Dispensing justice

Written by Michael Vaughan, senior associate at Morton Fraser MacRoberts

The intersection of IP and competition law is interesting, and embedded in a complex relationship. A recent case has lead Michael Vaughan of Morton Fraser MacRoberts to provide an update on whether post-expiry royalty payments are anti-competitive.

The recent case of Rocep-Lusol Holdings Limited v Lindal Dispenser GmbH 2024[CSOH] 29 sheds light on the complex relationship between intellectual property rights and competition law. The dispute centred around a contract for the exclusive licence of various patents in exchange for royalty payments. 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 was 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 effect 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. Lord Sandison heard the case at debate and 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 [1990] CMLR 915 and again in Genentech Inc v Hoechst GmbH [2016] Bus LR 1016. Both cases examined whether requiring royalty payments 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 both cases, it was considered that an obligation to continue to pay royalties for the exclusive use of a product that is no longer covered by a patent is not, of itself, a breach of competition law. This was subject to the licensee having the right to terminate the contract on reasonable notice. The situation here was similar in that, although there was no right to terminate on reasonable notice, there was a short and defined period of post-expiry royalty payments rather than an ongoing contract. This supported the pursuer’s argument that the key point in Ottung and Genentech was to avoid a party being bound to indefinitely pay post-expiry royalty payments.

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. The court can determine whether the object of a contract is anti-competitive simply by reference to the terms of the contract. If this is determined, there is no need to consider its effect on competition. In contrast, when deciding whether the effect of the contract is anti-competitive, the court will require to assess whether the contract 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 anti-competitive effect of the contract.

The court held that it could ‘confidently be determined’ that the object of the contract was not anti-competitive as it is not an example of the sort of cooperation between undertakings which, by its nature, has been recognised as harmful to the proper functioning of competition. Therefore, the burden was on the defender to establish its ‘effect’ argument – i.e. that the contract had in fact prevented, restricted or distorted competition by an appreciable extent.

The defender argued that their obligation to make royalty payments constrained the prices that could be charged for their products. However, the court held that the defender’s averments failed to demonstrate that 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 that 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 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. Lord Sandison also noted his doubts that, even after enquiry, the relevant market would have been found to have been as restrictive as the defender contended.

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

Although this case is subject to an appeal (likely to be heard in the first half of 2025), the decision provides useful guidance for those dealing in the licence of intellectual property rights and confirms the position on the legality of post-termination payment in contracts of a defined duration. It is important to consider that, whilst IP 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.

Morton Fraser MacRoberts acted for the pursuer in this case.

Written by Michael Vaughan, senior associate/solicitor advocate at Morton Fraser MacRoberts