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The European Commission ("the Commission"), the European Union's antitrust law enforcer, historically has taken a favorable view of standards and has repeatedly promoted the development of standards in the context of its regulatory and research programs.

However, standards may raise antitrust law issues. Before examining these issues in more detail under European Community ("EC") competition law, we briefly summarize the principal rules of EC competition law as they apply generally.

Main Features of EC Competition Law Generally

EC competition law is principally based on two provisions of the EC Treaty: (1) Article 81, which in paragraph 1 prohibits agreements and concerted practices restrictive of competition, and (2) Article 82, which prohibits a dominant firm (generally a firm occupying more than 40% of the relevant market) from abusing its dominant position, e.g., by charging excessive prices, discriminating between customers, or refusing to supply. Both Treaty provisions are implemented by a basic regulation known as Regulation 17¹ and a number of accompanying regulations.

EC competition law is enforced by the European Commission in Brussels and the national courts in the Member States. The European Commission publishes non-binding guidelines and non-binding notices reflecting the principles behind its enforcement practice and providing additional guidance on the application of Articles 81 and 82. For example, it has published guidelines on the applicability of Article 81 to horizontal cooperation agreements (i.e., cooperation agreements between actual or potential competitors).² The ultimate arbiters of EC competition law disputes are the Court of First Instance and the European Court of Justice in Luxembourg.

The principal consequences for failing to comply with Article 81 EC Treaty are the partial or even complete and automatic unenforceability of the agreement in the national courts and fines of up to EUR 1 million or 10% of the turnover of the group to which the infringing company belongs, whichever is higher. If the parties to the agreement have a small collective market share (generally under 5% of the relevant market if the parties are actual or potential competitors or 10% if they are not) and does not contain any egregious EC competition violations such as price fixing, market sharing or output limitation arrangements, the agreement is deemed by the European Commission not to "appreciably restrict competition," which means the European Commission generally will not impose fines or declare the agreement illegal, and the national courts are unlikely to hold provisions of the agreement to be unenforceable.

Certain agreements that bring about a merger of companies, a joint venture, or a change in control of an undertaking must be notified to the European Commission under the specific rules of the EC Merger Regulation.³ Agreements related to cooperation between competitors that do not fall within the scope of the Merger Regulation must still comply with the general rules of Article 81. Indeed, any agreement between companies that may affect trade between EU Member States and that may have as its object or effect the restriction or prevention of competition within the EU will be prohibited based on Article 81(1), unless the restrictive provisions can be justified by reference to technical or economic efficiencies in accordance with Article 81(3),⁴ in which case they may benefit from an "exemption" from Article 81(1).

EC Competition Law as It Applies to Standards

Standards can be created by interested industry players pursuant to a standardization agreement, possibly in the context of a public or private standard-setting body, or develop spontaneously as a result of market forces.

The principal competition law issues arising in relation to standards concern:

• the terms of standardization agreements, the manner in which standardization fora operate, and the way in which a standard is set, which mainly raise questions related to Article 81;
• the contribution of necessary IP to a standard, or the manner in which access is provided to a proprietary de facto standard, which principally raises questions related to Article 82

Competition Law Aspects of Standard-Setting Agreements

Standardization agreements have as their primary objective the definition of technical or quality requirements with which current or future products, production processes or methods may comply. Standardization agreements can cover various issues, such as standardization of different grades or sizes of a particular product or technical specifications in markets where compatibility and interoperability with other products or systems is essential. The terms of access to a particular quality mark or for approval by a regulatory body can also be regarded as a standard.⁵

The primary provision of EC competition law of importance to standardization agreements is Article 81. The Commission has issued guidelines on the application of Article 81 to horizontal cooperation agreements, including agreements on standards ("the Guidelines").⁶ Although the Guidelines strictly speaking are not binding, they provide a useful insight into the main factors that the officials of the competition law directorate generally consider when reviewing an agreement on standards under Article 81. From a competition law perspective, standardization agreements generally will be welcomed if:

• it can be expected that they will bring economic benefits, such as improved supply or the opening of new markets;
• the agreement does not harm innovation;
• the agreement does not harm the consumer, for example if the rapid obsolescence of old products brought on by the introduction of a new standard is not outweighed by other benefits.

In particular, according to the Commission's Guidelines, standardization agreements generally will not restrict competition if:

• the standard-setting process (including the standard-setting body, if any) is open, transparent and non-discriminatory;
• the standard-setting agreement's coverage is limited to what is required to establish the standard;
• the actual standard itself is formulated in a way that is not intended to exclude competitors, and ideally, is technology-neutral;
• the standard achieves economic benefits, which generally requires that the standard be accessible to competitors on fair, reasonable and non-discriminatory terms and that an appreciable portion of industry be involved in the adoption of the standard;
• compliance with the standard is voluntary or is part of a wider agreement to ensure compatibility of products; the parties remain free to develop alternative standards or products that do not comply with the agreed standard;
• it can be justified why one standard was chosen over another, to the extent that there are several potential standards.

The Guidelines note these characteristics generally exist with regard to standards adopted by recognized standards bodies, which are based on non-discriminatory, open and transparent procedures. They may, of course, also exist with regard to private standardization initiatives, depending on the circumstances.⁷

Agreements that standardize aspects such as minor product characteristics, forms and reports, which have an insignificant effect on the main factors affecting competition in the relevant markets, generally also will not raise competition law concerns.

By contrast, standardization agreements could breach Article 81 if:

• The criteria for involvement in the standard-setting process are exclusionary, such that certain competitors cannot participate in the formulation of the standard and have no access to the standard, to the extent such criteria are subjective and not objectively justifiable. All competitors in the market(s) affected by the standard should have the possibility of being involved in discussions. Therefore, participation in standard setting should be open to all, unless the parties demonstrate important inefficiencies in such participation or unless recognized procedures are foreseen for the collective representation of interests, as in formal standards bodies.
• The standard itself is formulated with the purpose or effect of excluding competitors.
• They grant the parties joint control over production and/or innovation, thereby restricting their ability to compete on product characteristics, while affecting third parties like suppliers or purchasers of the standardized products.
• The standards agreement prevents participants from developing competing standards or products that do not comply with the standard (thus hindering innovation).
• The standards agreement confers the exclusive right to test compliance with the standard to certain bodies.
• The standard-setting forum degenerates into a conduit for unlawful collusion (e.g., in the form of a venue for unlawful information exchange or of a cartel).⁸

To the extent the standardization agreement does contain restrictions on the setting of the standard, use of the standard or access to the standard, the parties to the agreement must be able to demonstrate that these restrictions are required to achieve the economic benefits envisaged to result from the standards agreement.

High market shares held by the parties in the market(s) affected will not necessarily be a concern for standardization agreements. Where the standard concerned has a negligible coverage of the relevant market , no appreciable restriction on competition exists. However, in a number of cases, the success of a standard will depend on the coverage it has in the relevant market. If the standard covers a significant portion of the market, it need not be restrictive of competition provided the general principles above are observed in relation to the setting of, use of and access to the standard.

The Guidelines provide a few examples of permissible and impermissible standardization agreements:

• A number of videocassette manufacturers agree to develop a quality mark or standard to denote the fact that the videocassette meets certain minimum technical specifications. The manufacturers are free to produce videocassettes that do not conform to the standard and the standard is freely available to other developers. Provided that the agreement does not otherwise restrict competition, Article 81(1) is not infringed, as participation in standard setting is unrestricted and transparent, and the standardization agreement does not impose an obligation to comply with the standard. If the parties agreed only to produce videocassettes that conform to the new standard, the agreement would limit technical development and prevent the parties from selling different products, which would infringe Article 81(1).
• A group of competitors active in various markets which are interdependent with products that must be compatible, and with over 80% of the relevant markets, agree to develop jointly a new standard that will be introduced in competition with other standards already present in the market and widely applied by their competitors. The various products complying with the new standard will not be compatible with existing standards. Because of the significant investment needed to shift and to maintain production under the new standard, the parties agree to commit a certain volume of sales to products complying with the new standard so as to create a critical mass in the market. They also agree to limit their individual production volume of products not complying with the standard to the level attained last year. This agreement, owing to the parties' market power and the restrictions on production, falls under Article 81(1) and is not likely to fulfil the conditions of paragraph 3, unless access to technical information were provided on a non-discriminatory basis and reasonable terms to other suppliers wishing to compete.

Competition Law Aspects of Refusals by a Dominant Company to License the Intellectual Property Related to the Standard It Owns to Third Parties

A standard may also emerge over time as a result of market forces. If the intellectual property rights that are part of the standard are owned by one or more dominant companies, the extent to which the dominant companies grant actual or potential competitors access to the standard might raise the question of whether the provider is abusing its dominant position in violation of Article 82 EC Treaty. The refusal to grant access to the dominant de facto standard may enable the owner of that standard to prevent other market players from participating effectively in the market(s) to which the standard is applicable, as well as to related markets.

The following concrete example illustrates this proposition. Last year, NDS Health, a provider of pharmaceutical sales data, complained to the Commission that it was refused a license by IMS Health ("IMS"), a competitor that claimed to hold database protection rights in the reporting scheme used to provide pharmaceutical data to pharmaceutical companies selling products in Germany. The Commission indicated in a statement of objections released in March of 2001 that use of IMS's reporting scheme had in essence developed into a standard, the use of which had become essential to participate effectively in the pharmaceutical reporting business in Germany. The Commission believes that IMS abused its dominant position by refusing to license the reporting scheme to competitors. It ordered IMS to engage in negotiations to license its reporting structure to NDS Health and others.

The Commission is in effect arguing that IMS's proprietary reporting structure is an "essential facility." Pursuant to the European Court of Justice's holding in the Magill case,⁹ an essential facility to which access should be granted by a dominant firm exists only in carefully circumscribed circumstances.

A refusal to grant a license cannot in itself constitute an abuse of a dominant position. An abuse will only be present in exceptional circumstances if the intellectual property owner exercises its rights in a manner that is abusive. According to the Court of Justice, the following may constitute exceptional circumstances:

• the refusal to license precludes emergence of a new product for which consumer demand exists;
• as a result of the refusal, all competition in "secondary" markets is excluded and thus reserved for the intellectual property owner;
• the intellectual property owner cannot justify the refusal.

In IMS, the Commission found that IMS's refusal amounts to an abuse warranting the imposition of a compulsory license; even in the absence of additional abusive conduct, it prevents the appearance of a new product. IMS is contesting this decision, arguing among other things that the exceptional circumstances identified in Magill must be present cumulatively, and that a mere finding that a company's refusal prevents the emergence of a new product is not enough to warrant the finding of an abuse in the exercise of intellectual property rights. In part based on that argument, the Court of First Instance has at the request of IMS ordered suspension of the provisional measures imposed by the Commission, which required among other things that IMS license its reporting structure to competitors.¹⁰ The IMS case has not yet reached a final conclusion on the merits, and it is unclear whether the Commission will prevail.

A similar argument could be made in the context of the Commission's ongoing investigation of Microsoft's alleged leveraging of its dominant positions on the PC operating systems and personal productivity applications markets to the work group server operating systems market.¹¹ Microsoft's Windows PC operating system now holds a market share of over 94%. It could be said that Microsoft's alleged refusal to provide access to interface information that allows third party vendor's server programs to interoperate with the Windows desktop operating system is in fact a denial of access to a standard interface, namely the Windows interface, necessary to compete effectively in the market for Windows desktop software, as well as in other markets such as the market for server software and Internet services.

The law on this point is not yet well developed, and the European Court of Justice has not yet had a real opportunity to provide its view as the final arbiter in competition law cases on the applicability of essential facility-type arguments to technology in general and technology standards in particular.

Competition Law Aspects of Refusals to License Intellectual Property to a Standard

Competition law issues could, theoretically at least, also arise out of the refusal of a company to license essential intellectual property rights required for the formulation of a standard for use as part of that standard.

An example of this fact pattern can be found in the dispute between U.S. telecommunications technology provider Qualcomm and the European Telecommunications Standards Institute ("ETSI") concerning the formulation of the 3G mobile communications standard in 1998. Qualcomm refused to license necessary patent rights to ETSI unless ETSI made changes to its 3G standard, which in effect would favor Qualcomm's preferred technology. It is understood that several ETSI members considered filing complaints with the European Commission based on Article 82, making the argument that Qualcomm refused to license an essential facility (the intellectual property needed for the standard) and by its conduct engaged in unlawful tying (it would only provide a license to the necessary IP if changes to the standard would be accepted by ETSI that would require its members to license additional patent rights from Qualcomm). The Commission ultimately was never able to provide its views on the matter as the parties settled the dispute in 1999. The validity of the theories set forth in this section thus remains to be tested by the European Commission and the courts.

Conclusion

The establishment and use of standards can bring great benefits to the development of an industry, but can also raise a number of competition law concerns: some of the issues raised under EC competition law are discussed above. It is important to identify and address these antitrust issues early to avoid the obstruction of the standards process by an antitrust investigation.

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1: Regulation No 17 implementing Articles 85 and 86 of the Treaty [1962] OJ 13/204, as subsequently amended. This regulation is currently being reviewed, and the Commission has made proposals to radically change the current, heavily centralized system of competition law enforcement. However, assuming these proposals will ultimately be adopted, they are unlikely to enter into force within the next couple of years. Therefore, we do not discuss them in detail here.

2: [2001] OJ C 3/2.

3: Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings [1990] OJ L 395, as subsequently amended.

4: In this connection, it should be noted that not only agreements between companies based within the EU, but also agreements between EU companies and non-EU companies may be found potentially to affect trade between Member States if they concern the supply of goods or services into or within the EU.

5: Commission Guidelines on the application of Article 81 to horizontal cooperation agreements [2001] OJ C 3.

6: Ibid.

7: The Brussels office of Morrison & Foerster LLP has advised a number of participants in publicly sanctioned standards bodies as well as private standard-setting organizations on the compatibility of their standard-setting agreements and practices with EC competition law.

8: In order to reduce the likelihood that standard-setting for a become venues to engage in unlawful collusion, it can be of significance to train the company representatives participating in the standard-setting initiative about the limits set to discussions in such for a by competition law, e.g., by implementing a competition law compliance program in the standard-setting body.

9: Joined Cases C-241/91 and C-242/91, RTE and ITP v. Commission [1995] ECR I-743 ("Magill"). See also Case C-7/97, Bronner v. Mediaprint [1998] ECR I-7791.

10: Case T-184/01 R, IMS v. Commission, Order of the President of the Court of First Instance, October 26, 2001.

11: Case COMP/C-3/37.792, incorporating Case No. IV/C-3/37.345. See the press release on the Commission's Web site and "EU issues Statement of Objections to Microsoft Monopoly" on the MoFo website.