Pricing Abuses by Essential Patent Holders in a Standard-Setting Context: A View from Europe

Damien Geradin, Howrey LLP; Tilburg University - Tilburg Law and Economics Center (TILEC)

8/08/2008
(Original Publish Date: 7/1/2008)

Intellectual property rights (hereafter, "IPR") are legitimate exclusive rights, which confer upon their owners two basic prerogatives: the right to prevent any third party from applying or using the subject-matter of the IPR and, correlatively, the right to set the conditions of a licence in consideration for use of the IPR and as a reward for the innovative contribution contained therein. These exclusive rights are recognized in all patent laws as well as in the TRIPS agreement. Relying on the EC Treaty rule on abuse of a dominant position (Article 82 EC), the European Court of Justice (hereafter, the "ECJ") indicated in Magill and IMS that in certain exceptional circumstances IPR holders may be forced to grant a licence to other firms. The European Commission (hereafter, the "Commission") relied on this line of case law to mandate Microsoft in its March 2004 Decision to license its interoperability information to its competitors on the downstream market for work-group servers. This decision of the Commission was recently confirmed by the Court of First Instance of the EC (hereafter, the "CFI"), hence signaling that the first prerogative attached to the holding of an IPR, i.e. the right to exclude, could be subject to limitations under EC competition rules. More recently, the European Commission has taken an interest in the level of royalties that are charged by IP holders. The Commission adopted in February 2008 a decision imposing a fine of 899 million euros on Microsoft for non-compliance with its obligation to licence its downstream competitors under its March 2004 Decision. This decision required Microsoft to licence its interoperability information on reasonable and non-discriminatory terms. This aspect of the decision effectively placed limits on the second prerogative attached to the possession of an IPR, i.e. the right to set the conditions attached to the granting of a licence. The bone of contention between the Commission and Microsoft related to the royalties Microsoft wanted to charge its competitors for the licence in question. The Commission rejected Microsoft's initial demand of a royalty rate of 3.87% of a licensee's product revenues for a patent licence and of 2.98% for a licence giving access to the secret interoperability information. Under the pressure of periodic penalty payments for non-compliance, Microsoft eventually agreed to provide a licence giving access to the interoperability information for a flat fee of 10,000 euros and an optional worldwide patent licence for a reduced royalty rate of 0.4% of licensees' product revenues.