COMPETITION AUTHORITY IMPOSED FINE AGAINST PHILIPS FOR ABUSING ITS DOMINANT POSITION
9 January 2020 |
Dr. Hamdi PINAR, LL.M.*
Selen ADEMOĞLU**
During recent years, courts and competition authorities of many countries have started to make decisions about standard-essential patents (“SEPs”) and FRAND obligation especially in the US and EU. It can be said that German Federal Supreme Court’s (“BGH”) Orange-Book-Standard (2009) and EC’s Motorola and Samsung decisions (2014) and ECJ’s Huawei/ZTE decision (2015) are the most remarkable ones. Especially, in recent decisions, undertakings have been subjected to high administrative fines. The most notable of these fines are $ 975 million fine imposed by the China National Development and Reform Commission against Qualcomm and $ 850 million fine imposed by the South Korean Competition Authority against the same undertaking (Seoul High Court uphold South Korean Competition Authority’s decision on 4 December 2019).
Decisions coming from different points of the world are loadstars for this newly developing field for the undertakings. In addition to this, some countries have begun to publish SEP Guidelines for a better understanding of the issue. The EC has also set up a working committee for SEPs and issued several papers and reports that provide guidance and clarification.
On 31 December 2019 Turkish Competition Authority (“TCA”) has completed its investigation initiated upon VESTEL’s complaint against Koninklijke PHILIPS N.V. (“PHILIPS”). TCA decided that within the period examined, PHILIPS was in a dominant position in the subtitling technology market for digital video broadcasting and abused its dominant position. Therefore, the administrative fine has been imposed on PHILIPS. This is the first decision that TCA has ever made on SEPs. Therefore, this decision will undoubtedly be a guide for undertakings in terms of disputes and complaints that may arise before the Authority in the coming period.
Since the SEP issue is complex and unfamiliar in Turkish jurisdiction, it might be helpful to give a piece of brief introduction about the issue before mentioning the PHILIPS decision. When SEP holders give a declaration to standard-setting organizations (“SSOs”) the patent is declared as SEP. Parties, particularly the SEP owner should act in good faith during the license negotiations. Packaging SEPs and non-SEPs jointly, continuing to require royalty for the patents whose validity periods have expired or offering these patents with SEPs in the same package, determining licensing conditions unilaterally are some examples that demonstrate the lack of good faith.
While the patents are declared as SEP, SEP holder commit SSOs to license their SEPs on fair, reasonable and non-discriminatory conditions (“FRAND”). It is understood from the “fair and reasonable conditions” that the SEP holder shall not require abusive terms against the willing licensee. From the “non-discriminatory conditions”, it is understood that patent holders must treat willing licensee an equal basis with other licensees and offer similar license agreement conditions or in the case of unequal treatment justify this action that it is acceptable.
With the declaration to SSOs, SEP holders explicitly allow other undertakings to use SEPs while producing standard-compliant technologic products and assure that they will make offers on FRAND terms. This is the point where SEPs differentiate from patents. Although SEPs and patents resemble each other in respect of absolute right, they diverge when it comes to monopolistic authority. SEPs have to be licensed to anyone willing to obtain. Therefore, the SEP holder has no discretional power whether to provide a license. Furthermore, while in the intellectual property law, right owners have the power to determine the royalty rate at will on the strength of their monopolistic authority, SEP holders do not have such a power to determine royalty rate with a monopolistic price policy.
Abuse of the dominant position through SEP can occur in the form of exclusion, hold-up or exploitation. The main behaviours of SEP holders that are accepted as an abusive conduct are; (I) excessive royalties, (ii) discrimination, (iii) adding requirements to the license agreement apart from reasonable royalty (e.g. no-challenge clause), (iv) termination- upon- challenge clause, (v) seeking injunctive relief, (vi) threatening to seek injunctive relief.
The subject matter of the dispute before the TCA is whether PHILIPS’s license agreements for its two patents comply with the FRAND terms. PHILIPS declared its patents as SEP by applying ETSI. (ETSI, is one of the three institutions that conduct standardization at the European level. It is officially responsible for standard-making, drafting specifications to support policies established by the EU and EFTA and establishing an internal market for telecommunication.) Decisions made to date; it is accepted that a patent creates a dominant position in the relevant market when it is declared as SEP. As a matter of fact, in the PHILIPS decision, the TCA confirmed that PHILIPS was in the dominant position in the examined period.
In its complaint, VESTEL claimed that PHILIPS got a court order for an injunction, recall, and destruction to VESTEL’s products and forced VESTEL to sign license agreement which is added unilaterally by PHILIPS and contains provisions contrary to the FRAND terms. Based on these claims VESTEL asserted that PHILIPS abused its dominant position according to Art. 6 of the Protection of Competition Act numbered 4054 (the Act). It is possible to evaluate provisions that VESTEL claimed to be contrary to FRAND terms in three main titles:
1. No- Challenge Clause and Termination- Upon-Challenge Clause
2. Reverse Burden of Proof
3. Excessive Royalty Rates
TCA has taken the following decisions at the Competition Board Meeting held on 26 December 2019 with the number 19-46/790-344 in accordance with Dr. Hamdi PINAR’s legal opinion submitted on 2 July 2019 (For an explanation of the final decision, see. https://www.rekabet.gov.tr/Dosya/geneldosya/philips-nihai-karar-pdf ):
1. Koninklijke PHILIPS N.V. was in a dominant position in the subtitling technology market for digital video broadcasting within the period examined (unanimously),
2. Koninklijke PHILIPS N.V. abused its dominant position and violated Art.6 (by a majority vote),
3. Therefore, according to Art. 16(3) of the Act and Art. 5(1) (b), 5(2) and 5(3) (a) of “Regulation on Fines to Apply in cases of Agreements, Concerted Practices and Decisions Limiting Competition, and Abuse of Dominant Position (Regulation On Fines)” Koninklijke PHILIPS N.V. has fined %0,75 of its annual gross revenues generated at the end of the fiscal year preceding the final decision and which determined by the Board (unanimously),
4. Türk PHILIPS A.Ş. did not violate the Act. (unanimously).
Although the PHILIPS decision of the Competition Authority is the first for our country, it will not be wrong to say that many more decisions will be made regarding SEPs in the coming periods. After the release of the reasoned decision, TCA’s approach to SEP’s will be clarified and become a significant guide for technology companies.
For the moment, it is possible to say that the local companies in our country are generally SEP implementers. With the knowledge of SEPs, SEP implementer will be able to prevent dominant undertakings with whom they carry out license negotiations from abusing their dominant position. With the increase in domestic technological production in Turkey, local companies will not only be present as SEP implementers but also as SEP holders in the licensing negotiations. Therefore, to avoid allegations that they have abused their dominant position due to their conducts during negotiations, it is useful to understand the essence of SEPs and FRAND obligations and keep abreast of all the latest developments.
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