The recent case Rocep-Lusol Holdings Limited v Lindal Dispenser GmbH sheds light on the complex relationship between intellectual property rights and competition law. The dispute centered around a contract for the exclusive licence of various patents in exchange for royalty payments (payments made to IP owners for use of their invention). The products were aerosol cans with a dispenser valve system. The contract was fixed for an eight-year duration, with the patents expiring around three years prior to the end of the contractual term. Although the royalty rate was reduced when the patents expired, the payment obligations continued until the contract ended. The question for the court to determine was whether Lindal were lawfully required to pay royalties following the expiration of the patents.
The action was defended on the basis of both contractual interpretation and competition law. The competition law defence is particularly interesting given the exclusionary nature of patents. The defender argued that the contract was anti-competitive because, once the patents had expired, it still required to pay royalties for use of the technology whilst its competitors could use it for free. The Court of Session explored several key issues in deciding whether the agreement breached competition law, as outlined below.
Are Post-Expiry Royalty Payments Anti-Competitive?
This question had been considered before in the European Court of Justice, firstly in Ottung v Klee & Weilbach A/S 1989 and again in Genetech Inc v Hoechst GmbH 2016. Both cases examined whether requiring royalty payment after a patent's expiration restricted competition. In both cases it was held that post-expiry royalties were not inherently a breach of competition law. In Ottung it was determined that such a contract was not anti-competitive if the licensee had the right to terminate on reasonable notice. The situation here was similar in that there was a short and defined period of post-expiry royalty payments rather than an ongoing contract.
Was the Contract's Object or Effect Anti-Competitive?
Under Section 2 of the Competition Act 1998 (1998 Act) and Article 101 of the Treaty on the Functioning of the European Union (TFEU), an agreement is deemed anti-competitive if its object or effect is to restrict, prevent, or distort competition. The object of a contract will be viewed as anti-competitive if, by its very nature, it is deemed anti-competitive even if it has no negative effects on the market. In deciding whether the effect of the contract is anti-competitive, the court will require to assess whether the contract actually results in there being an appreciable effect on competition. The defender argued that it would be at a competitive disadvantage as the contract could lead to its competitors having a more advantageous trading position if they entered into similar contracts. Importantly however, the pursuer had not entered into equivalent agreements with other parties and therefore could not have imposed dissimilar conditions. As such the court considered the wider potential anticompetitive effect of the contract.
The court held that it could be "confidently determined" that the object of the contract was not anticompetitive. Therefore, the burden was on the defender to establish that the contract had in fact prevented, restricted or distorted competition by an appreciable extent. The defender argued that their requirements to make royalty payments constrained the prices that could be charged for their products. However, the court held that the defender failed to provide sufficient facts to show the contract had in fact distorted competition. In particular, no detail was given of the economic context in which the defender and its competitors were operating. Accordingly, the defences based upon object and effect were unsuccessful.
Did the pursuer abuse a dominant position?
Article 102 of the TFEU and section 18 of the 1998 Act prohibits conduct which amounts to abuse of a dominant position in the market. To assess whether conduct constitutes abuse, the relevant market must first be defined. In this case, the defender argued that the market should be restricted to the upstream market for intellectual property rights in the technology which it had licensed from the pursuer.
Whether or not a party is abusing a dominant position must be assessed objectively. Consideration must be given to whether the party is using its dominant market position to restrict competition. The defender argued that the imposition of post-expiry royalty payments amounted to abuse of the pursuer's dominant position, particularly as there was no commercial reason for imposing such an obligation and the pursuer was effectively 'compelling payment for nothing.' Additionally, the defender argued that they had no choice but to agree to the royalty payments as they were dependent on the pursuer's technology to manufacture their product and any replacement of this technology would be particularly expensive.
However, the court noted that taking advantage of a strong market position is normal in competitive markets and that the defender was not obliged to accept the contract’s terms. Furthermore, the court highlighted that the royalties likely reflected a commercial assessment and that the defender had not received something for nothing as they had benefitted from the contract's non-compete clause. The court held that, even if the defender proved all it set out to, the pursuer's conduct had not amounted to abuse.
The defender's arguments therefore failed and it was ordered to account for the products sold using the technology in question in order that royalty payments could be calculated.
Comment
This decision provides useful current guidance for those dealing in the licence of intellectual property rights. It is important to consider that, whilst these rights are exclusionary by nature, block exemptions exist, meaning some agreements are not automatically prohibited under competition law. When entering into such agreements, it is essential to carefully assess when and how these exemptions apply and seek legal advice as necessary. MFMac are well placed to advise you on all such aspects.
