Competition regulators have traditionally been wary of intervening in fast-moving technology markets and with good reason. Cumbersome enforcement processes mean that there is always a danger of fighting yesterday’s battles. Remedies may turn out to be at best redundant and at worst counter-productive. Technology markets have been regarded as ‘difficult’ both from the technical perspective and from a legal one as the tension between competition law and the legal ‘monopolies’ conferred by intellectual property rights has never been fully resolved. There has also been a certain justified resistance to competition intervention in markets which are driven by innovation and technological change.
This, however, is changing. At a time when consumer habits in the use of technology are rapidly developing, with the rise of smartphones and tablets as a potential alternative to PCs and laptops, the European Commission, the EU’s antitrust regulator, is taking an increasingly active interest in potential anti-competitive practices in technology markets, with a view to ensuring that access and interoperability are preserved. As the EU Competition Commissioner Joaquin Almunia said in a speech in February 2012, referring to the digital economy:
‘…competition policy aims to limit the establishment of dominant closed gardens and to ensure interoperability across different services.’[1]
The origin of this trend undoubtedly lies in the Commission’s 2004 decision fining Microsoft for abusing its dominant position in PC operating systems by withholding interoperability information from rival suppliers of work group server operating systems and by bundling Windows Media Player with Windows OS. This was not the first foray by the Commission into technology markets but it was more high-profile and more involved in terms of the regulator’s technical and economic analysis than any case that preceded it.
Since Microsoft there has been a steady stream of concluded cases involving technology companies:
· Intel was fined for abusive loyalty rebates in relation to the supply of central processing units with the effect of excluding rival chip makers (2009)
· Microsoft gave commitments to enable browser choice on new PCs following a complaint by Opera (2009)
· Rambus gave commitments not to charge excessive royalties for access to standard-essential patents (2009)
· IBM gave commitments to provide access to mainframe maintenance materials to rival maintainers (2011).
However, this stream is becoming a flood. The current pipeline includes:
· an investigation into the Google’s search ranking and advertising practices which are alleged to give preference to Google services over other results. Most recently, on 21 May 2012, the Commission announced that it had written to Google outlining its concerns and inviting an offer of commitments to settle the case by 2 July 2012 (it appears that moves are indeed afoot to settle this);
· investigations into allegedly abusive practices in the licensing and enforcement of standards-essential patents for 3G smartphones by Samsung and Motorola Mobility (now owned by Google);
· an investigation, following a complaint made by National Instruments, that US company Mathworks may be hindering interoperability in relation to software in the commercial control systems sector;
· an investigation into whether Honeywell and DuPont have engaged in a ‘patent ambush’ in connection with the setting of a new standard for refrigerator gas used in car air conditioning units.
Anti-trust complaints have also been lodged with the Commission by HP against Oracle, alongside complaints in France and Spain, alleging abuse of dominance through stopping software development for the Intel Itanium microprocessor and by Huawei against Interdigital also in relation to standards-essential patents for 3G smartphones. It remains to be seen whether the Commission takes up these complaints but it is clear that companies in the technology sector increasingly regard a complaint to the Commission as one of the available tools in disputes over standards or interoperability.
The past year or so has also seen a succession of important merger decisions in the technology sector – Intel/McAfee[2], Microsoft/Skype[3] and Google/Motorola Mobility[4] – in which the Commission has had to grapple with difficult issues of technical interoperability and standardisation in technology markets. All the deals were cleared but in each case the Commission examined closely whether the transaction would enable the acquirer to create barriers to entry or expansion by rivals through degrading or blocking interoperability.
On top of all this, the Commission launched on 23 March 2011 a consultation on technical interoperability in situations not covered by industry standards which asks whether technology companies should be forced to disclose information about their products to allow rivals to market interoperable products. [5]
What is striking is the proactive nature of the Commission’s approach – aiming to limit the establishment of closed systems rather than tackling them after the event as has historically been the case. This is surely a legacy of Microsoft. At the time of the Commission’s decision, Microsoft had over 90% of the world market for client PC operating systems and around 60% of workgroup server operating systems. Competition in the latter market, which the Commission found that Microsoft had impeded by withholding adequate interoperability information, had already been substantially weakened by the time of the decision and its full implementation in 2008, 10 years after the initial complaint by Sun. In its ruling rejecting Microsoft’s appeal, the European Court of First Instance (now General Court) gave a clear signal that the Commission need not wait so long in the future:
‘If the Commission were required to wait until competitors were eliminated from the market, or until their elimination was sufficiently imminent, before being able to take action under [Article 102 of the Treaty on the Functioning of the European Union], that would clearly run counter to the objective of that provision, which is to maintain undistorted competition in the common market and, in particular to safeguard the competition that still exists on relevant markets.‘[6]
This proactive approach can be further illustrated by the Intel/McAfee merger decision and the Commission’s pending inquiries into smartphone patents and standardisation.
Intel/McAfee involved the acquisition by Intel, the world’s dominant supplier of microchips, of McAfee, the (at the time of the merger) third player in ‘endpoint’ security for PCs. The Commission was concerned that, as a result of the merger, Intel would have both the ability and incentive to disadvantage rivals to McAfee in the market for software security systems through:
· degradation of rivals’ access to performance parameters of Intel chips and optimising interfaces to favour McAfee
· technical tying of McAfee products to Intel chips.
To resolve the Commission’s concerns, Intel offered, and the Commission accepted, commitments to continue for five years to provide the documentation necessary for rival vendors of security software to develop and optimize software that uses the functionality of Intel chips and chipsets, supervised by a monitoring trustee and arbitration procedure.
This was a notable and important outcome. It is very unusual for the Commission to accept ‘behavioural’ commitments as a condition for approving a merger. The only commitments that are acceptable are normally structural – divestment of a business or assets to a third party. However, in this case, the Commission accepted that Intel’s commitments would be an effective remedy for its competition concerns. As the Commission put it:
‘this is a case where one of the main concerns is that control of key technology and possibly related IP rights may lead to foreclosure of competitors the products of which need to interoperate with this technology on an equal footing. The parties may withhold information necessary for the interoperability of competing security software or competing CPUs and chipsets, thus raising competition problems. In these circumstances, commitments to grant competitors access to the necessary information may eliminate the competition concerns.‘[7]
It is likely that this kind of quasi-regulatory approach will become a model for cases in communications and technology markets where the competition concerns centre not around classic consolidation of market power, but around issues of interoperability, exclusion and foreclose.
A similar theme underlies the Commission’s engagement in the ‘patent wars’ taking place over standards for 3G smartphones. Standardisation is hugely important for ensuring interoperability in many technology markets, but anti-trust concerns can arise over the market power that may be acquired by holders of standard-essential intellectual property rights. The Commission’s policy on standardisation was clarified and expanded in 2010 in revised guidelines on horizontal co-operation agreements.[8] These guidelines state that holders of standard essential IPRs must license those IPRs to third parties on fair, reasonable and non-discriminatory (FRAND) terms if they are to avoid censure under the competition rules.
The cases against Samsung and Motorola Mobility will be the first big test of the new guidelines. Samsung and Motorola Mobility both hold portfolios of standard-essential patents (SEPs) for 3G smartphones and tablets. Complaints have been made to the Commission by Apple, Microsoft and others that these patent holders have, by pursuing an aggressive litigation strategy, breached their FRAND commitments and abused the market power that comes with holding SEPs in order to raise royalties, harm competitors and extract favourable cross-licences. The cases are still pending but some indication of the Commission’s approach is apparent from its decision in Google/Motorola Mobility and the public statement of Commission officials.
Like Intel’s acquisition of McAfee, Google’s acquisition of Motorola Mobility, a mobile handset manufacturer, did not give rise to any direct concentration of market power. However, as with Intel/McAfee, the transaction raised concerns about possible exclusionary conduct by Google vis-à-vis other handset manufacturers. One of the key drivers of the deal from Google’s point of view (as reported in the Commission’s clearance decision) was the acquisition of Motorola Mobility’s portfolio of patents for mobile devices, some of which were SEPs. The Commission therefore considered, among other things, whether Google would have the ability and/or incentive to depart from the FRAND commitments that Motorola Mobility had given in relation to those SEPs. The Commission concluded that Google would not have an incentive to act in this way. However, it gave a strong signal as to its view of SEP holders who abuse their position through aggressive litigation strategies and the need for swift action to prevent anti-competitive harm:
‘Depending 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 [of an SEP], may significantly impede effective competition by, for example, forcing the potential licensee into agreeing to potentially onerous licensing terms which it would not otherwise have agreed to. Another concern would be that the SEP holder may force a holder of non-SEPs to cross-license those non-SEPs to it in return for a licence of the SEPs. To the extent that injunctions are actually enforced, this furthermore may have a direct negative effect on consumers if products are excluded from the market. Even if exclusion of competing products from the market through injunctions were to be temporary (i.e. there would be a delay only in access to the relevant products until the counter-party of the SEP holder agreed to the commercial terms demanded), in a fast-moving market such as the smart mobile device market, serious harm could potentially be caused by it.‘ [9] [emphasis added]
In its press release announcing clearance of the deal in February 2012, the Commission indicated that it would ‘continue to keep a close eye on all market players in the sector, particularly the increasingly strategic use of patents’. This prompted almost immediate complaints by Apple and Microsoft against Motorola Mobility which the Commission is considering whether to investigate formally.
The pattern is clear, therefore. The Commission has the tech sector in its sights. Technology in general and the digital economy in particular is seen as one of the prime means of restoring growth to the European economy. But, for the Commission, this must not come at the expense of excessive concentrations of market power through loss of interoperability and the regulator, hardened by past and ongoing battles with the world’s biggest tech sector players, appears ready to use all the tools available to it in competition enforcement and merger control to pursue that goal.
Nick Pimlott is a Partner at Field Fisher Waterhouse LLP: www.ffw.com
[1] ‘Competition Policy and Growth by Joaquin Almnuia, Vice President of the European Commission responsible for Competition Policy, Brussels 28 February 2012, SPEECH/12/131
[2] Case COMP M.5984, Decision 26 January 2011
[3] Case COMP M.6281, Decision 7 October 2011
[4] Case COMP M.6381, Decision 13 February 2012
[5] http://ec.europa.eu/yourvoice/ipm/forms/dispatch?form=Interoperability&lang=EN
[6] Case T-201/04 Microsoft v Commission, judgment of 17 September 2007, paragraph 561
[7] Intel/McAfee decision, paragraph 306
[8] Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements (2011/C11/01) http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52011XC0114(04):EN:NOT
[9] Case COMP M/6381 Google/Motorola Mobility, paragraph 107
