Abuse in Technology - Enabled Markets : Established Standards Reconsidered

NICOLAS PETIT, UNIVERSITY OF LIEGE (ULG)&

MIGUEL RATO, SHEARMAN & STERLING LLP

11TH CONFERENCE OF THE ASSOCIATION OF EUROPEAN COMPETITION LAW JUDGES

(AECLJ)

HELSINKI , 15 JUNE 2012

Abuse in Technology-Enabled Markets: Established Standards Reconsidered

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Technology-Enabled Markets?

A loose conceptKey features

Intense degree of innovation Rapid innovation cycles Network-effects First mover advantage Price and product differentiation Importance of standards

Examples => ICT, semiconductors, e-commerce

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Goals of the Presentation

1. Is a different approach to abuse of dominance required in “technology-enabled ” markets?

2. Explore the various areas of the law on abuse of dominance in light of the specificities of “technology-enabled ” markets

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Outline

1. Are Technology-Enabled Markets Particularly Prone to Abusive Conduct?

2. Market Definition and Dominance in Technology-Enabled Markets

3. General Reflections on Legal Standards for Unlawful Abuse in Technology-Enabled Markets

4. Three Types of Abuse in Technology-Enabled Markets

1. Excessive pricing2. Abusive Litigation3. Predatory Pricing

5. Conclusion

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1. Are Technology-Enabled Markets Particularly Prone to Abusive Conduct?

Recent Article 102 investigations by the Commission Microsoft I, Microsoft II, Intel, Rambus, IPCom, MathWorks,

Samsung, Motorola, IBM, Thomson Reuters, Google, Qualcomm…

The traits of a monopolistThe appearance of abusePotential for error even greater than in old economy

casesCost of error even more severeTechnology-enabled market particularly prone to

errors in applying Article 102

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2. Market Definition and Dominance in Technology-Enabled Markets

i. Inadequacy of static market share analysisii. High profit margins are no proxy for SMPiii. Competitive constraints arising from

technological complementsiv. Technological convergence creates

constraints across relevant marketsv. Importance of potential competitionvi. The road to dominance may mattervii. IP Rights do not necessarily confer SMPviii.Several misconceptions about standards

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3. General Reflections on Legal Standards for Abuse in Technology-Enabled Markets

Focus on exclusionary conduct as a matter of priority

Effects-based standards should prevail over forms-based standards

“Likely” effects analysis is forms-based approach in disguise

Not all foreclosure is anticompetitive foreclosureLiability based on “actual” effects is preferable to

liability based on “likely” effectsDifficulty of counterfactual analysis is not a

reason to avoid it

94. Three Types of Abuse in Technology-Enabled Markets

1. Excessive pricing2. Abusive litigation3. Predatory pricing

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4.1. Excessive Pricing

Notoriously difficult to determine when a price is excessive

Risk of chilling competition and investmentCommission has shown remarkable self-restraintIP laws already provide adequate incentives to

innovateEnforcers should thus be wary of applying

competition law to exercise of IPSurprising that most recent excessive pricing

cases concern patents, in particular standard-essential patents (SEPs)

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4.1. Excessive Pricing

Two types of cases De facto standards Formal standards adopted by SSOs

Different types of proceedings National litigation (patent infringement) Commission investigation

Different types of allegations Violation of a FRAND commitment (patent hold-up) “Competition law” defense

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4.1. Excessive Pricing

Absence of a thorough legal analysis of the duties imposed on owners of SEPs by Article 102

Straightforward application of the United Brands test in our view incorrect

Appropriate test is Magill/IMS Health (“exceptional circumstances that prevent the development of the secondary market”)

If a dominant firm can refuse to license its patents at any price, then it can also legitimately license them at any price it sees fit

Article 102 will only limit IPR prices where there is an antitrust duty to license

Rambus: Using Article 102 to sanction conduct by non dominant firms?

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4.2. Abusive Litigation

Theory of harm that has not featured prominently in any case over the last decades

Sudden interest: investigations into Samsung and Motorola

Allegation that mere act of seeking injunctions against unlicensed implementers of SEPs is abusive

One precedent in ITT/Promedia (1998) Key principles: (i) only abusive in “wholly exceptional

circumstances” because access to the courts is a fundamental right; and (ii) exception must be construed narrowly

Legal standard: (i) “action cannot be reasonably considered an attempt to establish the rights of the undertaking concerned”; and (ii) “conceived in the framework of a plan whose goal is to eliminate competition”

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4.2. Abusive Litigation

Applying ITT/Promedia to Samsung and Motorola Can a request for injunctive relief reasonably be

considered an attempt to establish patent owners’ rights? Yes, unless:

Patent owner was under an antitrust duty to license; Patent owner knowingly breached that duty

The bottom-line => need to apply again the Magill/IMS Health test

+ need to prove that patent owner request for injunction is part of a plan to eliminate competition

Theses are high hurdles to overcome, for good reason

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4.3. Predatory Pricing

Free products are pervasive on technology-enabled markets (e.g., email accounts, social networks, search engines, news, etc.)

Zero pricing looks suspicious under Article 102, yet should not

Explained by two-sided markets and product versioning The fact that no price is charged on a category of users does

not mean that no price is charged at all (two sided markets) The fact that no price is charged for a particular service

does not mean that no price is charged for other services (versioning)

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4.3. Predatory Pricing

Bottin Cartographes v Google France, Tribunal de commerce de Paris, 31 January 2012

Case about Google Maps API (Geocoding web services, itineraries, etc.)

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4.3. Predatory Pricing

Complaint from rival supplier of online mapsTribunal de commerce:

Price is “equal to 0” Google thus cannot “recoup” any of the “production costs” Elimination of all competitors on the market and “evidently

part of a wider exclusionary strategy”But:

Classic example of two-sided market => advertisers who seek placement on maps pay for users

Product versioning => website owners can purchase premium version (Google Maps API for business) which is licensed under specific financial conditions

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5.3. Predatory Pricing

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5. Conclusion

A substantive remark Technology-enabled markets are a magnifying glass for the flaws of

current legal standards in Article 102 case-law In modern EU competition law, several legal standards compete for

the assessment of abuse A clear choice in favour of the effects-based approach would promote

legal certainty and administrative efficiencyA procedural remark

Technology-enabled market often view as candidate for rapid intervention (Almunia’s recent speech at St Gallen)

This should be avoided, given risks and cost of type I errors are significantly greater on such markets

Difficult to predict demand conditions, or market entry and supply conditions on newly emerging markets (recognised in SSR)

Prudence, as opposed to precaution, should prevail

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Thank you!