Olswang Competition Law Bulletin – Technology Focus

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

In this bulletin we provide an update on recent competition law activity in the technology sector. We report first on global developments at the interface of competition law and intellectual property in respect of standard essential patents ("SEPs"), looking at the circumstances of Qualcomm's record fine in China as well as the ongoing FRAND debate. We also examine the current trend for consolidation in the EU telecoms sector and report on the European Commission's decision to open a phase II investigation in the proposed music licensing JV between UK, Swedish and German collecting societies.

SEPs - what's new?

Fine of $975m imposed on Qualcomm under Chinese competition law

On 9 February 2015, Qualcomm announced a settlement with the Chinese competition regulator (the National Development and Reform Commission or "NDRC") in respect of a 14-month investigation into whether the company abused its market position by charging Chinese manufacturers excessive royalty fees on its SEPs. Under the settlement, Qualcomm has agreed to pay a fine of approximately $975 million and to make certain changes to the way it licenses its 3G and 4G essential Chinese patents for phones sold for use in China.

Expansion of China's high-speed 4G network offers huge opportunities for Qualcomm, which generates a large part of its global revenues from licensing of patents used in mobile handsets. However, in order to address antitrust concerns identified by the NDRC, Qualcomm has agreed to offer licences to its current 3G and 4G essential Chinese patents separately from licecses to its other patents and to provide patent lists during negotiations.

In addition, for companies opting for the new agreement, Qualcomm has agreed to calculate royalties based on 65 per cent of the phone's net selling price. Qualcomm will give its existing licensees an opportunity to elect to take the new terms for sales of branded devices for use in China as of 1 January 2015.

The $975 million fine is reportedly equal to 8 per cent of Qualcomm's 2013 sales in China - less than maximum fine allowed under the Chinese Anti-monopoly law. Qualcomm remains under investigation for similar practices by the European Commission.

The ongoing FRAND debate

The announcement of Qualcomm's settlement follows recent developments in the FRAND debate in China, where a proposed intellectual rights policy for standards organisations was published in January. The proposals, which come from a research centre closely associated with China's Ministry of Industry and Information Technology, contain factors to take into account in assessing a reasonable royalty including a consideration of the total aggregate royalties that may apply if other patent holders demand similar terms. Competition authorities in other parts of the world, including the European Commission and the US Department of Justice (the "DOJ"), have steered clear of a prescriptive approach to the calculation of royalties, leaving it to the private sector and, where necessary, the courts to determine. It is as yet unknown what impact, if any, these proposals had on the Qualcomm settlement.

Controversial update to Wi-Fi patent policy

In addition, on 8 February, the Institute of Electrical and Electronics Engineers ("IEEE"), a global organisation which sets some key internet and Wi-Fi standards, announced a controversial update to its patent policy. The update, which was subject to a review by the DOJ, will limit patent holders' ability to obtain injunctions on SEPs and will require patent holders to license to component manufacturers as well as end-users. A group of industry players, including Qualcomm, have criticised the changes. In a statement, the group known as Innovation Alliance, stated the changes "represent an anticompetitive shift favoring the buyers of inventions at the core of Wi-Fi and other IEEE technologies, at the expense of those who invented them".

Consolidation in the EU telecoms sector

Policy backdrop

In setting the agenda for his five year term as European Commission President, Jean-Claude Juncker put the digital economy centre stage. He is backing a connected digital single market as the means of generating up to €250 billion of additional growth in Europe, thereby creating "hundreds of thousands of new jobs and a vibrant knowledge-based society". Margrethe Vestager, Euroepan Commissioner for competition enforcement, has been vocal in her support of Juncker's priorities and the contribution competition enforcement can make in realising these goals.

Obstacles to progress do exist, however, and achieving the economic growth Juncker envisages will require considerable investment in vital infrastructure across large parts of the EU. The major network operators are being touted as the primary sources of finance but revenues are already under pressure with the phasing out of roaming charges and legislation prohibiting companies from charging for improved access to high-speed networks. Consolidation is seen by many players as the key to driving future investment. Operators such as Vodafone and Telefόnica have called on the Commission to relax its strict approach to mergers in the telecoms sector and to reevaluate how it deals with evolving digital market structures.

UK deals

Indeed, following consolidation in several EU Member States in 2014, the UK is now following suit. BT announced last week that it had reached an agreement to acquire EE for £12.5bn. EE, which was formed from the merger of the Orange and T-Mobile brands, is the leading mobile network operator in the UK with 31 million customers. Under the terms of the transaction the joint venture owners of EE, Deutsche Telekom and Orange, will take a 12% and 4% stake respectively in BT. In addition, Deutsche Telekom will be entitled to appoint one non-executive member of the BT Board of Directors. The transaction will be reviewed by the UK Competition and Markets Authority ("CMA").

The BT/EE deal in itself would be unlikely to raise significant competition concerns but there is a further UK acquisition on the horizon, that of O2 by Hutchison Whampoa, owner of the Three mobile network. If it goes ahead, this deal will lead to a reduction of four to three UK mobile network operators, a scenario that Ofcom recently intimated would be unfavourable for UK consumers. However, a Three/O2 tie up would satisfy the thresholds for review under the European Union Merger Regulation, which is likely to have been a significant factor in Hutchison's decision to go forward with the acquisition as, in addition to the policy backdrop described above, in 2014, the European Commission cleared deals involving four to three reductions in both Ireland and Germany. Indeed, the acquirer in the Irish deal was Hutchison, who can be expected to strongly resist any attempt to have the case referred back to the UK regulator from the European Commission.

Joint venture to create music licensing hub for online platforms - M.6800 PRSfM/STIM/GEMA/JV

The European Commission is currently examining a proposed joint venture between three royalty collecting societies, Gema of Germany, PRS for Music of the UK and Stim of Sweden. Under the joint venture, the three societies propose, inter alia, to establish a licensing hub that would combine their national repertoires and provide access to millions of works for download, subscription and streaming services.

The joint venture was notified to the Commission in November 2014 and is now subject to an in-depth, second phase review. One of the issues the Commission is currently grappling with is whether the joint venture would have increased bargaining power, enabling it to charge higher royalty rates