Turkish Council of State’s Landmark Decision on Special Responsibility of Dominant SEP Holders, Non-Challenge and Termination Clauses
While the intersection between intellectual property and competition law has always been an issue due to the imbalance between the exclusivity rights ensured by intellectual property law and the anti-competitive practices that the competition law protects, there are mechanisms in place to ensure a fair balance, such as the notion of standard-essential patents (“SEP”) and the commitment to license these SEPs on a fair, reasonable, and non-discriminatory (“FRAND”) basis. However, the existence of FRAND terms has not necessarily led to a more peaceful environment as SEP holders and implementers dispute the scope, application, and interpretation of FRAND terms and resort to the courts and relevant authorities.
Upon a complaint from the licensee, Vestel Elektronik Sanayi ve Ticaret A.Ş. (“Vestel”), the Turkish Competition Authority (“TCA”) initiated an investigation into Koninklijke Philips N.V. (“Philips”) on whether Article 6 of Law No. 4054 on the Protection of Competition (“Competition Law”) regulating abuse of dominance matters had been violated. Although the TCA decided to impose fines on Philips due to abusive practices breaching FRAND commitment, the Ankara 11th Administrative Court (“Court of First Instance”) annulled the TCA’s infringement decision. Further to the appeals from the TCA and the intervener Vestel, the Council of State partly quashed the annulment decision. This article aims to analyse this landmark decision of the Council of State that sheds light on the special responsibility of dominant SEP holders and non-challenge and termination clauses.
The TCA’s Infringement Decision
The TCA’s decision stated that the SEPs held by Philips had granted a monopolistic power to Philips in the relevant market and that Philips’ practices had led to abuse of dominance. Within the scope of the case, Philips was found to be in the dominant position in the market for subtitles for digital video broadcasting during the patent protection period. The TCA found that Philips had not abided by its commitment to the relevant standard-setting organization that it would license the SEPs related to subtitle technology for digital video broadcasting under FRAND terms.
The TCA’s reasoning for finding a violation was as follows:
- Philips resorted to a court injunction without applying to an independent third party to determine the royalty fee, which violates the European Court of Justice’s (“ECJ”) Huawei-ZTE decision;
- Philips forced a termination clause in the form of a non-challenge clause in the License and Settlement Agreement onto Vestel;
- Philips violated the transparency principle by not announcing its royalty fees on its website, and thus engaged in discriminatory practices; and
- Philips reversed the burden of proof with its License and Settlement Agreement, in violation of FRAND terms.
The Court of First Instance’s Annulment Decision
The Court of First Instance accepted Philips’ appeal to the case and annulled the TCA’s infringement decision. The Court annulled the decision by drawing the following conclusions:
- Resorting to a court injunction by Philips cannot be regarded as an abuse of its dominant position as Philips had filed a lawsuit only to protect its intellectual property rights after the failure of the negotiations. As per the ECJ’s Huawei-ZTE decision, it is understood that applying to an independent third party for the determination of royalty fee is left to the discretion of both parties;
- While in some instances a non-challenge clause may lead to competitive concerns, bearing in mind the history of the dispute between Philips and Vestel, there is no violation in incorporating a non-challenge clause and reversing the burden of proof in the License and Settlement Agreement;
- As per Article 44 of the Competition Law setting forth that the TCA shall not base its decisions on issues about which the parties have not been informed and granted the right to defence, it has been found that the transparency principle being a pillar for abusive practices has not been previously directed to Philips and that Philips was not granted a right to defence.
Following the annulment of the TCA’s decision, the Ankara Regional Administrative Court upheld the Court of First Instance’s decision.
The Council of State’s Landmark Decision
Although the Council of State found that the Court of First Instance’s annulment decision had been lawful in terms of the application to an independent third party, the transparency principle, and the reversal of the burden of proof, the Court partly quashed the annulment decision. Within its deliberations, the Council of State indicated the following:
- In terms of competition law, Philips has a special responsibility due to its undertaking to license SEPs under FRAND terms along with its dominant position.
- Philips imposed a non-challenge and termination clause in the License and Settlement Agreement, which was signed by Vestel under the threat of a court injunction. Licensees should always be able to challenge the validity and the essence of SEPs. Any behaviour of the licensor to the contrary would entail a competition law violation through abuse of the dominant position.
First, the Council of State indicated that a SEP holder who committed to license its SEPs under FRAND terms is expected to offer acceptable terms for both parties of the potential license agreement. In this regard, a commitment to license under FRAND terms burdens a special responsibility to the SEP holder in terms of competition law.
Following the special responsibility finding, the Council of State evaluated whether the non-challenge and termination clause would amount to a breach of the Competition Law. The clause at stake was as follows: “Philips shall be entitled to terminate this Agreement forthwith by means of a written notice to Vestel in the event Vestel or any of its Associated Companies, a partner in a joint venture, or any other party benefitting from this Agreement challenges the validity of any Philips TV patent.”
Non-challenge clauses, which prevent a licensee to challenge the validity of a technology, do not benefit from the safe harbour under the Turkish Technology Transfer Block Exemption Regulation. On the contrary, termination clauses, which allow the licensor to terminate the agreement if the other party challenges the validity of the licensed technology, benefit from the safe harbour under the Turkish Technology Transfer Block Exemption Regulation, as opposed to the European Union. That said, considering Philips held a dominant position with a 100% market share in the market for subtitles for digital video broadcasting, Philips’ imposition of a termination clause cannot benefit from the Turkish Technology Transfer Block Exemption Regulation.
Before evaluating the legality of the relevant clause, the Council of State highlighted that the SEPs in question were indispensable for Vestel to operate in the market and the License and Settlement Agreement, including the termination clause, had been signed by Vestel under the threat of a court injunction.
In its evaluation, the Council of State found that the non-challenge and termination clause prevents the licensee from questioning the validity of the patent. Third parties who do not actually use the patent have no economic justification for filing a lawsuit on patent validity. Therefore, it is clear that if SEP licensees are deprived of their right to challenge the validity of the patent, both the license fee will continue to be paid for invalid patents and it will not be possible to control the validity of SEPs. Invalid intellectual property rights are an unmerited extra cost for licensees and limit innovation and economic activity. Therefore, in terms of competition law, a licensee’s right to challenge the validity of the relevant patents is an interest worth protecting. By referring to the ECJ’s Huawei/ZTE decision and the European Commission’s Motorola decision, the Council of State concluded that the imposition of the non-challenge and termination clause amounts to abuse of the dominant position.
Since the TCA calculated the base fine at the lowest possible rate (0.5%) for abuse of dominance, the Council of State did not reduce the fine although it confirmed the annulment of certain parts of the TCA decision as mentioned above. Following this decision, the case file will be sent to the Ankara Regional Administrative Court for a new decision. The Ankara Regional Administrative Court has the right to comply with the Council of State’s decision or to resist upholding the annulment decision.
Concluding Remarks
The evaluation of SEPs and FRAND terms in Turkey is still new. This case is the first in terms of the assessment made regarding the balance between intellectual property rights and competition law. However, it can be seen that its relatively novel nature does not cause authorities to relinquish control over this issue, which will undoubtedly fuel the discussions on this topic and inevitably enrich the Turkish stance with regard to the evaluation of the balance.
The Council of State’s decision is of utmost importance as it confirms the special responsibility arising from the FRAND commitments of SEP holders. This will set a precedent for all future disputes concerning SEPs and FRAND terms, especially with regard to the special responsibility of SEP holders. Accordingly, SEP holders should be aware of competition law risks while conducting license negotiations and license agreements with potential licensees in Turkey.
