Herbert Smith Freehills Competition Law Moot 2016
Problem Question: Prepared by Professor Alison Jones, King’s College London
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RURITANIA IS A FICTIONAL MEMBER STATE OF THE EUROPEAN UNION.
MANZANA CORP, ELF CO AND JOHNSSON CO ARE FICTIONAL ENTITIES.
REFERENCE TO THE COURT OF JUSTICE OF THE EUROPEAN UNION UNDER
ARTICLE 267 TFEU FROM THE RURITANIAN HIGH COURT IN THE CASE OF:
Manzana Corp (Claimant) v Elf Co (Defendant)
Introduction
1.
The following paragraphs set out the factual and legal background to the questions referred to below, together with a summary of the parties’ submissions to the Ruritanian
High Court.
2.
The case raises a number of issues relating to the interpretation of Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) and the principles of national procedural autonomy and effective judicial protection and it is these issues that form the subject matter of the reference.
Background
3.
The Telecommunications Standards Organisation (TSO) (a fictional standard setting organisation) devises standards to ensure the compatibility and interoperability of products in the information and communications technology sector, including the second generation (2G – such as GSM/GPRS), third generation (3G – such as Uniform Mobile
Telecommunications System (UMTS)) and fourth generation (4G – such as Long Term
Evolution (LTE)) standards. It is officially recognised in the EU as a European Standards
Organisation. Its policy on Intellectual Property Rights (IPR policy) states, amongst other things, that each member must: a.
use its reasonable endeavours to inform TSO of essential IPRs to a standard or
IPRs which might be essential if its proposal for a standard is adopted; and b.
grant irrevocable licences to such IPRs on Fair, Reasonable and Non-
Discriminatory (FRAND) conditions.
The policy also provides expressly that FRAND obligations should run with the patents and bind all successors.
4.
Johnsson Co owned a portfolio of patents which it considered to be essential to the 2G,
3G and 4G standards. Johnsson declared these to be standard essential patents (SEPs) to
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With thanks to David Bailey, Dorothy Livingston and Richard Whish for valuable assistance.
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TSO under the TSO IPR policy and gave the TSO a FRAND undertaking in respect of them (it has promised to grant licences to all interested in a licence on FRAND terms).
Johnsson also sells mobile devices which integrate the technology.
5.
Manzana Corp makes mobile devices complying with TSO standards but does not own a portfolio of patents essential to TSO standards. Manzana and Johnsson have not yet finalised licensing discussions but have been debating issues relating to the validity and essentiality of Johnsson’s patents and FRAND royalty rates.
6.
At the end of 2014, Johnsson sought a mechanism to maximise revenues from its large holding of patents. It sold half of its portfolio of SEPs declared essential to TSO to Elf
Co. Elf, who is not, and has never been, a member of TSO, is a patent assertion entity, or non-practising entity, whose business is primarily to purchase and assert patents, typically against operating companies with products on the market. Under the terms of the patent transfer agreement: a.
Elf is obliged to license the SEP-portfolio on terms in which the royalty due is a percentage of the aggregate net sales revenue of the licensee; and b.
Elf is obliged to share the revenue it earns from licensing the patents with
Johnsson – in particular, a minimum payment, of 1.5% of the net sales revenue of the licensed party, is to be made to Johnsson by Elf in respect of every licence granted.
The agreement made no express provision for the transfer of the FRAND commitment to
Elf.
7.
Following the transfer of the SEP portfolio, Elf contacted Manzana to let Manzana know that it was infringing Elf’s SEPs and demanding that Manzana should agree licensing terms with it (Elf). Elf claimed that Manzana should pay it royalties for its portfolio of
SEPs at a level of 2.0% of net sales revenue for products incorporating the technology.
8.
Manzana declined to pay the royalties demanded, claiming that: a.
No royalties were due: the contract purporting to transfer the patents to Elf breached Article 101 and was void. Consequently, title to the patents had not been transferred; b.
Even if title to the patents had passed, a number of Elf’s patents were in fact either not valid or had not been infringed. Although Manzana stated that it was prepared to take a licence of any patents established to be valid and infringed, the royalties requested were not FRAND in relation to such patents. Consequently, it proposed a license fee, representing a small fraction of the amount claimed by Elf. In particular, it contended that the royalties should be calculated by reference to a lump sum figure or the value of the patents themselves rather than the value of its end product.
9.
Elf considered that Manzana had shown itself unwilling to negotiate and filed a claim before the Ruritanian Patent Court seeking an injunction against Manzana. On 12 January
2015, the Court granted the injunction sought.
10.
Following the grant of the injunction, Manzana’s products were excluded from the
Ruritanian market for a period of two working days. Elf withdrew the injunction, however, once Manzana agreed:
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a.
to pay the licensing terms originally demanded by Elf; and b.
not to challenge either the validity of the transfer of the patents to it by Johnsson or the validity of the patents before the Ruritanian courts.
Relevant provisions of Ruritanian Law
11.
The following information about Ruritanian Law are of particular relevance to the current proceedings: a.
Under Ruritanian law an injunction must be granted to a patent holder as of right unless an extremely high degree of likelihood of invalidity of the patent can be established. Such an injunction remains in force until the questions of validity and infringement are finally resolved in subsequent proceedings; b.
Sections 1 and 2 of the Ruritanian Competition Act (“the Act”) are modelled on, and are identical to, Articles 101 and 102 TFEU respectively, save in that they only apply to conduct that affects trade within Ruritania; c.
Ruritania has not yet implemented Directive 2014/104/EU on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member States and of the European Union
[2014] OJ L349/1EU (the ‘Damages Directive’). Under Ruritanian law a defence of passing on is not currently available to a defendant in the context of a private claim for restitution or damages.
The current proceedings
12.
In July 2015 Manzana filed an action before the Ruritanian High Court alleging violations by Elf of both Articles 101 and 102 TFEU (and sections 1 and 2 of the Act). In particular, it claimed that: a.
the agreement dividing the Johnsson portfolio and transferring a portion of the portfolio to Elf and providing for specified royalty payments breached Article 101
(and section 1 of the Act). The agreement has as its object the restriction of competition by creating an irresistible incentive for Elf to charge royalties of at least 1.5% of net sales revenue, to increase licensing prices and to set unfairly high royalties which restrict competition.
As the agreement is void, no valid transfer of title of the patents was made to Elf under the agreement; b.
Whether or not title has been transferred, the seeking and enforcing of an injunction against it violated Article 102 (and section 2 of the Act); c.
Even if title to the patents had been transferred, Elf is breaching Article 102 (and section 2 of the Act) by charging unfair and discriminatory prices in respect of the licence and by requiring it not to challenge the validity of its patents.
Manzana claims damages in respect of the loss it has suffered in consequence of the violations of Article 102 (and section 2 of the Act).
13.
Elf has defended the charge claiming: a.
The transfer of title to the patents was made under a legal and enforceable contract which does not violate Article 101 or section 1 of the Act; these provisions do not constrain a patentee from selling its patents or from seeking a higher level of royalty; b.
It has committed no infringement of Article 102, in particular i.
Its seeking and enforcing of the injunction does not violate Article 102; ii.
The licensing terms comply with Article 102 (and are FRAND);
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c.
Even if a violation has occurred, Manzana passed on any loss through licensing terms infringing Article 102 to customers through higher prices for its products on the Ruritanian market. The Ruritanian court should not apply the ordinary rule of
Ruritanian law denying a defence of passing on as the application of such a rule would be incompatible with the EU principles of unjust enrichment, effective judicial protection and effectiveness.
Questions referred
14.
Faced with such fundamental differences in interpretations and readings of the law, the
Ruritanian High Court has decided to stay proceedings before it and refer the following questions relating to the interpretation of Articles 101 and 102 TFEU to the Court of
Justice of the European Union:
(1) Does a term in a patent transfer agreement, which provides for a minimum payment to the vendor in respect of each licence granted by the transferee in respect of the standard essential patents transferred, infringe Article 101? In particular, what factors are relevant in determining whether such a provision has as its object the restriction of competition?
(2) In relation to Article 102 : a.
To avoid committing an abuse of a dominant position, does an undertaking which acquires a dominant position by purchasing standard essential patents subject to a FRAND declaration made by the previous owner, have to abide by the principles laid down by the Court of Justice in Case C-
170/13, Huawei Technologies Co Ltd v ZTE Corp , even if: (i) it was unaware of the FRAND declaration until after the date of purchase; and/or
(ii) it does not operate on the market for products incorporating the technology?
b.
Is it an abuse of a dominant position for a holder of standard essential patents to seek to collect royalties related to the sale price of the licensee’s products without any moderation to take account of the relative importance or value of the patents or the number of other patents that are essential to the standard?
(3) In national proceedings for damages in respect of a breach of Article 102, is a national court obliged to provide a passing on defence in order to comply with EU principles of unjust enrichment, effective judicial protection and effectiveness?
15.
The request for a preliminary ruling arrived at the Court of Justice on 23 November 2015.
In accordance with Article 23 of the Statute of the Court of Justice, the Registrar has notified the claimant and defendant and has invited them to submit written observations to the Court.
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The deadline for submission is on 10 April 2016. Oral hearings are provisionally scheduled for 17-18 June 2016.
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The page limit is set out in the Moot Rules.
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