Unfair Pricing and Standard Essential Patents

Technical standards that are agreed upon within a Standard Development Organization (SDO) often cover several ‘essential’ patents for implementing a standard (i.e., Standard Essential Patents, SEPs).

In order to allow for the standard implementation, the SEP holder commits to license its patents to any potential licensee on the basis of Fair and Reasonable and Non-Discriminatory (FRAND) conditions. In view of the recent ruling of the UK Supreme Court in Unwired Planet and the judgement of the German Bundesgerichtshof in Sisvel v. Haier, the paper assumes that the FRAND commitment implies a ‘range’ rather than a ‘single’ royalty rate. On the other hand, a royalty rate ‘beyond the outer boundary of the range’ should be considered ‘unfair’, and thus incompatible with the FRAND commitment. Besides representing a breach of the FRAND commitment, an ‘unfair’ royalty rate might also be considered an abuse of a dominant position by the SEP holder, in breach of Art. 102(a) TFEU.

This paper analyses whether, and under what circumstances, Art. 102(a) TFEU can be relied upon by a competition authority in Europe to sanction a case where the SEP holder has set an ‘unfair’ royalty rate. The paper provides a detailed analysis of the EU Court of Justice’s jurisprudence on Art. 102(a) TFEU. In particular, the latter jurisprudence is relied upon as a ‘yardstick’ to assess ‘when’ competition policy should sanction a request of unfair royalty rate by the SEP holder, ‘how’ a competition agency should assess the case and, eventually, ‘what’ remedies the competition authority might adopt. Economists have elaborated a number of ‘filters’ to define ‘when’ EU competition policy should sanction unfair pricing cases. In particular, antitrust intervention would be justified only in markets that are characterized by high and stable entry barriers, in which a firm enjoys a super-dominant position. Due to the phenomenon of over-declaration, not every SEP is indeed ‘essential’; the market power of the SEP holder thus requires a case-by-case analysis of the ‘essentiality’ of every SEP. A number of authors have also argued that excessive pricing cases should not be sanctioned in industries characterized by dynamic efficiencies. The paper argues that innovation considerations could be considered as efficiency defences in the context of antitrust investigations, rather than in excluding a priori competition policy enforcement in this field. The paper argues that a competition agency should rely on the case law of the Court of Justice of the European Union (CJEU) on Art. 102(a) TFEU to analyse a case of unfair royalty rate. In particular, United Brands cost/price test is not suitable for assessing an unfair royalty rate requested by the SEP holder, since it is de facto impossible to determine the ‘costs of production’ of individual SEPs. On the other hand, in accordance with the CJEU case law, the competition agency might rely on a number of benchmark methods with which to assess the alleged unfairness of the rate. In particular, the agency should verify its findings under multiple benchmark tests, in order to minimize the risk of false negative errors. Finally, the SEP holder could argue that the requested royalty rate is justified by its past R&D investments. In terms of remedies, the paper argues that a competition agency could require the SEP holder to license its ‘essential’ patent; such behavioural remedy is well established in the practice of the European Commission.

In light of the recent Broadcom interim decision, if the competition authority was confident about its preliminary findings of unfair pricing, the agency might require the SEP holder to license its ‘essential’ patents via an interim decision; the scope, duration and exact obligations of such a duty would later be refined in the final commitment decision.