Antitrust and technology in Europe and Asia: Use or abuse of patents?
May 2012

Europe

The Commission investigates patent abuse

The last few months have seen a number of complaints made regarding alleged abuse of intellectual property rights by patent holders. In each case, the allegation is that the holder of patents considered to be essential to operate in the market are not licensing such patents on fair, reasonable and non-discriminatory (FRAND) terms and that, as a result, the patent holder, which is deemed to hold a dominant position by virtue of its patent, is abusing its position - a breach of EU antitrust law. As a result of these complaints, in the past few months, the Commission has opened investigations into the conduct of Samsung and Motorola.

Motorola under investigation for abuse of mobile and wireless telecommunication system patent power

On 3 April 2012, the Commission opened two formal investigations into whether Motorola has acted abusively in seeking injunctions for breaches of patents against Apple’s iPhone and iPad products and Microsoft’s Windows and Xbox products. Motorola’s patents form part of an industry standard and Motorola has committed to licence these patents on FRAND terms.

The investigation follows substantial complaints about Motorola’s behaviour from Apple and Microsoft and a warning from Competition Commissioner Almunia, following the European Commission’s clearance of Google’s acquisition of Motorola Mobility in February 2012, that he would closely monitor Google’s behaviour with respect to the standard-essential patents owned by Motorola.

The complaints from Apple and Microsoft represent the latest example of companies involved in long-running patent disputes seeking to use the European Commission as an alternative forum for resolving those disputes. Apple in particular has been very active, looking to use antitrust arguments to limit the ability of rivals to use patents to gain market advantages (see, in addition, the Samsung complaint below).

Microsoft - no stranger to the impact that antitrust laws can have on a business - is also now very active in looking to gain advantages from antitrust enforcement and it appears to have its great rival, Google, firmly in its sights. Microsoft’s complaint about Motorola was filed just days after the European Commission had given the green light for Google to acquire Motorola Mobility (a deal widely viewed as driven by Motorola’s extensive patent portfolio). Microsoft has, of course, already filed a broad-ranging complaint against Google’s search ranking practice [Antitrust and Technology in Europe and Asia: Microsoft on the attack - Google under investigation].

Samsung under investigation for potential abuse of dominance in the mobile phones market

Prior to the Motorola case being opened, on 31 January 2012, the Commission had already opened an investigation to assess whether Samsung Electronics has abused its dominant position by using certain of its standard-essential patent rights to block market access to key technologies for competing companies such as Apple. This investigation followed a complaint by Apple, following aggressive enforcement of patents by Samsung (including seeking injunctions to prevent sales by competing mobile device makers).

In 1998, Samsung gave irrevocable commitments to the European Telecommunications Standards Institute (ETSI) to license any standard-essential patents relating to European mobile telephony standards on FRAND terms. The Commission will investigate whether Samsung has abused its dominant position by restricting access to such standard-essential patents, in breach of the commitments it made to ETSI.

Technology on Almunia’s agenda

In two speeches in February 2012, Competition Commissioner Almunia stressed the importance of standard-essential patents in the technology sector and the importance of maintaining overall competitiveness by applying antitrust rules to essential patents. One of the pillars of the EU 2020 strategy is to improve innovation and Mr Almunia wants to ensure that large corporations do not hinder innovative new players by making essential patents either too expensive or simply unavailable. He particularly highlighted the following:

• issues of access and interoperability are closely associated with patents and intellectual property rights;
• the patent wars amongst mobile-device firms have not gone unnoticed by the Commission. Mr. Almunia expressed his concerns over such litigation wars having anti-competitive effects;
• companies that hold standard-essential patents can essentially hold up the entire market by banning competitors’ products or licensing on unfair terms.

The European Commission reviews two proposed mergers in the hard disk drive sector

After having opened two in-depth investigations, the Commission cleared, on 19 October and 23 November 2011, two separate transactions in the hard disk drive (HDD) sector.

In and of itself, this may not be particularly interesting. However, the cases highlight an important rule in the Commission’s assessment of mergers that, it appears, the Commission has applied rather dogmatically.

The Commission applies a “priority” rule to two or more mergers notified in the same market. That is to say, even if a merger has not been cleared or completed, if it is notified to the Commission, it is assumed to have taken place for the purposes of assessing mergers subsequently notified to the Commission in the same market.

In these cases, an acquisition of Viviti Technology by Western Digital was notified a day after the proposed acquisition of Samsung’s HDD business by Seagate Technology. As a result, the Commission’s assessment of the Western Digital/Viviti transaction took into account the Seagate/Samsung transaction (and assumed that this consolidation had already taken place) but, in assessing the Seagate/Samsung transaction, the Commission assumed that Western Digital and Viviti were still independent suppliers.

This ultimately gave a significant advantage to the Seagate/Samsung transaction as the deal was viewed as only reducing the number of 3.5 inch HDD competitors from 4 to 3 compared to the Western Digital/Viviti deal (which was viewed as reducing the number of 3.5 inch HDD competitors from 3 to 2).

Consequently, whilst the Seagate/Samsung transaction was cleared without any divestments being required, in order to secure the acquisition of Viviti, Western Digital was forced to divest essential production assets for the manufacture of 3.5-inch HDDs, including a production plant, and to commit to the transfer or license of the IP rights used by the divestment business, the transfer of personnel and the supply of HDD components to the divestment business. Western Digital also committed not to close its proposed acquisition of Viviti before concluding a binding agreement for the sale of the divestment business to a suitable purchaser approved by the Commission.

The approach of the Commission has given rise to criticism, in particular given that the Western Digital/Viviti transaction was announced one month before the Seagate/Samsung deal and that the companies had already engaged in pre-notification discussions with the Commission before the Seagate/Samsung deal was notified. Not surprisingly, Western Digital has filed two appeals to the European Courts, one in August 2011 challenging, amongst other things, the priority rules applied by the Commission and another one in February 2012 challenging the Commission’s clearance decision of the Western Digitial/Viviti deal.

It is interesting to note that the Commission’s approach was not followed by other competition authorities in Asia, such as Korea or Japan. More information about their reasoning and assessment is provided in the Asia Pacific section below.

Commission clears the acquisition of Skype by Microsoft ...

Microsoft’s acquisition of the internet video communication provider Skype was announced in May 2011 and notified to the Commission in September 2011. The deal, which had already been cleared by the Federal Trade Commission in the USA, was unconditionally approved by the Commission in October 2011.

Although the two parties’ services overlapped in relation to video communication because of Microsoft’s Windows Live Messenger, the Commission held that no competition concerns were raised on the basis that this was a growing market and that the parties would still face competition from several competitors, such as Google.

The Commission also assessed the following two aspects, resulting from the fact that Microsoft and Skype were active on neighbouring and complementary markets:

• whether Microsoft could alter Skype’s interoperability with competing services: the Commission considered that Microsoft has a vested interest to keep the Skype programme available on a large number of platforms and would therefore have no incentive to degrade Skype’s current interoperability; and
• whether Microsoft’s ability to bundle and tie software with its Windows operating system could allow them to limit competition between communication providers (which was essentially the concern that led to the European Commission’s past cases against Microsoft for abuse of a dominant position). Here, the Commission held that the market practice is that newly sold personal computers will offer a pre-installed version of Skype and the purchaser would then, at some point, download the latest version of Skype that is different from the one originally provided in the personal computer. The Commission considered that this situation would not be altered as a result of the transaction and hence held that such bundling would not restrict the customers’ freedom of choice.

Interestingly, the Commission was of the opinion that Skype cannot be considered as a product for the corporate market and that interoperability with Skype is not decisive for competitors. The Commission considered that Microsoft’s Lync more closely competed with products from other communication companies, such as Cisco, for example, and that this competition would not be altered by the merger.

...but Cisco challenges such decision before the European courts

On 15 February 2012, Cisco, together with Messagenet, a European video-calling provider, filed an appeal to the General Court to challenge the Commission’s decision authorising the Microsoft-Skype deal. Cisco claims that the Commission should have sought remedies in relation to standard-based interoperability in video services for corporate customers and that, as a result, the Commission’s decision should be annulled.

As mentioned above, Cisco competes with Microsoft’s Lync in relation to video communications. Considering the vast number of Skype account holders, Cisco is concerned that if Microsoft decides to exclusively integrate Skype into its Lync Enterprise Communications Platform, it would exclude other businesses that would want to be in contact with the 700 million Skype account holders. As video communication is a key developing sector, Cisco fears that Skype and Window’s products will become very attractive (in particular if bundled together with other products such as Windows Office), to the detriment of stand alone video communication products.

This appeal raises the key issue of whether Microsoft should be required to adopt standard based interoperability remedies in a sector which is developing and where one single company, Microsoft, could potentially control the market through standards it owns by not making them available to competitors active in the same market.

European Commission opens an investigation into MathWorks software company

On 1 March 2012, the Commission opened an investigation against MathWorks. This investigation was launched further to the receipt of a complaint from technology firm National Instruments, alleging that MathWorks refused to provide a competitor with end-user licenses and the interoperability information in relation to MATLAB and Simulink, its two software programmes used in the design and simulation of commercial control systems. The complaint suggests that, by withholding such licenses, MathWorks abused its dominant position by preventing their competitors from lawfully reverse-engineering in order to achieve interoperability with these two products.

This investigation is the first Commission investigation on software interoperability since the landmark Microsoft decision [EU antitrust decisions in the technology sector] where the Commission required the company to publish interoperability information.

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Asia Pacific

Mergers in the hard drive sector also under scrutiny in Asia

Following the European Commission, a number of competition authorities in Asia have also conducted an in-depth merger review of Seagate’s proposed acquisition of Samsung’s hard drive business and the parallel acquisition by Western Digital of the Viviti Technology hard drive storage business. In Korea and Japan, in contrast with the priority rule adopted by the European Commission, the cumulative effects of both transactions were examined in parallel. In China, the transactions were reviewed separately but similar clearance conditions were imposed in both cases. In Singapore, only the Seagate/Samsung transaction was notified under Singapore’s voluntary merger control regime.

With the notable exception of China, the substantive outcome of these Asian merger control procedures is broadly aligned with the EU: the Seagate/Samsung transaction was cleared unconditionally but divesture remedies were deemed appropriate to clear the Western Digital/Viviti transaction. China is the only jurisdiction to impose clearance conditions for both transactions.

On 26 December, the Korean Fair Trade Commission (KFTC) announced that it had conditionally approved Western Digital’s acquisition of Viviti’s hard disk drive business. In line with the European Commission’s decision of 23 November, the KFTC found that the proposed merger would possibly create anticompetitive unilateral and coordinated effects in the global markets for 3.5 inch desktop drives and for 3.5 inch consumer electronics drives. To clear the transaction, the KFTC imposed remedial conditions similar to those imposed by the European Commission, namely, Western Digital shall divest its assets essential to the manufacture of 3.5 inch hard disk drives. (In a later decision, the KFTC cleared the disposal of these activities to Toshiba). The KFTC explained that it had also reviewed the parallel acquisition of Samsung’s hard disk drive business by Seagate but that it had found that this second transaction would not substantially harm competition. Therefore this second transaction was unconditionally cleared.

The Japan Fair Trade Commission (JFTC) also chose to review the cumulative effects of both notified transactions in parallel. Whereas it identified competition concerns on the global market for the supply of 3.5 inch drives used in personal computers and consumer electronics as well as on the global market for the supply of “business critical” 3.5 inch drives, the JFTC announced on 28 December 2011 that it had decided not to oppose these parallel transactions in view of Western Digital’s commitment to the European Commission to divest its essential production assets for the manufacture of 3.5 inch drives.

Under Singapore’s voluntary merger control regime, only the Seagate/Samsung transaction was notified to the Competition Commission (CCS). The transaction was unconditionally cleared by the CCS on 20 November 2011. Like the European Commission, the CCS did not take into account in its competitive analysis the impact of the parallel acquisition of Viviti’s hard drive business by Western Digital. Interestingly, the CCS identified the global hard drive disk market as the only relevant market on which the parties have overlapping activities. Notwithstanding the high combined market share of the parties on the relevant HDD market (between 40 and 50 per cent), the CCS ruled out competition concerns on the basis that Samsung had a relatively small market share and that the parties were not the closest competitors. The CCS also took into account the low barriers to entries, countervailing buying power and the innovative nature of the HDD market to rule out competition concerns.

Both transactions were also notified in China. After an extended six-month review, the Chinese Ministry of Commerce (MOFCOM) announced on 12 December 2011 that it had conditionally approved the Seagate/Samsung transaction. Identifying the global hard disk drive market as the relevant market, MOFCOM considered that the transaction was likely to eliminate or restrict competition because the market is highly concentrated with only five suppliers that are subject to little competitive pressure from their customers and their competitors. In order to clear the transaction, MOFCOM imposed a series of behavioural conditions on Seagate. Most importantly, Seagate shall maintain the production, R&D, sales and pricing independence of the acquired business, so that Samsung hard drives remain independent competitive products in the relevant market. Seagate shall also expand the production capacity of the acquired business, as well as maintain the normal scale and pace of its R&D investments.

Three months later, on 2 March 2012, MOFCOM conditionally approved the Western Digital/Viviti transaction. In its analysis, MOFCOM took into account the fact that Western Digital had already committed to divest Viviti’s 3.5-inch hard disk drive business as part of the conditional clearance obtained from the European Commission when it reviewed the same transaction. MOFCOM however considered that this divestment was not enough to address all of the anticompetitive effects of the transaction, and went on to impose additional behavioural conditions. Most importantly, and in line with what MOFCOM had decided in the parallel Seagate/Samsung transaction, Western Digital is required to maintain Viviti’s independence so that it remains a separate competitor in the market (this condition will apply for a period of at least two years, contrary to what was the case in the other transaction, where the minimum period of application was one year).

MOFCOM’s approach contrasts with that adopted so far by other competition authorities in the same case. The most significant divergence is that it imposed conditions to approve the Seagate/Samsung transaction whereas the same transaction was cleared unconditionally by all other authorities. It is also interesting to note that MOFCOM imposed behavioural conditions as opposed to structural divesture measures which are more commonly used by other competition authorities to remedy competition concerns in merger cases, although the behavioural conditions imposed are very drastic indeed: not integrating the target businesses in China.

Korean competition authority issues patent licensing and standard setting guidelines

In a sign that patent abuse issues are also becoming an important policy issue in Asia, the KFTC recently adopted two sets of guidelines dealing respectively with patent licensing issues and standard setting activities.

On 17 January 2012 the KFTC adopted Guidelines for Fair Patent License Agreements. The guidelines explain in general terms how patent licensing agreements may infringe competition law and provide examples of potentially abusive practices, including price discrimination, territorial restrictions, exclusive use obligations and restrictions on the price of goods produced using the licensed patent. The guidelines appear to be generally in line with international best practice. Assessing the market power of the patent holder, as well as the competitive relationship between parties and the essential/non-essential nature of the patent in question are key considerations for a competitive assessment, according to the KFTC.

A focus of the guidelines is also to assist small- and medium-sized enterprises when negotiating patent licenses with larger businesses. This is consistent with the approach of the KFTC when it adopted revised Guidelines on the unlawful exercise of intellectual property rights in April 2010. At that time the authority had stated that its guidelines could be used as “legal grounds for domestic SMEs with weak bargaining power which intend to address unfair request of large companies or multinationals when negotiating a contract for patent license”.

Two weeks later, on 31 January 2012, the KFTC issued Model Operating Guidelines for Standard Setting Organizations for Voluntary Compliance with the Monopoly Regulation and Fair Trade Act. While acknowledging that standard-setting activities are often pro-competitive, these guidelines describe in general terms certain business practices - such as patent ambush or discriminatory licensing arrangements - which are likely to raise competition law concerns. The guidelines also set out model operating procedures for standard-setting organisations. To minimise competition law risks, participation to any standard setting activity should be based on fair and transparent criteria, the decision-making process should be objective and transparent and there should be adequate procedures in place to ensure a fair availability of the standard once it is established. Interestingly, in line with the EU model, the guidelines recommend the adoption of early IPR disclosure requirements and FRAND commitments as effective ways to ensure the future availability of standards incorporating essential IPRs.

Google faces allegations of leveraging its market power in mobile operating systems

Last September, the KFTC conducted an on-site investigation at Google’s Seoul offices in relation to alleged restrictive practices in the domestic online search markets. The investigation follows complaints received from NHN and Daum Communications that Google is stifling competition in the mobile search market.

The two complainants, South Korea’s leading internet search engines, allege that Google is making it difficult for third party search engines to offer their services on smart phones that run on the Google Android operating system by pressurizing local phone carriers and manufacturers not to preload their search applications in devices using the Android operating system. According to NHN, Google has threatened smart phone manufacturers working with competing search engines to delay the grant of certifications needed to run Google Android on their devices. Google denies the allegations and has stated that the Android platform – which reportedly runs on nearly 70 per cent of all smart phones sold in South Korea – is an open-source platform and mobile manufacturers are therefore free to decide which applications and services to include in their smart phones.

Google is facing increasing antitrust scrutiny around the world. Most of the allegations against Google relate to abusive conduct on the online search and advertising markets on which Google has significant market power. What distinguishes the Korean case from the others is that Google’s strength in online search is not at stake. Instead the complainants allege that Google is leveraging its market power as a mobile operating system provider to gain market share in online search, where it has been less successful in Korea to date. Whereas the market penetration of Android phones is particularly high in Korea, Google could be exposed to similar complaints elsewhere if and when the Google smart phone operating system becomes the dominant online platform.

Heavy fines imposed on consumer electronic manufacturers for cartel conduct

In recent months, the KFTC has imposed significant fines on consumer electronic manufacturers for cartel conduct relating to a number of products ranging from liquid-crystal display panels to telephone handsets, washing machines and laptop computers.

Last October, the KFTC imposed fines totalling ₩194 billion ($174 million) on 10 liquid-crystal display (LCD) manufacturers, including Samsung Electronics and LG Display for fixing the prices of panels for computers and televisions. The LCD manufacturers were found to have engaged in price fixing conduct between 2001 and 2006. The KFTC found evidence of about 200 meetings – both bilateral and multilateral – to agree on minimum prices, production quotas and other measures aimed at preventing price declines caused by oversupply. The LCD manufacturers also exchanged confidential sales data to monitor their agreements. In 2010, the European Commission had already imposed fines totalling €649 million ($910 million) on the LCD manufacturers for similar cartel conduct.

In January, Samsung Electronics and LG were again sanctioned by the KFTC for fixing the prices of washing machines, flat panel televisions and laptop computers. The two leading electronic producers were found to have attended meetings in Seoul between 2008 and 2009 to exchange information and agree on the price levels of these three products. Samsung was fined ₩25.81 billion ($22 million) whereas LG was fined ₩18.83 billion ($16 million) for this conduct.

On 15 March, the KFTC imposed cease and desist order and fines totalling ₩45.3 billion ($39 million) on three domestic telephone handset manufacturers (Samsung Electronics, LG Electronics and Pantech) and three mobile phone carriers (SK Telecom, LGU+, and KT) for collusion and consumer fraud practices. The KFTC found that between 2008 and 2010 the parties had inflated the retail price of mobile phone handsets and consequently offered misleading rebates to customers. It would appear that the parties were sanctioned both for deceptive trade practice and anti-competitive collusive conduct. The highest fine of ₩20.2 billion ($17 million) was imposed on SK Telecom. Samsung Electronics was fined ₩14.2 billion ($12 million), KT was fined ₩5.1 billion ($4 million) and LGU+ was fined ₩2.9 billion ($2 million). The other companies involved were fined smaller amounts. Separately, the KFTC also imposed another fine of ₩440 million ($388,000) on SK Telecom for favouring its affiliated stores and threatening to stop activating Samsung phones purchased in non-affiliated stores.

Three days later it was reported that the KFTC imposed an additional fine of ₩400 million ($352,000) on Samsung Electronics for obstructing the same investigation. The KFTC found that Samsung Electronics had ordered security guards to bar the KFTC’s investigators from entering the premises in March 2011 to carry out the investigation and submitted fake documents to the KFTC. The KFTC also stated that video records from surveillance cameras showed that employees were ordered to remove documents after having been informed of the KFTC’s investigation.

In total, over the last six months, the KFTC has imposed fines in excess of ₩284 billion (around $250 million) to sanction cartel conduct in the consumer electronics sector. Even though the fines recently imposed concern conduct which took place sometimes several years ago, these decisions are a reminder that the consumer electronics sector remains high on the enforcement agenda of the KFTC.

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