Abuse in Technology - Enabled Markets : Established Standards Reconsidered

1. Abuse in Technology-EnabledMarkets: Established Standards Reconsidered Nicolas Petit, University of Liege (Ulg) & Miguel Rato, Shearman & Sterling LLP 11th conference of the Association of europeancompetitionlawjudges (aeclj) helsinki, 15 june 2012

3. Technology-EnabledMarkets? • A loose concept • Key features • Intense degree of innovation • Rapid innovation cycles • Network-effects • First moveradvantage • Price and productdifferentiation • Importance of standards • Examples => ICT, semiconductors, e-commerce

4. Goals of the Presentation Is a different approach to abuse of dominance required in “technology-enabled” markets? Explore the various areas of the law on abuse of dominance in light of the specificities of “technology-enabled ” markets

5. Outline • Are Technology-Enabled Markets Particularly Prone to Abusive Conduct? • Market Definition and Dominance in Technology-Enabled Markets • General Reflections on Legal Standards for Unlawful Abuse in Technology-Enabled Markets • Three Types of Abuse in Technology-Enabled Markets • Excessive pricing • Abusive Litigation • Predatory Pricing • Conclusion

6. 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 monopolist • The appearance of abuse • Potential for error even greater than in old economy cases • Cost of error even more severe • Technology-enabled market particularly prone to errors in applying Article 102

7. 2. Market Definition and Dominance in Technology-Enabled Markets Inadequacy of static market share analysis High profit margins are no proxy for SMP Competitive constraints arising from technological complements Technological convergence creates constraints across relevant markets Importance of potential competition The road to dominance may matter IP Rights do not necessarily confer SMP Several misconceptions about standards

8. 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 foreclosure Liability based on “actual” effects is preferable to liability based on “likely” effects Difficulty of counterfactual analysis is not a reason to avoid it

9. 4. Three Types of Abuse in Technology-Enabled Markets Excessive pricing Abusive litigation Predatory pricing

10. 4.1. Excessive Pricing Notoriously difficult to determine when a price is excessive Risk of chilling competition and investment Commission has shown remarkable self-restraint IP laws already provide adequate incentives to innovate Enforcers should thus be wary of applying competition law to exercise of IP Surprising that most recent excessive pricing cases concern patents, in particular standard-essential patents (SEPs)

11. 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

12. 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?

13. 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”

14. 4.2. Abusive Litigation • Applying ITT/Promediato 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

15. 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)

16. 4.3. Predatory Pricing • BottinCartographes v Google France, Tribunal de commerce de Paris, 31 January 2012 • Case about Google Maps API (Geocoding web services, itineraries, etc.)

18. 4.3. Predatory Pricing • Complaint from rival supplier of online maps • Tribunal 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

19. 5.3. Predatory Pricing

20. 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 efficiency • A 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

21. Thank you!