Generally speaking, the competition authorities are extremely reluctant to intervene in the pricing decisions of companies. This is particularly the case in relation to intangible products such as intellectual property rights, proprietary information or databases. However, two recent competition law decisions, one from either side of the
When is a price fair?
The first case relates to the proprietary information, stored on a database. The information in question related to runners and riders in
The BHB asked ATR to pay substantial sums of money for access to the information. The BHB threatened to withhold the data if ATR would not comply. ATR commenced legal proceedings and succeeded at first instance in arguing that the BHB’s prices were too high.
In late 2006, the Court of Appeal was asked to review the decision that the prices charged by the British Horseracing Board (BHB) for access to pre-race data were excessive. It gave judgment in February this year. Of most interest to companies in the IT industry is the question of when a price charged by a dominant company for access to information or other assets that it controls may be excessive so as to infringe competition law.
The trial judge had concluded that the prices charged by the BHB to ATR were so far in excess of the cost of compiling the data and creating the database as to be clearly excessive. He suggested that a price would be excessive as long as it was significantly in excess of the economic value of the asset. He held that the ‘economic value’ could be assessed by measuring the cost of production (here, the cost of compiling the database) plus a reasonable rate of return. In reaching his conclusion, the first instance judge took quite a narrow view of the allowable costs, ignoring many of the costs arguably attributable to developing the underlying information.
This judgment caused much consternation for companies with assets such as databases and IP rights. Often the direct cost of acquiring or creating such assets can be very low, and the use of a bare ‘costs plus’ test to decide whether a price was fair posed a significant threat to the freedom to set prices or fix royalties. The possibility of very narrow market definitions, leading to a risk of dominance increased the commercial uncertainty.
On 2 February, the Court of Appeal rejected the approach of the trial judge (Attheraces v British Horseracing Board [2007] EWCA Civ 38). The Court of Appeal held that he had been wrong to find that the ‘economic value’ of an asset was the bare cost of compilation plus a reasonable return. The Court of Appeal said that whilst a ‘costs-plus’ analysis would be part of an assessment of excessive prices, it would not be sufficient. It also suggested that the judge’s approach to ‘allowable cost’ had been too narrow.
The Court of Appeal did not give definitive guidance on how ‘economic value’ should be assessed, but indicated strongly that a key factor is likely to be the value of the product to the purchaser.
Imposing reasonable royalties
The second recent interesting development was the decision by the US Federal Trade Commission (‘FTC’) to impose a maximum limit on the royalty rates to be charged by Rambus for some of its DRAM technology (see In the matter of Rambus Inc. Opinion of the FTC on Remedy, (5 February 2007) – see www.ftc.gov). This will bar Rambus from collecting royalties for some of its memory technologies in excess of the rate imposed by the FTC. The imposition of such a price cap is very unusual. Competition authorities generally resist any suggestion that they should set selling prices or royalties.
The FTC has made it clear that the imposition of a maximum royalty (diminishing to 0% over time) must be seen against the background of the conduct of Rambus in the process whereby industry standards were set for certain types of computer memory saying:
‘The order is designed to remedy the effects of the unlawful monopoly Rambus established in the markets for computer memory technologies that have been incorporated into industry standards for dynamic random access memory – DRAM chips.’
Standards bodies are increasingly important in the IT, telecommunications and related electronics industries. Many such bodies require members to license standardised technology on FRAND (‘Fair Reasonable and Non-Discriminatory’) or
And finally
Finally, on issues of pricing and intervention by the competition authorities, it is interesting that the European Commission has also been flexing its muscles recently by pointing out to Microsoft that it did not regard the prices that Microsoft proposed to charge for some of its interface and interoperability information as reasonable (see Commission press release IP/07/269 of 1 March 2007). Microsoft has already been ordered to make the information available to third parties on reasonable terms as part of its long‑running dispute with the Commission. The Commission has stated that it does not believe that the information in question is sufficiently innovative to justify the price sought and has threatened Microsoft with penalties if it does not revise its prices.
Pat Treacy is joint managing partner and head of the EU and competition law team at Bristows.
