For years Article 82 of the European Community Treaty–the provision that outlines improper conduct for companies with market dominance–languished in a state of uncertainty. Defined through a series of 30-year-old court cases, the article wasn’t the regulatory tool the modern-day European Commission wanted. Several years ago the authority decided to review Article 82 and focus its efforts on “exclusionary abuses”–company conduct that bars competitors from the market.
“[I]t is sound for our enforcement policy to give priority to so-called exclusionary abuses, since exclusion is often at the basis of later exploitation of consumers,” said European Competition Commissioner Neelie Kroes in a 2005 speech on Article 82 policy review. “I will therefore focus on exclusionary abuses.”
The Commission seems to be making good on its promise. Recently it has been targeting market-dominant technology companies for allegedly excluding competition through questionable IP practices. The Commission’s most notorious such matter concluded back in September when the agency defeated Microsoft Corp. on allegations that its refusal to share its IP excluded competitors. To show it meant business, the Commission levied a whopping $613 million fine against the company, which a court upheld.
For U.S.-based market dominators, the Microsoft case should serve as a clear warning–if you’re protecting your IP at the expense of market competition, be prepared to take on the Commission.
“The Microsoft judgment has given a boost of confidence to the Commission in relation to applying Article 82 to the technology sector,” says Ian Forrester, partner at White & Case and co-lead attorney on the Microsoft case.
Lowering the Bar
Winning the Microsoft matter was crucial for the Commission because it established a precedent that gave the regulatory body the ammunition to take down other EU market leaders for their licensing practices.
Specifically, one of the allegations against Microsoft was that the company excluded its competitors from the market by refusing to license IP related to its server software interfaces. Those competitors, which included Sun Microsystems, claimed the lack of disclosure barred them from creating and selling their own additional features to Microsoft’s software.
According to EU case law, a court can compel a company to share its IP with competitors if the facts of the case satisfy a two-pronged test. First, the IP in question must be indispensable for the development and production of a new product for which there is consumer demand in a related market. The facts of the Microsoft case met this part of the test.
The second part of the test is that the refusal to license the IP must give rise to the elimination of the competition in that related market. Prior to the Microsoft judgment, the bar for this portion of the test was set high, requiring exclusion to be imminent. However the Commission argued to weaken this requirement, saying Microsoft’s actions were likely to exclude competitors in the future.
In the end the court sided with the Commission, concluding that there was a sufficient likelihood over time that the company’s competitors could be excluded if it didn’t share its IP.
“We went from a hard test that said the practice must lead to exclusion to a softer test that said exclusion must be likely,” says Bill Batchelor, partner at Baker & McKenzie in Brussels.
This softer test has allowed the Commission to push forward with similar market exclusion cases. Specifically the authority has targeted several U.S. multinational technology companies for similar Article 82 violations, including Rambus Inc., Intel Corp. and Qualcomm Inc.
Both the Rambus and the Qualcomm matters deal with the companies’ involvement in standard-setting organizations–groups of companies that band together to develop an industry standard. In Rambus’ case the Commission claims the company “engaged in intentional deceptive conduct … by not disclosing the existence of … patents which it later claimed were relevant to the adopted standard.”
This is known as “patent ambushing,” and the Rambus case represents the first time the Commission has targeted a company for such practices. If Rambus goes to court and loses, it may have to relinquish its IP to competitors.
In Qualcomm’s case the Commission is accusing the company of charging excessive royalty fees for the use of one of its patented technologies, which was previously incorporated into a set of standards. In the U.S. a series of bitter private actions ensued between Qualcomm and competitor Broadcom Corp. regarding this issue–with Qualcomm coming out on top, at least for now. However the company likely won’t find the same fortune in the EU.
“There’s the suggestion within the technology sector post-Microsoft that market leaders may be obliged to supply technology to a competitor either free of charge or at a reduced price to encourage competition,” Forrester says.
“I’m pretty certain that the U.S. authorities would not at all take such an interventionist approach.”
As the Commission continues to shape EU antitrust policy through regulatory action, U.S. companies, especially those in the technology sector, need to stay informed about how U.S. policy and EU policy diverge. As the Qualcomm case demonstrates, what a U.S. court may consider legal could land a company in hot water in the EU.
In addition the Commission is working on freeing up resources by creating a new settlement procedure for cartel participants. With less personnel needed to slog through the logjam of cartel cases, more attention may be paid to Article 82 offenders.
For now technology companies, especially those with a large market share, should take time to evaluate their licensing policies and ensure they aren’t excluding competitors from the market.
“There’s no escape from the fact that there’s a real spotlight on IT,” Batchelor says. “All the officials working on the Microsoft case are just looking for someone to chase after.”