Gómez-Acebo & Pombo © 2015. Nespresso wars Comments on Competition Law Interlaw Seminar Eduardo Gómez de la Cruz 23.03.2015

Gómez-Acebo & Pombo © 2015.

Nespresso warsComments on Competition Law

Interlaw SeminarEduardo Gómez de la Cruz

23.03.2015

Gómez-Acebo & Pombo © 2015. 2

• Nespresso claims against several coffee capsule producers for patent infringement.

• Capsule producers defend using IP arguments.

• Possible additional argument based on Competition Law: If Nespresso holds a dominant position in the

market.

Any abuse is contrary to art. 102 TFEU (and art. 2 LDC).

Then :

Patents acquired in abuse are null and void.

Abusive acts by the patent holder are null and void.

Damages should be compensated.

BACKGROUND

“War does not determine who is right; only who is left”Bertrand Russell“It is nice to have valid competition; it pushes you to do better”Gianni Versace


INDEX

Market definition and dominance• Market definition• Dominance

Alleged abusive conducts• Abusive patent thickets• Technical tying• Misleading patent authorities• Abusive technical adaptations• Abusive communications to consumers


• Has Nespresso a dominant position? In which market?

• EC Communication on the definition of relevant market for the purposes of Community competition law (97/C 372/03).

MARKET DEFINITION (1)

Relevant market defined as the combination of the relevant product market and the relevant geographic

market. The relevant product market includes all those

products and services regarded as interchangeable or substitutable by the

consumer, by reason of their characteristics, their prices or their intended use or which are regarded substitutable by the suppliers which

can switch between supplying different products in the short term.

The relevant geographic market comprises the area in which the affected undertakings are

involved in the supply and demand of products and services, in which the conditions of

competition are sufficiently homogeneous and which can be distinguished from neighbouring

areas due, in particular, to the fact that the conditions of competition prevailing therein are

appreciably different from the former area.


TRADITIONAL COFFEE PERCOLATOR DRIP FILTER COFFEE MACHINE PAD FILTER MACHINE

ESPRESSO MACHINES

MANUAL ESPRESSO MACHINE PUMP PORTIONED ESPRESSO MACHINES FULLY AUTOMATIC ESPRESSO MACHINE

MARKET DEFINITION (1bis)


• We found two relevant markets for this case:

– the market for pump portioned espresso machines (the primary market); and

– the market for coffee capsules for use in Nespresso machines (the secondary market).


Monopolization of the market

Foreclosure of

secondary market

Abuse in the primary market

• Subsequent Theory of Harm: Nespresso would be abusing its dominant position in the primary market for excluding competitors in the secondary market.

• Can the primary market be defined as narrow as that or is the market much wider, including any of the different (and several) available solutions to prepare a coffee?



Narrow definition: at least espresso machines; possibly pump portioned espresso machines• Technical characteristics of the espresso machines are

different from other devices suitable for making coffee (traditional coffee percolators, drip filter coffee machines and pad filter coffee machines), mainly because of the extraction process by high pressure brewing (beyond 10 bars) which would also exclude other pad filter devices also using (lower) pressure brewing systems.

• The coffee they make is different in terms of taste and texture

• Significant price differences among the various devices.

• At least, limited supply-side substitutability.• Possible sub-segmentation differentiating manual,

pump-portioned and automatic espresso machines.• Precedents:

• European Commission Decision dated July 17, 2009 in the case COM/M5.547 Koninklijke Philips Electronic / Saeco International Group (not clear).

• Decision from the Greek competition authority dated February 12, 2009 in case No. 434/V/2009 – Nestlé Hellas AE (clearly distinction between instant coffee, Greek coffee, espresso coffee and drip filter coffee.

Wider definition: market of coffee• Do consumers really perceive different solutions to

prepare coffee as not substitutable?• Is there a clear differentiation in prices? Apparently

not so different except if we assumed total life-cycle costs.

• Precedents:• Portuguese authority decision (20 April 2006).• HCC decision 12/95.


• For the secondary market (Paragraph 56 of the EC Communication on market definition):

– “A narrow definition of market for secondary products, for instance, spare parts, may result when compatibility with the primary product is important. Problems of finding compatible secondary products together with the existence of high prices and a long lifetime of the primary products may render relative price increases of secondary products profitable. A different market definition may result if significant substitution between secondary products is possible or if the characteristics of the primary products make quick and direct consumer responses to relative price increases of the secondary products feasible.”



• A dominant position has been defined under EU law as a position of economic strength enjoyed by an undertaking, which enables it to prevent effective competition being maintained on a relevant market, by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of consumers (EUCJ, Case 27/76 United Brands Company and United Brands Continentaal v Commission [1978] ECR 207, paragraph 65; EUCJ, Case 85/76 Hoffmann La Roche & Co. v Commission [1979] ECR 461, paragraph 38.)

• The EU Commission, as a general rule, uses a 40% threshold in order to determine whether there is an indication that an undertaking is dominant on the relevant market (Section 14 of the Communication from the Commission — Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings [2009/C 45/02]).

• From the case-law of the European Court of Justice it appears that a market share of at least 50% is in itself "evidence of a dominant position" (Case C-62/86, Akzo Chemie B.V. v. Commission [1991] ECT I-3359).

DOMINANCE


INDEX

Market definition and dominance

• Market definition• Dominance

Alleged abusive conducts

• Abusive patent thickets• Technical tying

• Misleading patent authorities• Abusive technical adaptations

• Abusive communications to consumers


• Abusing the patent system by– Abusive use of patent thickets: excessive augmentation of the number of

patent applications, together with an intensive use of divisionals and the amendment of applications in reaction to the introduction of competitive capsules.

– Technical tying: trying to extend patent protection on machines to products (capsules), which can no longer be protected by patent law, in particular by making use of system claims.

– Misleading patent authorities.• Technical adaptations aimed at making the use of a capsule with a sealing element

indispensable together with the implementation of an extensive portfolio of defensive patents, whose aim is to make it impossible (or far more difficult) for competitors to develop a capsule with a sealing element without thereby infringing IPRs.

• Communications to consumers suggesting that only Nespresso capsules may be used in Nespresso machines.

ALLEGED ABUSES


INDEX








• Excessive augmentation of the number of patent applications …

ABUSIVE USE OF PATENT THICKETS (1)

Total amount of filings per year

0

5

10

15

20

25

30

35

40

1975 1980 1985 1990 1995 2000 2005

Year

tota

l am

ount

of f

iling

s

• A few years before the original patent expired (1996) the number of filings suddenly increased.

• In 1999, there is again a strong increase in the number of applications.

• The EC observes that this may indicate abuse of patent system: the commercial success of a product has no direct relation to the technical or innovative properties, so that there must be other (and hence improper) reasons for the increases in the number of patent applications (see e.g. para. 488 of the Pharmaceutical Sector Inquiry Final Report).


• … together with an intensive use of divisionals


• Starting in 1999, increase of the number of divisional applications applied for.

• For patent families with a filing date from 1999 up to 2005, on average, about one divisional per family. For 2006 to 2008, on average, between 1.5 and 2 divisional applications per family. In general, second and third-generation divisional applications very likely represent less than 0.02% of all European patent applications.

• From a competition law perspective, divisionals can be objectionable. They make it much more difficult for competitors to assess and survey the exact scope of the patent portfolio.

Total amount of families Vs. number of divisional application and filings under EP priority

0

5

10

15

20

25

1975 1980 1985 1990 1995 2000 2005

Year

Num

ber

of fi

lings

Total amount of familieswith at least one EPapplication

Divisional applicationsand filings under priority


• Excessive use of patent applications may hinder competition by artificially creating legal uncertainty for competitors:– the exact scope of protection is not fixed now that a

pending application can always be amended, and – divisionals can be generated again and again so that legal

uncertainty persists. • Excessive use of patent applications may also hinder

competition by artificially forcing competitors to incur high costs and invest a great deal of time to investigate the legal situation and, if necessary, to challenge the IP holder position or to defend their own position.




• Spanish CNC, 14 December 2006 (As. 606/2005, Asinem/Endesa), confirmed by the Supreme Court on 10 February 2011: “it must be concluded that the assessed conduct constitutes an abuse of dominant position since the same results in a distortion of the competitive conditions of the market which grants Endesa a competitive advantage which other competitors may not replicate“. “It is true that this kind of conducts is not included in the examples of abuses listed in article 6 of Law 16/1989, dated 17 July on Competition Defence [now article 2 of Law 15/2007, dated 3 July, on Competition Defence] or article 82 of the European Union Treaty [now article 102 of the Treaty on the Functioning of the European Union],but it cannot be forgotten that such a list is merely a list of examples and therefore, it must be interpreted as an open list of possible abusive conducts which, in no event, closes any further possibilities for assessing a conduct by a dominant operator as an abusive one”.

• Supreme Court (judgment dated 1 June 2010) has stated that: “In this sense, the relevant question is, as it has also pointed out by this Supreme Court in judgment dated 20 June 2006, whether the conduct considered as an abuse of dominant position has led to the shaping of a captive market where barriers of entry has been imposed to competitors for them to be required to bear expenses which make impossible or seriously onerous their commercial response”.



• Autorità garante delle concorrenza e del mercato fined Pfizer in 2012 (confirmed by the Consiglio di Stato on 12 February 2014) for putting in place a “complex legal strategy” aimed at extending the patent protection of the medicinal product Xalatan and at instrumentally using the consequent uncertainty of the real expiry of the patent in order to delay or to prevent the access of the generic products containing latanoprost as active ingredient.

• According to the Consiglio di Stato: “This case does not concern a conduct prohibited under patent law, but the anti-competition implications of a series of acts that are per-se lawful. In fact, the abuse of a dominant position attributed to Pfizer is nothing but the specification of the broader category of abuse of right, whose precondition is the existence of a right which is used artificially, for a scope which is incoherent with that for which that right is granted: in the case at issue, the exclusion of competitors from the market”.

• Also criticism against patent thicket sin the EC’s Pharmaceutical Sector Inquiry Final Report.


INDEX








• Alleged anticompetitive use of system claims• Although the use of system claims may be justified in itself, it

is not when its purpose resides in extending patent protection to products that cannot be protected by patent law anymore, without there being a valid reason for doing so.

• Nestlé allegedly intended to extend the patent protection on capsules the shape of which has not evolved since 1976. By the use of system claims, Nestlé would be creating the possibility for itself to argue that competitive capsules indirectly infringe patents, even if the capsules in question do not infringe possible patent rights to capsules as such.

TECHNICAL TYING (1)


• "Technical tying occurs when the tying product is designed in such a way that it only works properly with the tied product (and not with the alternatives offered by competitors)". Guidance on the Commission's enforcement priorities in applying Article [102] of the [TFUE] to abusive exclusionary conduct by dominant undertakings.

• Tying can also occur through extension of patent protection to a product that is no longer susceptible of protection by patent law without there being a valid reason for it.

TECHNICAL TYING (2)


INDEX








• Misleading patent authorities may also be an abuse of patent system• Typical cases: submitting last minute amendments to patent applications

or making up false problems which then need a solution.• In the well-known Astra Zeneca case, the Commission found that Astra

Zeneca misused public procedures in a number of EEA States, only with the objective to exclude competition from generic rivals in the market for proton pump inhibitors. Case confirmed by the CFI on 1 July 2010 (Case T-321/05) and the CJ on 6 December 2012 (C‑457/10 P)

• CFI stated: “the submission to the public authorities of misleading information liable to lead them into error and therefore to make possible the grant of an exclusive right to which an undertaking is not entitled, or to which it is entitled for a shorter period, constitutes a practice falling outside the scope of competition on the merits which may be particularly restrictive of competition”.

MISLEADING PATENT AUTHORITIES


INDEX








• Nestlé adapted Nespresso machines to complicate the interface between the machine and the capsule: the removal of the rubber sealing element from the capsule holder of Nespresso machines (and some related other changes) made it virtually impossible to use capsules without a sealing member in these machines with a modified capsule holder.

• Commission Decision in the Decca Navigator System case (Case 89/113/EEC, 21 December 1998): a dominant undertaking abuses its dominant position if it modifies its product on the primary market in order to prevent the products (on the secondary market) of its competitors from fitting in them.

ABUSIVE TECHNICAL ADAPTATIONS


INDEX








• “Important: This machine operates only with Nespresso capsules, available exclusively through the Nespresso Club”.

• “Nespresso quality is only guaranteed with the use of Nespresso capsules and machines”.

• ECJ (Judgment dated 12 December 1991, Hilti AG v Commission, Case T-30/89, paragraph 118): "(…) not the task of an undertaking in a dominant position to take steps on its own initiative to eliminate products which, rightly or wrongly, it regards as dangerous or at least as inferior in quality to its own products.".

• Also, according to the EC, Novo Nordisk, an insulin manufacturer abused its dominant position by excluding liability in case of incorrect functioning of its insulin injection systems or excluding the guarantee of those products when used in conjunction with compatible components supplied by other manufacturers. This let to Novo Nordisk to offer commitments consisting, amongst other, in the withdrawal of those exclusions to avoid that the sanctioning procedure would continue.

ABUSIVE COMMUNICATIONS TO CONSUMERS

Thank you for your attention!Questions? E.gomez@GomezAcebo-

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Gómez-Acebo & Pombo © 2015. Nespresso wars Comments on Competition Law Interlaw Seminar Eduardo Gómez de la Cruz 23.03.2015