Canadian COMPETITION LAW

The United States Department of Justice announced that it was closing its three investigations into Google Inc’s acquisition of Motorola Mobility Holdings Inc., the acquisitions by Apple Inc., Microsoft Corp. and RIM of certain Nortel patents, and the acquisition by Apple of certain Novell Inc. patents (see: Department of Justice Closes its Investigation of Google Inc.’s Acquisition of Motorola Mobility Holdings Inc.).

In making the announcement, the DoJ said:

“After a thorough review of the proposed transactions, the Antitrust Division has determined that each acquisition is unlikely to substantially lessen competition and has closed these three investigations. In all of the transactions, the division conducted an in-depth analysis into the potential ability and incentives of the acquiring firms to use the patents they proposed acquiring to foreclose competitors. In particular, the division focused on standard essential patents (SEPs) that Motorola Mobility and Nortel had committed to license to industry participants through their participation in standard-setting organizations (SSOs). The division’s investigations focused on whether the acquiring firms could use these patents to raise rivals’ costs or foreclose competition.

The division concluded that the specific transactions at issue are not likely to significantly change existing market dynamics.”

The DoJ made a number of interesting comments in its announcement including:

Behavioural commitments obtained from Google, Apple and Microsoft:

“During the course of the division’s investigation, several of the principal competitors, including Google, Apple and Microsoft, made commitments concerning their SEP licensing policies. The division’s concerns about the potential anticompetitive use of SEPs was lessened by the clear commitments by Apple and Microsoft to license SEPs on fair, reasonable and non-discriminatory terms, as well as their commitments not to seek injunctions in disputes involving SEPs. Google’s commitments were more ambiguous and do not provide the same direct confirmation of its SEP licensing policies.”

The importance of standard setting in the wireless industry (and potential pro- and anti-competitive effects):

“Today’s wireless device industry, which includes smartphones and tablets, relies on complex operating systems that allow seamless interaction with wireless communications technologies while providing audio, video and computer functionalities.

To facilitate seamless interoperability, industry participants work through SSOs collectively to develop technical standards that establish precise specifications for essential components of the technology. For example, wireless devices typically implement a significant number of telecommunication and computer standards, including cellular air interface standards (e.g., 3G and 4G LTE standards), wireless broadband technologies (e.g., WiFi and WiMax) and video compression technologies (e.g., H.264). As with other industries, these standards facilitate compatibility among products and provide consumers with a wider range of products and capabilities than would otherwise be available.

Often, many technologies adopted by the SSOs fall within the scope of existing patents or patent applications. Once a patent is included in a standard, it becomes essential to the implementation of that standard, thus the term “Standard Essential Patent.” After industry participants make complementary investments, abandoning the standard can be extremely costly. Thus, after the standard is set, the patent holder could seek to extract a higher payment than was attributable to the value of the patented technology before the standard was set. Such behavior can distort innovation and raise prices to consumers. A comparable harm may also arise in situations outside of the SSO context where a patent holder’s prior actions, such as open source commitments, lead others to make complementary investments …”

Analysis of possible patent holdup by the acquiring firms:

“The division’s investigations regarding the acquisitions of the Motorola Mobility and Nortel SEPs focused on whether the acquiring firms would have the incentive and ability to exploit ambiguities in the SSOs’ F/RAND licensing commitments to hold up rivals, thus preventing or inhibiting innovation and competition (The division’s analysis was limited to SEPs encumbered by F/RAND commitments). Such hold up could include raising the costs to rivals by demanding supracompetitive licensing rates, compelling prospective licensees to grant the SEP holder the right to use the licensee’s differentiating intellectual property, charging licensees the entire portfolio royalty rate when licensing only a small subset of the patent holder’s SEPs in its portfolio, or seeking to prevent or exclude products practicing those SEPs from the market altogether. In this analysis, the critical issue is whether the patent holder has the incentive and ability to hold up its competitors, particularly through the threat of an injunction or exclusion order. The division’s analysis focused on how the proposed transactions might change that incentive and ability to do so.

The division concluded that each of the transactions was unlikely to substantially lessen competition for wireless devices. With respect to RIM’s and Microsoft’s acquisition of Nortel patents, their low market shares in mobile platforms would likely make a strategy to harm rivals either through injunctions or supracompetitive royalties based on the acquired Nortel SEPs unprofitable.  Because of their low market shares, they are unlikely to attract a sufficient number of new customers to their mobile platforms to compensate for the lost patent royalty revenues. Moreover, Microsoft has cross-license agreements in place with the majority of its Android-based OEM competitors, making such a strategy even less plausible for it.”

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