technologies complemented rather than substituted for the
UMTS standard.490 It was alleged that Samsung infringed Article 102 TFEU by petitioning
for injunctions to prevent use of its UMTS SEPs.491 Such actions could produce
anticompetitive effects by excluding Apple, a rival manufacturer of UMTS-compliant mobile
devices, and by forcing Apple to accept disadvantageous licensing terms.492 The Commission
found that Samsung failed to proffer an adequate objective justification for seeking
injunctions. Protecting Samsung’s IPR, its commercial interests, the public interest in an
effective standardization process, or efficiencies did not qualify.493 The Commission also
found that, at the time of Samsung’s conduct, Apple demonstrated a willingness to enter into
a licensing agreement for Samsung’s UMTS SEPs on FRAND terms and conditions.494 The
Commission accepted by an Article 9 of regulation 1/2003 decision Samsung’s commitment
not to seek injunctions before any court or tribunal in the European Economic Area (‘EEA’)
for infringement of its SEPs (including all existing and future patents) implemented in
483
See ibid., para 2.
484
Ibid., para 13.
485
Ibid., para 33.
486
Ibid., para 35.
487
Ibid., para 41.
488
Ibid., para 46.
489
Ibid., para 49.
490
Ibid., para 51.
491
Ibid., para 52.
492
Ibid., para 62.
493
Ibid., para 65.
494
Ibid., para 68.

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smartphones and tablets against a potential licensee willing to enter into a licence agreement
(licence framework) on FRAND terms and conditions. The Licensing Framework includes (i)
a negotiation period of up to 12 months; and (ii) a third party determination of FRAND terms
and conditions in the event that no licensing agreement or alternative process for determining
FRAND terms and conditions has been agreed upon at the end of the negotiation period.
According to the commitments, the third party determination of FRAND terms and
conditions will consist of the submission of the dispute to arbitration or to court adjudication
in order to determine the FRAND terms and conditions of either a unilateral licensing or
cross-licensing agreement. In case of disagreement between Samsung and a potential licensee
about the venue for the determination of FRAND terms and conditions, the dispute would be
submitted to court adjudication. The commitments therefore provide for a ‘safe-harbour’
available to all potential licensees of Samsung’s Mobile SEPs that submit to the Licensing
Framework provided for by the commitments. According to the Commission’s decision if the
potential licensee does not sign up the licensing framework he cannot be automatically
regarded as unwilling to enter into a licence agreement on FRAND terms and conditions.
Rather, it is expected that the court or tribunal called upon to grant injunctive relief would
need to evaluate all the circumstances of the case at hand in order to decide whether a
potential licensee is indeed unwilling to enter into an agreement on FRAND terms and
conditions
The second case involved Apple alleging a violation of Article 102 TFEU because a
dominant undertaking, this time Motorola, sought to enforce injunctions against using its
standard essential patents (SEPs) reading on the General Packet Radio Service (GPRS)
standard.495 Motorola had declared the relevant patent essential to the GSM/GPRS standard
and had agreed to license the patent on FRAND terms and conditions.496 During the
injunction proceedings pursued by Motorola, Apple ‘made a total of six licensing offers
which covered all Apple entities’ sued in the German courts.497 Apple’s second licensing
offer gave Motorola the right to set royalties ‘according to its equitable discretion and
according to FRAND principles, without any limitations [] as regards the royalty rates and
the method of calculation of the final amount of royalties’.498 The offer also permitted a full
judicial review of the amount of FRAND royalties, ‘whereby Motorola and Apple could
submit their own evaluations, calculations and reasoning for consideration to the court’.499
Motorola did not accept this offer and instead pursued injunction proceedings against
Apple.500 In a fourth license offer, Apple was willing to acknowledge unlimited liability for
damages ‘for past infringement of Motorola’s SEPs, including for damages exceeding the
FRAND royalty rates, according to German law’.501 Motorola did not accept Apple’s Fourth
and Fifth licensing offers because they did not address the iPhone 4S and did not give
Motorola the right to terminate the agreement if Apple sought to challenge the validity of its
licensed SEPs.502 In Apple’s sixth license offer, it explicitly added the termination clause that

495
See Motorola-Enforcement of GPRS Standard Essential Patents, Case AT.39985, C(2014) 2892, para 1.
496
Ibid., para 54.
497
Ibid., para 120.
498
Ibid., para 126.
499
Ibid.
500
Ibid., para 127.
501
Ibid., para 132.
502
Ibid., para 138.

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Motorola sought503 and included the iPhone 4S within the products that infringed Motorola’s
patents.504 Even these stipulations did not dissuade Motorola from continuing to press its
injunction.505 The parties finally reached a settlement agreement in February 2012 based on
this license offer.506
The Commission adopted in this case an Article 7 of Regulation 1/2003 infringement
decision, finding that, ‘in the exceptional circumstances of this case’, which were the GPRS
standard-setting process and Motorola's commitment to license the GPRS SEP on FRAND
terms and conditions, and in the absence of any objective justification, Motorola had
infringed Article 102 TFEU by seeking and enforcing an injunction against Apple before the
courts of the Federal Republic of Germany. In other words, a SEP holder cannot force an
implementer, under the threat of injunctions, to give up right to challenge validity or
infringement of SEP. However, the Commission did not impose a fine, because of the lack of
EU case law and diverging outcomes at national level.
According to the Commission, the relevant technology market ‘encompasse[d] the
technology [] on which Motorola’s Cudak GPRS SEP reads, and other technologies to which
customers could switch in response to a small but permanent increase in relative prices of
Motorola’s technology’.507 The Commission also concluded that for manufacturers of mobile
devices in the EEA, no viable substitutes to Motorola’s technology existed.508
As to the factors that contributed to dominance, for the Commission, market shares and
entry barriers can indicate dominance, while the mere ownership of a SEP does not alone
confer dominance.509 Motorola attained, however, a 100% market share for the licensing of
the relevant technology. The ‘indispensability of the GPRS standard on which Motorola’s
Cudak GPRS SEP reads for manufacturers of standard-compliant products’, and the industry
lock-in of that standard, further suggested dominance.510 Since GPRS has attained
widespread adoption, manufacturers of mobile devices must comply with the standard.511
Neither other 2G, nor 3G or 4G standards, offer viable alternatives to GPRS in the EEA.512
2G universally provides a stronger signal indoors; the 3G signal occasionally is unavailable;
and the more extensive 2G coverage all contribute to the indispensability for manufacturers
of mobile devices to incorporate the GSM/GPRS standard.513 Apple was not also found to
maintain buyer power in its relationship with Motorola because Apple could switch to
competing suppliers, since no substitutes for the technology existed in the EEA.514
The Commission found that Motorola abused its dominant position by seeking and
enforcing an injunction against Apple in Germany on the basis of the Cudak GPRS SEP. The
abuse commenced as of Apple’s second licensing offer dated 4 October 2011, which
‘constituted a clear indication that Apple was not unwilling to enter into a license agreement

503
Ibid., para 145.
504
Ibid., para 158.
505
Ibid., paras 148, 159.
506
Ibid., para 162.
507
Ibid., para 191.
508
Ibid., para 193.
509
Ibid., paras 223–224.
510
Ibid., para 226.
511
Ibid., para 227.
512
Ibid., para 229.
513
Ibid., para 236.
514
Ibid., para 243.

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on FRAND terms and conditions’.515 Motorola’s conduct produced anticompetitive effects

reflected in the temporary ban of online sales of Apple’s GPRS-compatible products in
Germany, and in Apple agreeing to accept a number of onerous licensing terms. Motorola’s
conduct further could have negatively impacted the process of standard-setting.516
Motorola opted to pursue a licensing strategy that applied enormous pressure on Apple to
accept unfavorable terms or face material exclusion from the market. The online ban on
Apple’s products resulting from the injunction lasted a brief period only because Apple was
willing to accept disadvantageous licensing terms.517 Motorola also had sought to enjoin
Apple from selling its products in real stores as well.518 Under such circumstances, the
underlying value of the patented technology does not drive the licensing negotiation process.
Rather, the potential cost of lost sales and damage to reputation determine the fees.519
The termination clause also could have produced a number of anticompetitive effects. It
could have limited Apple’s ability to influence royalty levels for using SEPs covered by the
Settlement Agreement. The termination clause further may have resulted in other potential
licensees paying an invalid fee,520 which increases production costs and prices paid by
consumers.521 The cumulative effect of these market conditions enabled Motorola to exert
enormous pricing power despite the fact that a court had not conducted even a limited review
of many of the patents covered by the Settlement Agreement, which were not subject to the
injunction proceedings.522 Acknowledging purported infringement essentially forced Apple to
pay disadvantageous licensing fees.523 According to the Commission, Motorola failed to
proffer a valid objective justification for its exclusionary conduct, the Commission finding
that the absence of objective justification in this case in particular related to the fact that
Apple was not unwilling to enter into a licence agreement on FRAND terms and conditions.
A number of private cases involving competition law counterclaims against litigation
brought by IP holders explored the possibility for a request for injunctive relief to be
considered an abuse of a dominant position under Article 102 TFEU.
The most important body of case law on this topic has come from German courts, which
took a relatively liberal view over the ability of SEP-holders to seek injunctive relief without
infringing competition law.524 In a leading case in 2009 the German Federal Supreme Court
(BGH) held that in the case of a patent infringement, in this case brought by Philips against
Master & More and involving a patent essential to the Orange Book Standard, which contains
the format specifications for CD-Rs, the defendant, Master & More could raise as a defense
that the claimant has refused to license on fair, reasonable and non discriminatory terms and
therefore was in violation of Article 102 TFEU (the so called Orange Book Defense or
compulsory licensing objection).525 Philips was not subject to any sort of SSO-based FRAND

515
Ibid., para 280.
516
Ibid.
517
Ibid., para 320.
518
Ibid., para 321.
519
Ibid., para 324.
520
Ibid., para 336.
521
Ibid., para 377.
522
Ibid., para 370.
523
Ibid., para 402.
524
English courts have, in contrast, taken a restrictive perspective on granting injunctive relief in the context of
SEPs. See, for instance, the position of Roth J, in Nokia v IPCom [2012] EWHC 1446 (Ch).
525
BGH, decision taken on May 6, 2009, KZR 39/06, translation in English available at
www.ipeg.com/blog/wp-content/uploads/EN-Translation-BGH-Orange-Book-Standard-eng.pdf .

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obligations. According to the BGH, for the defense to succeed, the defendant should prove
two conditions:
 First, ‘the proposed licensee must have made an offer on acceptable contracting
terms that the patent proprietor cannot refuse without discriminating the proposed
licensee against similar companies without objective reason or without unduly
obstructing him’, that is without acting abusively. Indeed, competition law forbids
a patent holder with a dominant position from abusing its dominant position only
if he declines an offer to conclude an agreement on non-restraining or
discriminating terms. However, it does not does require a dominant patent holder
to tolerate the use of his patent by a company who is not ready to enter into a
license agreement on non-restraining or discriminatory terms and conditions.
 Second, the infringer must behave as if the patent holder has already accepted his
offer, by either paying a reasonable compensation (license fee) to the hypothetical
licensor that exceeds his own estimate of a FRAND royalty or by paying the
appropriate license fee into an escrow account.
Subsequent cases in lower courts in Germany showed that the conditions of the Orange
Book Defense were not easy to prove. In view of the statement of objections sent by the
European Commission against Samsung and Motorola, the patent court of Düsseldorf
referred to the CJEU a preliminary reference question in the context of a patent infringement
action initiated by Huawei against its Chinese rival ZTE. The case led the CJEU to pronounce
itself on the possibility for a request of an injunction and other remedies for patent
infringement to constitute an abuse of a dominant position in violation to Article 102 TFEU.

13.8.3. Huawei v ZTE

Case C-170/13 Huawei Technologies Co. Ltd v ZTE Corp. and ZTE Deutschland GmbH
[2015] ECLI:EU:C:2015:477

The request for a preliminary ruling was made in the context of a patent dispute
opposing Huawei Technologies, a multinational undertaking active in the telecom sector, and
ZTE Corp. and ZTE Deutschland, another multinational operating in the same sector. The
infringed patent at issue was notified by Huawei to ETSI, that patent being essential to the
Long Term Evolution (LTE) standard developed by ETSI, Huawei giving ETSI a commitment
to grant licences to third parties on FRAND terms. Following the break-out of the
negotiations for the conclusion of a licensing agreement on FRAND terms between Huawei
and ZTE, Huawei sought through an action for patent infringement an injunction prohibiting
ZTE from the continuation of the infringement and ordering it to recall its products, to
proceed to a rendering of accounts and the payment of damages. ZTE filed an opposition
before the European Patent Office (EPO) against the grant of the patent contesting its
validity. The EPO rejected ZTE’s opposition and at the time of the preliminary reference an
appeal was pending against this decision. In addition, ZTE considered that the action for a
prohibitory injunction could be dismissed on the basis of Article 102 TFEU (compulsory
licensing defense) if Huawei held a dominant position. The German court accepted that
Huawei ‘unquestionably’ held a dominant position and was thus subject to Article 102
TFEU. The referring court then indicated that there are two approaches to determining if a
SEP holder commits an abuse under Article 102 TFEU: (i) the stricter, for the competition

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law plaintiff approach followed in the Orange Book Standard case law, subjecting the
competition law defense to strict conditions, and (ii) the European Commission’s approach in
Samsung, which considered that there was an abuse, if the case concerns a SEP, the patent
holder had taken a commitment to license under FRAND to the standardization body and the
infringer was itself willing to negotiate such a license. According to the German patent court,
had the Orange Book Standard being applied in this case, ZTE could not have legitimately
relied on the competition law defense, in view of the fact that ZTE’s offers were not
unconditional, since they were limited to the products giving rise to the infringement and that
ZTE had not paid the royalty, neither had it offered a deposit as security. However, the facts
of the case satisfied the conditions for the finding of an infringement under Article 102 TFEU
set by the Commission at Samsung and subsequent cases, as Huawei held a SEP, it had
committed to license on FRAND terms to ETSI and that the willingness of ZTE to negotiate
was ‘apparent’. The referring court proceeded by asking a number of questions, relating to
the conditions for the finding of an infringement under Article 102 TFEU in these
circumstances, not only for an action for injunctive relief, but also for other IP remedies,
such as rendering the accounts relating to the infringing activities and submitting pertinent
documentation (eg bills, invoices, shipping orders, etc.), or requesting the payment of
damages.
In his Opinion Advocate General Wathelet noted some factual differences between the
referred case and the Orange Book-Standard case in Germany, in which the owner of the
patent had not given any commitment to grant licences on FRAND terms. The AG made it
also clear that he does not think that the fact that an undertaking owns a SEP necessarily
means that it holds a dominant position. At most, the finding that the fact that anyone who
uses the standard set by the standardization body must necessarily make use of the teaching
of an SEP, thus requiring a licence from the owner of that patent, gives rise to a ‘rebuttable
presumption that the owner of that patent holds a dominant position’, which can be rebutted
‘with specific detailed evidence’ (para 58 of the Opinion). The AG then examined the
existence of an abuse of a dominant position or, as he put it, ‘abuse of technological
dependence’. The AG proceeded to an analysis of the various interests at play: those of the
IP holder, as ‘any restriction of the right to bring these actions necessarily constitutes a
significant limitation of intellectual property rights and can therefore be permitted only in
exceptional and clearly defined circumstances’, the right of access to the courts, whose
importance only justifies that bringing a prohibitory injunction can constitute an abuse of a
dominant position only in ‘exceptional circumstances’, the freedom to conduct business and
undistorted competition. The AG also considered Huawei’s argument that following the EU
case law on the ‘exceptional circumstances’ regarding competition law intervention in the
context of a refusal to license or to supply (Magill, Oscar Bronner, IMS/NDC Health), the
claimant that wants to have access to a product or service indispensable for carrying on a
particular business, had to provide evidence that three cumulative conditions were satisfied
for Article 102 TFEU to apply: (i) the refusal is preventing the emergence of a new product
for which there is potential consumer demand, that it is unjustified and such as to exclude
any competition on a secondary market. However, he noted that this case law ‘is based on
facts which are not directly comparable with those of the dispute’, as although in both cases
having a license to use the patent at issue was indispensable for the production of the product
or services in the secondary market, this case law was only ‘partially applicable to the
dispute’ in the referred case as Huawei had already taken a commitment towards ETSI to

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license that patent on FRAND terms (paras 70–71). The AG noted the technological
dependence established between the SEP-holder and the undertaking producing products and
services in accordance with that standard, finding that this led to economic dependence (para
71). He relied instead on the Volvo case law of the CJEU, which according to him, ‘attached
importance, on the one hand, to a relationship of dependence’ between the IP owner holding
a dominant position and other undertakings and ‘on the other hand, to the abusive
exploitation of that position by the right holder through recourse to methods different from
those governing normal competition’ (para 73). The AG concluded that
‘[i]n those circumstances, which are characterized, on the one hand, by the infringer’s
technological dependence following the incorporation into a standard of the teaching
protected by the patent, at variance with its commitment to grant licences on FRAND terms,
towards an infringer which has shown itself to be objectively ready, willing and able to
conclude such a licensing agreement, the bringing of an action for a prohibitory injunction
constitutes recourse to a method different from those governing normal competition; it has an
adverse effect on competition to the detriment, in particular, of consumers and the
undertakings which have invested in the preparation, adoption and application of the
standard and it must be regarded as an abuse of a dominant position for the purposes of
Article 102 TFEU’ (para 74).
The application of these principles to the case led the AG to suggest a procedural
framework organizing the negotiations between the parties, so that an eventual request for
injunctive relief by the SEP-holder is found compatible to Article 102 TFEU (paras 83–90).
First, in order to establish that the alleged infringer is fully aware of the infringement, the
SEP-holder must alert it to the fact in writing, giving reasons and specifying the SEP
concerned and the way in which it has been infringed, which are anyway requirements the
SEP-holder would had to take in any event in order to substantiate an action for a
prohibitory injunction. Second, the SEP-holder must present to the alleged infringer a written
offer for a licence on FRAND terms that contains all the terms normally included in a licence
in the sector in question, including the precise amount of the royalty and the way in which
that amount is calculated. Third, the infringer should respond ‘in a diligent and serious
manner to the offer made’ and in case the offer is not accepted, it ’must promptly submit to
the SEP-holder, in writing, a reasonable counter-offer relating to the clauses with which it
disagrees’ (para 88 of the Opinion). The AG, in particular, noted that ‘the bringing of an
action for a prohibitory injunction would not constitute an abuse of dominant position if the
infringer’s conduct were purely tactical and/or dilatory and/or not serious’, the time frame
for the exchange of offers and counter-offers and the duration of the negotiations, having to
be assessed by national courts ‘in the light of the commercial window of opportunity’
available to the SEP-holder for securing a return on its patent in the sector in question (para
89 of the Opinion). Furthermore, according to the AG, if negotiations are not commenced or
are unsuccessful, ‘the conduct of the alleged infringer cannot be regarded as dilatory or as
not serious if it asks for those to be fixed either by a court or an arbitration tribunal’ (para
93). In this case, the SEP-holder may ask the infringer ‘either to provide a bank guarantee
for the payment of the royalties or to deposition a provisional sum at the court or arbitration
tribunal in respect of its past and future use of the SEP’ (para 93).
The AG then examined if other remedial actions than a request for injunction arising
from the infringement, such as the rendering of accounts, the recall of products and damages,
could constitute an abuse of a dominant position in similar circumstances. He noted that the

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principles applying to the action for prohibitory injunction applied mutatis mutandis to the
corrective measures provided for in Article 10 of Directive 2004/48, but that, in his view,
there is nothing precluding ‘an SEP-holder from taking legal action to secure the rendering
of accounts in order to determine what use the infringer has made of the teaching of an SEP
with a view to obtaining a FRAND royalty under that patent’, as long as the national court
makes sure the measure is reasonable and proportional (para 101 of the Opinion), or from
bringing a claim for damages for past acts of use infringing the SEP (para 102 of the
Opinion). Indeed, such claims ‘do not have a direct impact on products complying with the
standard in question manufactured by competitors appearing or remaining on the market’
(note 74 in the Opinion) and thus do not lead to the exclusion from the market of standard-
compliant products.
The CJEU followed most of the suggestions of the AG.

42. For the purpose of providing an answer to the referring court and in assessing the
lawfulness of such an action for infringement brought by the proprietor of an SEP against an
infringer with which no licensing agreement has been concluded, the Court must strike a
balance between maintaining free competition — in respect of which primary law and, in
particular, Article 102 TFEU prohibit abuses of a dominant position — and the requirement
to safeguard that proprietor’s intellectual-property rights and its right to effective judicial
protection, guaranteed by Article 17(2) and Article 47 of the Charter, respectively.
43. As the referring court states in the order for reference, the existence of a dominant
position has not been contested before it by the parties to the dispute in the main proceedings.
Given that the questions posed by the referring court relate only to the existence of an abuse,
the analysis must be confined to the latter criterion.
44. By Questions 1 to 4, and Question 5 in so far as that question concerns legal proceedings
brought with a view to obtaining the recall of products, which questions it is appropriate to
examine together, the referring court asks, essentially, in what circumstances the bringing of
an action for infringement, by an undertaking in a dominant position and holding an SEP,
which has given an undertaking to the standardisation body to grant licences to third parties
on FRAND terms, seeking an injunction prohibiting the infringement of that SEP or seeking
the recall of products for the manufacture of which the SEP has been used, is to be regarded
as constituting an abuse contrary to Article 102 TFEU.
[…]
46. It is […] settled case-law that the exercise of an exclusive right linked to an intellectual-
property right — in the case in the main proceedings, namely the right to bring an action for
infringement — forms part of the rights of the proprietor of an intellectual-property right,
with the result that the exercise of such a right, even if it is the act of an undertaking holding
a dominant position, cannot in itself constitute an abuse of a dominant position (see, to that
effect, judgments in Volvo, 238/87, EU:C:1988:477, paragraph 8; RTE and ITP v
Commission, C-241/91 P and C-242/91 P, EU:C:1995:98, paragraph 49; and IMS Health,
C-418/01, EU:C:2004:257, paragraph 34).
47. However, it is also settled case-law that the exercise of an exclusive right linked to an
intellectual-property right by the proprietor may, in exceptional circumstances, involve
abusive conduct for the purposes of Article 102 TFEU (see, to that effect, judgments in
Volvo, 238/87, EU:C:1988:477, paragraph 9; RTE and ITP v Commission, C-241/91 P and

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C-242/91 P, EU:C:1995:98, paragraph 50; and IMS Health, C-418/01, EU:C:2004:257,

paragraph 35).
48. Nevertheless, it must be pointed out, as the Advocate General has observed in point 70 of
his Opinion, that the particular circumstances of the case in the main proceedings distinguish
that case from the cases which gave rise to the case-law cited in paragraphs 46 and 47 of the
present judgment.
49. It is characterised, first, as the referring court has observed, by the fact that the patent at
issue is essential to a standard established by a standardisation body, rendering its use
indispensable to all competitors which envisage manufacturing products that comply with the
standard to which it is linked.
50. That feature distinguishes SEPs from patents that are not essential to a standard and
which normally allow third parties to manufacture competing products without recourse to
the patent concerned and without compromising the essential functions of the product in
question.
51. Secondly, the case in the main proceedings may be distinguished by the fact […] that the
patent at issue obtained SEP status only in return for the proprietor’s irrevocable undertaking,
given to the standardisation body in question, that it is prepared to grant licences on FRAND
terms.
52. Although the proprietor of the essential patent at issue has the right to bring an action for
a prohibitory injunction or for the recall of products, the fact that that patent has obtained
SEP status means that its proprietor can prevent products manufactured by competitors from
appearing or remaining on the market and, thereby, reserve to itself the manufacture of the
products in question.
53. In those circumstances, and having regard to the fact that an undertaking to grant licences
on FRAND terms creates legitimate expectations on the part of third parties that the
proprietor of the SEP will in fact grant licences on such terms, a refusal by the proprietor of
the SEP to grant a licence on those terms may, in principle, constitute an abuse within the
meaning of Article 102 TFEU.
54. It follows that, having regard to the legitimate expectations created, the abusive nature of
such a refusal may, in principle, be raised in defence to actions for a prohibitory injunction or
for the recall of products. However, under Article 102 TFEU, the proprietor of the patent is
obliged only to grant a licence on FRAND terms. In the case in the main proceedings, the
parties are not in agreement as to what is required by FRAND terms in the circumstances of
that case.
55. In such a situation, in order to prevent an action for a prohibitory injunction or for the
recall of products from being regarded as abusive, the proprietor of an SEP must comply with
conditions which seek to ensure a fair balance between the interests concerned.
56. In this connection, due account must be taken of the specific legal and factual
circumstances in the case […]
57. Thus, the need to enforce intellectual-property rights, covered by, inter alia, Directive
2004/48, which — in accordance with Article 17(2) of the Charter — provides for a range of
legal remedies aimed at ensuring a high level of protection for intellectual-property rights in
the internal market, and the right to effective judicial protection guaranteed by Article 47 of
the Charter, comprising various elements, including the right of access to a tribunal, must be
taken into consideration […]

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58. This need for a high level of protection for intellectual-property rights means that, in
principle, the proprietor may not be deprived of the right to have recourse to legal
proceedings to ensure effective enforcement of his exclusive rights, and that, in principle, the
user of those rights, if he is not the proprietor, is required to obtain a licence prior to any use.
59. Thus, although the irrevocable undertaking to grant licences on FRAND terms given to
the standardisation body by the proprietor of an SEP cannot negate the substance of the rights
guaranteed to that proprietor by Article 17(2) and Article 47 of the Charter, it does, none the
less, justify the imposition on that proprietor of an obligation to comply with specific
requirements when bringing actions against alleged infringers for a prohibitory injunction or
for the recall of products.
60. Accordingly, the proprietor of an SEP which considers that that SEP is the subject of an
infringement cannot, without infringing Article 102 TFEU, bring an action for a prohibitory
injunction or for the recall of products against the alleged infringer without notice or prior
consultation with the alleged infringer, even if the SEP has already been used by the alleged
infringer.
61. Prior to such proceedings, it is thus for the proprietor of the SEP in question, first, to alert
the alleged infringer of the infringement complained about by designating that SEP and
specifying the way in which it has been infringed.
62. […] (I)n view of the large number of SEPs composing a standard such as that at issue in
the main proceedings, it is not certain that the infringer of one of those SEPs will necessarily
be aware that it is using the teaching of an SEP that is both valid and essential to a standard.
63. Secondly, after the alleged infringer has expressed its willingness to conclude a licensing
agreement on FRAND terms, it is for the proprietor of the SEP to present to that alleged
infringer a specific, written offer for a licence on FRAND terms, in accordance with the
undertaking given to the standardisation body, specifying, in particular, the amount of the
royalty and the way in which that royalty is to be calculated.
64. As the Advocate General has observed in point 86 of his Opinion, where the proprietor of
an SEP has given an undertaking to the standardisation body to grant licences on FRAND
terms, it can be expected that it will make such an offer. Furthermore, in the absence of a
public standard licensing agreement, and where licensing agreements already concluded with
other competitors are not made public, the proprietor of the SEP is better placed to check
whether its offer complies with the condition of non-discrimination than is the alleged
infringer.
65. By contrast, it is for the alleged infringer diligently to respond to that offer, in accordance
with recognised commercial practices in the field and in good faith, a point which must be
established on the basis of objective factors and which implies, in particular, that there are no
delaying tactics.
66. Should the alleged infringer not accept the offer made to it, it may rely on the abusive
nature of an action for a prohibitory injunction or for the recall of products only if it has
submitted to the proprietor of the SEP in question, promptly and in writing, a specific
counter-offer that corresponds to FRAND terms.
67. Furthermore, where the alleged infringer is using the teachings of the SEP before a
licensing agreement has been concluded, it is for that alleged infringer, from the point at
which its counter-offer is rejected, to provide appropriate security, in accordance with
recognised commercial practices in the field, for example by providing a bank guarantee or
by placing the amounts necessary on deposit. The calculation of that security must include,

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inter alia, the number of the past acts of use of the SEP, and the alleged infringer must be able
to render an account in respect of those acts of use.
68. In addition, where no agreement is reached on the details of the FRAND terms following
the counter-offer by the alleged infringer, the parties may, by common agreement, request
that the amount of the royalty be determined by an independent third party, by decision
without delay.
69. Lastly, having regard, first, to the fact that a standardisation body such as that which
developed the standard at issue in the main proceedings does not check whether patents are
valid or essential to the standard in which they are included during the standardisation
procedure, and, secondly, to the right to effective judicial protection guaranteed by Article 47
of the Charter, an alleged infringer cannot be criticised either for challenging, in parallel to
the negotiations relating to the grant of licences, the validity of those patents and/or the
essential nature of those patents to the standard in which they are included and/or their actual
use, or for reserving the right to do so in the future.
70. It is for the referring court to determine whether the abovementioned criteria are satisfied
in the present case, in so far as they are relevant, in the circumstances, for the purpose of
resolving the dispute in the main proceedings.
71. It follows from all the foregoing considerations that the answer to Questions 1 to 4, and to
Question 5 in so far as that question concerns legal proceedings brought with a view to
obtaining the recall of products, is that Article 102 TFEU must be interpreted as meaning that
the proprietor of an SEP, which has given an irrevocable undertaking to a standardisation
body to grant a licence to third parties on FRAND terms, does not abuse its dominant
position, within the meaning of Article 102 TFEU, by bringing an action for infringement
seeking an injunction prohibiting the infringement of its patent or seeking the recall of
products for the manufacture of which that patent has been used, as long as:
- prior to bringing that action, the proprietor has, first, alerted the alleged infringer of the
infringement complained about by designating that patent and specifying the way in which it
has been infringed, and, secondly, after the alleged infringer has expressed its willingness to
conclude a licensing agreement on FRAND terms, presented to that infringer a specific,
written offer for a licence on such terms, specifying, in particular, the royalty and the way in
which it is to be calculated, and
- where the alleged infringer continues to use the patent in question, the alleged infringer has
not diligently responded to that offer, in accordance with recognised commercial practices in
the field and in good faith, this being a matter which must be established on the basis of
objective factors and which implies, in particular, that there are no delaying tactics.

Notes and Questions

1. Note that the CJEU, as its advocate general, examined the relevant issue, not only
from the perspective of competition law, but also of IP law, citing for that purpose
Directive 2004/48. Compare with the approach followed by the EU courts in Magill
and IMS/NDC Health.
2. In contrast to the previous cases cited by the CJEU regarding refusals to license,
where an abuse may only be found in exceptional circumstances, the CJEU, following
the Opinion of the AG, distinguished this case, noting (i) that the essential nature of
the SEP makes it indispensable to all manufacturers of standard-compliant products

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and (ii) that the SEP-holder took a commitment to the SSO, in this case ETSI, to grant
licenses on FRAND terms, thus creating legitimate expectations for implementers.
What is the nature of this obligation? Can it be considered as a contractual obligation
to the SSO equivalent to a waiver of the right to obtain an injunction, or a contractual
commitment to invite third parties to make offers for a license? Would in this case the
breach of this contractual duty be considered automatically as abusive conduct in the
context of Article 102, or would that require in addition evidence of anticompetitive
foreclosure? Does this result, instead, from the discretion of the national IP court to
award injunctions, without these leading to an abuse of the IP right (the EU principle
of proportionality)? Or, can this be considered as relating to an independent
type/category of abuse of a dominant position, that of reneging on a commitment to
license on FRAND terms?
3. Should you choose in your answer to the previous question the third option, how do
you reconcile this case law of the CJEU on this new category of abuse, with that
involving a unilateral refusal to license? Are you convinced by the distinction with
this case law established by the CJEU? Note that the case law on refusals to license
(Magill/IMS-NDC Health) may potentially apply to situations in which the request for
an injunction concerns non-essential patents, which is not targeted by the narrower
category of abuse involved in Huawei v ZTE.
4. The CJEU could have also characterized the facts of the case as involving
abusive/vexatious litigation, rather than qualifying them as an independent form of
abuse. If that were the case, according to the case law of the EU courts (ITT
Promedia, Protégé International), an abuse may only occur in ‘wholly exceptional
circumstances’, if two cumulative conditions are met: (i) the action cannot reasonably
be considered as an attempt to establish the rights of the undertaking concerned and
would therefore serve only to ‘harass’ the opposite party, and (ii) the action is
conceived in the framework of a plan whose goal is to eliminate competition (intent
test). According to the case law of the EU courts, the two conditions ‘must be
construed and applied strictly’, legal proceedings constituting an abuse ‘only if they
cannot reasonably be considered to be an attempt to assert the rights of the
undertaking concerned and can therefore only serve to harass the opposing party’.526
Any alternative explanation trumps the finding of an abuse. These conditions look
more difficult for the claimants to prove than those required in the context of new
category of abuse established by the CJEU in Huwaei v ZTE, although in both cases
the CJEU (and/or AG) emphasized the need to protect the right to access to the court.
What explains in your view the different balancing of this right and other
considerations by the CJEU in these two contexts? How significant is it the
requirement in Huawei v ZTE that there is a ‘willing licensee’?
5. An alternative approach527 would be to consider that Huawei’s conduct consisted in
some form of ‘intentional deceptive conduct’ towards the SSO and/or patent
implementers, equivalent to the type of misleading conduct the CJEU found to

526
Case T-111/96 ITT Promedia NV v Commission [1998] ECR II-2937, para 72.
527
See the excellent analysis in N Petit, ‘Injunctions for FRAND-Pledged SEPs: The Quest for an Appropriate
Test of Abuse under Article 102 TFEU, Injunctions for Frand-Pledged Standard Essential Patents: The Quest for
an Appropriate Test of Abuse Under Article 102 TFEU’ (December 23, 2013), p 31. Available at SSRN:
ssrn.com/abstract=2371192

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constitute an abuse in AstraZeneca v Commission (against the patent office in this

case)528, or the Commission’s decision in Rambus (regarding the failure of Rambus to
disclose patents and patent applications to the relevant SSO, JEDEC, thus
undermining confidence in the standard-setting process.529
6. Would you distinguish Huawei v ZTE from the Orange Book Standard jurisprudence
of the German Federal Supreme Court? Or, do you think that the position of the CJEU
is closer to that of the Commission in Samsung and Motorola? Do you consider that
the position of the CJEU in Huawei v ZTE is more, or less, ‘patent-friendly’? Note
that there was no FRAND commitment in the Orange Book Standard case. Note also
that in Samsung the Commission examined the conduct of the implementer when
assessing the existence of an objective justification by the SEP holder for seeking
injunctive relief. In Huawei v ZTE, the CJEU seems to have considered the conduct of
the implementer when assessing the existence of a prima facie restriction of
competition, the step before proceeding to the assessment of objective justifications.
Does this change the balance between the parties to the dispute as to the rules shifting
the evidential burden of proof? Is this similar to the approach followed by the German
Federal Supreme Court with regard to the Orange Book Standard defence?
7. Do you find the test suggested by the AG and adopted by the CJEU in Huawei v ZTE
to be more formalistic, or effects-based? Note that some authors proposed a different
test of antitrust liability that would have relied on evidence, from the claimant, that
the use of injunction would alter the balance of bargaining power in favor of the
player seeking injunctive relief ‘after having tried to charge a price which is above
what it would have been able to charge if the adoption of the standard would not have
altered the balance of bargaining powers’.530 This test would have asked the national
courts to identify the incremental ‘increase in market power’ resulting from the
request of injunctive relief, which naturally would have required from the courts to set
the ‘correct counterfactual’.531 If this test were adopted, there would be no need to
examine if there was any FRAND commitment, as the CJEU has required in Huawei
v ZTE. Assess the relative costs and benefits of a more effects-based test, in
comparison to the test chosen by the CJEU. Do you consider that by adopting a more
formalistic test the CJEU moved further away from an effects-based approach in the
context of exclusionary abuses under Article 102 TFEU?
8. Note that although in paragraph 43 of the judgment, the CJEU indicates that as the
national court did not refer any question as to the existence of a dominant position, it
confines its analysis to the question of the abuse. In his Opinion, AG Wathelet
insisted that any presumption that a an SEP holder enjoys a dominant position in
relation to the SEP in question should be capable of being rebutted by ‘specific,
detailed evidence’. What is the relevant market on which the SEP holder holds a
dominant position? In Samsung and Motorola these markets were those of the
technologies reading on the specific SEP.

528
Case C-457/10 P AstraZeneca AB and AstraZeneca plc v European Commission [2012]
ECLI:EU:C:2012:770.
529
Rambus (Case COMP/38.636) Commission decision of 9 December 2009, para 3.
530
M Marinniello, ‘European Antitrust Control and Standard Setting’, Bruegel Working Paper, 2013/01, p 16.
531
Ibid.

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9. Do you consider that the judgment of the CJEU provides clear directions to the
national courts when assessing if a request for an injunction by a SEP holder
constitutes an abuse? Do you think there is room for divergent approaches among
national courts? How, do you think national courts would interpret concepts such as
‘recognized commercial practices’ and ‘delaying tactics’?
10. The practice for SEP holders is to offer cross-licenses, portfolio licenses to
implementers (covering more than one essential patent), grant-backs of non SEP and
global licenses, rather than offer a single license covering only essential patent and
one jurisdiction. This saves SEP holders the costs of country-by-country patent
litigation. The judgment of the CJEU stays silent as to what happens when the SEP
holder suggests cross-licenses or portfolio licenses. In any case, with regard to global
licenses one needs to consider if these may be characterized as amounting to the
independent abuse of tying in breach of Article 102 TFEU.532 Would you assess in a
similar way the demand by a SEP holder to the implementer for grant backs of non-
SEPs?
11. Note that in Huawei v ZTE, the SEP-holder sought an injunction against a competitor.
Do you think that there are reasons to believe that this case law extends to situations
in which the SEP-owner seeks an injunction against a customer, or more generally, a
party with which they are not in competitive relationship with each other? This is of
particular importance for Non-Practising Entities, which do not compete with the
patent holder in the standard-compliant product market (they are pure-licensors
without any productive activity in this market). Some authors advance the view that
Article 102 TFEU ‘only catches injunctions that target the SEP owner’s competitors’
and that ‘non-implementing entities cannot be guilty of abuse when they seek
injunctions against implementers’ with which they are not in a competitive
relationship.533 Indeed, according to the CJEU in Huawei, the SEP holder ‘can
prevent products manufactured by competitors from appearing or remaining on the
market and thereby reserve to itself the manufacture of the product in question’, thus
indicating that the case concerns situations in which the SEP holders are vertically
integrated (para 52). However, in a recent speech Commissioner Vestager opened the
possibility that ‘this obligation applies to whoever exercises the patent right in
question’.534 This is a crucial issue in view of the importance of litigation by non-
practising Patent Assertion Entities (PAEs) with regard to SEPs.535 According to
Damien Geradin, ‘PAEs may also be used by SEP holders to evade their FRAND
commitments’, by divesting its SEPS to PAEs with whom they will have a revenue-
sharing agreement. These PAEs will be able to target the competitors of the SEP

532
See, for this possibility, D Geradin, ‘European Union Competition Law, Intellectual Property law and
Standardisation’ (April 15, 2016), pp 21–22. Available at SSRN: ssrn.com/abstract=2765549 (noting that ‘[a]
more straightforward [situation] of tying would, however, occur […] in case the SEP holder only accepts to
license its SEP’s provided that the standard implementer accepts to license its non-SEPs’.
533
N Petit, ‘Injunctions for FRAND-Pledged SEPs: The Quest for an Appropriate Test of Abuse under Article
102 TFEU, Injunctions for Frand-Pledged Standard Essential Patents: The Quest for an Appropriate Test of
Abuse Under Article 102 TFEU’ (December 23, 2013), p 10. Available at SSRN: ssrn.com/abstract=2371192 .
534
M Vestager, 19th IBA Competition Conference, Florence 11 September 2015 – version 01, available at
ec.europa.eu/commission/2014-2019/vestager/announcements/intellectual-property-and-competition_en.
535
FT, Patent trolls rear their ugly heads in courtrooms around the world, June 9th, 2016, available at
www.ft.com/cms/s/2/a1427d4c-0e25-11e6-b41f-0beb7e589515.html#axzz4H14rkJMv .

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holder on downstream product markets. These arrangements could also increase the
royalty rates the standard implementers would have to pay, in view of the patent
portfolio fragmentation that would result from them.536 Furthermore, SEP holders
may circumvent the prohibition of seeking an injunction in case they have committed
to FRAND terms, by suing instead of the standard implementer, his customers, along
the supply chain for instance in the case of smartphones, Mobile Network Providers
instead of Original Equipment Manufacturers. See, for instance, the recent Mannheim
District Court case in the Saint Lawrence v Deutsche Telekom case for an illustration
(examined in the next question).
12. Following Huawei v ZTE, some German courts granted injunctions to SEP holders.
The Düsseldorf Regional Court granted injunctive relief to Sisvel, a SEP holder that
was a non-practising entity, against Haier, which distributed UMTS and GPRS-
standard compatible mobile devices infringing Sisvel’s SEP. The German Court
rejected the FRAND defence because Haier did not provide an account and security
for the payment of royalties in a timely manner, upon Sisvel’s rejection of their first
counteroffer, the CJEU considering that security should be provided within one month
of the rejection of the implementer’s counter-offer.537 In another litigation in Germany
initiated prior to Huawei, the Mannheim Regional Court granted an injunction against
Deutsche Telekom (DT), introduced by a non-practising entity, Saint Lawrence,
because DT was selling phones without a license to a patent owned by Saint
Lawrence and essential for the standard for wideband audio coding used in HD-Voice
transmission. On appeal, also pronouncing itself prior to Huawei v ZTE, the Karlsruhe
Appellate Court stayed the execution of the injunction, finding that if a SEP holder
has made a FRAND commitment and licensed the OEMs, there is no objective reason
to direct patent claims against the distributors as long as the OEM is willing to take a
license. The Mannheim Regional court stayed Saint Lawrence’s second proceedings,
pending the CJEU’s Huawei judgment. Following that judgment, the Mannheim
Regional Court538 granted an injunction against DT. Because the products offered by
DT included mobile phones supplied by HTC and several other handset
manufacturers, HTC and others participated in the proceedings as interveners in
support of DT. As DT, HTC had not accepted Saint Lawrence’s offer, but made a
counter-offer, which was nevertheless found to be insufficient by the court. In
particular the Court found that HTC did not specify the royalty rate, but referred to a
determination of the adequate royalty in separate proceedings before the High Court
of England and Wales. This did not constitute a ‘specific’ counter-offer as required by
the CJEU in Huawei v ZTE (para 66) an in any case did not allow the determination of
the defendant’s security (as the CJEU held in Huawei, para 67). In a parallel case at
the Regional Court of Düsseldorf, the court granted the injunction to Saint Lawrence,
this time against Vodafone, as it considered that Vodafone did not respond to Saint

536
D Geradin, supra n 532.
537
Joint cases 4a O 93/14 und 4a O 144/14, summary available at
www.eplawpatentblog.com/eplaw/2015/11/de-sisvel-v-qingdao-haier-group-first-german-injunction-after-cjeu-
frand-decision.html. This judgment was appealed at the Upper District Court of Düsseldorf, which stayed
execution of the injunction by interim order, hinting that it considered that the Düsseldorf Regional Court did
not implement correctly the Huawei v ZTE framework.
538
Case 2 O 106/14, summary available at eplaw.org/document/de-summary-mannheim-district-court/.

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Lawrence’s offer in good time that it intends to take a FRAND license to the patent in
question, since it took five months to respond and its counter-offer did not also
qualify as FRAND.539
13. An interesting issue relates to situations where the original SEP-holder, member of
the SSO that took a FRAND commitment, transfers the patent to a new SEP holder.
Would in this case the new SEP holder be required to keep the commitment to license
on FRAND terms, and consequently be limited in its capacity to seek injunctive relief,
in a fact pattern similar to Huawei v ZTE? The European Commission has taken
position for the transferability of the FRAND commitment in its Horizontal
Cooperation Guidelines providing that ‘to ensure the effectiveness of the FRAND
commitment there would also need to be requirement of all participating IPR holders
who provide such a commitment to ensure that any company to which the IPR owner
transfers its IPR (including the right to license that IPR) is bound by that commitment,
for example through a contractual clause between buyer and seller’.540
The issue was raised in a recent UK case involving the transfer of SEPs by
Ericsson, the previous SEP holder that had taken a commitment to license in FRAND
terms to ETSI, to Unwired Planet, a patent assertion entity, under a Master Sales
Agreement. Unwired Planet brought a claim for patent infringement against Google,
Samsung and Huawei for infringing five SEPs. The defendants put forward a number
of defenses, by way of counterclaim, alleging that by seeking an injunction, Unwired
Planet is in breach of its article 102 TFEU obligations and also arguing that the
contract through which Ericsson transferred the patents in issue to Unwired Planet
breaches article 101 TFEU because Ericson had transferred its patent portfolio to a
‘hybrid non-practicing entity’ or PAE, whilst retaining the right to a substantial share
in the licensing revenue generated by Unwired Planet, thus enabling it to divide its
patent portfolio into two parts and earn unfair higher royalties (see our comments at
question no 11 about the ways for SEP holders to circumvent the limitations to
injunctive relief set by the CJEU in Huawei v ZTE). As a PAE, Unwired Planet does
not have the same incentive as Ericsson to seek cross-licences from other market
players, such as Samsung and Huawei. In addition, by preliminary judgment Briss J
accepted that certain terms of the sale agreement represented price-fixing clauses and
could constitute an infringement of Article 101 TFEU.541
Of particular interest for the assessment of the nature of the FRAND
commitment, is the following passage from Briss J. preliminary judgment in Unwired
Planet International Limited v Huawei & Samsung regarding the nature of the
disputes involving SEP holders’ FRAND commitment:
‘[t]here are three legally relevant ways of looking at licence terms offered by a
patentee or advanced by a defendant in the context of standard essential
patents and ETSI. All three contexts involve considerations of fairness,
reasonableness, and non-discrimination, i.e. FRAND, but although that
expression is used in all three contexts, it is necessary to distinguish between

539
Case 4a O 73/14, summary available at www.lexology.com/library/detail.aspx?g=21ba15a4-f3e6-4042-9834-
4c1070fc30ec.
540
Communication from the Commission – Guidelines on the applicability of Article 101 TFEU to horizontal
co-operation agreements, [2011] OJ C 11/1, para 285.
541
Unwired Planet International Limited v Huawei & Samsung [2015] EWHC 2097 (Pat).

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them. One context is compliance with competition law. A second is

compliance with the contractually enforceable obligation to ETSI in terms of
the ETSI declaration and the IPR policy. The third context is directed to
granting and refusing injunctions. One could describe the third context as
being concerned with whether licence terms are “equitably refusable”. In other
words are the terms on offer such that an injunction would be granted if the
defendant refused to accept them? Conversely, are terms proposed by the
defendant such that an injunction would be refused if a patentee, obliged to
license on FRAND terms, refused to accept them? The third context is not
necessarily only concerned with the first two contexts since it will also relate
to the exercise of the court’s discretionary power to grant injunctive remedies.
Even if a patentee is not contractually obliged by the ETSI IPR Policy to
accept FRAND terms offered by a defendant, perhaps a court might refuse to
grant an injunction in such a case’.542
Briss J. held that these issues cannot be decided by summary judgment, and
had to be resolved after a full trial. Samsung applied for the case to be transferred to
the CAT, an application resisted by Ericson and Unwired Planet. The court rejected
any transfer to the CAT, noting that FRAND issues may fall under both competition
and contract law as part of the ETSI IPR policy and thus remain outside the scope of
Article 102 TFEU.543 This case to be decided in Autumn 2016 by the UK Patent
Court, raises interesting questions as to the competition law or contractual law nature
of FRAND commitments and could provide guidance on the meaning and
determination of FRAND terms.544
14. Note that the CJEU in Huawei considers that the SEP holder’s seeking of an
injunction is a form of exclusionary abuse. The CJEU stays however silent as to the
possibility for an injunction to be considered as constituting an exploitative abuse, for
instance if the SEP holder aims to extract unfair terms.
15. The CJEU does not provide any guidance as to the elephant in the room, the
determination of what constitutes a FRAND royalty. This is a very complex factual
question, for which there is little case law, also in the context of IP law disputes. The
question is examined in a separate Section in this Chapter, as it also relates to the
finding of an exploitative abuse under Article 102 TFEU.
16. What would you consider as being the main impact of the Huawei v ZTE case law to
the strategies of SEP holders? Would this lead them to increasingly opt for filing
claims for damages and rendering of accounts, rather than immediately seeking
injunctive relief?
17. In paragraph 68 of the judgment the CJEU explains that in case no agreement is
reached on the details of the FRAND terms following the counter-offer by the alleged
infringer, ‘the parties may, by common agreement, request that the amount of the
542
Briss J. in Unwired Planet International Limited v Huawei & Samsung [2015] EWHC 1029 (Pat), para 29.
543
Unwired Planet International Limited v Huawei & Samsung [2016] EWHC 958 (Pat). According to Briss J.,
transferring the competition law aspects of this claim to the CAT would have left the interrelated contract claims
in the High Court and would have created a division in the handling and decision making process.
544
The dispute between Vringo and ZTE constitutes another example of the importance of FRAND related
disputes regarding SEPs, in situations where the SEPs were transferred to a new SEP holder, a dispute finally
settled in December 2015: see www.lexology.com/library/detail.aspx?g=b118fa05-19d7-4ac7-93e4-
048fe1f8a38e.

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royalty be determined by an independent third party, by decision without delay’

(emphasis added). This does not establish an obligation for the parties to seek
determination of the licensing terms by an independent court or arbitrator, in the
absence of agreement. Note that the CJEU opens the possibility for the potential
implementer infringer of the patent to challenge its validity or essentiality, in parallel
with the negotiations of the licence.
18. Do you consider that the issues raised by Huawei v ZTE could be better dealt under
contract law, and with a more intensive involvement of competition authorities and
consumers/other stakeholders to the major Standard Setting Organizations, such as
ETSI, ITU, IEEE etc.?

13.9.Exploitative IP-related abuses and the meaning of FRAND

The persistence of the patent thicket problem with the development of complex
products involving numerous inputs with corresponding third-party proprietary rights
attached may lead to what is frequently referred to as ‘royalty stacking’. Royalty stacking
results from multiple royalty obligations, as various licenses related to different inputs of a
product combine to impose aggregate royalty obligations of an extent of 6%–20% (or
greater).545 The theory is based on Cournot’s complements problem, according to which if
two input goods are perfect complements and both inputs are offered by a monopolist and
these inputs are necessary for the creation of a single good, both monopolists will add their
own profit margins to the pricing of the inputs without fully considering the pricing of other
inputs. In the context of standard setting although various technologies are competing prior to
the adoption of the standard, once the standard is adopted, patents in the standard are
essential, that is, they constitute perfect complements. As standards may require hundreds of
patents owned by different patent holders, the scale of the complements problem, and
consequently royalty stacking, may be significant. A similar problem emerges in situations of
‘royalty packing’, where multiple technologies are bundled together (sometimes imposed by
the licensor or by best practices within an industry) also increasing the aggregate-royalty
problem. Hold up problems may also emerge, more so if non-practising entities holding SEP
are involved, and may increase considerably the royalties paid. It is possible that the cost
burden of royalties will not be based on the actual contribution of the invention to the final
product. There are various techniques to deal with royalty stacking and packing: royalty
ceilings, royalty floors, variable royalties, and alternatives to royalties, such as lump-sum
payments and patent pools with no fee cross-licensing among the members of the pool.
Cross-licensing and patent pools may solve the problem, but these options also face problems
of their own. Cross-licensing may not be possible if one of the patent holders is a non-
practising entity (a technology specialist) and thus is not present in the downstream market
for implementing the technology. Second, there may be significant transaction costs if there

545
On this practice, see, E Elhauge, ‘Do Patent Holdup and Royalty Stacking Lead to Systematically Excessive
Royalties?’ [2008] 4 Journal of Competition law & Economics 535; TF Cotter, ‘Patent Holdup, Patent
Remedies, and Antitrust Responses’ (2009) 34 The Journal of Corporate Law 1151, 1160; J Farrell et al,
‘Standard Setting, Patents, and Hold-Up: A Troublesome Mix’ [2007] 74 Antitrust Law Journal 603; MA
Lemley and C Shapiro, ‘Patent Holdup and Royalty Stacking’ [2007] 85 Texas Law Review 1991; GJ Sidak,
‘Holdup, Royalty Stacking, and the Presumption of Injunctive Relief for Patent Infringement: A Reply to
Lemley and Shapiro’ [2008] 92 Minnesota Law Review 714.

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are many patent holders that need to proceed to cross-licensing. Third, patent pools may
create a one-stop shop, which may create problems of its own if the pool disposes of a
dominant position. Fourthly, as we elaborated in a previous Section, patent pools may also
include substitutes and not just complements.
How can however royalty stacking infringe competition law? One might distinguish
between the sanction by competition law of exclusionary practices leading to situations of
royalty stacking from that of royalty stacking as such, that is the exploitative practice of
demanding excessive royalties. As we indicated above the European Commission has
analysed most royalty stacking claims focusing on the level of the royalty rate(s).546 There are
various instances in which competition authorities will look to the level of royalty rates.
First, ‘excessive’ royalties may be found to infringe Article 102(a) TFEU which may
apply to purely exploitative conduct (exploiting consumers directly without any requirement
to prove any exclusionary conduct), in particular conduct that is ‘directly or indirectly
imposing unfair purchase or selling prices or other unfair trading conditions’. In United
Brands, the Court of Justice held that a price may be found excessive if it has no reasonable
relation to the economic value of the product supplied.547 Further case law from the EU
courts and decisional practice of the Commission has set the principles regarding the
determination and calculation of ‘excessive prices’ (see Chapter X), although the EU courts
have not yet pronounced themselves as to the methods of calculating when a royalty is
‘excessive’.
As to the adequate benchmark prices that would define the ‘unfair’ character of the
prices charged, a comparison with the prices charged by competitors might be a possible
option (although one should be cautious, as price differences may indicate quality
differences). In United Brands the Court noted that ‘other ways may be devised— and
economic theorists have not failed to think up several— of selecting the rules for determining
whether the price of a product is unfair’.548 Other options include the comparison with the
price of the product over different geographic markets.549 In Kanal 5, the remuneration model
applied by the Swedish Copyright Management Organisation (STIM), relating to the
broadcast of musical works protected by copyright, which calculated the amount of royalties
on the basis of the revenue of companies broadcasting those works and the amount of music
broadcast, was found to be an abuse for the simple reason that another method would enabled
the use of those musical works and the audience to be identified and quantified more

546
Rambus (Case COMP/38.636) European Commission Decision of 9 December 2009, available at
ec.europa.eu/competition/antitrust/cases/dec_docs/38636/38636_1203_1.pdf. See also, the statement of
objections sent to Qualcomm by the European Commission for the fact that its licensing terms and conditions
for its patents essential to the standard did not comply with its own FRAND commitment and had led to
excessive royalties. The Commission abandoned the case.
547
Case C-27/76 United Brands Company and United Brands Continentaal BV v Commission [1978] ECR 207.
548
Ibid., para 253.
549
Case C-27/76 United Brands, para 239; Case C-395/87 Ministère Public v Tournier [1989] ECR 2521; Case
C-110/88 Lucazeau v SACEM, [1989] ECR 2811, the last two cases on the level of royalties charged by the
French collecting society SACEM for playing recorded music in discotheques (acknowledging that important
price differentials between Member States could indicate an abuse, unless the undertaking justifies the
difference by reference to objective dissimilarities between the situation in the Member State concerned and the
situation prevailing in all the other Member States).

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precisely.550 In view of this jurisprudence it remains unclear if the Commission will take
major enforcement initiatives in this area of the law551.
The OFT (now replaced by the CMA) fined Napp pharmaceuticals for having charged
much higher prices to pharmacies and patients (community sales) for sustained release
morphine tablets and capsules MST that it produced than the amount it charged to hospitals,
in some cases more than 10 times hospital prices and up to six times its export prices, which
the OFT found to be excessive and above the level that would be charged in a competitive
market. The excessive pricing claim against Napp was complementary to an exclusionary
conduct claim relating to the discount policy of Napp which targeted with significant
discounts specific hospitals in order to exclude its competitors from this market and then
skimmed the milk of community sales as the prescribing practices of GPs were found to be
strongly influenced by the brands used in hospitals. In assessing excessive prices the OFT
looked to a number of comparators552. The CAT upheld the OFT’s decision553.
The CMA has recently issued a statement of objections against Pfizer and Flynn
alleging that they each abused their dominant position by charging excessive and unfair
prices in the UK for phenytoin sodium capsules, an anti-epilepsy drug, violating Chapter II
CA 98 and Article 102 TFEU. Pfizer manufactures the capsules and then supplies them to
Flynn Pharma, which then distributes them to UK wholesalers and pharmacies. The SO
concerns both the prices Pfizer charges to Flynn and those charged by Flynn to its customers,
after Pfizer sold the UK distribution rights for this drug to Flynn Pharma, which de-branded it
and started selling it on to customers at prices which were between 25 and 27 times higher
than those historically charged by Pfizer. Pfizer also continued to manufacture the drug
selling it to Flynn at prices that were 8 to 17 times higher than its historic prices. The prices
are considered by the CMA as “very high”554.
Second, the issue may also arise in the process of deciding whether to impose a
licensing obligation (compulsory licensing) as a remedy in a refusal to license case. If the
parties do not arrive to an agreement as to the level of the royalty, courts can set royalty
guidelines based on industry conditions, capital invested, risk incurred, and the contribution
of the investment to societal welfare. This raises of course complex questions. Valentine
Korah has pointed-out that setting licensing rates could prove arbitrary, further stating that
the level of compensation for a license ‘could lie anywhere between the cost of granting the
license (usually minimal) and the opportunity cost: loss of the profit to be made by exploiting

550
Case C-52/07 Kanal 5 Ltd v Föreningen Svedska Tonsättares Internationella Musikbyrå (STIM) UPA [2009]
ECR I-9275.
551
For instance, the European Commission has declined to open an investigation into allegations of excessive
prices for Hepatitis C drugs in 2014, alleging that “pursuant to Article 168(7) TFEU, Member State may […]
take measures to regulate or influence the prices in these areas. For this reason, price-setting by pharmaceutical
manufacturers and healthcare systems in general takes place on a national level, allowing Member States to
exercise their bargaining power”: Answer by Ms Vestager on behalf of the Commission to a Parliamentary
question, available at http://www.europarl.europa.eu/sides/getAllAnswers.do?reference=P-2014-
008636&language=SV .
552
OFT, No CA98/2/2001, available at
https://assets.publishing.service.gov.uk/media/555de4bf40f0b669c4000169/napp.pdf , paras 203-234.
553
CAT, Case Case No. 1001/1/1/01 (2002).
554
CMA, Press release, see https://www.gov.uk/government/news/cma-issues-statement-of-objections-to-pfizer-
and-flynn-pharma-in-anti-epilepsy-drug-investigation .

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the right oneself free of direct competitive restraints’.555 The authority or court usually issues
a FRAND commitment for the IP owner to follow.556
Third, the level of royalty rates may arise in the context of SSOs and FRAND
commitments related disputes. The Commission considers FRAND commitments to be a
material stipulation in the context of SSOs, as participants relinquish full control over their
ability to set prices.557 The Commission notes that the SSO’s IPR policy ‘would need to
require participants to have their IPR included in the standard to provide an irrevocable
commitment in writing to offer to license their essential IPR to all third parties on fair,
reasonable and non-discriminatory terms (“FRAND commitment”)’ that should be given
prior to the adoption of the standard’.558 When a dispute arises over whether members of an
SSO charge reasonable fees, the Commission will look to whether ‘the fees bear a reasonable
relationship to the economic value of the IPR’.559 The Commission finds cost-based methods
for calculating reasonable fees generally inappropriate because of the complexity of
determining the costs necessary to create patents. The Commission recommends conducting
a hypothetical inquiry comparing the fees that a company would have charged in a
competitive environment, ex ante, before the industry selected a standard, to prices charged
ex post, after the industry adopted the standard.560 If this process is infeasible, the
Commission states that the parties could select an independent expert to value the IPR.561
Lastly, the Commission points to royalty rates charged for the same IPR in other comparable
standards as a relevant benchmark.562 As it is also observed in the Commission’s Guidance
on Horizontal Cooperation Agreements, on the question of whether fees charged for access to
IPR in the standard-setting context are unfair or unreasonable in the presence of a FRAND
commitment, ‘cost-based methods are not well adapted to this context because of the
difficulty in assessing the costs attributable to the development of a particular patent or
groups of patents’; It may be better, instead, ‘to compare the licensing fees charged by the
company in question for the relevant patents in a competitive environment before the industry
has been locked into the standard (ex ante) with those charged after the industry has been
locked in (ex post)’.563 However, the determination of the excessive nature of pricing in an IP
context is notoriously difficult.
Fair, reasonable, and non-discriminatory licensing (FRAND) as a pillar of SSO policy
has prevailed because ex ante pricing can lead to intractable disputes that discourage

555
V Korah, Intellectual Property Rights & the EC Competition Rules (Hart Publishing 2006) 135; see also M
Lamping, Refusal to License as an Abuse of Market Dominance: From Commercial Solvents to Microsoft, Max
Planck Institute for Innovation & Competition, pp 25–26 (‘Unless the Commission is aware of comparable
markets and transactions that could be used as a benchmark, it would have no choice but to look into the
investments made in connection with the [IP] at stake, and to add an adequate amount that reflects the incurred
risks, failures and opportunity costs’.).
556
See, Microsoft (Case COMP/C-3/37.792) Commission Decision of 24 March 2004, available at
ec.europa.eu/competition/antitrust/cases/dec_docs/37792/37792_4177_1.pdf, para 1008.
557
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to
horizontal co-operation agreements [2011] OJ C11/1, para 288.
558
Ibid., para 285.
559
Ibid., para 289.
560
Ibid.
561
Ibid., para 290.
562
Ibid.
563
Ibid., para 289.

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participation in SSOs.564 Even if determining royalty rates and the royalty base are usually
considered as constituting the essence of FRAND, these are not the only dimensions covered
by this concept565. While FRAND is a central element in the IP policies of almost all SSOs,
almost none defines how this principle is to be interpreted. Parties often interpret FRAND in
different ways, leading to important divergences in the proposed royalty rates: for instance, it
has been noted that in the case between Motorola (and later Google) and Microsoft, the
FRAND rates defended by the two parties differed by as much as a factor 2000.566
Nonetheless, regarding royalty rates, although there is no much guidance from EU courts,
with the exception of the general principles regarding excessive pricing as an abuse of a
dominant position, there is some case law from the other side of the Atlantic, which might be
helpful.567
A first possible approach is to define FRAND by using the ex-ante incremental value
rule. This rule states that ‘a FRAND royalty rate should reflect the incremental value of the
patented invention over the next-best alternative available at the time the standard was
defined (which corresponds to the maximum amount that a willing licensee would have been
willing to pay in a hypothetical negotiation at this moment)’.568 Once this rate is determined it
will be used as a benchmark to assess if a particular royalty is fair and reasonable. The
approach relies on a model developed by Swanson and Baumol who take into account the
price the IP holder would be able and willing to charge prior to the incorporation of the
specific patent into the SSO’s standard, as this aims to reflect the value of the IP
independently of the value of the standard.569 Indeed, as Shapiro and Varian also argued in
another publication, ‘reasonable should mean the royalties that the patent holder could obtain
in open, up-front competition with other technologies, not the royalties that the patent holder
can extract once other participants are effectively locked in to use technology covered by the
patent’.570 Carlton and Shampine also recommend an ex ante standard based on ‘the
incremental value that the technology brings to the licensee compared to the next best
alternative available’.571
Swanson and Baumol’s approach alleviates concerns that the IP holder may exert ex-post
market power and thus their model relies on an auction-like process for the selection of

564
See V Torti, Intellectual Property Rights & Competition in Standard Setting: Objectives & Tensions (2016)
68.
565
See, European Commission, Patents and Standards - A modern framework for IPR-based Standardization,
(2014), p. 184, available at ec.europa.eu/DocsRoom/documents/4843/attachments/1/translations indicating that
FRAND ‘has large number of dimensions, inducing the following: (i) the allowed royalty rates and royalty
bases; (ii) whether licensing can be made subject to reciprocity conditions - and which conditions exactly; (iii)
whether licensing can be made subject to reciprocity bundling other SEPS or non-SEPs; (iv) whether the patent
owner is entitled to seek injunction in case of infringement; (v) whether the initial offer of the SEP owner should
be FRAND or whether this only applies to the outcome of the process, and several more’.
566
See, ibid, European Commission, p 185.
567
For an interesting historical perspective on FRAND, see J Contreras, ‘A Brief History of Frand: Analyzing
Current Debates in Standard Setting and Antitrust through a Historical Lens’ [2015] 80 Antitrust L.J. 39.
568
Y Ménière, Fair, Reasonable and Non-Discriminatory (FRAND) Licensing Terms, JRC Science and Policy
Report, European Commission (2015), p 10.
569
DG Swanson & WJ Baumol, ‘Reasonable & Non-Discriminatory Royalties, Standards Selection & Control
of Market Power’ [2005] 73 Antitrust L.J. 2.
570
C Shapiro & H Varian, Information rules: A strategic guide to the network economy (Harvard Business
Press, 1999).
571
DW Carlton & AL Shampine, ‘An Economic Interpretation of FRAND’ [2013] 9 J. of Competition Law &
Economics 531.

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technologies to be incorporated into the standard, various owners of competing technologies

offering bids of a license fee per unit of output to downstream standard implementers, who
are choosing which patent should be embodied in a standard.572 Their model is based on a
number of simplified assumptions.573 The ex-ante rule aims to calculate the incremental value
of the innovation before the alleged lock-in, when there was still inter-technology
competition. The incremental value of the patented invention over the next-best alternative
will establish the maximum amount that a willing licensee would pay in this hypothetical
negotiation. According to this approach, using an ex-post valuation would be inappropriate as
it would allow the patent holder to appropriate not just the value of its innovation but also the
value of the implementer licensee’s investments, thus leading to the IP owner’s over-
compensation. This approach sets the hypothetical negotiation at an early stage of product
development, when the infringer is making design decisions at the time the standard was
defined. FRAND royalties should thus limit the SEP holder to a reasonable royalty calculated
according to the value of the patented technology itself (the specific technology’s merits),
without including the value associated with the patent’s incorporation into an industry
standard (the standard’s merits). Swanson and Baumol also propose a formula for royalties
that are ‘non-discriminatory’ (the ‘ND’ in RAND), which is based on the principle of the
‘efficient component pricing rule’ (ECPR), so that a license fee is competitively neutral in
downstream markets.574 According to the ECPR rule, when a rival and the bottleneck
monopolist both produce a complementary component, the ECPR specifies that the access fee
paid by the rival to the monopolist should be equal to the monopolist's opportunity costs of
providing access, including any forgone revenues from a concomitant reduction in the
monopolist's sales of the complementary component.575
The ex-ante rule is compatible with the approach suggested by the EU Guidelines on
Horizontal Cooperation Agreements regarding SSOs.576 In designing its compulsory licensing
remedy and in Microsoft I, following the decision of the European Commission finding that
Microsoft’s refusal to provide interoperability infringed Article 102 TFEU, Microsoft was
required to grant access to and authorize the use of the interoperability information on
reasonable and non-discriminatory terms. The European Commission suggested that the
assessment of the reasonableness of Microsoft’s prices depended on ‘whether there is
innovation in the protocols, and if there is, what is charged for comparable technologies in

572
DG Swanson & WJ Baumol, ‘Reasonable & Non-Discriminatory Royalties, Standards Selection & Control
of Market Power’ (2005) 73 Antitrust L.J. 2, 18.
573
Ibid., p 19. These are the following: (i) ‘that all investments in R&D by the patent holders already have been
sunk and patent holders do not anticipate incurring any future costs as a consequence of licensing their patent’,
(ii) that ‘they will not be obligated costs for further development, to provide support, or to manage the license
contract’, (iii) ‘that the choice of patent has no effect on the quality of the downstream product, but does affect
the downstream production costs of downstream producers and affects all downstream producers identically’,
(iv) ‘that many downstream firms use the IP to produce perfect substitutes, but that patent owners do not also
produce final products’. According to the authors most of these assumptions are ‘highly unrealistic’ but useful
for modelling purposes.
574
DG Swanson & WJ Baumol, Reasonable & Non-Discriminatory Royalties, Standards Selection & Control of
Market Power (2005) 73 Antitrust L.J. 2, 25–45.
575
On ECPR, see WJ Baumol, ‘Some Subtle Pricing Issues in Railroad Regulation’ [1983] 10 International
Journal of Transport Economics 341. For a criticism of ECPR, see N Economides & LJ White, ‘Access and
Interconnection Pricing: How Efficient is the Efficient Components Pricing Rule?’ [1995] XL The Antitrust
Bulletin 557.
576
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to
horizontal co-operation agreements [2011] OJ C11/1, para 289.

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the market’.577 According to the Commission, ‘such a remuneration should not reflect the
strategic value, stemming from Microsoft’s market power’. In this case, the benchmark for
the calculation of royalties was the incremental value of Microsoft’s protocols over the prior
art and the royalties agreed among third parties for comparable technologies. Following the
remedy imposed by the Commission, Microsoft submitted its remuneration schemes,
containing principles for pricing the interoperability information, as these were negotiated by
the parties. The Commission found that some of the remunerations charged by Microsoft for
non-patented information were unreasonable and imposed periodic penalties.578 The General
Court confirmed the control effectuated by the Commission of the reasonableness of the
royalties’ rate charged.579
This approach has nevertheless been criticized. First, the rule is difficult to implement
in practice. As Robart J. from the US noted in his judgment in Microsoft v Motorola, the first
time a US court has made a determination of RAND licensing terms for a standard-essential
patent portfolio license that the approach lacks ‘real-world applicability’, as it is impossible
to conduct explicit multilateral ex ante negotiations under the auspices of the SSO (this could
amount to a cartel) and that
‘[i]n practice, approaches linking the value of a patent to its incremental contribution
to a standard are hard to implement. Calculating incremental value for multipatent
standards ‘gets very complicated, because when you take one patent out of a standard
and put another one in you may make other changes, the performance of the standard
is multidimensional, different people value different aspects’.580
Furthermore, ‘a reasonable royalty rate for an SEP committed to a FRAND obligation must
value the patented technology itself, which necessarily requires considering the importance
and contribution of the patent to the standard. If alternatives available to the patented
technology would have provided the same or similar technical contribution to the standard,
the actual value provided by the patented technology is its incremental contribution. Thus,
comparison of the patented technology to the alternatives that the SSO could have written
into the standard is a consideration in determining a FRAND royalty’.581 Indeed, as some
authors have also highlighted, ‘the method amounts to simulating tough price competition
between technologies after inventors have sunk their R&D costs, which gives all the
bargaining power to the licensee’ and ‘therefore fails to preserve inventors’ incentives to
invest in R&D and to contribute their inventions to the standard-setting process’.582
Another approach may be to use a comparative approach and rely on actual
information or proxies in case there are data available on the price and relative quality of
substitute technologies, prior to the adoption of the standard. If such data is unavailable, one
may try a comparison with the prices charged by the licensor in non-standardised markets, or
577
Microsoft/W2000 (Case COMP/C-3/37.792) Commission Decision of 24 March 2004, available at
ec.europa.eu/competition/antitrust/cases/dec_docs/37792/37792_4177_1.pdf, paras 1005–1009.
578
Microsoft (Case COMP/C-3/37.792) Commission Decision, Microsoft [2009] OJ C 166/20.
579
Case T-167/08 Microsoft Corp. v European Commission [2012] ECLI:EU:T:2012:323 (noting that the
distinction between the strategic value and the intrinsic value of the technologies covered is a basic premise of
the assessment of the reasonableness of any remuneration charged).
580
Microsoft Corp. v Motorola Inc., 904 F.Supp.2d 1109 (W.D.Wash. Oct 22, 2012), para 79 (referring to
testimony by professor R Schmalensee). Rodard J. judgment was affirmed by the 9th Circuit Court of Appeals
in Microsoft Corp. v Motorola Inc., 795 F.3d 1024 (2015).
581
Ibid., para 80
582
Y Ménière, Fair, Reasonable and Non-Discriminatory (FRAND) Licensing Terms, JRC Science and Policy
Report, European Commission (2015), p 10.

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its own downstream business units, or those charged by other licensors for complementary
essential patents for the same standard, or in competitive markets with inter-standard
competition.
One might also find some inspiration from the multi-factor analysis of ‘reasonable
royalties’ in patent damages cases. The Southern District of New York crafted a widely used
licensing test in the United States (the Georgia Pacific Test) developed and applied by the
courts for determining reasonable royalties in patent damage cases.583 It sets-out 15 wide-
ranging factors to help guide the licensing inquiry. It is noteworthy that a modified version
for FRAND purposes of the Georgia Pacific factors have been recently applied by U.S. courts
also in the FRAND context. These factors aim to determine what a ‘willing’ licensor and a
‘willing’ licensee would have agreed in the context of a hypothetical negotiation.

The Georgia-Pacific factors

1. The royalties received by the patent owner for the licensing of the patent-in-suit, proving
or tending to prove an established royalty;
2. The rates paid by the licensee for the use of other patents comparable to the patent-in-suit;
3. The nature and scope of the license, as exclusive or non-exclusive, or as restricted or non-
restricted in terms of territory or with respect to whom the manufactured product may be
sold;
4. The licensor’s established policy and marketing program to maintain its patent monopoly
by not licensing others to use the invention or by granting licenses under special conditions
designed to preserve that monopoly;
5. The commercial relationship between the licensor and the licensee, such as whether they
are competitors in the same territory in the same line of business, or whether they are
inventor and promoter;
6. The effect of selling the patented specialty in promoting sales of other products of the
licensee; the existing value of the invention to the licensor as a generator of sales of its non-
patented items; and the extent of such derivative or convoyed sales;
7. The duration of the patent and the term of the license;
8. The established profitability of the product made under the patent; its commercial success;
and its current popularity;
9. The utility and advantages of the patent property over the old modes or devices, if any, that
had been used for working out similar results;
10. The nature of the patented invention; the character of the commercial embodiment of it as
owned and produced by the licensor; and the benefits to those who have used the invention;
11. The extent to which the infringer has made use of the invention, and any evidence
probative of the value of that use;
12. The portion of the profit or of the selling price that may be customary in the particular
business or in comparable businesses to allow for the use of the invention or analogous
inventions;
13. The portion of the realizable profit that should be credited to the invention as
distinguished from non-patented elements, the manufacturing process, business risks, or
significant features or improvements added by the infringer;

583
Georgia-Pacific v United States Plywood, 318 F.Supp. 1116 (S.D.N.Y. 1970).

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14. The opinion testimony of qualified experts; and

15. The amount that a licensor (such as the patent owner) and a licensee (such as the
infringer) would have agreed upon (at the time the infringement began) if both had been
reasonably and voluntarily trying to reach an agreement; that is, the amount that a prudent
licensee – who desired, as a business proposition, to obtain a license to manufacture and sell a
particular article embodying the patented invention – would have been willing to pay as a
royalty and yet be able to make a reasonable profit, and which amount would have been
acceptable by a prudent patent owner who was willing to grant a license.

This aims to replicate the different parameters of a real negotiation. The method considers
the hypothetical price that the parties would have negotiated ex ante, prior to the adoption of
the standardized technology. Like the ‘Ex-Ante Incremental Value’ rule, this factor simulates
a hypothetical negotiation between a willing licensee and a willing licensor, the key
difference however being that this negotiation is assumed to take place at the time the
infringement began (and therefore after the implementer has adopted the standard) ‘which is
more advantageous for the licensor’.584 This multi-factor test also includes comparative
factors, such as the royalties received by the licensor from other undertakings for the IPR at
issue or how licensors in related industries price patents of similar scope, as well as
considerations related to the invention’s incremental value, for instance its importance as
compared with available alternatives or the portion of the infringer’s profit that can be
attributed to the infringed patent.
A problem with the comparative factors is that previous bargaining contexts may skew
the optimal rate, such as the effect of potential litigation on licensing fees. 585 A key
assumption of the Georgia Pacific factors, which were originally developed to assess
damages in patent infringement cases, is that the patent is valid and infringed. This
assumption may of course be criticized.
In Microsoft v Motorola, US Judge Robart applied the Georgia Pacific factors taking into
consideration a hypothetical negotiation between a willing licensor and a willing licensee ex
ante standardization, ‘before (the licensor) gets the extra boost in value by the standard
becoming final and everyone has to practice the patent’ (using Georgia Pacific factors 1-3, 6,
8-15), taking into consideration the peculiarities of the FRAND context.586 He sought to
adjust the test for the importance of the SEPs to the standard (both in terms of numeric
proportion, and technical contribution), the importance of these SEPs (patent portfolio as a
whole) to the infringing product and also account for ‘unresolved disagreements’ and
therefore uncertainty on the infringement and validity of the SEPs. This led him to use
comparators (including some from patent pools) to eventually define a royalty rate below the
one usually asked for the same SEPs by the patent holder (here, Motorola).
In Innovatio IP Ventures, Judge Holderman introduced some modifications in Robart’s
modified George Pacific factors, in particular by choosing not to adjust the FRAND rate in
light of pre-litigation uncertainty about the essentiality of a given patent, since it had
already determined, in a separate proceeding, that all asserted patents were standard-essential.

584
Y Ménière, Fair, Reasonable and Non-Discriminatory (FRAND) Licensing Terms, JRC Science and Policy
Report, European Commission (2015), p 11.
585
V Torti, Intellectual Property Rights & Competition in Standard Setting: Objectives & Tensions (Routledge
2016) 68–69.
586
Microsoft Corp. v Motorola Inc., 904 F.Supp.2d 1109 (W.D.Wash. 2012).

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If the validity and infringement of the patent has already been settled, according to
Holderman, ‘the hypothetical negotiator could no longer leave the negotiating table to contest
liability in court, and could no longer demand the benefit of uncertainty about a court's
rulings’ and ‘accordingly the hypothetical negotiation should assume that the asserted patent
claims are valid and infringed’.587As a result of this modification, ‘it would be inappropriate
to adjust the (F)RAND rate based upon pre-litigation uncertainty about the essentiality of a
given patent’. As it was the case with Judge Robart’s judgment, Judge Holderman excluded
from the RAND royalty the value to the licensee created by the standard itself or by
incorporating the patented technology into the standard. However, Judge Holderman took a
different approach as to Georgia Pacific factors 12 and 13, which concern the portion of the
profit customary in the business to allow for royalties and the portion of the profit that should
be credited to the patented invention in issue. He did not take the ‘bottom-up’ approach
followed by Judge Robart, but opted instead for a ‘top-down’ approach, which starts by
looking to the average price of the product incorporating the technology, which is used to
calculate the average profit per unit of product made by the implementer. This provides
information on the portion of income potentially available to pay royalties and thus takes into
account royalty stacking concerns as the FRAND rate for all licensees will be within the
implementer’s profit margin, thus preventing cumulative royalties from exceeding that
margin. This profit is then multiplied by a fraction consisting of the number of SEPs covering
the standard, owned by the specific licensor, divided by the total number of all patent owners’
SEPs covering that standard. The fraction’s denominator was adjusted to reflect the relative
value of the specific SEP’s holder SEPs to the specific standard.
This US jurisprudence offers, of course, important insights as to the methodologies that
may adopted by UK courts when calculating FRAND royalties. However, the George Pacific
factors are not unanimously accepted. In his judgment in Apple v Motorola, Judge Posner,
although accepting that the ‘proper methodology of computing a FRAND royalty starts with
what the cost to the licensee would have been of obtaining, just before the patented invention
was declared essential to compliance with the industry standard, a license for the function
performed by the patent’, he refused to apply the Georgia Pacific factors, noting their
ambiguity and their complexity, questioning if a judge or a jury could ‘really balance 15 or
more factors and come up with anything resembling an objective assessment’.588 In Ericsson
v D-Link decision, the US Court of Appeal of the Federal Circuit (CAFC) rejected the idea of
applying ‘a Georgia-Pacific-like list of factors that district courts can parrot for every case
involving RAND-encumbered patents’. It also held that ‘any royalty award must be based on
the incremental value of the invention, not the value of the standard as a whole or any
increased value the patented feature gains from its inclusion in the standard’ and that ‘if an
accused infringer wants an instruction on patent hold-up and royalty stacking, it must provide
evidence on the record of patent hold-up and royalty stacking in relation to both the
(F)RAND commitment at issue and the specific technology referenced therein’.589
Royalty rates is a significant aspect of FRAND, but not the only one. It remains also
important to choose the appropriate base for FRAND determinations. The choice is between
granting the patentee the possibility to obtain royalty on entire market value of infringing

587
In re Innovatio IP Ventures, LLC Patent Litig., MDL No. 2303, 2013 WL 3874042 (N.D. Ill. July 26, 2013).
588
Apple Inc. v Motorola Inc., 869 F. Supp. 2d 901, 911-913 (N.D. Ill. 2012).
589
Ericsson, Inc. v D-Link Sys., Inc., 2014 WL 6804864 (Fed. Cir. Dec. 4, 2014).

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product incorporating the infringing part, or to obtain royalty on the value of the infringing
component itself. The interest of the patentee will be of course to go after the most
downstream implementer in order to increase the net sales base. The US case law seems to
accept that the royalty base is the entire market value of the accused product ‘only where the
patentee feature created the basis for customer demand or substantially creates the value of
the component parts’; absent such proof, the court calculates license rates based on ‘the
smallest saleable patent-practicing unit’ (SSPPU).590 In the FRAND context, most disputes
will center on what is meant by SSPU. The infringing components must be the basis for
customer demand for the entire product and they must be sold together with the non-
infringing components so that they constitute a single functioning unit.

13.10. Reverse patent settlements: unilateral and collusive practices in the pharmaceutical
sector

13.10.1. General Principles

A recent area of competition law enforcement to IP rights related conduct involves

settlements of IP infringement disputes.591 These practices have been particularly preeminent
in the pharmaceutical industry, where pioneer drug companies use a tool-box of patent-
related practices that contribute to delays in generic entry. Most practices generate from the
intersection of competition law with two regulatory regimes: patent law and market
authorization regulation. The regulation for market authorizations delays competition by
generics for years beyond the patent period for brand name drugs. A pioneer pharmaceutical
company (originator) must invent the drug (active ingredient, formulation, delivery system),
develop it, conduct safety and efficacy studies, then satisfy the Food and Drug
Administration (FDA) in the US that the drug is both safe and effective. In Europe, the
originator has the choice of either a national authorization procedure, a decentralized
procedure, a mutual recognition procedure, or a centralized procedure. Each country within
the EU has its own procedures for authorizing a marketing application for a new drug but the
originator can also seek approval from several EU countries simultaneously using the
decentralized or mutual recognition procedure for products that fall outside the scope of the
European Medicines Agency. Under the mutual recognition procedure, destination countries
recognize a product that has been first authorized by one country in the EU in accordance
with the national procedures of that country. European drug approvals are overseen by the
European Medicines Agency, which is responsible for the scientific evaluation of
applications for authorization to market medicinal products in Europe (via the centralized
590
See Microsoft Corp. v Motorola Inc., 904 F.Supp.2d 1109, 1121 (W.D.Wash. 2012).
591
This Section does not deal with trademark delimitation agreements or trademark settlements, whereby
owners of identical or confusingly similar trademarks or tradenames enter into agreements restricting the
exercise and use of their respective trademarks or tradenames. In Case C-35/83 BAT v Commission [1985] ECR
363 Court of Justice acknowledged that ‘agreements known as “delimitation agreements” are lawful and useful
if they serve to delimit, in the mutual interest of the parties, the spheres within which their respective trademarks
may be used, and are intended to avoid confusion or conflict between them’ (paras 14–15), but did not exclude
the possibility that they may fall under Article 101(1) TFEU ‘if they also have the aim of dividing up the market
or restricting competition in other ways’ (para 33). Indeed, agreements under which the parties undertake not to
use certain trade marks in specified Member States (or within a particular field of use) are viewed with
suspicion, as such agreements may serve to divide up the market: see, Sirdar-Phildar (Case IV/27.879)
Commission Decision [1975] OJ L125/27.

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procedure). This procedure takes at least 210 days (although it is possible to conduct an
accelerated assessment in 150 days). Because of the time consuming and complex pre-
marketing requirements, regulators in both Europe and the US have made efforts to extend
the exclusivity period for pharmaceuticals, while promoting competition on price by generics.
In the US, the Hatch-Waxman Act592 has extended the drug patent term for as much
as five years to take into account the lengthy FDA approval process. The Federal Food, Drug,
and Cosmetic Act mandates that branded companies attempting to market a new drug secure
FDA approval by filing a New Drug Application (NDA). NDAs consist of a multiplicity of
information such as clinical trial data that is ‘extremely expensive and time-consuming to
develop’.593 The Hatch-Waxman Act requires drug companies to certify that generic drugs do
not infringe the patents of a branded drug, and that such patents are otherwise valid. The legal
mechanism to certify involves filing an Abbreviated New Drug Application (ANDA) —
which, in the context of pay-for-delay deals, means checking sub-paragraph IV. The generic
company essentially states that its drug does not infringe any patent, or that if it does, the
branded company procured the patent inequitably, or that prior art anticipated the
invention.594 US Congress designed the ANDA process to provide society with a degree of
confidence that generic drugs feature ‘the same active ingredient, route of administration,
dosage form and strength, and proposed labeling as the brand-name drug’.595 In return for
demonstrating this fact, the ANDA permits the generic company to refer to the FDA’s
previous findings on the branded drug and to avoid the expensive and time-consuming
process of establishing the safety and effectiveness of its drug before the Food and Drug
Administration (FDA). This saves immense amounts of money in development costs.596
Filing a paragraph IV certification constitutes an act of infringement. The branded
company then has 45 days to sue. A lawsuit stays the FDA from approving the ANDA until
one of the following occurs: (1) the patent expires; (2) a court determines non-infringement
or patent invalidity; or (3) 30 months pass from the receipt of notice of the paragraph IV
certification.597 The 30-month stay provision grants branded companies an exclusionary
extension beyond the monopoly right created by the patent system. Provided the generic
company can succeed in the patent case, it also earns a limited (but perhaps durable) duopoly
right — 180 days to exclusively market the generic drug before other generics can enter the
market.
A branded company possibly can prevent all generic applicants from entering the
market in which its branded drug operates by paying the generic to agree not to initiate the
180-day exclusivity period.598 If this period never runs, then the FDA cannot approve any
later-filing generic applicants. The Act bestows the benefit of the 180 day exclusivity period
only upon the first generic company to legally question the validity of the branded company’s
patents. Given this delimited reward and the effect of halting the 30-month stay provision,

592
21 U.S.C. § 355.
593
See FTC Generic Drug Entry prior to Patent Expiration: An FTC Study, 5 July 2002 [FTC Generic Drug
Study], available at: hwww.ftc.gov/sites/default/files/documents/reports/generic-drug-entry-prior-patent-
expiration-ftc-study/genericdrugstudy_0.pdf.
594
See CS Hemphill, ‘Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem’
[2006] 81 N.Y. Univ. L.R. 1553, available at: ssrn.com/abstract=925919.
595
See FTC Generic Drug Study, 5.
596
Ibid., 5.
597
Ibid., 7.
598
Ibid., 57.

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the branded company has a strong incentive to block market entry perhaps altogether by
settling with the first challenger. Assuming that a subsequent ANDA filer can establish no
infringement or patent invalidity, the court decision also would trigger the exclusivity period
— but only the exclusivity period belonging to the first filer. The subsequent filer essentially
forces the first filer to enter the market with exclusivity or forfeit the benefit.599 US Congress
subsequently amended the Hatch-Waxman Act and limited patent holders to only one 30-
month stay period. Previously, branded companies would list additional patents in the Orange
Book after a generic company filed an ANDA. If the generic company responded by filing
another paragraph IV certification, the branded company would sue again and benefit from an
additional 30-month stay.
Hatch-Waxman has produced material effects in the branded and generic drug market.
As intended, it has increased generic drug production. In July 2002, the date that the Federal
Trade Commission published a study on the generic drug market, generic drugs comprised
greater than ‘47 percent of the prescriptions filled for pharmaceutical products — up from 19
percent in 1984’, the date the act took effect.600 This has saved consumers billions of dollars.
The US Congressional Budget Office sifted through retail pharmacy information from 1993
and 1994 and found that generic prescriptions cost about half the average price of a branded
prescription. The CBO asserted that, in 1994 alone, increased generic drug consumption
saved patients between $8 billion and $10 billion.601 The CBO also determined that for 75
percent of drug products that its study covered, branded companies filed patent infringement
suits against the first generic applicant. The branded company consistently sued generic
applicants when its own product had annual sales greater than $500 million measured in the
year that the initial generic applicant filed the ANDA.602 In an astounding finding, given all
patent infringement decisions reaching judgment as of 1 June 2002, involving both first and
later generic challengers, generic companies won in 73 percent of the cases.603
EU law provides no statutory duopoly period for the first company to legally
challenge a branded product. The process that the EU has instituted to approve drugs takes
several years and involves multiple phases of clinical trials that require companies to
establish the safety and efficacy of drugs. Satisfying this process materially curtails the
period during which a company can sell a new drug exclusively. A specific regulation has put
in place a supplementary protection certificate (SPC) for medicinal products, extending the
patent right for a maximum of five years and enabling the holders of both a patent and an
SPC for a medicinal product to enjoy a maximum period of up to 15 years' effective
protection in every Member State from the time the medicinal product in question first
receives marketing authorisation in the EEA.
In 1984 the EU introduced a data exclusivity period. Similar to the US ANDA
provision, generic companies can file an abridged drug approval application. Depending on
the member state, the data exclusivity period ranges from six to ten years after the date that
the drug company receives initial market authorization. In 2005, the EU implemented a new
“8+2 (+1)” exclusivity period that (i) added the Bolar provision which allows companies to

599
See CS Hemphill & MA Lemley, ‘Earning Exclusivity: Generic Drug Incentives & The Hatch-Waxman Act’
(2011) 77 Antitrust L.J. 947, 963–64, available at papers.ssrn.com/sol3/Papers.cfm?abstract_id=1736822.
600
See FTC Generic Drug Study, Introduction (p. i).
601
Ibid., 9.
602
Ibid., 18.
603
Ibid., 13.

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use patented drugs for clinical studies, and (ii) unified the applicable rules across member
states. Specifically, branded drug companies enjoy eight years of data exclusivity that
prevents generic drug companies from seeking an abridged application. They also receive an
additional two years of market exclusivity during which the generic drug company can
request an abridged application but cannot market the drug. Branded companies finally can
sell a drug with exclusivity for an additional year if the drug contributes ‘a significant clinical
benefit’. While the EU offers no 30-month automatic stay, branded drug companies can seek
a preliminary injunction from national courts to block generic entry at least until the court
decides the underlying patent dispute.
Another delay technique that makes the EU drug approval process similar to the U.S.
framework involves national certification processes. Even without injunctions, health
authorities responsible for pricing and reimbursement of medical products can delay generic
entry by demanding that the manufacturer certify that the drug does not infringe any other
patent. Any dispute over this claim delays competition until the generic company resolves
the patent question.
Despite also never instituting an automatic 180-day exclusivity period for the first
generic drug company to challenge a branded patent, delays in the drug approval process at
the EU and national level often provide the first generic entrant a limited duopoly period.
National drug agencies generally have a backlog of cases that alone delays drug approval for
one or two years.
Any delay for the entry of generic drugs in the market produces negative welfare
effects for consumers and the national health systems. According to the European
Commission’s Pharmaceutical sector inquiry in 2009, the price at which generic companies
enter the market is on average, 25% lower than the price of the originator medicines prior to
the loss of exclusivity.604 Furthermore, in markets where generic medicines become available,
average savings to the health system are almost 20% one year after the first generic entry, and
about 25% after two years (EU average). The inquiry showed that because of the strategies of
originators marketing authorisations were granted on average four months later in cases in
which an intervention took place and produced evidence that such practices generated
significant additional revenues on a number of originator products.
The Pharmaceutical Sector Inquiry report published by the European Commission in
2009 analyzed relevant factors affecting generic drug entry. The report found that drug
originators may abuse the different regulatory regimes in order to limit competition by
generics and block their market entry. First, they have developed patent strategies to extend
the breadth and duration of their patent protection, by filing numerous patent applications for
the same medicine (forming the so called ‘patent clusters’ or ‘patent thickets’). Patent clusters
make it more difficult for generic competitors to determine if they could develop a generic
version of the original medicine without infringing one of the many patents of the originator
company and can lead to uncertainty thus affecting the ability of generic competitors to enter
the market. Second, originator companies may fill voluntary ‘divisional patent’ applications,
most prominently before the EPO. These split an (initial) parent application and can extend
the examination period of the patent office, which adds to the legal uncertainty for generic
companies. Third, they may market generic versions of their own drugs, which are typically

604
European Commission, Pharmaceutical Sector Inquiry - Final Report (8 July 2009) para 720 [EU Generic
Report], available at: ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/staff_working_paper_part1.pdf

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marketed before the genuine generic enters the market so as to capture a significant part of
the market share and reduce the incentive of generics to enter the market, a form of
‘evergreening’ (making minor changes to the formulation of the drug in order to prevent the
launch of less expensive generics). Fourth, originators may argue data exclusivity for their
products in order to oppose marketing authorisations for a generic product. Fifth, they may
introduce patent litigation against generics.605 Taking into account that the average duration
of court proceedings in EU Member States is 2.8 years, in some jurisdictions this going up to
6 years, and the higher percentage of opposition procedures in the pharmaceutical sector for
EPO’s patents, the duration of the procedures severely limits the generic companies’ ability
to enter timely the market. In some cases, all these practices may be combined in an
exclusionary strategy. EU generic companies expressed the greatest concern about the cost of
litigation, as they generally cannot afford lengthy and expensive suits. As a closely related
factor, generic companies consider the probability of fully recovering costs sunk in
litigation.606 Generic companies further attempt to assess their exposure to damage claims
asserted by the patent holder, which turn on patent validity and infringement.607
Facing these increasing hurdles, generic companies find rational to conclude
settlement agreements with the originators. Originators have also an incentive to conclude
settlements as they have prevailed in less than the half of cases (75% in the US608), despite
the strong presumption that requires accused infringers to prove patent invalidity by clear and
convincing evidence. Settlements typically limit the ability of the generic company to enter
the market (the generic agrees not to market for part or all of the patent term or not to
challenge the validity of the patent) but a significant proportion of these settlements contains,
in addition to this restriction, a value transfer from the originator company to the generic,
most often a direct payment (‘pay for delay’ or ‘reverse settlements’) or a form of license or a
future supply relationship, as side-deals. Indeed, as it was noted in the Commission’s
Pharmaceutical sector inquiry, between 2000 and 2007, originator companies and generic
companies entered into a large number of agreements concerning the sale/distribution of
generic medicines, one third of which were concluded with generic companies before the
originator company's product lost exclusivity (‘early entry agreements’). These ‘early entry’
agreements contain clauses that provide for a certain type of exclusive relationship between
the contracting parties, their duration typically exceeding the date of loss of exclusivity on
average by more than two years.609 For most of those agreements, the generic products were
the first generic products on the market and, thus, were likely to benefit from certain first
mover advantages.
As an alternative to pay-for-delay deals, the patent holder simply could attempt to
license the underlying technology. Assuming that the costs of patent litigation deter generic
companies from defending against a patent infringement suit, branded companies can secure
substantial licensing fees by exploiting the weakness of competitive restraints on both the
upstream technology market, and potentially on the downstream product market as well.

605
The Commission noted in the Pharmaceutical sector inquiry that the number of patent litigation cases
between originator and generic companies increased by a factor of four between 2000 and 2007.
606
See ibid., para 721.
607
See ibid.
608
Federal Trade Commission, Generic Drug Entry Prior to Patent Expiration: An FTC Study (July
2002), pp 19–20.
609
European Commission, Pharmaceutical Sector Inquiry – Final Report, p 10.

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The incentive structure for generics and originators established by the Hatch-Waxman
Act may encourage the use of litigation, reverse settlements and other early entry agreements.
Indeed, while the originator risks the end of exclusivity and lost profits on sales of the drug,
the first generic to get ANDA benefits from the exclusivity period of 180 days, the prices,
during this period, being on average quite high and dropping even more after the end of the
generic exclusivity period.610 With the pay-for-delay provisions costing the branded
companies far less than the profits they would lose from price competition, while generic
makers gaining far more than they would from competing on the market, both sides benefit
from the settlement to the detriment of the consumers who lose access to lower-priced
generics.611 The amount of these side payments may be significant: for instance, in Cipro, the
originator agreed to make payments which totaled $398 million. The Commission found in its
Pharmaceutical sector inquiry that patent settlements in Europe totaled transfers to generics
of about 200 million Euros from 2000 to 2007. In other words, with these settlements,
originators and generics divide monopoly profits.
Different approaches have been proposed in order to reconcile intellectual property
and competition law in this context.612 One approach would be to examine the scope of the IP
right and determine if the exercise of market power was inside the scope of the patent or
outside. If the alleged infringer would have been able to stay on the market and compete but
for the settlement, then the settlement might enable the patent holder to exercise market
power outside the scope of the patent right, and the reverse settlement will be found unlawful.
If it would not have been possible for the alleged infringer to continue to compete, then it is
unlikely that the settlement would violate competition law. Another approach would be to
focus on the welfare effects of the practice and examine if the proposed settlement generates
‘at least as much surplus for consumers as they would have enjoyed had the settlement not
been reached and the dispute instead (were) resolved through litigation’.613 This approach
would require decision-makers to ‘finely calibrate the likelihood of entry’, based on the
probabilistic strength of the patent litigation.614 Finally, another approach would not find an
infringement of competition law so long as the parties were settling a legitimate IP dispute
and the settlement was within the potential scope of the IP right. Challenges to patent
settlements can go forward only if the infringement suit is ‘objectively baseless’, thus
applying the first prong of the sham litigation test. Some would go even as far as requiring
evidence of both prongs of the vexatious (sham) litigation test and/or the test for fraud to the
patent office/regulatory abuses.
After significant disagreement between the US Circuit Courts of appeal as to the
approach to follow, the Supreme Court in the US has settled on the principles applying to
reverse patent settlements in its FTC v Actavis judgment.615

610
For an analysis, see Federal Trade Commission, Generic Drug Entry Prior to Patent Expiration: An FTC
Study (July 2002).
611
FTC Staff Study, How Drug Company Pays-Offs Cost Consumers Billions (January 2010), available at
http://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf.
612
For further analysis, see, ABA Section of Antitrust Law, Intellectual Property and Antitrust Handbook
(2007), pp 252–270.
613
C Shapiro, ‘Antitrust Limits to Patent Settlements’ (2003) 34 Rand Journal of Economics 391, 395–396.
614
ABA Section of Antitrust Law, supra n 612, 256. On probabilistic patents, see M.A. Lemley & C. Shapiro,
‘Probabilistic Patents’, 19(2) Journal of Economic Perspectives 75-98.
615
FTC v Actavis, 570 U.S. 756 (2013).

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The US approach: FTC v Actavis

Solvay sued Actavis for patent infringement and then settled. Actavis agreed it would not
sell its generic drug until 65 months before Solvay’s patent on AndroGel expired, and that it
would provide other services to Solvay, including promoting the branded drug. In return,
Solvay agreed to pay various sums to three generic companies. The parties described these
sums as payment for services rendered, but the FTC contended that the services had little
value, and that Solvay paid the generic companies not to compete. The FTC brought suit
under § 5 of the FTC Act.
Contrary to the position of various circuit courts and to the dissent, the Court abandoned
the inherency or scope of the patent doctrine and acknowledged that competition law could
kick in, even if concluding settlements forms part, in principle, of the scope of the property
right provided by the patent. The Court found disturbing the essence of a reverse payment,
which pays-off a party ‘with no claim for damages … simply so it will stay away from the
patentee’s market’.616 Justice Breyer attributed the reticence of circuit courts to apply
antitrust law to a practical concern about litigating the validity of a patent ‘to demonstrate
what would have happened to competition in the absence of the settlement’.617 The concern
essentially related to prohibitive administrative costs.
The Court reversed the dismissal of the claim below based on five considerations. First,
the reverse payment examined by the Court potentially could have produced adverse effects
on competition. The amount at issue created a justifiable inference that Solvay sought ‘to
induce the generic challenger to abandon its claim with a share of its monopoly profits that
would otherwise [have been] lost in the competitive market’.618 Second, Solvay could not
justify the alleged anticompetitive consequences. Reasonable explanations could relate to the
fact that the settlement amount roughly approximated the litigation expenses saved from
settling. Or the payment could compensate for legitimate services that the generic company
agreed to perform.619 Third, with legitimate allegations of anticompetitive harm, ‘the patentee
likely possesses the power to bring that harm about in practice’.620 The large size of a reverse
payment suggests substantial market power sufficient to generate anticompetitive effects.
The amount can indicate the ability to charge prices above the competitive level. Patent
protection supports that power. Competitive undertakings lack the profitability to pay
enormous sums to prevent generic companies from entering a market. Fourth, the Court
discounted the administrative burden of evaluating patent strength, since litigating patent
validity was unnecessary to answering the antitrust question. Again, the Court pointed to a
reasonable inference derived from the amount of the reverse payment, namely that ‘the
patentee has serious doubts about the patent’s survival’.621 Presuming a weak patent and
payments well above litigation expenses and services rendered, the Court further could infer
that the most likely justification for the payment related to splitting supra-competitive prices.
Fifth, condemning large reverse payments does not preclude the parties from settling their
patent dispute. They can decide on the date of generic entry without exchanging money.

616
Ibid.
617
Ibid.
618
Ibid.
619
Ibid.
620
Ibid.
621
Ibid.

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The Court found that the five considerations discussed above ‘outweigh the single strong
consideration — the desirability of settlements — that led the Eleventh Circuit to provide
near-automatic antitrust immunity to reverse payment settlements’.622 Interestingly, the
Court lastly noted that ‘[t]he existence and degree of any anticompetitive consequence may
also vary as among industries’.623
The dissent raised several important points. Chief Justice Roberts focused on the
superseding application of patent law, which promotes consumer interests by ‘providing
protection against competition’.624 He considered the relevant question to be ‘whether the
settlement [gave] Solvay monopoly power beyond what the patent already gave it’.625
Antitrust law’s ‘amorphous rule of reason’ had no relevance to deciding that question.626
Justice Roberts considered the nature of reverse payments less disturbing: ‘As in any
settlement, Solvay gave its competitors something of value (money) and, in exchange, its
competitors gave it something of value (dropping their legal claims)’.627 In that sense, the
dissent would defer to the results produced by Coasean bargaining. Due to risk aversion or
other business-related considerations, a branded company may pay large sums to increase
certainty. The payment amount therefore does not eliminate the necessity of actually
determining patent validity before reaching the antitrust question. The dissent presumably
would allow inquiry into the intent of the branded company when settling, though it
anticipated the difficulty of discerning intent in this context.628 The dissent disapproved of the
legal consequences of the majority opinion, in that it ‘may very well discourage generics
from challenging pharmaceutical patents in the first place’.629 Litigating ‘parties are more
likely to settle when they have a broader set of valuable things to trade’.630
The implications of FTC v Actavis have given rise to different interpretations. Cotter has
pointed-out that the majority opinion essentially adopted a rule of per se illegality because
branded companies unlikely will be able to satisfy the rule of reason.631 Carrier has
highlighted several ways to weaken Actavis: Courts could limit the decision to cash
payments, consider the merits of the patent, and construct additional burdens for the
challenging party to satisfy.632 Edlin et al. have argued that evidence of patent strength
‘demonstrates what would have happened to competition in the absence of the settlement’.633
This evidence is relevant to whether the settlement produces anticompetitive effects because
it provides ‘a baseline for identifying the expected amount of competition absent the
settlement, which could then in principle be compared to the terms of the settlement’.634

622
Ibid., 20.
623
Ibid., 20.
624
FTC v Actavis, Inc., 570 U.S. 756 (2013), (Roberts, C.J., dissenting).
625
Ibid.
626
Ibid.
627
Ibid.
628
See ibid. (noting privilege concerns).
629
Ibid.
630
Ibid.
631
See TF Cotter, FTC v. Actavis, Inc.: When is the Rule of Reason Not the Rule of Reason?, Univ. of Minn.
Law School Research Paper No. 13-20, 3 (2013), available at: ssrn.com/abstract=2281291.
632
See MA Carrier, ‘Why A “Large & Unjustified” Payment Threshold Is Not Consistent with Actavis’ [2016]
91 Wash. L.R. 109, available at ssrn.com/abstract=2663668.
633
See A Edlin et al., ‘Activating Actavis’ (2013) 28 Antitrust 16, 19, available at:
papers.ssrn.com/sol3/papers.cfm?abstract_id=2317241.
634
See ibid.

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With a strong patent, the chances that the settlement replicates a competitive result, meaning
the expected outcome of patent litigation, increases.635
In the wake of FTC v. Actavis, challenges to reverse payment settlements have
profligated, in particular after the third circuit court of appeal held in King Drug v. Smithkline
Beecham that other forms of consideration than cash payments may be subject to antitrust
scrutiny636.
Hence, Actavis applies to both cash and non-cash settlements.637 Non-cash conveyances
have the same potential to reduce challenges to invalid or non-infringing patents, and thus
they equally weaken drug markets anti-competitively.638 In fact, some circuits found that non-
cash consideration could produce even greater anticompetitive effects relative to cash
because it often facilitates higher generic prices. The value transferred represents more than
the generic ever could have secured by winning the patent suit.639

With regard to reverse settlements, The CJEU considered the competitive effects of reverse
payment settlements long before the issue became fashionable among academics in the
United States. The Court essentially adopted a rule of reason to evaluate reverse payments.
In Bayer AG, Advocate General Darmon recommended a presumption of incompatibility
with Article 101(1) TFEU because reverse payments could ‘perpetuate a patent granted in
error’, and such agreements lower ‘the chances that a doubtful patent will be revoked’.640
The Advocate General also noted that Article 3 of the then Block Exemption Regulation
2349/84 on patent licensing agreements included reverse payment settlements on a blacklist,
withholding the benefit of an exemption.641 The CJEU decided that no-challenge clauses
comply with Article 101(1) of the EEC Treaty when: (1) the purpose of the agreement is to
settle legal proceedings before a court; (2) the relevant intellectual property ‘is genuinely in
doubt’; (3) the settlement ‘includes no other clauses restricting competition’; and (4) it relates
to the intellectual property right in dispute.642 The Court provided additional guidance by
stating that even if a reverse payment violated Article 101(1), the Commission further should
consider the applicability of Article 101(3), specifically inquiring into whether the clause
‘restrict[s] competition to an appreciable extent’.643

635
See ibid.
636
King Drug of Florence, Inc. v. Smithkline Beecham Corp., 791 F.3d 388, 403-404 (3d Cir. 2015) (in this case
the patent holder granted the generic manufacturer early entry shortly before the expiration of the patent,
agreeing not to launch any authorized generics during that period of exclusivity, as a consideration for agreeing
to settle (“the no-authorized generic agreement”). The Court found that the “no-authorized generic agreement”
“transfers the profits the patentee would have made from its authorized generic to the settling generic – plus
potentially more, in form of higher prices, because they will now be generic monopoly instead of duopoly” (Id.,
405). See also, In re Loestrin, 814 F.3d 538, 549-550 (1st Cir. 2015). These issues may be reviewed by the US
Supreme Court.
637
See M Carrier, The U.S. Court of Appeals for the First Circuit concludes that a reverse payment need not be
in cash (Loestrin), p 1, e-Competitions-N ° 78533 (Mar. 2016), available at www.concurrences.com.
638
See ibid., 4.
639
See ibid., 4..
640
See Case C-65/86 Bayer AG and Maschinenfabrik Hennecke GmbH v Heinz Süllhöfer [1988] ECR 5249,
Opinion of AG Darmon, 187 (7 July 1987).
641
See ibid.
642
See Case C-65/86 Bayer AG v Heinz Süllhöfer [1988] ECR 5249, para 14.
643
See ibid., para 19.

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The Commission’s new Guidelines on Transfer of Technology agreements, adopted in

2014, include for the first time a separate Section on settlement agreements, including also
no-challenge clauses in settlement agreements.

TTBER Guidelines [2014] OJ C89/3 (references omitted)

235. Settlement agreements in the context of technology disputes are, as in many other areas
of commercial disputes, in principle a legitimate way to find a mutually acceptable
compromise to a bona fide legal disagreement. The parties may prefer to discontinue the
dispute or litigation because it proves to be too costly, time-consuming and/or uncertain as
regards its outcome. Settlements can also save courts and/or competent administrative bodies
effort in deciding on the matter and can therefore give rise to welfare enhancing benefits. On
the other hand, it is in the general public interest to remove invalid intellectual property rights
as an unmerited barrier to innovation and economic activity.
236. Licensing, including cross licensing, in the context of settlement agreements is generally
not as such restrictive of competition since it allows the parties to exploit their technologies
after the agreement is concluded. In cases where, in the absence of the licence, it is possible
that the licensee could be excluded from the market, access to the technology at issue for the
licensee by means of a settlement agreement is generally not caught by Article 101(1).
237. However, the individual terms and conditions of settlement agreements may be caught
by Article 101(1). Licensing in the context of settlement agreements is treated in the same
way as other licence agreements. In these cases, it is particularly necessary to assess whether
the parties are potential or actual competitors.

Pay-for-restriction in settlement agreements

238. ‘Pay-for-restriction’ or ‘pay-for-delay’ type settlement agreements often do not involve
the transfer of technology rights, but are based on a value transfer from one party in return for
a limitation on the entry and/or expansion on the market of the other party and may be caught
by Article 101(1).
239. If, however, such a settlement agreement also includes a licensing of the technology
rights concerned by the underlying dispute, and that agreement leads to a delayed or
otherwise limited ability for the licensee to launch the product on any of the markets
concerned, the agreement may be caught by Article 101(1) and would then need to be
assessed in particular in the light of Articles 4(1)(c) and 4(1)(d) of the TTBER. If the parties
to such a settlement agreement are actual or potential competitors and there was a significant
value transfer from the licensor to the licensee, the Commission will be particularly attentive
to the risk of market allocation/market sharing.

Cross licensing in settlement agreements

240. Settlement agreements whereby the parties cross license each other and impose
restrictions on the use of their technologies, including restrictions on the licensing to third
parties, may be caught by Article 101(1) of the Treaty. Where the parties have a significant
degree of market power and the agreement imposes restrictions that clearly go beyond what is
required in order to unblock, the agreement is likely to be caught by Article 101(1) even if it
is likely that a mutual blocking position exists. Article 101(1) is particularly likely to apply

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where the parties share markets or fix reciprocal running royalties that have a significant
impact on market prices.
241. Where under the settlement agreement the parties are entitled to use each other's
technology and the agreement extends to future developments, it is necessary to assess what
is the impact of the agreement on the parties' incentive to innovate. In cases where the parties
have a significant degree of market power the agreement is likely to be caught by Article
101(1) of the Treaty where the agreement prevents the parties from gaining a competitive
lead over each other. Agreements that eliminate or substantially reduce the possibilities of
one party to gain a competitive lead over the other reduce the incentive to innovate and thus
adversely affect an essential part of the competitive process. Such agreements are also
unlikely to satisfy the conditions of Article 101(3). It is particularly unlikely that the
restriction can be considered indispensable within the meaning of the third condition of
Article 101(3). The achievement of the objective of the agreement, namely to ensure that the
parties can continue to exploit their own technology without being blocked by the other party,
does not require that the parties agree to share future innovations. However, the parties are
unlikely to be prevented from gaining a competitive lead over each other where the purpose
of the licence is to allow the parties to develop their respective technologies and where the
licence does not lead them to use the same technological solutions. Such agreements merely
create design freedom by preventing future infringement claims by the other party.

Non-challenge clauses in settlement agreements

242. In the context of a settlement agreement, non-challenge clauses are generally considered
to fall outside Article 101(1) of the Treaty. It is inherent in such agreements that the parties
agree not to challenge ex post the intellectual property rights which were the centre of the
dispute. Indeed, the very purpose of the agreement is to settle existing disputes and/or to
avoid future disputes.
243. However, non-challenge clauses in settlement agreements can under specific
circumstances be anti-competitive and may be caught by Article 101(1) of the Treaty. The
restriction of the freedom to challenge an intellectual property right is not part of the specific
subject-matter of an intellectual property right and may restrict competition. For instance, a
non-challenge clause may infringe Article 101(1) where an intellectual property right was
granted following the provision of incorrect or misleading information. Scrutiny of such
clauses may also be necessary if the licensor, besides licensing the technology rights, induces,
financially or otherwise, the licensee to agree not to challenge the validity of the technology
rights or if the technology rights are a necessary input for the licensee's production.

With regard to ‘pay for delay’ settlement agreements, the Commission distinguishes
between situations in which they just involve a value transfer from one party in return for a
limitation of the entry and/or expansion on the market of the other party, in which case they
‘may be caught by Article 101(1)’, and situations in which the settlement agreement also
includes the licensing of the technology rights concerned by the underlying dispute and the
agreement leads to a delayed or otherwise limited ability for the licensee to launch a product
on any of the markets concerned, in which case, again the agreement ‘may be caught by
Article 101(1)’ and in case this is so, it will be analyzed according to the principles set in
Articles 4(1)(c) and 4(1)(d) of the TTBER, that is, as a hardcore restriction to competition.

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According to the Commission’s Guidelines, no-challenge clauses included in

settlement agreements are an inherent part of settlement agreements and generally regarded
as falling outside Article 101. However, they may be anticompetitive under certain
circumstances. Note that the Commission refers to the ‘specific subject matter’ of the IP right
and finds that a ‘restriction of the freedom to challenge an intellectual property right is not
part of the specific subject-matter of an intellectual property right and may restrict
competition’.644

13.10.2. Reverse patent settlements law in EU and UK competition law

13.10.2.1. The European Commission’s decisional practice

In three reverse payment settlement cases that the Commission considered in 2015, it
appeared to adopt a restrictive view of such agreements, finding that they violated Article 101
TFEU and could restrict competition by object.645
In Lundbeck, the Commission delved into the settlement agreements concluded
between Lundbeck and different generic companies, which agreed to settle or suspend patent
litigation concerning Lundbeck’s process patents, following expiry of the compound patent
covering Lundbeck’s anti-depressant citalopram and the imminent entry in this market of
generics. The process patent gave Lundbeck exclusivity rights on certain, but not all, new
ways of producing citalopram to the extent such patents would be found to be valid and
infringed. Any undertaking using either the original production processes or any production
process not covered by valid Lundbeck process patents could in principle freely enter the
market with generic citalopram, provided of course the product and its production process
met the requisite regulatory requirements. The generics agreed to withdraw their products and
suspend their market access pending resolution of the process patent proceedings. Lundbeck
agreed to make payments to each of the generic companies.
The Commission noted that ‘patent dispute settlements are, in principle, a generally
accepted, legitimate way of ending private disagreements’ and added that ‘[t]hey can also
save courts or competent administrative bodies, such as patent offices, time and effort and
can therefore be in the public interest’. However, the Commission found that the ‘[t]he
agreements in question did not resolve any patent dispute; they rather postponed the issues
raised by potential generic market entry’; they ‘contained no commitment from Lundbeck to
refrain from infringement proceedings if the generic undertaking entered the market with
generic citalopram after expiry of the agreement”; and finally they ‘obtained results for
Lundbeck that Lundbeck could not have achieved by enforcing its process patents before the
national courts’ as they ‘prevented the generic company concerned from selling generic
citalopram, irrespective of whether such citalopram would be produced in infringement of
Lundbeck's process patents’.
The Commission noted that ‘the “right to oppose infringement”’ is a unilateral right
of the patent holder, flowing directly from the intellectual property of which it is the owner’,
adding that this right ‘covers the right to warn other undertakings who risk infringing one's

644
TTBER Guidelines [2014], para 243.
645
See Lundbeck (Case AT.39226) Commission decision of 19 June 2013; Fentanyl (Case AT.39685)
Commission decision of 10 December 2013; Perindopril (Servier) (Case AT.39612) Commission decision of 9
July 2014.

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patent of the existence of such patent and the exclusionary rights it entails’, and also
‘includes, based on the procedural instruments provided for in the applicable national legal
framework, the right to initiate infringement proceedings before national courts, including
requests for interim injunctions to avert imminent market entry and requests for damages to
repair any injury already caused’ (para 599).
The Commission clearly abandoned the scope of the patent doctrine, as it held that
‘[e]ven if the limitations included in a patent settlement agreement remain within the scope of
the patent, that agreement may, under certain circumstances, have to be considered as
contrary to competition law’ (para 603). Indeed, ‘[p]atent settlement agreements are, just like
any other civil law contracts, voluntarily concluded by a meeting of the free will of two or
more parties’ and therefore ‘[s]uch agreements are fully subject to the discipline of
competition law’ (para 600).646 The fact that the restrictions agreed do go beyond the
substantive scope of the patent, in the sense that the same restrictions could not have been
obtained by the patentee's right to oppose possible infringement before the court, remained
however relevant when the Commission examined the nature of the restriction of competition
(para 642).
The Commission found immaterial, with regard to in-scope limitations obtained
through transfers of value, that the patent holder might (or might not) have obtained the same
result by seeking an infringement ruling from a court, and rejected the idea that the patent
owner should be ‘free to achieve that same potential result in any other manner conceivable’
(para 603). Actually, ‘[t]he means used by patent holders to defend their rights matter’’ (para
641, emphasis added). The Commission noted that potential competition may also affected by
these agreements:
‘By paying the generic undertaking to give up its competitive challenge, the originator
undertaking obtains certainty that the generic undertaking will not enter the market for
the period of the agreement, and, because the generic undertaking will no longer have
the incentive to try to enter or litigate given that it cannot sell, there is a high
probability that the generic undertaking will not seek a ruling of non-infringement or
a ruling of invalidity of the invoked patent, even without any non-challenge clause in
the agreement. From the perspective of the originator undertaking, it is the uncertainty
of possible generic market entry, including through patent litigation, which reflects
potential competition. This potential competition is eliminated through the transfer of
value and transformed into the certainty of no competition. This is in particular the
case when the amount of the value transfer matches the profit that the generic
producer would have made if it had entered the market.
If the exclusion agreed in a patent settlement agreement covers not just the allegedly
infringing process used by the generic undertaking at that point in time, but extends to
future processes which may not even exist yet and which may or may not be covered
by the patent holder's patents, then it becomes all the more clear that the generic
undertaking's willingness to give up its efforts to seek market entry was not based on
any analysis of possible patent infringement but on the financial incentives offered by
the originator undertaking’. (paras 604–605).

646
The Commission remarked that such approach was consistent with that adopted with regard to no challenge
clauses and/or delimitation agreements for trademarks.

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That led the Commission to examine if the generics were a source of potential
competition for Lundbeck. While the TTBER Guidelines focus on the possible rise of
‘blocking positions’ and consider that, in case such blocking position exist, the blocked party
will not be deemed to constitute a source of potential competition on a relevant market647, the
Commission took a different approach in Lundbeck, as well as the other pay for delay cases,
in view of the fact that there was no ultimate decision on the validity of the relevant patents.
The Commission relied on the AstraZeneca judgment of the CJEU, which held that in the
pharmaceutical sector potential competition on the compound can and is likely to exist
already well before the expiry of a basic patent, even if process patents may still be in
force.648 Indeed, for the Commission,
‘[w]hen an originator undertaking issues allegations of infringement of process
patents against a generic undertaking, this normally provides a solid indication that
there is potential competition, in particular if the generic undertaking has already sunk
considerable resources and time into the development or marketing of the generic
product to which the dispute relates. The absence of a marketing authorisation does
not mean that the product is not capable of reaching the market in the near future, as
long as the generic undertaking was pursuing its efforts to obtain regulatory approval
before it entered into an agreement with the originator undertaking. It then examined
if the agreement had the potential to restrict competition by its very nature and
constitute an object restriction. Taking into account the legal and economic context of
the agreement, the content of the agreement and each party’s subjective intention, the
Commission found that the generic undertaking and the originator undertaking were
at least potential competitors, that the generic undertaking committed itself in the
agreement to limit, for the duration of the agreement, its independent efforts to enter
the market with generic product, and that the agreement was related to a transfer of
value from the originator undertaking which substantially reduced the incentives of
the generic undertaking to independently pursue its efforts to enter one or more
markets with generic product’ (para 620).
This different approach than the TTBER Guidelines for defining the existence of a situation
of potential competition is justified by the specificities of the pharmaceutical sector, where
‘patent challenges are an essential part of the competitive process between generic companies
seeking market entry for compounds that are no longer patent-protected and originator
companies that invoke process patents or other process patents against such market entry’
(para 626). Quite interestingly, the Commission also referred to internal documents and
assessments by Lundbeck, which viewed generics as a source of potential competition (para
627). In any case, the Commission noted that such blocking situation did not exist in this
case, as Lundbeck’s process patents were not capable of blocking all possible routes to the
market (para 634).
The Commission then moved to explore the existence of a restriction of competition
that would infringe Article 101 TFEU. It found problematic the clauses prohibiting further
challenge of Lundbeck’s patents and provisions that prohibited further infringements of
Lundbeck’s patents. It did not deny that even patent settlements which limit the commercial
freedom of one of the parties do not necessarily infringe Article 101 TFEU, provided that

647
TTBER Guidelines, para 29.
648
Case C-457/10 P AstraZeneca v Commission [2012] ECLI:EU:C:2012:770, para 108

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‘such an agreement does not come about or is induced by elements extraneous to the issue of
the likely validity and infringement of the patent in question’ (para 638). It also held that it is
not ‘necessarily the case that all patent settlements that contain payments of some kind would
be problematic under Union competition law’, as payments ‘may, in specific legal and
commercial circumstances, be instrumental to the finding of an acceptable and legitimate
solution for both parties’; Indeed, such is the case
‘in particular but not exclusively in cases where, for example, the generic undertaking
had already entered the market and if each party in the course of litigation comes to
consider that the likelihood of patent validity and infringement is high, a patent
settlement may legitimately include not only a withdrawal from the market of the
generic product but also a payment from the generic undertaking to the originator
undertaking to settle the damage suffered by the latter. Likewise, a patent settlement
could include a payment from the originator undertaking to the generic undertaking if
originally, through legal threats or court action of the originator undertaking, the
generic undertaking had refrained from entering the market and both parties come to
consider later on, for instance in the course of on-going litigation, that there is in fact
a high likelihood either that the patent is invalid or that it is not infringed. If in that
case a patent settlement is concluded that allows for immediate market entry by a
generic undertaking, such a settlement could legitimately include a payment by the
originator company compensating the damage suffered by the generic company’ (para
639).
However, the situation is different ‘when the generic undertaking accepts to exit or not to
enter the market for a certain period of time (in which case one would expect, if anything, a
payment by the generic undertaking to compensate the originator undertaking for any
damages it may have suffered) but instead the originator undertaking pays a considerable sum
of money to the generic undertaking’ (para 640). Indeed, ‘a payment from an originator
company to a generic company in the context of an agreement that prevents the generic
company from entering the market is a clear warning signal that merits further examination’
(para 702).
The fact that an agreement may also have had other, entirely legitimate objectives
does not bar the possibility of finding a restriction by object (para 653). In its characterization
of the agreement as an object restriction to competition, the Commission found ‘decisive’ the
fact that those limitations to the potential competition by generics ‘were paid for by the
originator undertaking’ (para 660). Other important factors were also taken into account, in
particular the fact that ‘the value which Lundbeck transferred the turnover or the profit the
generic undertaking expected if it had successfully entered the market; the fact that Lundbeck
could not have obtained the limitations on entry through enforcement of its process patents,
the obligations on the generic undertaking in the agreement going beyond the rights granted
to holders of process patents; and ‘the fact that the agreement contained no commitment from
Lundbeck to refrain from infringement proceedings if the generic undertaking entered the
market with generic citalopram after expiry of the agreement’ (para 662).
Ultimately, the Commission rejected the arguments of the parties as to the existence
of possible justifications under Article 101(3) TFEU, for instance, avoided litigations costs
and improved distribution of Lundbeck's own products through distribution agreements with
two of the generic undertakings, as the parties failed to sufficiently substantiate the alleged
efficiency gains and, in particular, to show that the restrictions on the generic undertakings

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imposed by the agreements were necessary to the attainment of any such efficiency gains and
that they outweighed the disadvantages for consumers of the restrictions in the agreements.
The Commission imposed fines totalling €146 million. The decision was confirmed by the
General Court (see Section 13.10.2.2.)
In Fentanyl, the Commission adopted a similar approach to a ‘co-promotion
agreement’ according to which Sandoz, a Novartis subsidiary, agreed to refrain to enter the
market with a generic version of the fentanyl patch product for pain relief produced by
Johnson & Johnson and agreed to promote Johnson & Johnson’s original product and to keep
its own product out of the market in exchange of significant monthly payments by Johnson &
Johnson.649
In Perindopril the European Commission imposed fines totalling €427.7 million on
the French pharmaceutical company Servier and five producers of generic medicines for
concluding a series of deals all aimed at protecting Servier's blockbuster blood pressure
control medicine, perindopril, from price competition by generics in the EU. Servier's patent
for the perindopril molecule expired, for the most part, in 2003 and generic companies sought
access to patent-free products or challenged Servier's process-type patents that they believed
were unduly blocking them. In its effort to block entry by generics to its best-selling drug
market, Servier reacted by acquiring the most advanced non-protected technology with the
purpose to ‘strengthen its defense’ without however implementing that technology, and
concluded settlement agreements, every time a generic challenged its patents, thus stopping a
number of generic projects or delaying generic entry. Some of these settlements included an
‘agreement on joint activity to control the market’, which provided in some cases the generic
company the right to market either its own or an authorized generic of Servier’s product in
case another generic company entered the market.
The Commission held that patent settlement agreements can be restrictions of
competition by object, noting that the generics were perceived as a source of competitive
pressure by Servier, this pressure being “obviously stronger after the expiry of the compound
patent, even if the originator company still enjoy[ed] some protection by a number of other
[p]atents’ (para 1129). Accordingly, it becomes crucial to protect the ability of generics to
challenge the patents of the originators, patent challenges being an ‘essential, and at times
unavoidable, part of the competitive process’, in particular in view of the fact that, as the
Commission highlighted in its 2009 sector inquiry, ‘generic companies won 62% of all patent
litigation cases that resulted in a ruling’. Indeed, ‘[i]n such a situation, competition – actual or
potential – from generic undertakings trying to enter the market by inventing around the
outstanding process and other patents, having to defend themselves against alleged
infringement, seeking declarations of non-infringement or trying to invalidate process patents
or other patents still held by the originator undertaking, or indeed by generic entry at risk, is
the essence of competition in this sector’ (para 1131).
The Commission found that ‘[p]reventing patent challenges, whether in the form of
pre-litigation disputes, court litigation, or opposition procedures may therefore seriously
impact the competitive process as they are frequently the very expression of competition to
enter the market with a cheaper, generic product’ (para 1132). Furthermore, depending on the
specific circumstances of the case, ‘a patent settlement agreement by which a generic

649
Fentanyl Case AT.39.685 Commission decision of 10 December2013 (summary decision) [2015] OJ C
142/21.

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company accepts restrictions on its ability and incentives to compete in return for a value
transfer (either in the form of significant sums of money or another significant inducement)
can be a restriction of competition by object contrary to Article 101 of the Treaty’, as it
affects generic companies' incentives to compete (para 1134). While the Commission
recognizes that certain limitations on the commercial behaviour of the generic undertaking
agreed as a result of the settlement of a patent dispute, are acceptable, because ‘they directly
and exclusively result from the strength of the patent litigation case, as perceived by each
party and are not the result of an additional transfer of value from the originator to the
generic’, inducements to generics to enter settlement agreement, either through payment or
through other means, were found suspect from a competition law perspective, in particular as
the generic parties' incentives to independently compete have been affected by elements
extraneous to the dispute/litigation and the merits of their patent case (paras 1136–1137).
Interestingly, the Commission referred to the Irish Beef case, as an analogous situation, where
the CJEU concluded that exclusionary payments, were a restriction by object. Consequently,
the Commission held that ‘[i]n essence, settlement agreements rewarding a competitor for
staying out of the market distinctly pursue the object to restrict competition’ (1141).
Nonetheless, the Commission did not only analyse the legal context of the agreement, but
also explored the economic context of this type of agreement (as opposed to the economic
context of this specific agreement conclude by Servier), as it is usually the case for
restrictions of competition by object (paras 1145–1153).
As in Lundbeck the Commission found that the ‘scope-of-the-patent’ test is ‘not
supported’ by the case law of the CJEU and, ‘in addition, is ill-suited’ (para 1193). Its
assessment focused on (i) the contractual limitations usually imposed on the generic company
as a patent challenger (typically in the form of non-challenge and non-compete obligations)
and (ii) on the ‘reverse payment’ which may be in the form of an actual financial payment or
another inducement (through a value transfer) from the originator (the patent holder) to the
generic company (para 1184). With regard to contractual restrictions on the generic
undertaking, the Commission examined if these in fact go beyond the scope of the patents at
issue and the related dispute/litigation, that is, what the patent holder would have legally
obtained through successful enforcement of its patents in court had the patent been litigated.
These ‘side-deals’/inducements may take different forms (para 1190). Some of them may be
more suspect, from a competition law perspective, than others. For instance, ‘a value transfer
which broadly corresponded to the profits associated with generic company's entry would in
itself be an indication that it constituted a significant inducement, and affected the generic
companies' incentives to accept the settlement terms’. However, the Commission takes scare
not to establish a safe harbour for value transfers inferior to the expected profits (para 1191).
The Commission characterizes its approach to object restrictions as ‘hybrid’650, noting
that its test ‘is not akin to an automatic prohibition rule depending on the existence of any
value transfer […] but examines, on a case by case basis, the entire agreement and the
relationship between the parties, in their legal and economic context’ (par 1195). The
counterfactual to eliminating a potential competitor by a settlement, ‘is not that the patent
would be invalidated’, but ‘that the competitive process consisting also in genuine patent
challenges by potential competitors (as well as their legitimate interest in settling) would
remain undistorted by inducements affecting the generic companies' incentives to compete’

650
See our analysis, Chapter XX.

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Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

(para 1197). Furthermore, in order to ensure that the decision is fundamental rights-proof, in
particular with Article 47 of the Charter of Fundamental Rights of the EU and Article 6(1) of
the ECHR, the Commission noted that ‘not all settlements with value transfer constitute a
restriction by object, only those with a significant inducement which substantially reduced
the incentives of the generic undertaking to independently pursue its efforts to enter one or
more EU markets with a generic product instead of competing’ (para 1200).
It is noteworthy that, contrary to its approach in Servier, the Commission did not only
examine the specific conduct as a restriction of competition by object, but also proceeded to
complement its assessment by an additional analysis of the conduct’s likely anticompetitive
effects, which ‘must be established with a sufficient degree of probability’ (paras 1212–
1269). This qualification was viewed as an alternative to the object restrictions qualification.
The effects analysis delved into (i) Servier’s position on the market, the important question
being if Servier enjoys market power (ii) the structure of the market for perindopril at the
time the settlement agreements were concluded and identify the remaining scope for
competition, (iii) the existence of potential competition between Servier and the generics and
the likely (not actual) anticompetitive effects of the agreement, (iv) the counterfactual
(competition that would have existed in the absence of the restrictive clauses). The
Commission assessed the likely restrictive effects from an ex ante perspective, on the basis of
the facts at the time of the settlement, while also taking into account how the agreement was
actually implemented (para 1220).
Servier had also concluded an agreement with a generic producer acquiring
alternative technology used for the production of perindopril under an Assignment and
License Agreement (ALA). The Commission found that ‘[t]he acquisition occurred under
specific market circumstances in which there were only very scarce alternative sources of
potentially viable […] technology independent of Servier at the time of the acquisition’, and
that such transfer to an incumbent still holding a monopoly for perindropil sales in some
markets entails an immediate one-off distortion of competition within the meaning of Article
101(1) TFEU (para 1772). In order to assess the ALA, and the ‘considerable’ payment to the
generics (of an amount of €30 million), the Commission examined the inherent value of the
transferred technology from the parties' perspective needs, finding ‘a wide gap between the
high sum Servier paid for the two patent applications, and the actual, or expected, benefits
from the acquired technology which were, at best, moderate, if any at all’ (para 1795). The
objectives of both parties were also explored. The Commission concluded that the object of
the ALA was to share markets, that it led to the emergence of ‘a de facto duopoly’ in several
Member States, and that for these reasons it constituted a by object restriction to competition
(para 1810). Nonetheless, it also examined, as for settlement agreements, the existence of
restrictive effects to competition. No justification for the various clauses of the settlement
agreements was accepted by the Commission.
The characterization of the agreements in question as object restrictions to
competition has been contested by the parties in subsequent appeals651, the recent judgemtn
of the General Court in Lundbeck confirming the Commission’s approach.
In addition to an Article 101 TFEU infringement, the Commission also found that
Servier abused its dominant position on two relevant product markets: the market for the final

651
Case T-472/13 Lundbeck v Commission (pending) and Case T-691/14 Servier and Others v Commission
(pending).

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product of perindropil and an upstream market for the active pharmaceutical ingredient (API)
technology for perindropil. The Commission referred to the ATC classification, which
provides ‘the broadest possible universe in which potential substitutes may be present’ (para
2438), finding that perindropil belonged to the category of anti-hypertension drugs, but did
not include in this relevant market other drugs, such as Ramipril or cilazapril, with formed
part of the same group, for a number of reasons. First, although medical guidelines offered an
algorithm for initiating hypertension treatments, the ultimate therapeutic choice was in the
hands of the prescribing doctor who was to select the treatment that would best suit the
patient's profile. Second, Servier has been able to differentiate perindropil from its potential
competitors. Third, there was limiting switching to other drugs, in particular in view of the
lock-in effects, as patients whose treatment was successful continued their therapies for long
periods of time. The Commission also took into account the perception of the producers of
allegedly competing products, which generally did not consider themselves as immediate
competitors to Servier's perindopril. Fourth, there was evidence that the majority of
individual prescribers considered perindopril to be a preferred first or second line treatment
for essential (primary) hypertension, all factors contributing to the impression that ‘once the
perindopril treatment proved to be successful for a given patient, that patient was unlikely to
be switched away to other treatments for a prolonged period of time’ (para 2401). The so
called ‘doctors' inertia’ limited patterns of switching from perindropil to other drugs in view
of the large base of continued-use patients from which it benefitted and the natural tendency
of doctors to prescribe new patients with the medicines which have shown to be good for
their previous patients. Fifth, the Commission relied on econometric studies that did not
reveal any significant price constraints from other anti-hypertension drugs, and pointed to the
strong price constraint introduced on the Servier's market position by perindopril's own
generics.
The Commission made a direct finding of the dominance of Servier in view of the
substantial economic rents from which it benefitted on the perindropil market. With regard to
the API technology, the Commission noted that dominance ‘can be manifested in the
technology market itself (eg by having the power to determine the terms of licensing to an
appreciable extent independently of other possible licensors) or with respect to the output
markets for products incorporating the technology (para 2668). Servier was found dominant
in this market as well.
Moving to the analysis of the abusive conduct of Servier, in particular its strategy to
protect its perindopril market position against generic entry, the Commission stressed the
following:
‘[s]uch a strategy is generally legitimate to the extent it resorts to measures
representing competition on the merits (competition on product quality, strength of
the patented technologies and similar). Consequently, Servier can have a strategy to
protect its commercial interests without infringing Article 102 of the Treaty, which
may particularly include the strategic use of IPRs and the patent system. However, the
implementation of a narrower strategy to use certain measures, which, in the context
of Servier's special responsibility as a dominant undertaking, deviate from
competition on the merits and are capable of producing foreclosure effects will not be
immune to antitrust scrutiny merely because the goals it seeks to achieve could also
be achieved by legitimate means’ (para 2766).

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The Commission highlighted elements of the strategy implementing the overall

anticompetitive objective, including the exclusionary buying out of close competitive threats,
which combined a technology acquisition and five consecutive settlement agreements that
served principally to remove close sources of competition, forming ‘a single and continuous
exclusionary strategy’ (para 2774), the various elements being complementary. Servier’s
generic competitors were also found to be aware of this exclusionary strategy.
Referring to the Tetra Pak I 652 and AstraZeneca653 precedents, the Commission took
into consideration three elements for the purpose of assessing whether the technology
acquisition in the present case deviates from competition on the merits and, consequently, is
capable of producing foreclosure effects contributing to an overall single infringement of
Article 102 of the Treaty. These are listed in paragraph 2800 of the decision:
‘- whether the technology that Servier purchased was potentially enabling and thus a
source of competition to Servier, i.e. whether it was sufficiently advanced (as opposed
to merely embryonic and distant from possible commercial exploitation by the extent
of the development work still needed), and had the potential to overcome barriers to
entry;
- whether the purchased technology was effectively removed from the market as a
potentially enabling source of competition, i.e. whether the transferor remained free to
use and/or license the technology or parts thereof and whether the transferee was
willing and able to license it out on terms that would be attractive to competitors; and
-whether the acquisition was ‘capable of making more difficult, or impossible the
entry’ and thus to significantly delay generic competitors trying to enter the
perindopril market, namely to what extent the purchased technology was necessary
for timely entry, and, conversely, to what extent there existed alternative technologies
capable of offsetting the loss of one source of technology (in particular, whether such
alternative sources of API technology were scarce or inferior in quality)’.
The Commission found problematic that through this conduct Servier was able to remove a
source of technology which was the only alternative means of competing effectively, at the
relevant time (para 2809). In the absence of an objective justification for this conduct
outweighing the anticompetitive effects, the Commission found that ‘unlike many other
technology acquisitions’ this one ‘deviated from competition on the merits in that it
consisted, as part of a broader strategy to eliminate competitive threats, in the acquisition by a
dominant undertaking of scarce potentially viable technology liable to enable early entry by
interested generic companies, which it acknowledged did not infringe its patents and with the
stated purpose of strengthening the defence mechanism for these patents, and its branded
product’, thus constituting an infringement of Article 102 TFEU (para 2917). The
Commission took care to note the specific circumstances of the case, as the technology
acquisition formed part of an exclusionary strategy and contributed to the foreclosure effect,
stressing that this finding should not be construed as a general prohibition of technology
acquisitions by dominant undertakings.
It then moved to analyse if the five reverse payment patent settlements that Servier
had concluded with its generics competitors constituted an abuse of a dominant position,

652
Tetra Pak I (BTG license) (Case IV/31.043) Commission Decision 88/501/EEC [1988] OJ L 272 /27; Case
T-83/91 Tetra Pak International SA v Commission [1994] ECR II-755.
653
Case T-321/05 AstraZeneca AB and AstraZeneca plc v Commission [2010] ECR II-2805, para 359; Case C-
457/10 P AstraZeneca AB and AsttraZeneca plc v Commission [2012] ECLI:EU:C:2012:770, para 110.

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noting that where an agreement has been concluded between two undertakings, both Articles
101 and 102 of the Treaty may be applicable and may be applied concurrently. The EU case
law is however clear on the principle that the Commission cannot simply recycle its findings
under Article 101 of the Treaty in order to find an infringement of Article 102 of the
Treaty.654 The Commission examined the ‘unilateral aspects’ of Servier's conclusion of five
settlement agreements with its generic competitors, which it defined as referring to the
inducement of generic companies to enter into a series of patent settlements which were
capable of delaying generic entry (para 2926). This inducement presented a distinct unilateral
aspect than the patent settlement agreements themselves, and for this reason presented an ‘an
additional element’ to the Article 101 TFEU infringement. The ‘unilateral’ dimension of
Servier’s conduct was in particular supported by the fact that all the settlement agreements
were part of Servier’s unilateral strategy to protect its product from generic entry, the fact
that Servier was the counterparty in all the agreements and thus ‘at the centre of contractual
relationships’ (para 2934), the fact that it used its market power to induce generic companies
to enter into reverse payment patent settlement agreements by paying the generics and the
fact that the ‘chain of agreements was likely to have a cumulative and self-reinforcing effect,
which was stronger than that of each agreement taken individually and sought to maximise
the potential of perpetuating Servier's monopoly on the perindopril market’ (para 2933). This
is a particularly interesting paragraph, in view of the distinction we elaborated in Chapter 4
between unilateral and collusive conduct.
Remaining unconvinced by the objective justifications put forward by the parties, the
Commission concluded that Servier's API technology acquisition and reverse payment patent
settlements formed part of a single and continuous exclusionary strategy to buy out potential
sources of generic competition as a part of its broader anti-generic strategy. This finding was
based on (i) the existence of an exclusionary strategy by Servier within its overall strategy to
confront generic entry, characterised by a consistent course of conduct targeting most of the
generic threats, (ii) the high degree of centralisation which characterised the abusive
behaviour, (iii) the fact that the technology acquisition and patent settlements followed a
common method of excluding competition and were complementary, (iv) as well as the fact
that they occurred in a consistent sequence of time, and covered a broad range of potential
sources of competition.
The finding of a single and continuous strategy led the Commission to analyse, not
only its individual effects, but also its combined effects. In view of the largely overlapping
timeline, the Commission found impossible to disentangle the effects and apportion them to
individual practices. According to the Commission, it is sufficient that ‘the effects of all of
the subsequent patent settlements were, from an ex ante perspective, capable of having long
lasting effects’ (para 2973), without the need to look to actual effects by exploring, for
instance the possibility that the patents could have been successfully enforced. The
Commission concluded that ‘the cumulative nature of the foreclosure effects’ resulted from

654
The Commission referred to Case T-65/98 Van den Bergh Foods Ltd v Commission [2003] ECR II-4653,
where the additional element was also the inducement of retailers in the form of an offer to supply freezer
cabinets and to maintain them for free in circumstances in which, for the purposes of stocking impulse ice
cream, the said retailers did not have their own freezer cabinets or a freezer cabinet made available by another
competing ice-cream supplier. See the analysis by I Lianos, ‘Categorical Thinking in Competition Law and the
“Effects-based” Approach in Article 82’ in A Ezrachi (ed.) Article 82EC: Reflections on its recent Evolution
(Hart Pub. Oxford, 2009) 19.

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the implementation of the anti-generic strategy ‘as a single and continuous infringement of
Article 102 of the Treaty’ (para 2997).

13.10.2.2. The General Court’s judgment in Lundbeck

In its recent judgment in Lundbeck the General Court largely confirmed the approach
chosen by the Commission in reverse payment settlement cases. The facts of this case and the
contents of the Commission’s decision have been presented in the previous Section, hence we
focus on the relevant paragraphs of the Court’s judgment.

Case T-472/13, H. Lundbeck A/S and Lundbeck Ltd v European Commission,

ECLI:EU:T:2016:449

The Commission’s finding the generics were potential competitors to Lundbeck (and
thus the agreement could be qualified as an agreement between competitors) was contested
by the appellants who argued that such qualification presupposes the existence of real
concrete possibilities of entering the market in the absence of the agreement, which they
thought the Commission had not sufficiently proven. The GC rejected this argument (paras
100-112)655.
The General Court also affirmed the applicability of Article 101 TFEU to intellectual
property rights, explicitly rejecting the scope of the patent approach in EU competition law,
noting the probabilistic nature of the patents in question.

Probabilistic patents

121. Whilst patents are indeed presumed valid until they are expressly revoked or invalidated
by a competent authority or court, that presumption of validity cannot be equated with a
presumption of illegality of generic products validly placed on the market which the patent
holder deems to be infringing the patent.
122. As the Commission rightly points out, without this being called into question by the
applicants, in the present case it was for the applicants to prove before the national courts, in
the event that generics entered the market, that those generics infringed one of their process
patents, since an ‘at risk’ entry is not unlawful in itself. Moreover, in the context of an
infringement action brought by Lundbeck against the generic undertakings, those
undertakings could have contested the validity of the patent on which Lundbeck relied by
raising a counter-claim. Such claims occur frequently in patent litigation and lead, in
numerous cases, to a declaration of invalidity of the process patent relied on by the patent
holder […]. Thus, it can be seen from the evidence […] that Lundbeck itself estimated the
probability that its crystallisation patent would be held invalid at 50 to 60%.

The GC indeed noted:

655
The discussion of the GC’s approach to potential competition and the burden of proof in this case was
discussed in Chapter 5 (XXX).

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125. It is indeed possible that, in certain cases, the applicants might have been successful
before the competent courts and obtained injunctions or damages against the generic
undertakings. However, it can be seen from the evidence in the contested decision as regards
each of the generic undertakings that that possibility was not perceived at the time as a
sufficiently credible threat to them. […]
126. In addition, it was not at all certain that the applicants would have actually initiated
litigation in the event that generics entered the market. The contested decision indeed
acknowledges that the applicants had put in place a general strategy consisting in threatening
infringement actions or bringing such actions on the basis of their process patents.
Nevertheless, any decision to bring an action depended on the applicants’ assessment of the
probability that an action would be successful and that a marketed generic product would be
held to be infringing. […]
127. Lastly, it must be observed that, in the present case, Lundbeck’s original patents had
already expired when the agreements at issue were concluded, and that the crystallisation
patent had not yet been definitively granted in the United Kingdom […] [when the
settlement] agreement were concluded. The grant of interim measures in favour of Lundbeck
in the United Kingdom against Merck (GUK) and Arrow would therefore have been, if not
impossible, at the very least unlikely in the event that those undertakings entered the United
Kingdom market before that patent was granted. Consequently, it is unlikely that Lundbeck
could have obtained injunctions against all of the generic undertakings, even if it had
systematically brought actions against them. Likewise, the iodo patent was not granted until
26 March 2003.

Generics as potential competitors

The GC remarked that the generic undertakings had several routes to enter the market at the
time the agreements at issue were concluded and that such ‘real concrete’ possibilities of
entry represented the expression of potential competition. Indeed, Lundbeck’s original
patents had expired and there were other processes allowing the production of generic
citalopram that had not been found to infringe other Lundbeck patents. Added to that the
generics’ producers had taken steps and proceeded to investments in order to enter the
market before concluding the agreement with Lundbeck and some of them had even entered
the market. The General Court noted:

131. The case-law requires only that it be demonstrated that the generic undertakings had real
concrete possibilities and the capacity to enter the market, which is certainly the case when
those undertakings had made significant investments in order to enter the market and when
they had already obtained MAs or had taken the necessary steps to obtain them within a
reasonable period. In that respect, it must be borne in mind that some of them even entered
the market, at their own risk, before or after the conclusion of the agreements at issue. […]
To accept the applicants’ argument would amount to accepting that such an effective entry to
the market does not constitute the expression of potential competition, simply because the
applicants were convinced of the unlawful nature of that entry and they could potentially
have tried to prevent it by relying on their process patents in infringement actions. […]

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The appellants argued that challenging a valid patent does not constitute a real concrete
possibility of entering the market. This argument was rejected by the General Court, which
repeated that the Commission had taken a number of factors into account, and not just the
challenge of the validity of the patent.

160. The case-law indeed indicates that the purely theoretical possibility of market entry is
not sufficient to establish the existence of potential competition and that the Commission
must demonstrate, by factual evidence or an analysis of the structures of the relevant market,
that the market entry could have taken place sufficiently quickly for the threat of a potential
entry to influence the conduct of the participants in the market, on the basis of costs which
would have been economically viable.
161. It does not appear, however, that the Commission disregarded that case-law in the
present case, since the analysis of the pharmaceutical sector carried out by the Commission in
the contested decision, as well as the particular situation of each generic undertaking at the
time the agreements at issue were concluded (paragraph 129 above), adequately demonstrate
that the entry of those generic undertakings to the citalopram market was not a mere
theoretical possibility, but that they had real concrete possibilities in that respect […]
Moreover, it would be surprising if an undertaking as experienced as Lundbeck would have
decided to pay several million euros to the generic undertakings in exchange for their
commitment not to enter the market during a certain period if the possibility that those
generic undertakings could enter the market was purely theoretical.

The GC distinguished the facts of the case from those in European Night Services and
Others656 v Commission, where the GC had referred to the existence of exclusive rights
precluding, de jure or de facto, in most Member States, the existence of potential competition,
noting that Lundbeck’s process patents were “in no way comparable to the exclusive rights
enjoyed by railway undertakings” and there were “significant differences between the
markets concerned”. The General Court did not explain in detail in what sense the IP rights
were not comparable to the exclusive rights, but one may understand that this distinction may
have been influenced by the GC’s view of patents as probabilistic, which manifestly was not
the case of the exclusive rights in ENS (para. 162). The GC further noted that

163. […] [I]n order to establish the existence of potential competition, the case-law requires
only that the entry to the market take place within a reasonable period, without fixing a
specific limit in that respect. The Commission therefore does not need to demonstrate with
certainty that the entry of the generic undertakings to the market would have taken place
before the expiry of the agreements at issue in order to be able to establish the existence of
potential competition in the present case, particularly since, as the Court of Justice has
already held, potential competition may be exerted long before the expiry of a patent (see, to
that effect, judgment of 6 December 2012 in AstraZeneca v Commission, C-457/10 P, ECR,
EU:C:2012:770, paragraph 108).
164. In that respect, it should be noted that the remark of the Court of Justice concerning the
fact that potential competition may be exerted before the expiry of a patent is independent of

656
Joined cases T-374/94, T-375/94, T-384/94 and T-388/94, European Night Services and Others v
Commission, EU:T:1998:198.

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the fact that the SPCs at issue in that judgment had been obtained fraudulently or irregularly.
The case that gave rise to the judgment in AstraZeneca v Commission, cited in paragraph 163
above (EU:C:2012:770, paragraph 108) concerned, inter alia, an abuse of a dominant position
committed by an undertaking which had submitted misleading representations in order to
obtain, from the competent national authorities, SPCs allowing it to prevent the entry to the
market of generic versions of its medicinal product, even after the future expiry of the patents
protecting that product. In that context, the Court of Justice considered, in essence, that the
anticompetitive character of those representations was not called into question by the fact that
those SPCs had been requested between five and six years before their entry into force and
that, until that time, the appellants’ rights had been protected by regular patents. According to
the Court of Justice, not only did such unlawful SPCs lead to a significant exclusionary effect
after the expiry of the basic patents, but they were also liable to alter the structure of the
market by adversely affecting potential competition even before that expiry. Accordingly,
that case-law confirms that potential competition already exists before the expiry of patents
protecting a medicinal product and that the steps taken before that expiry are relevant in
assessing whether that competition was restricted.

The GC rejected the argument of the appellants that the Commission should have
demonstrated that the generic undertakings would have brought legal proceedings and that
they would have been successful before the competent national court, noting that the generic
undertakings were not required to demonstrate that their generic products did not infringe
any patent in order to obtain an Market Authorization and sell their products in the market,
the burden of proof being on the patent holder claiming infringement of the patent. (para.
165)

Having found that there was potential competition between Lundbeck and the generics, the
GC proceeded to the analysis of the existence of a restriction of competition under Article
101(1) TFEU, and in particular the characterization of the agreements as by object
restrictive of competition.

Characterization of reverse payment settlements as a restriction by object

The part of the judgment dealing with the interpretation of what is meant by a restriction of
competition by object has been included in Chapter 5657. What follows are the parts of the
judgment implementing these principles to the present case and to reverse payment
settlements.

352. […] [W] here a reverse payment is combined with an exclusion of competitors from the
market or a limitation of the incentives to seek market entry, the Commission rightly took the
view that it was possible to consider that such a limitation did not arise exclusively from the
parties’ assessments of the strength of the patents but rather was obtained by means of that
payment […]
353. The size of a reverse payment may constitute an indicator of the strength or weakness of
a patent, as perceived by the parties to the agreements at the time they were concluded, and of

657
See our analysis in XXX.

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the fact that originator undertaking was not initially convinced of its chances of succeeding in
the event of litigation. Similarly, the Supreme Court of the United States has also held that
the presence of a significant reverse payment in a patent settlement agreement can provide a
workable surrogate for the weakness of a patent, without a court having to carry out a
detailed analysis of the validity of that patent (judgment of the Supreme Court of the United
States of 17 June 2013 in Federal Trade Commission v. Actavis, 570 U.S. (2013), ‘the
Actavis judgment’). […]
354. It must be noted, in that respect, that the Commission did not find, in the contested
decision, that all patent settlement agreements containing reverse payments were contrary to
Article 101(1) TFEU; it found only that the disproportionate nature of such payments,
combined with several other factors — such as the fact that the amounts of those payments
seemed to correspond at least to the profit anticipated by the generic undertakings if they had
entered the market, the absence of provisions allowing the generic undertakings to launch
their product on the market upon the expiry of the agreement without having to fear
infringement actions brought by Lundbeck, or the presence, in those agreements, of
restrictions going beyond the scope of Lundbeck’s patents — led to the conclusion that the
agreements at issue had as their object the restriction of competition, within the meaning of
Article 101(1) TFEU, in the present case […].
355. It must be found, therefore, that the Commission did not err in considering, in the
contested decision, that the very existence of reverse payments and the disproportionate
nature of those payments were relevant factors in establishing whether the agreements at
issue constituted restrictions of competition ‘by object’ for the purpose of Article 101 TFEU
in that, by those payments, the originator undertaking provided an incentive to the generic
undertakings not to continue their independent efforts to enter the market.

The GC noted that the problem of disproportionate reverse payment settlements is that the
transfer of value replaces the autonomous assessment, by the parties, of the strength of the
originator undertaking’s patents and the assessment of their chances of succeeding in
potential litigation based on those patents or concerning their validity (para. 360).

The GC also rejected the appellants’ argument that the inference that a reverse payment in a
settlement implies that the parties lack confidence in the strength of the relevant patent was
establishing an “economic presumption” devoid of robust empirical and theoretical
foundations as there could be alternative explanations for it.

366. It must be pointed out, in that respect, that, in accordance with the case-law […] in the
present case, the Commission relied on a body of evidence in the contested decision to
demonstrate that it is principally the size of the reverse payments to the generic undertakings
which induced those undertakings to accept the limitations governing their behaviour and not
the existence of Lundbeck’s process patents or even the desire to avoid the expenses linked to
potential litigation […]
369. In any event, the Commission was not required to demonstrate irrefutably that the
applicants doubted the validity of their patents in order to establish the existence of an
infringement by object in the present case, since the evidence set out in the contested decision
shows that the generic undertakings were confident of their chances of being able to enter the
market within a sufficiently short period, either by overcoming the applicants’ infringement

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allegations, or by challenging the validity of their patents, in the event of a dispute[…]. What
matters, therefore, is that there was uncertainty, at the time the agreements at issue were
concluded, as to the possibility, for the generic undertakings, of entering the market without
being subject to injunctions or infringement actions, or of successfully challenging the
validity of the applicants’ patents, and that those agreements had replaced that uncertainty, by
means of significant reverse payments, with the certainty that the generic undertakings would
not enter the market during the term of the agreements at issue […]

The appellants further argued that the asymmetry of risks allowed the generic undertakings
to ‘bluff’ the applicants in order to obtain significant amounts of money, by pretending that
they were preparing to enter the market with non-infringing products. This was also rejected
by the GC, which stated the following:

384. […] [I]f the applicants were so convinced of the validity of their patents, and of the fact
that the products that the generic undertakings intended to sell infringed them, they could
have obtained orders to prevent market entry before the competent national courts, or, in the
event that the generic undertakings unlawfully entered the market, obtained damages from
them. […]
386. Accordingly, to accept the applicants’ argument concerning the asymmetry of risks
would amount, ultimately, to considering that they could — by concluding agreements such
as the agreements at issue with the generic undertakings — protect themselves against an
irreversible price fall which, according to their own assertions, could not have been avoided
even if they had been successful in infringement actions brought before the national courts.
They could therefore, by concluding such agreements, maintain higher prices for their
products, to the detriment of consumers and the healthcare budgets of States, even though
such an outcome could not have been obtained if the national courts had confirmed the
validity of their patents and the products of the generic undertakings had been held to be
infringing. Such an outcome would be manifestly contrary to the objectives of the treaty
provisions on competition, which are intended inter alia to protect consumers from
unjustified price increases resulting from collusion between competitors (see, to that effect,
judgments of 19 March 2015 in Dole Food and Dole Fresh Fruit Europe v Commission,
C-286/13 P, ECR, EU:C:2015:184, paragraph 115 and the case-law cited, and 9 July 2015 in
InnoLux v Commission, C-231/14 P, ECR, EU:C:2015:451, paragraph 61). There is no
reason to suppose that such collusion would be lawful in the present case, under the pretext
that certain process patents were in dispute, when the defence of those patents before the
national courts could not, even in the most favourable scenario for the applicants, have led to
the same negative consequences for competition and, in particular, for consumers.
388. Lastly, inasmuch as the applicants, supported by the intervener, argue that the
agreements at issue would have allowed the avoidance of significant costs linked to litigation
in various Member States, as well as the risk of conflicting decisions resulting from such
litigation before multiple courts, it must be pointed out, first of all, that most of the
agreements at issue contain no specific reference to the costs of the litigation that would be
avoided, nor the least estimate of those costs. Furthermore, the applicants have not provided
any explanation regarding the manner in which the amounts of the reverse payments were
calculated, except that they resulted from their negotiations with the generic undertakings,
whereas the contested decision contains numerous pieces of evidence showing that those
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amounts broadly corresponded to the profits expected by the generic undertakings if they had
entered the market or to the damages that they might have obtained if they had succeeded in
litigation against Lundbeck […].
389. In any event, contrary to the applicants’ assertions, it is unlikely that the costs relating to
any litigation in the various EEA countries would have been greater than the payments
obtained by the generic undertakings under the agreements at issue in the present case, which
amounted to several million euros. Pharmaceutical undertakings do not often initiate
litigation in all the Member States simultaneously
390. Moreover, the contested decision acknowledges that there are ways of resolving a
dispute amicably, which are acceptable from a competition law perspective, other than those
consisting in delaying the market entry of potential competitors through reverse payments, as
in the present case (paragraph 354 above). According to the case-law, the specific subject
matter of the patent cannot be interpreted as also affording protection against actions brought
in order to challenge the patent’s validity, in view of the fact that it is in the public interest to
eliminate any obstacle to economic activity, which may arise where a patent was granted in
error (see, to that effect, the Windsurfing judgment, cited in paragraph 119 above,
EU:C:1986:75, paragraph 92). Although the applicants were entitled to enter into settlements
with the generic undertakings in order to avoid the costs of potential litigation, they could
not, on that ground, substitute their own assessment of the validity of their patents and the
infringing nature of the generic undertakings’ products for that of an independent judge while
paying the generic undertakings to comply with that assessment and refrain from entering the
market for a certain period.

The GC concluded:

401. In any event, even if the restrictions contained in the agreements at issue potentially fell
within the scope of Lundbeck’s patents, in that they could also have been obtained through
litigation, the contested decision rightly finds that this was merely a possibility at the time the
agreements at issue were concluded. Replacing that uncertainty in relation to whether or not
the generic undertakings were infringing and to the validity of the applicants’ patents with
the certainty that the generic undertakings would not enter the market during the term of the
agreements at issue constitutes, as such, a restriction on competition by object in the present
case, since that result was obtained through a reverse payment

Analogy with market sharing agreements

The General Court also upheld the Commission’s analogy of the agreements at issue with the
market sharing agreements condemned by the CJEU in BIDS658, noting that “a similar
dynamic arose in the present case through the conclusion of the agreements at issue,
pursuant to which Lundbeck, which was the principal, or even the only, undertaking on the
market in the countries concerned by those agreements, paid the generic undertakings, which
were potential competitors, so that they would stay out of the market for a certain period”
(para. 424). The fact that in BIDS the undertakings at issue were actual competitors, since

658
Case C-209/07, Competition Authority v Beef Industry Development Society, [2008] ECR I-8637. For a
discussion of this case, see XXX.

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the agreements in that case were intended to remove from the market undertakings which
were already present on that market, whereas, in the present case, Lundbeck and the generic
undertakings were merely potential competitors did not affect the GC’s characterization of
the agreements, which presented clear similarities to the situation in BIDS.

429. In the present case, the parties to the agreements at issue preferred to replace the risks
inherent in the normal competitive process and the state of uncertainty surrounding the
validity of Lundbeck’s process patents and whether or not the products that the generic
undertakings intended to market infringed those patents, with the certainty that those
undertakings would not enter the market during the term of those agreements, in return for
significant reverse payments which corresponded approximately to the profits that those
undertakings would have made if they had entered the market.
430. […] As the Commission submitted, in both cases, the payments played a decisive role in
that they induced the undertakings to withdraw from the market. Thus, in the case that gave
rise to the BIDS judgment, cited in paragraph 341 above (EU:C:2008:643), it is unlikely that
the ‘going’ undertakings would have agreed to withdraw from the market in the absence of
payments from the ‘staying’ undertakings. Likewise, in the present case, it can be seen from
the file that the generic undertakings would not have agreed to stay out of the market
unilaterally, after having taken significant steps and having made significant investments, in
the absence of reverse payments.

Of particular interest is also what the GC stated with regard to the intervention of the CB v.
Commission judgment of the CJEU659.

434. It must be observed that, by the judgment in CB v Commission, […] the Court of Justice
did not call into question the basic principles concerning the concept of a restriction ‘by
object’ set out in the previous case-law. It is true that, in its judgment, the Court of Justice
rejected the General Court’s analysis in the judgment of 29 November 2012 in CB v
Commission (T-491/07, EU:T:2012:633), according to which the concept of restriction of
competition ‘by object’ should not be interpreted in a restrictive manner. The Court of Justice
noted that the concept of restriction of competition ‘by object’ could be applied only to
certain types of coordination between undertakings which revealed a sufficient degree of
harm to competition that it could be found that there was no need to examine their effects,
otherwise the Commission would be exempted from the obligation to prove the actual effects
on the market of agreements which were in no way established to be, by their very nature,
harmful to the proper functioning of normal competition […].
435. It follows from the general scheme of the contested decision […] that the agreements at
issue were comparable to market exclusion agreements, which are among the most serious
restrictions of competition. The exclusion of competitors from the market constitutes an
extreme form of market sharing and of limitation of production. […]
436. Accordingly, it must be held that the Commission correctly applied the case-law […]
which consists in determining whether an agreement may, by its very nature, be regarded as
restricting competition in a sufficiently serious manner as to be classified as a restriction ‘by
object’ in the case at hand […]

659
Case C-67/13 P. Groupement des cartes bancaires (CB). v. European Commission, ECLI:EU:C:2014:2204.

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437. Accordingly, the Commission was not required also to examine the specific effects of
the agreements at issue on competition and, in particular, whether, in the absence of those
agreements, the generic undertakings would have entered the market without infringing one
of Lundbeck’s patents, in order to be able to establish the existence of a restriction of
competition by object, within the meaning of Article 101(1) TFEU, since those generic
undertakings had real concrete possibilities in that respect and were potential competitors of
Lundbeck at the time the agreements at issue were concluded (see the first plea in law
above).
438. Moreover, contrary to what is claimed by the applicants, it is not necessary that the
same type of agreement have already been censured by the Commission in order for them to
constitute a restriction of competition by object. The role of experience, mentioned by the
Court of Justice in paragraph 51 of the judgment in CB v Commission ( […], does not
concern the specific category of an agreement in a particular sector, but rather refers to the
fact that it is established that certain forms of collusion are, in general and in view of the
experience gained, so likely to have negative effects on competition that it is not necessary to
demonstrate that they had such effects in the particular case at hand. The fact that the
Commission has not, in the past, considered that a certain type of agreement was, by its very
object, restrictive of competition is therefore not, in itself, such as to prevent it from doing so
in the future following an individual and detailed examination of the measures in question
having regard to their content, purpose and context (see, to that effect, judgment in CB v
Commission, cited in paragraph 78 above, EU:C:2014:2204, paragraph 51; the Opinion of
Advocate General Wahl in CB v Commission, C-67/13 P, ECR, EU:C:2014:1958, point 142,
and the Opinion of Advocate General Wathelet in Toshiba Corporation v Commission,
C-373/14 P, ECR, EU:C:2015:427, point 74).
439. The applicants are therefore wrong in their submission that the Commission did not
sufficiently establish that the agreements at issue could be regarded, by their content and
their objectives, viewed in their economic and legal context, as sufficiently harmful to
competition […]

Ancillary restraints doctrine

The GC also rejected the appellants’ arguments that the decision failed to recognise that the
agreements at issue were necessary in order to achieve a legitimate objective, namely to
protect and enforce a patent and other “legitimate” objectives. The parts of the judgment
dealing with the ancillary restraints doctrine were discussed in Chapter 5, the GC noting
that “as the existence of a rule of reason in EU competition law cannot be upheld, it would
be wrong, when classifying ancillary restrictions, to interpret the requirement for objective
necessity as implying a need to weigh the pro and anticompetitive effects of an agreement”
(para. 455). We include here the parts discussing implementation of these principles in the
specific case.

458. First, the applicants have not demonstrated that the restrictions set out in the agreements
at issue were objectively necessary in order to protect their intellectual property rights, within
the meaning of the abovementioned case-law. They could have protected those rights by
bringing actions before the competent national courts in the event that their patents were
infringed. Furthermore, […] there are numerous ways of settling a patent dispute without

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agreeing to restrictions on the market entry of generic undertakings, by means of reverse

payments corresponding approximately to the profits expected by those undertakings if they
had entered the market […] The applicants have therefore failed to establish that those
restrictions were objectively necessary for the achievement of the alleged objective, namely
protecting their intellectual property rights.
459. Secondly, it must be recalled that, according to the case-law, an agreement is not
exempt from competition law merely because it concerns a patent or is intended to settle a
patent dispute, and it may be regarded as having a restrictive object even if it does not have
the restriction of competition as its sole aim but also pursues other legitimate objectives […].
The fact that it may have been the most cost-effective or least risky option from a
commercial perspective in no way precludes the application of Article 101 TFEU […].
460. Thirdly, in any event, even if the restrictions agreed under the agreements at issue could
be regarded as objectively necessary for the achievement of the main objective alleged by the
applicants, namely protecting their intellectual property rights, they are nevertheless
disproportionate to the achievement of that objective. Contrary to the applicants’ assertions,
the agreements at issue did not resolve any patent dispute, since they provided only that the
generic undertakings would stay out of the citalopram market for a certain period, in return
for payment, without even providing that at the end of that period they could enter that
market without having to face infringement actions from Lundbeck. Moreover, the scope of
the restrictions contained in those agreements often went beyond the scope of Lundbeck’s
patents […]
461. The applicants’ assertion that the restrictions contained in the agreements at issue were
objectively necessary and proportional in order to protect their intellectual property rights is
therefore wrong.

Counterfactual

With regard to the hypothetical counterfactual scenario the appellants alleged that the
contested decision disregarded the fact that, even without the agreements at issue, the
generic undertakings would not have sold the non-infringing drug, noting that if there is the
slightest doubt that competition would have existed in the absence of the agreement that is
enough to preclude any infringement of Article 101 TFEU. The GC also rejected these
arguments noting the following:

471. […] [I]t must be recalled that Article 101 TFEU is intended to protect potential
competition as well as actual competition between undertakings on the market […]. It is thus
to no avail that the applicants again submit that there is no certainty that the undertakings
would have actually entered the market during the term of the agreements at issue, since that
argument disregards the distinction between actual competition and potential competition.
472. […] [I]nasmuch as the applicants submit that the Commission should have examined
the counter factual scenario in the present case, it must be recalled that, as regards restrictions
on competition by object, the Commission was only required to demonstrate that the
agreements at issue revealed a sufficient degree of harm to competition, in view of the
content of their provisions, the objectives that they are intended to achieve and the economic
and legal context of which they formed part, without being required, however, to examine
their effects […]

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473. The examination of a hypothetical counterfactual scenario — besides being

impracticable since it requires the Commission to reconstruct the events that would have
occurred in the absence of the agreements at issue, whereas the very purpose of those
agreements was to delay the market entry of the generic undertakings […] — is more an
examination of the effects of agreements at issue on the market than an objective
examination of whether they are sufficiently harmful to competition. Such an examination of
effects is not required in the context of an analysis based on the existence of a restriction of
competition by object […]
474. Accordingly, even if some generic undertakings would not have entered the market
during the term of the agreements at issue, as a result of infringement actions brought by
Lundbeck, or because it was impossible to obtain an MA within a sufficiently short period,
what matters is that those undertakings had real concrete possibilities of entering the market
at the time the agreements at issue were concluded with Lundbeck, with the result that they
exerted competitive pressure on the latter. That competitive pressure was eliminated for the
term of the agreements at issue, which constitutes, by itself, a restriction of competition by
object, for the purpose of Article 101(1) TFEU.

Rejection of the scope of the patent test and of an intent-based test

The GC also clearly rejected the appellants’ argument for a scope of the patent test. It
referred to its traditional position on the distinction between existence and exercise of the IP
right and then continued noting that even if the clause in question falls within the scope of
the patent, it could not be accepted that that clause may be compatible with Article 101
TFEU, referring to the position of the CJEU in , where the CJEU held that the specific
subject matter of the patent cannot be interpreted as also affording protection against
actions brought in order to challenge the patent’s validity, in view of the fact that it is in the
public interest to eliminate any obstacle to economic activity which may arise where a patent
was granted in error, as well as an infringement of Articles 101 and 102 TFEU660.

490. In the light of that case-law, and of the inherent objectives of Article 101 TFEU, which
require, inter alia, that each economic operator must determine independently the policy
which it intends to adopt on the market […] in order to protect consumers from unjustified
price increases resulting from collusion between competitors (see paragraph 386 above), the
Commission was entitled to refuse to apply the ‘scope of the patent’ test in the present case
in order to evaluate the agreements at issue in the light of Article 101(1) TFEU.
491. As the Commission rightly noted […] that test is problematic from a competition law
perspective in several respects. First, it leads to a presumption that a generic medicinal
product infringes the originator undertaking’s patent and thus allows the generic medicinal
product to be excluded on that basis, when the question whether it infringes any patents is an
unresolved issue. Secondly, it is based on the premiss that any patent invoked in the context
of a settlement agreement will be held valid if its validity is challenged, although there is no
basis in law or in practice for that outcome […]. The ‘scope of the patent’ test is therefore

660
The GC referred in particular to the CJEU’s judgment in Case 193/83, Windsurfing International v
Commission, [1986] ECR 611.

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based on a subjective assessment, by the applicants, of the scope of their patents and of their
validity, whereas a national court or competent authority may have taken a different view.
492. Moreover, the Supreme Court of the United States, concluding an intense debate on that
issue, adopted the same approach by rejecting the ‘scope of the patent’ test applied by some
lower courts in its Actavis judgment, cited in paragraph 353 above, in which it held that the
fact that an agreement fell within the scope of a patent did not exempt it from an antitrust
action.
493. Whether or not a restriction falls within the scope of a patent is a conclusion that follows
from an examination of the scope and validity of that patent and not, as the applicants
suggest, the starting point of such an examination […]
495. […] [E] ven if the agreements at issue also contained restrictions potentially falling
within the scope of the applicants’ patents, those agreements went beyond the specific
subject matter of their intellectual property rights, which indeed included the right to oppose
infringements, but not the right to conclude agreements by which actual or potential
competitors were paid not to enter the market […]
498. In addition, even if the agreements at issue had settled a dispute between the parties, it
must be recalled that Article 101(1) TFEU makes no distinction between agreements whose
purpose is to put an end to litigation and those concluded with other aims in mind […]. The
anticompetitive object of those agreements being sufficiently established — since they
amount to agreements excluding potential competitors from the market in exchange for
payment — even if they might also have benefited competition and consumers, those effects
must be demonstrated by the applicants and examined in the light of Article 101(3) TFEU
[…] and not evaluated by the Commission in the context of the first paragraph of that article
[…]
499. […] The Commission did not commit any error of law in rejecting the ‘scope of the
patent’ test as the relevant test for the purpose of examining the agreements at issue in the
light of Article 101(1) TFEU. As the Commission points out, the relevant test in the present
case was the concept of restriction by object, as developed by the case-law of the European
Union courts […]
500. Consequently, the Commission was entitled, in the present case, to rely on a series of
factors as contextual elements — such as the existence of a reverse payment, the size of that
payment and the fact that it appeared to correspond to the profits expected by the generic
undertakings if they had entered the market, as well as the absence of a clause enabling the
generic undertakings to enter the market upon the expiry of the agreements at issue and the
presence of restrictions going beyond the scope of the applicants’ patents — in order to find
that those agreements had the object of restricting competition within the meaning of
Article 101 TFEU […]

Interestingly, the GC referred to the position of the US Supreme Court in Actavis, whiuch
also rejected the scope of the patent test, although it was careful to note that the regulatory
context is different in each jurisdiction, thus explaining why it agreed with the Commission’s
choice not to explore further the implementation of the Actavis judgment by some of the
lower courts in the US.

512. In any event, it suffices to note that the judgment containing the majority opinion of the
Supreme Court of the United States in the case that gave rise to the Actavis judgment, […]—

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and not the dissenting opinion of Chief Justice Roberts — clearly established that the fact
that an agreement falls within the scope of a patent does not make that agreement exempt
from an antitrust action, thus rejecting the ‘scope of the patent’ test as the relevant rule for
the purpose of examining the anticompetitive nature of patent settlement agreements
containing reverse payments (known as ‘pay for delay’ settlements) such as the agreements
at issue in the present case.

The GC also found that the Commission was right to consider the intention of the parties,
without however making this a necessary element of the test, thus rejecting an intent-based
test:

523. It must be recalled, […] that the Commission was fully entitled to take into account the
applicants’ intention at the time the agreements at issue were concluded, since the case-law
recognises that the parties’ intention may be a relevant factor for the purpose of establishing
the existence of a restriction by object within the meaning of Article 101(1) TFEU […]

Efficiency gains assessment under Article 101(3) TFEU

Finally, the appellants claimed that the agreements at issue favoured competition, since
settlement agreements preserve the incentive to innovate and can facilitate earlier market
entry. This argument was also rejected by the General Court.

710. Article 2 of Regulation No 1/2003 provides, as does the case-law (see, to that effect,
judgment of 6 October 2009 in GlaxoSmithKline Services and Others v Commission,
C-501/06 P, C-513/06 P, C-515/06 P and C-519/06 P, ECR, EU:C:2009:610, paragraph 82),
that it is for the party relying on the application of Article 101(3) TFEU to demonstrate, by
means of convincing arguments and evidence, that the conditions for obtaining an exemption
are satisfied.
711. The burden of proof thus falls on the undertaking requesting an exemption under
Article 101(3) TFEU. However, the facts relied on by that undertaking may be such as to
oblige the other party to provide an explanation or justification, failing which it is
permissible to conclude that the burden of proof has been discharged […]
712. Contrary to the applicant’s claim, the Commission examined to the requisite standard, in
the contested decision, the various arguments relied upon by the generic undertakings and by
the applicants during the administrative procedure. […]
714. In any event, it is clear in the present case that the agreements at issue, which sought to
delay the entry of generics on the market by means of reverse payments, were not essential in
order to preserve the applicants’ incentive to innovate. Furthermore, it is difficult to discern
the benefits that consumers would derive from such agreements. Finally, the condition that
all competition should not be eliminated is also not satisfied in the present case, given that
the generic undertakings were indeed potential competitors when the agreements at issue
were concluded and they agreed, against payment, not to enter the market during the term of
those agreements. […]
719. In any event, even if the agreements at issue made it possible to avoid certain costs
associated with potential proceedings before different courts, the applicants have failed to
establish how the restrictions on competition arising from those agreements were

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indispensable for the achievement of that objective, given that the conclusion of other types
of settlement agreements, with no anticompetitive aspect, was possible […]. Furthermore,
they have not explained how those agreements allowed consumers a fair share of the benefits
allegedly obtained.

Notes and Questions on the judgment in Lundbeck

1. (Paragraphs 121-122). How could one reconcile the perception by the GC in

Lundbeck that patents are probabilistic with the presumption of validity for patents
that is also espoused by the GC? Is there a contradiction in the GC’s judgment?
The court explains that this presumption of validity of patents does not equate to a
presumption of illegality of generic products that were validly placed on the
market “at risk”, noting that even Lundbeck itself estimated the probability that its
patent would be held invalid at 50 to 60%. Was this finding of fact determinative
in this case? Or, does the Court take the view that patents are probabilistic in
general, as in “numerous cases” in the event of litigation, process patents have
been declared invalid?
2. Indeed, in a paper published in 2005, professors Mark Lemley and Carl Shapiro
put forward the idea of “probabilistic patents” and argued the following:
“(f)or many years, economists typically conceptualized patents as well-defined
property rights giving their owners either a monopoly over some market or at
least a significant competitive advantage in that market due to control over a
product improvement or a low-cost method of production. Once a patent was
issued, this approach tended to assume that the patent was valid, that it granted
a right of definite scope, and that users of the patented technology respected
that right or were forced by courts to do so. Treating patents as well-defined
rights to exclude rivals has permitted economists to focus on important and
complex relationships among patents, innovation, competition and the
diffusion of technology. More recently, however, scholars and policymakers
have begun to look more closely at the empirical evidence regarding the
issuance of patents and patent litigation. Nearly 200.000 patents are issued
every year [in the U.S.] after a very limited examination process. Most issued
patents turn out to have little or no commercial significance, which is one
reason that only 1.5 percent of patents are ever litigated, and only 0.1 percent
of patents are ever litigated to trial. Given these uncertainties, economists have
increasingly recognized that a patent does not confer upon its owner the right
to exclude but rather a right to try to exclude by asserting the patent in court.
When a patent holder asserts its patent against an alleged infringer, the patent
holder is rolling the dice. If the patent is found invalid, the property right will
have evaporated. The risk that a patent will be declared invalid is substantial.
Roughly half of all litigated patents are found to be invalid, including some of
great commercial significance”.661.
3. In the same article, Lemley and Shapiro also noted “the incentives of patent
holders and alleged infringers to settle their disputes rather than litigate them to

661
M.A. Lemley & C. Shapiro, ‘Probabilistic Patents’, 19(2) Journal of Economic Perspectives 75.

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completion” and argued that “virtually every patent licensing and cross-licensing
agreement can be seen as the settlement of a patent dispute”. They considered that
“the frequency or form of such private settlements may not serve the public
interest, because litigating patent disputes to completion tends to generate positive
externalities, by clarifying the limits of patent protection if the patent is upheld or
encouraging wider use of the innovation if the patent is invalidated”662. The
authors noted that settlement agreements between actual and potential rivals are
normal and generally desirable, but they “also are agreements between
competitors that can limit competition”663. If the General Court has been inspired
by the thesis of probabilistic patents, should we expect a stricter approach with
regard to patent licensing and cross-licensing agreements, analogous to that
adopted by the GC with regard to ?
4. In respect of whether an undertaking could be considered as a potential
competitor, the General Court noted that the Commission had to determine
whether, if the agreement, in question had not been concluded, there would have
been real concrete possibilities for that undertaking to enter the market and
compete with incumbent undertakings. The GC found that Lundbeck’s patents,
although presumptively valid did not constitute insurmountable obstacles for the
generics’ entry into the market. Interestingly, Lundbeck argued that it follows the
High Court of England and Wales, Chancery Division’s judgment in Smithkline
Beecham Plc v Generics (UK) Ltd ([2002] 25(1) I.P.D. 25005; ‘the so called
Paroxetine judgment’ that a generic undertaking cannot enter the market before it
has proved that its product does not constitute an infringement, which Arrow was
unable to do. In this case, the High Court had applied the principles governing the
grant of interim injunctions in English law and found that the balance of interests
weighed in favour of the originator undertaking in view of the particular
circumstances of the case and in particular the fact that the generic undertaking in
question had not ‘cleared the way’ by having informing the originator undertaking
of its intention to launch its generic product on the market, despite the fact that it
knew that the originator undertaking held patents allowing it to bring an
infringement action against the generic undertaking. The General Court rejected
this argument, noting several differences between the Lundbeck case and the case
which gave rise to that judgment (para. 260). In particular, whereas in the case
that gave rise to the Paroxetine judgment, the patent allegedly infringed by the
generic undertaking in question already existed throughout the period in which
that undertaking was preparing to enter the market, in the present case, Lundbeck
filed its application for the crystallisation patent in the United Kingdom and the
patent was issued only after one of the agreements examined by the Court had
been entered into.
1. In E.On Ruhrgas664, frequently cited by the General Court in Lundbeck, the
General Court held that the lawful existence of de facto territorial monopolies was
likely to result in the absence of any competition, not only actual, but also

662
Id., 76.
663
Id., 76.
664
Case T-360/09, E.ON Ruhrgas and E.ON v Commission, EU:T:2012:332.

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Siciliani, Competition Law: Analysis, Cases and Materials (forth. Hart Pub. 2017).

potential, on that market. The General Court found that this was not the case here.
A similar point was made with regard to exclusive rights in the European Night
Services case. It seems therefore that the General Court establishes a distinction
between intellectual property rights, in this case patents, and other exclusive rights
provided by the State, such as those granted to certain undertakings in the German
market for gas in E.On Ruhrgas or those granted in European Night Services v.
Commission for the provision of international railway passenger services and
access to the infrastructure. Do you think that the distinction elaborated by the
General Court is justified? Can IP rights be treated the same as exclusive rights
provided by the State in regulated sectors and which are subject to intensive
regulatory scrutiny, even after they have been granted? Was the Court influenced
by the view of patents as probabilistic? Could the other exclusive rights be
considered probabilistic as well?
2. The idea of considering IP rights as a form of exclusive right granted by the State,
like the exclusive rights in E.On Ruhrgas and ENS is not a new one. In his
concurring opinion in the Picard v. United Aircraft Corp. in 1942, Judge Frank of
the second circuit court of appeals analysed patents as “public franchises, granted
by the government, acting on behalf of the public”665. Judge Frank continued the
analogy of patents as “public franchises”, by making the following comment:
“it is, accordingly, appropriate to ask whether the holder of such a public
franchise should be permitted, without any governmental control whatever, to
decide that no public use should be made of the franchise during its life or
only such public use as the franchise-holder, in its utterly unregulated
discretion, deems wise, and at such prices as it sees fit to extract. We accord
no such powers to the holder of a public franchise to run a bus line or to sell
electric power”666.
3. The General Court confirmed the Commission’s analysis of reverse payment
settlements as a restriction of competition by object. This indicates that the
Commission would not have to assess the effects of the agreement, before finding
an infringement of Article 101(1) TFEU. As for all restrictions of competition by
object, the Court proceeded to the analysis of the legal and economic context of
the agreement. What type of information did the Court take into account in
performing this analysis? Is this information relating to the likely effects of the
specific agreement, or does this relate to the likely effects of the specific type of
agreement? How would an analysis of a restriction of competition by effect would
look like, had it been adopted by the General Court for reverse payment
settlements?
4. (Paragraph 354). Should all reverse payment settlements be treated like a
restriction of competition by object? What type of reverse payment settlements
falls into the “object box”?

665
Picard v. United Aircraft Corp., 128 F.2d 632, 645 (2nd Cir. 1942), Judge Frank (concurring opinion)
666
Picard v. United Aircraft Corp., 128 F.2d 632, 645 (2nd Cir. 1942), For a discussion of the analogy between
IP and exclusive rights, see I. Lianos, Competition Law and Intellectual Property Rights: Is the Property Rights'
Approach Right? Chapter 8 in Cambridge Yearbook of European Legal Studies. John Bell & Claire Kilpatrick
(ed.), Oxford: Hart Publishing, 2006, 153-186; a more extensive version may be downloaded at
https://www.ucl.ac.uk/cles/research-paper-series/research-papers/cles-1-2008

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5. The General Court rejected the rule reason approach in the context of Article
101(1) TFEU (para. 455), and referred many times in the decision to the majority
opinion in the US Supreme Court FTC v. Actavis case. How does the approach
adopted by the General Court in Lundbeck compare with the approach of the
Supreme Court in FTC v. Actavis?
1. (Paragraph 473). The General Court dismisses the counterfactual analysis in the
context of a restriction of competition by object. As it is indicated in the
Commission’s guidelines on Article 101(3) TFEU, counterfactuals are only to be
used in effects-based analysis667.

13.10.2.3. The decisional practice of the UK CMA

One may finally note that pay for delay settlements have been the focus of the CMA’s
enforcement. Following its investigation into patent litigation settlement agreements (PLSAs)
in the pharmaceutical sector, the CMA fined a number of pharmaceutical companies for
entering into pay for delay deals.668 These agreements were concluded between
GlaxoSmithKline and a number of generic companies. GSK’s conduct aimed to defend one
of its blockbuster drugs, Seroxat, which is a prominent anti-depressant (paroxetine), after a
number of generic companies were taking steps to enter the UK market with a generic
version. GSK’s strategy has gone as far as establishing a project team called Project Dyke,
which was tasked with defending Seroxat from generic competition and with sustaining
patent protection for Seroxat, involving a global GSK team. GSK commenced litigation
proceedings against these companies alleging that their generic products infringed its patents.
Before that litigation went to trial, a number of these generic producers entered into
agreements with the GSK, these including terms prohibiting their independent entry into the
UK paroxetine market, in exchange for payments by GSK as compensation for their
agreement to delay their efforts to enter the market. These value transfers included cash
payments, and the effective transfer from GSK of profit margins by means of ‘co-marketing’
and ‘sub-distribution’ agreements permitting the supply of limited volumes of product to the
markets in place of GSK. Furthermore, two generic producers, GUK and Alpharma were
appointed as distributors of GSK’s paroxetine as part of the arrangement to transfer value
from GSK to generics, with no increase in the level of competition facing GSK in the
relevant market. The CMA found that by entering into such agreements, both GSK and the
generic producers had infringed Chapter I CA 98 and/or Article 101 TFEU. It is also worth
noting that the CMA has applied the Vertical Agreements Exclusion order in relation to one
of the generic companies (IVAX) whereas, it considered that GSK's agreements with GUK
and Alpharma were not vertical, despite the fact that they were its distributors (the CMA
emphasized that they were potential competitors)..
Following the Commission’s path in Perindopril, the CMA analysed the agreements
both as a restriction of competition by object and, alternatively, by effect. The CMA found
that the agreements with the generics revealed ‘in and of themselves, a sufficient degree of

667
See also, Case C-382/12P, MasterCard Inc. and Others v European Commission, ECLI:EU:C:2014:2201,
para. 161.
668
Paroxetine (Case CE-9531/11) Decision of the Competition and Markets Authority of 12 February 2006,
available at assets.publishing.service.gov.uk/media/57aaf65be5274a0f6c000054/ce9531-11-paroxetine-
decision.pdf.

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harm to competition and therefore had the object of restricting competition’ (Section 6.3.).
Indeed, ‘the harmful consequence to be expected from this type of coordination in the
pharmaceutical sector is that the potential for effective competition against the incumbent is,
in essence, “bought off”’. (Section 6.4.) The CMA noted that patent settlements are common
in the pharmaceutical industry and do not pose a problem to competition as a general
proposition, in the absence of a value transfer from the originator to the generics producers.
However, for the CMA, pay for delay settlements may seriously impact the competitive
process as they are frequently the very expression of potential competition in this sector. The
CMA took a similar approach with the Commission in identifying the existence of a potential
competition relation between GSK and the generics, noting that ‘at the time’ the agreements
were entered into, there were real concrete possibilities for the generic producers to supply
paroxetine in the UK independently of GSK (section 6.47 & Annex D, Section B). The CMA
found that the agreements were by object anticompetitive, as (i) the value transfers were
conditional on the generic producers not entering the market independently of GSK, and (ii)
the fact that the decision to make the value transfers could not be explained on the basis of
the stated purposes of the transfers, nor on any basis that was not anti-competitive.
Interestingly, the CMA seems to emphasize conditionality as the main problem with the value
transfers, while the Commission in both the TTBER Guidelines and its Lundbeck and
Perindopril decisions put emphasis on the ‘significant’ nature of the value transfers that had
no relation to the value of the settling patent infringement claim.
In addition, to having the object of restricting competition, the CMA found that the
agreements also had the likely effect of restricting competition to an appreciable extent.
Indeed, in the absence of the settlement agreements, it is likely that the relevant litigation
would have continued and the validity and infringement of GSK’s patent rights would have
been tested by the generics producers in court, ‘or else the Parties would have entered into
settlements on terms that reflected the real uncertainty that GSK faced about the strength of
its patent claims’, thus indicating that in the counterfactual the generics would have remained
potential competitors and would have pursued their efforts to enter the market independently
of GSK (Sections 7.3. & 7.12). GSK was found to have market power in the UK paroxetine
market (benefitting from a market share for the supply of finished product to
pharmacies/wholesalers (by volume) that was in excess of 60%). In the absence of other
relevant sources of competition to GSK, the Commission found that the agreements assisted
GSK in preserving its market power. Indeed, had true generic competition emerged, that
would have resulted in significant decreases in paroxetine prices in the UK and a decline in
GSK's market share. The CMA found that delaying the potential independent entry of
generics, also delayed the associated price decreases. Although the conclusion is similar to
that reached by the Commission in its pay for delay cases, the CMA’s analysis seems slightly
more effects-based oriented and insists less on the form of the conduct.
The CMA also then moved the assessment of an alleged abuse of a dominant position.
Here the approach is quite similar to that followed by the Commission in its pay for delay
case, the CMA finding that such practices fell outside the scope of ‘competition on the
merits’. The CMA held that inducing the generic producers to enter a pay for delay settlement
does not constitute ‘normal competition’. It also found that the likely effect of value transfers
made by GSK to the generic companies was to restrict or distort competition, as this had
induced delays to the potential emergence of true generic competition, therefore assisting

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GSK in preserving its dominant position. The CMA concluded that in the absence of any
objective justification for its conduct, GSK had committed an abuse of a dominant position.

13.10.3. Beyond reverse patent settlements: protecting generics’ competition

Competition authorities in Europe and the US have been quite proactive in preserving
the effectiveness of generic competition once the original patent has expired, to protect
generics from various strategies adopted by the patent holders in order to expand the patent
protection they benefit from and to promote opportunities for generics to challenge the
validity of patents. Firms may engage in other forms of exclusivity strategies to delay patent
expiry and generic competition, in view of the fact that the patent system in the US and
Europe provide several exclusivity opportunities, including:
1) New Chemical Entity exclusivity (NCE): a pharmaceutical manufacturer can gain NCE
exclusivity by introducing a drug that contains an ‘active moiety’ that has not been previously
approved in a new drug application. An ‘active moiety’ is defined as the molecule or ion
responsible for the drug substance’s physiological or pharmacological action.
2) Clinical Investigation Exclusivity: Drug companies that sponsor additional clinical testing
on a previously-approved drug that leads to changes in the marketed product pursuant to an
approved new NDA or supplemental NDA may be granted additional years of Clinical
Investigation Exclusivity.
3) Orphan Exclusivity provides drug manufacturers with years of market exclusivity period
after the approval of the drug, as well as research grants and tax credits for each new drug
developed to treat rare or unusual conditions.
4) Pediatric Exclusivity: grants additional months of exclusivity (after all other forms of
exclusivity have expired) to drug manufacturers who conduct pediatric clinical studies on
their marketed product and develop useful information about the safety and effectiveness of
their product in children.
Patentees are usually allowed to amend their patents, either by amending existing
claims or by introducing new claims, even after the grant of the patent. It is possible that a
main claim covers a class of chemical compounds that may be used for various therapeutic
purposes. Even if the chemical compounds are known and do not constitute new substances,
it is possible to get a patent for the manufacture or substance of a new inventive purpose for
the same compound.
The revisions of the original patent claims or additional new patent claims should not
however lead to the addition of “new matter, the technical disclosure about the invention
being confined by what was in the initial specification at the time the patent claim was filed.
It is also possible that the patentee, either voluntarily or after being asked by the patent office,
fills one (or more) divisional applications, for instance splitting original application into
smaller ones in order to increase the chance the claims will be accepted because they are
narrower and are embodied in the commercialised invention. These divisional patents expire
the same time as the original patent application and in principle cannot bring “new matter” to
the scope of the patent protection669.

669
R. Jacob, Pharmaceutical Patents: Competition Law Goes Too Far, in G. Pitruzzella & G. Muscolo (eds.),
Competition and Patent Law in the Pharmaceutical Sector (Kluwer, 2016), pp. 85-92.

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Competition authorities have been vigilant as to the opportunities that these normal
procedures of patent law may be abused and used strategically in order to limit competition
by generics.
Some competition authorities have been concerned by conduct aimed at delaying
generic entry and expansion.
The French Competition Authority (FCA) has recently adopted a number of decisions
fining a number of pharma companies for abusing their dominant position by denigrating the
drugs of the generic competitors of their own patent protected, or not, drugs. In Sanofi-
Aventis the FCA found that Sanofi-Aventis had infringed competition law by implementing a
‘denigration strategy’ aimed at convincing healthcare professionals to limit prescriptions and
sales of generic versions of its branded product, Plavix, and imposed to the company a fine of
40.6 million €670. Similar fines were imposed to Schering-Plough for its conduct in relation to
its drug Subutex, again for denigration tactics vis-à-vis generic competitors671. The Paris
Court of Appeal, has recently upheld the Sanofi-Aventis decision672. The Court highlighted
that the provisions of national and EU competition law are drafted in general terms and that
any conduct, including denigration of actual or potential competitors is susceptible of
constituting an abuse provided that it has as an object or could have the effect of distorting
competition, by restricting the circulation of a generic product The Court supported FCA’s
argumentation taking into account the prescribing doctors’ and pharmacists’ reluctance to
changes and the risk aversion of health professionals, which were facts not contested by
Sanofi. Therefore, the Court acknowledged the existence of an abusive conduct which took
the form of the diffusion of negative, incomplete, ambiguous information and the instillation
of a doubt or fear over the intrinsic qualities of a medicine, which is sufficient to discredit it
immediately. The judgment is on further appeal.
Similar issues have been raised by the UK Gaviscon case. The OFT found that Reckitt
Benckiser abused its dominant position in the market for the NHS supply of alginate and
antacid heartburn medicines, in breach of the Chapter II CA 98 and Article 102 TFEU by
withdrawing and de-listing Gaviscon Original Liquid drug from the NHS prescription
channel after the product’s patent expired but before the publication of the generic name for
it, so that more prescriptions would be issued for its alternative branded product, Gaviscon
Advanced Liquid673. The OFT imposed a fine of £10,2 million and subsequently the UK
National Health Service (NHS) sued Reckitt Benckiser for £90 million follow-on damages at
the High Court. NHS and Reckitt Benckiser settled the dispute in 2014.

670
FCA (2013), available at
http://www.autoritedelaconcurrence.fr/user/standard.php?id_rub=483&id_article=2091 .
671
FCA (2013), available at
http://www.autoritedelaconcurrence.fr/user/standard.php?id_rub=482&id_article=2283 .
672
Paris Court of Appeal, Sanofi judgment (December 18 th, 2014), available at
http://www.autoritedelaconcurrence.fr/doc/ca_plavix_13d11.pdf , confirmed by French Cour de Cassation,
judgment October 18th, 2016), available at http://www.autoritedelaconcurrence.fr/doc/cass_13d11.pdf .
673
Decision No. CA98/02/2011, Case CE/8931/08 (April 12, 2011), available at
http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft.gov.uk/shared_oft/ca-and-cartels/rb-
decision.pdf .

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