Tag Archives: Competition law

Can the abusive exercise of a –procedural- right constitute an abuse of dominant position?

Danai FATI, 10/05/2017

Introduction

The aim of this contribution is to cast light on a development characterizing competition law, namely the newly emerged category of ‘procedural abuses’ conducted by dominant undertakings in the EU’s internal market. The adjective ‘procedural’ is meant to show that the abuse is essentially linked to the abusive use of a procedure, be that administrative or judicial.

Article 102 of the Treaty on the Functioning of the European Union (hereafter TFEU) stipulates that “any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.

The decisional practice of the European Commission together with the confirmation given by the European Court of Justice (hereafter ECJ) in the Huawei case (C-170/13), reflect a new tendency in the boundaries of competition law. These boundaries are now being tested as a dominant company may be found to be breaching EU Competition law and particularly Art. 102 TFEU, not because of some conduct it held in the market but because it has exercised one of its procedural rights in an abusive way.

Background

The discussion on the emergence of procedural abuses was sparked by the judgment of the ECJ in the Huawei case, rendered a couple of summers ago. In a nutshell, Huawei is high-tech company active in the telecoms market, which developed a patent concerning the mobile network communications. Huawei’s technology was then incorporated in the establishment of a technical standard. To give a short insight to readers not familiar with the standard setting process, various market players of an industry, such as manufacturers, network operators, service providers and others, may decide to come together and through a standard setting body to set out some common technical standards for the manufacturing of complementary products. The development of standards can be very beneficial as it ensures that different products, for example a smartphone and headsets, produced by different companies are technically compatible and interoperable. When a company gives its patent to be part of a standard (called Standard Essential Patent or SEP), it also makes a commitment to grant licenses of its intellectual property (IP) to third parties who want to use that standard. The license must be offered by the SEP holder on FRAND terms, meaning on terms which are Fair, Reasonable and Non-Discriminatory. This commitment is offered in advance so to avoid that the IP holder, whose patent has been used in a standard, can misuse its power and lock-in third parties by refusing to grant them license or by granting it only in an excessive rate.

Huawei, as a SEP holder, and ZTE, the company seeking a license, failed to reach an agreement on the FRAND terms and thus Huawei refused to grant license to ZTE. Huawei then decided to initiate legal proceedings before national courts seeking for injunctions against ZTE, who had started using that SEP.

On examining the facts, the Court found that Huawei had abused its dominant position by bringing an action seeking an injunction prohibiting the use of its patent.  Of course, the finding of an abuse was subject to strict conditions set out by the Court. What is striking, however, and constitutes the essence of the case, is that a company which is dominant may see, under certain conditions and within a context, its right to have access to justice being restricted on the basis of competition law. The case introduces the idea that the exercise of the right of access to justice, now also enshrined in Art. 47 of the Charter of Fundamental Rights of the European Union, may constitute an abuse of dominant position. In other words, the –abusive- use of a procedure, a judicial one in this case, may constitute an abuse of dominant position.

However, how ‘new’ is this finding and where does it come from?

The emergence of ‘procedural abuses’ as a distinct type of abuse

The idea that a use of a procedure in an abusive way may trigger the application competition law and Art. 102 TFEU, may not come as such a surprise if one closely follows the decisional practice of the Commission and the Court in the past. Studying the relevant case-law shows that the judgment in Huawei case cannot be regarded as an isolated incident. In fact, the Commission had the occasion to talk about the possibility of new types of practices falling under Ar.102 some years ago following the Commission’s Sector Inquiry in the Pharmaceutical sector. There the Commission found evidence which seemed to suggest that dominant pharmaceutical companies might be using a variety of -in principle legal- instruments with the aim to block or delay competition in the market. Indicatively, such practices may consist in patent filing strategies, recourse to litigation by dominant originator companies to delay generics, settlements between originators and generics over patents in the context of litigation or the intervention of originators in the process of market authorization of generics medicine. On the first reading, all these practices do not seem to entail any illegal behavior. In fact, quite the opposite; Settling in litigation is absolutely legitimate. Recourse to litigation, as enforcement of IP rights, is a fundamental tool to oppose infringements for their holders (on an EU level with regard to the enforcement of IP rights, the Enforcement Directive 2004/48 aims to ensure a common high and equivalent level of protection in the internal market). Therefore, what the Commission suggests is that although the use of all those procedures is legitimate they can be abusively used, be they administrative as is the case of patent filling before national or European patent offices, or judicial as is the case of bringing an action before court or the settling in a context of litigation with the opponent.

It is apparent from the analysis just above, that the abuse of a dominant position which is linked to an abuse of a procedure, does not necessarily only refer to the initiation by a dominant company of legal proceedings before courts (for seeking injunctions in the context of a SEP whereby the patent holder has undertaken to grand license under FRAND terms). In fact, there are other types of procedures which can be misused with the aim to exclude competitors and which can thus constitute a competition law infringement. This is not just theoretical; the case-law of the Commission and the Court have already paved the way. Based on the analysis of existing case-law, the procedural abuses identified so far can be summarized in three main categories: a) misusing an administrative patent filing process, b) settlements in litigation and c) bringing an action seeking injunctions (in a SEP context, as in the Huawei case). Let’s take a closer look to each of those practices and see how they ended up being caught under art. 102 TFEU.

  1. a) Filing a patent as an abuse of dominance

How bad can the filing of a patent be? The Commission had from very early on the opportunity to establish in the Astra Zeneca case (COMP/37.507, 15/6/2005) that the misuse of an administrative procedure regarding the filing of a patent before a patent office can amount to an abuse of dominant position. And the Commission’s position was well upheld by the ECJ (C-457/10P). Astra Zeneca was a pharma company which had a acquired a patent for the drug ‘Losec’. The company was found to have abused its dominant position by abusing public procedures to exclude or delay generic companies’ drugs to enter the market. More in detail, Astra Zeneca gave misleading information to several national patent offices which resulted in the company gaining extended patent protection for Losec, whose patent was about to expire. Based on the applicable procedure at the time, the patent office was not expected to make a substantive evaluation of the data provided but essentially relied on the information given by Astra Zeneca. In addition, the company misused the national procedures applied by the national medicine agencies when issuing market authorizations for drugs, by selectively deregistering the market authorizations for Losec capsules, with the aim to delay the authorization and marketing of generic drugs. At the time, a generic medicine could be imported and traded only if an original medicine was already authorized in that country. So by deregistering the original drug, Astra Zeneca was misusing a (patent-related) process to exclude competitors who could have entered the market with cheaper generic medicine, benefiting health systems and consumers.

One could of course say that this finding was subject to the special circumstances of the case, relating to the area of IP sand to the fact that the public authorities had no discretion to evaluate the validity of the information provided by the undertaking so to grant the patent. However, the principle was set out: the abusive use of a procedure can now also bring antitrust liability.

  1. b) Settlements in courts between competitors as an abuse of dominance

As seen in the Huawei case, analyzed above, the right of access to a judge is a constituent part of the right of effective judicial protection, a right protected at an international level through the European Charter of Human Rights, at an EU level through the Charter of Fundamental Rights of the EU, and also at a national level of the EU member states. But this did not restrict the Commission and the ECJ from holding that when Huawei exercised that right by initiating proceedings in national courts against a competitor, it was abusing its dominant position. Something different but closely related occurred in the Servier case (AT 39612, 9/07/2014), decided by the Commission in 2014.

Servier is a French drug company producing the bestselling blood pressure drug, perindopril. Servier was found to have abused its dominant position by entering into the so called “pay-for-delay” settlements with four generic companies within the context of litigation before national courts. In a nutshell, the abuse consisted in the fact that Servier, who had initiated proceedings against the generic companies claiming they were breaching its patent rights, proposed and signed settlements with the defendants whereby it agreed to pay them a fee in return for their commitment not to enter or delay their entry in the market. These are also known as reverse payment settlements, as normally it is the generic companies who pay the originator of a drug for the damages caused to him from infringing its patent. However, here, the originator pays the generic companies to extract their consent to delay introducing their competing drug in the market. The rational for condemning the company based on competition law was that Servier had used a chain of settlement agreements (an utterly legitimate judicial procedure in principle) to delay the generic companies from entering the market and thus to protect itself against competition. In other words, it was established that a judicial procedure, commonly available, was used in an abusive way, aiming not at ensuring the plaintiff’s rights protection, but as a targeted strategy to exclude competitors. That conclusion was of course subject to the exceptional circumstances found on that case; Servier had initiated the legal proceedings against four generic companies and was a common subject in all four settlements (that showing the anti-competitive exclusionary strategy), that the settlements were part of a single strategy (to keep competitors out of the market) and that the chain of settlements was self-reinforcing.

To be noted that an appeal against the Commission’s decision is currently pending before the EU General Court (T-691/14).

 

  1. c) Initiating legal proceedings before courts as an abuse of dominance

As already discussed above, the idea that an abusive exercise of the right to have access to justice may amount to a competition law infringement, was recently established by the ECJ in the summer 2015 in the Huawei case. However, this is not actually an entirely novel idea; the Commission had opened the door with a couple of decisions that had preceded.

In 2014, the Commission issued two decisions, again both emerging in the area of IP, one against Motorola and the other against Samsung. The facts of both cases were quite similar, pertaining on the fact that these two undertakings, each holding a dominant position, had abusively exercised their right to recourse to justice by seeking injunctions against their competitors. To use Motorola case as an example, the company had filed an action seeking injunctions alleging that its competitor, which happened to be Apple, had infringed its SEP-patent by using its patent without paying royalties since the parties had not succeeded in agreeing on the FRAND terms for its licensing. The Commission, however, underlined that since Motorola’s patent referred to a SEP, the undertaking had committed to grant a license to its competitors under FRAND terms. Therefore, seeking now injunctions against Apple for the use of the SEP could be regarded as an abusive exercise of that right and also an abuse of dominant position, especially in light of the fact that “Apple was not unwilling to agree on a license on FRAND terms”. That conclusion was of course subject to certain conditions and the Commission developed a detailed procedure which needs to be followed by the SEP holder in order to avoid being caught under 102 TFEU. The procedure, essentially, aims to ensure that the parties enter into genuine negotiations for the FRAND terms, with good faith and according to the standard commercial practice of the field. Despite the strict conditions established by the Commission and the ‘exceptional circumstances’ of the case at hand, one being the existence of a SEP and a preexisting commitment by the IP proprietor to grant licence to its competitors, the principle was spelled out by the Commission: the abusive exercise of the right of access to justice may amount to a competition law infringement. It is interesting to note that Motorola and Samsung were Commission decisions and their reasoning and conclusion had not been confirmed by the Court since those cases never reached the ECJ. This is why the Court’s ruling in the Huawei case was a stepping stone, being the first instance where the ECJ established the principle.

 

Conclusions

The analysis above shows that the Commission and the Court have established a new concept according to which the abusive exercise of a right can amount to an abuse of dominant position. And this is how the ‘procedural abuses’ were born.

Although, the concept of an abusive exercise of a right is well established in national jurisdictions and commonly prohibited on the basis of civil law provisions, one may wonder on the necessity of the use of competition law on such an occasion. The essential factor triggering the application of competition law seems to be the exclusionary intention of the dominant company when exercising its rights to have recourse to administrative procedures or litigation. Meaning that, instead of using a procedure as a means to assert its rights, the dominant company resorts to procedures with a view of making it more difficult or impossible for competitors to enter the market and compete.

It is important to note, however, that the new category of procedural abuses seems to have risen in the area of intellectual property and this is something to be taken into account when one assesses that legal development. And both the Commission and the Court have underlined the relevance of the ‘particular circumstances’ which were present in all the cases where an abuse was established. Therefore, the approach followed can be better understood if put in the context of the Commission’s agenda as regards the enforcement of competition law in the area of IP. As competition law stands today regarding the interplay between competition law and IP, dominant companies which are IPR holders should be vigilant of the case-law analyzed above if they want to avoid antitrust liability.

The bottom line is that in the EU, the balance to be struck between the need to ensure appropriate remuneration of IPR holders and the need to avoid abusive recourse to procedures or litigation, seems to end up in curtailing the IPR holders’ room for maneuver.

 

Danai FATI held the post of Academic Assistant in the Law Department of the College of Europe, specialising in competition law issues. She is also an alumna of the Havel Promotion.