Herbert Smith Freehills Competition Law Moot 2016

REFERENCE TO THE COURT OF JUSTICE OF THE EUROPEAN UNION UNDER

ARTICLE 267 TFEU FROM THE RURITANIAN HIGH COURT IN THE CASE OF:

ON BEHALF OF AGAINST

Manzana Corp Elf Co

CLAIMANT DEFENDANT

C-TEAM JAEGER
 C-Team Jaeger

A. TABLE OF CONTENTS

A. Table of Contents i

B. List of Abbreviations ii

C. List of References iv

D. Statement of Facts 1

E. Questions Referred 2

F. Executive Summary of Observations 3

G. Observations on Question One 5

(I) General Principles 5
(II) Infringement of Article 101 5
(III) Relevant Factors in Assessing Object Restriction 6
(IV) Proper Analysis as a Matter of Principle and Policy 7
(V) Effect Restriction and Inapplicability of Article 101(3) 8
(VI) Conclusion 9

H. Observations on Question Two (A) 9

(I) First Factor: Awareness of the FRAND Declaration 10
(II) Second Factor: Status as an NPE 12

I. Observations on Question Two (B) 13

(I) Excessive Pricing 13
(II) Proper Benchmark for the Economic Value of SEPs 14
(III) Practicality and Evidence 15
J. Observations on Question Three 16
(I) Indirect purchaser’s entitlement to sue does not arise on the facts 16
(II) Undetermined qualification of indirect purchaser’s right to sue by Ruritanian law 17
(III) Deference to Ruritanian authorities due to future implementation of Damages 17
Directive
(IV) Insurmountable difficulties arise in multi-level cases 19
(V) Conclusion 19

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B. LIST OF ABBREVIATIONS

Article 101 Article 101 of the TFEU

Article 102 Article 102 of the TFEU
Claimant / Manzana Manzana Corp
CJEU Court of Justice of the European Union
Commission European Commission
Damages Directive Directive 2014/104/EU on certain rules governing actions for
damages under national law for infringements of the competition law
provisions of the Member States and of the European Union [2014]
OJ L349/1EU
Defendant / Elf Elf Co
ECJ European Court of Justice
EC Treaty Treaty establishing the European Economic Community
EU European Union
FRAND Fair, Reasonable and Non-Discriminatory
FRAND-encumbered SEP An SEP which is subject to a previous FRAND declaration made in
respect of the same SEP
FRAND undertaking / An irrevocable undertaking / commitment / declaration to grant a
commitment / declaration licence on FRAND terms
FTC Federal Trade Commission
FTC Act Federal Trade Commission Act
Guidelines on Horizontal Guidelines on the applicability of Article 101 of the Treaty on the
Co-operation Agreements Functioning of the European Union to horizontal co-operation
agreements [2014] OJ C89/3
Huawei Case C-170/13 Huawei Technologies Co Ltd v ZTE Corp [2015] 5
CMLR 14
IPR Intellectual Property Right
Johnsson Johnsson Co
LTE Long Term Evolution
NPE Non-Practising Entity
PE Practising Entity

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R&D Research and Development

Regulation 1/2003 Council Regulation (EC) No 1/2003 of 16 December 2002 on the
implementation of the rules on competition laid down in Articles 81
and 82 of the Treaty [2003] OJ L1/1
RPM Resale Price Maintenance
PBR Percentage-Based Royalty with reference to Net Sales Revenue
SEP Standard Essential Patent
SSO Standard-Setting Organisation
Technology Transfer Guidelines on the application of Article 101 of the Treaty on the
Guidelines Functioning of the European Union to technology transfer
agreements [2014] OJ C89/3
TFEU Treaty on the Functioning of the European Union
TSO Telecommunications Standards Organisation
TTBER Regulation 2014/316/EU of 21 March 2014 on the application of
Article 101(3) of the Treaty on the Functioning of the European
Union to categories of technology transfer agreements [2014] OJ
L93/17
US United States

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C. LIST OF REFERENCES

Referred to at
paragraph(s)
Case Law of the CJEU
Case C-209/07 Competition Authority v Beef Industry Development Society Ltd 3
[2009] 4 CMLR 6
Case C-513/06 GlaxoSmithKline Services v Commission [2010] 4 CMLR 50 3
Joined Cases T-374/94, T-375/94, T-384/94 and T-388/94 European Night 8
Services v Commission [1998] 5 CMLR 718
Case C-234/89 Delimitis v Henninger Bräu [1992] 5 CMLR 210 10
Case T-67/01 JCB Service v Commission [2006] 5 CMLR 23 12
Case C-68/12 Protimonopolny Urad Slovenskej Republiky v Slovenska 17
Sporitel’na AS [2013] 4 CMLR 16
Case C-170/13 Huawei Technologies Co Ltd v ZTE Corp [2015] 5 CMLR 14 20, 21, 22, 25,
26, 28
Case C-52/07 Kanal 5 v Föreningen Svenska Tonsättares Internationella 33, 34
Musikbyrå (STIM)[2008] ECR I-9275
Case 40/70 Sirena v Eda [1971] ECR 3169 34
Case 27/76 United Brands and United Brands Continentaal v Commission 34
[1978] ECR 207
Case 244/80 Pasquale Foglia v Mariella Novello (No. 2) [1982] 1 CMLR 585 44
Joined Cases C-295/04, C-296/04, C-297/04 and C-298/04 Manfredi v Lloyd 47
Adriatico Assicurazioni SpA [2006] 5 CMLR 17
Case 148/78 Pubblico Ministero v Ratti [1980] 1 CMLR 96 50
Case C212/04 Adeneler v Ellinikos Organismos Galaktos (ELOG) [2006] 3 50
CMLR 30

European Directives and Regulations

Council Regulation (EC) No 1/2003 of 16 December 2002 on the 17
implementation of the rules on competition laid down in Articles 81 and
82 of the Treaty [2003] OJ L1/1

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Directive 2014/104/EU on certain rules governing actions for damages under 43, 49, 50, 51,
national law for infringements of the competition law provisions of the 52, 53
Member States and of the European Union [2014] OJ L349/1EU

Commission’s Guidelines
Guidelines on the application of Article 101 of the Treaty on the Functioning of 7, 12, 14, 33
the European Union to technology transfer agreements [2014] OJ C89/3
Guidelines on the applicability of Article 101 of the Treaty on the Functioning 36
of the European Union to horizontal co-operation agreements [2011] OJ
C11/1

Case Law of the US

Georgia-Pacific Corp v US Plywood Corp 318 F Supp 1116 (SDNY 1970) 36
In re Innovatio IP Ventures, LLC Patent Litigation, No. 11-cv-09308 (ND Ill 39
October 3 2013)

Decision of the FTC

In the Matter of Negotiated Data Solutions LLC, File No 051 0094 24

Case Law of Germany

Case 2 U 10/03 Kart, judgment of the Berlin Higher Regional Court 53
(Kammergericht) of 1 October 2009

Books
Vivien Rose and David Bailey (eds), Bellamy and Child: European Union Law 3, 7, 8, 10, 46,
of Competition (7th Edn, OUP 2013) 53
Richard Whish and David Bailey, Competition Law (8th Edn, OUP 2015) 4
Alison Jones and Brenda Sufrin, EU Competition Law Text, Cases and Materials 17
(5th Edn, OUP 2014)

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Journal Articles and Research Papers

Fiona M Scott Morton and Carl Shapiro, ‘Strategic Patent Acquisitions’ (2014) 11, 29, 30, 31
79 Antitrust LJ 463
Executive Office of the President, Patent Assertion and US Innovation (June 29
2013) <www.whitehouse.gov/sites/default/files/docs/patent_report.pdf>
accessed 8 April 2016
Lauren Cohen, Umit G Gurun and Scott Duke Kominers, ‘Patent Trolls: 30
Evidence from Targeted Firms’ (2015) Harvard Business School Finance
Working Paper No 15-002 <http://ssrn.com/abstract=2464303> accessed
8 April 2016
J Gregory Sidak, ‘The Proper Royalty Base for Patent Damages’ (2014) 10(4) 36
Journal of Competition Law & Economics 989
J Gregory Sidak, ‘The Meaning of FRAND, Part I: Royalties’ (2013) 9(4) 36, 37. 38, 39
Journal of Competition Law & Economics 931
Signals Research Group LLC, The Essentials Of Intellectual Property, 38
Quantifying Technology Leadership In The Development Of The LTE
Standard (September 2010) <www.ericsson.com/res/docs/2010/101220_
lte_contribution_whitepaper.pdf> accessed 8 April 2016
Philip Solis and Peter Cooney, Standards Leadership Within the 3GPP (ABI 38
Research June 19 2013)

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D. STATEMENT OF FACTS

The Standard Setting Process: The TSO is an SSO in the information and communications technology
sector. Its IPR policy requires that members grant irrevocable licences on FRAND conditions to IPRs
which might be essential if a standard is adopted, and provides that FRAND obligations should run
with the patents and bind all successors.
The SEPs and the FRAND Declaration: Johnsson owned a portfolio of patents which it considered to
be essential to the 2G, 3G and 4G standards. It declared these to be SEPs to the TSO and gave a
FRAND undertaking in respect of them. It also sells mobile devices integrating the technology.
Parties to the Proceedings: Manzana makes mobile devices complying with TSO standards but does
not own a portfolio of patents essential to TSO standards. Elf is not a member of the TSO, is an NPE
and purchased half of Johnsson’s SEPs which were declared essential to the TSO.
The Agreement between Johnsson and Elf: The patent transfer agreement (the ‘Agreement’) provided
that: (1) Elf is obliged to license the SEP-portfolio on terms in which the royalty due is a percentage
of the aggregate net sales revenue of the licensee; and (2) Elf is obliged to share the revenue it earns
from licensing the patents with Johnsson – a minimum payment of 1.5% of the licensee’s net sales
revenue, is to be made to Johnsson by Elf in respect of every licence granted (‘Minimum Royalty
Provision’). There was no express provision for the transfer of the FRAND commitment to Elf.
Dealings between Elf and Manzana: Elf notified Manzana of its infringement of Elf’s SEPs. Elf
demanded royalties at 2.0% of net sales revenue for products incorporating the technology. After
Manzana’s refusal, Elf successfully sought an injunction to exclude Manzana’s products for two days,
which was withdrawn after Manzana agreed to pay the royalties originally demanded by Elf.
Ruritanian Law on Passing On: Ruritania has not yet implemented the Damages Directive. A passing
on defence is currently not available to a defendant in a private claim for restitution or damages.
Manzana's Claims Before the National Court: Manzana claimed before the Ruritanian High Court
that: (a) the transfer agreement, which restricts competition by object by creating an irresistible
incentive for Elf to charge royalties of at least 1.5% of net sales revenue, to increase licensing prices
and to set unfairly high royalties, breached Article 101; (b) Elf breached Article 102 by seeking and
enforcing the injunction; (c) Elf breached Article 102 by charging unfair and discriminatory prices
for the licences; and (d) Elf should pay damages for the loss due to Article 102 violations.
Elf’s Defences: Elf denied any infringement, and alternatively sought to rely on the passing on
defence under the EU principles of unjust enrichment, effective judicial protection and effectiveness.
The Reference: The proceedings were stayed and the following questions were referred to the CJEU.

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E. QUESTIONS REFERRED

Question 1: Does a term in a patent transfer agreement, which provides for a minimum payment to
the vendor in respect of each licence granted by the transferee in respect of the standard essential
patents transferred, infringe Article 101? In particular, what factors are relevant in determining
whether such a provision has as its object the restriction of competition?

Question 2: In relation to Article 102:

(a) To avoid committing an abuse of a dominant position, does an undertaking which acquires a
dominant position by purchasing standard essential patents subject to a FRAND declaration made
by the previous owner, have to abide by the principles laid down by the Court of Justice in Case
C-170/13, Huawei Technologies Co Ltd v ZTE Corp, even if: (i) it was unaware of the FRAND
declaration until after the date of purchase; and/or (ii) it does not operate on the market for
products incorporating the technology?
(b) Is it an abuse of a dominant position for a holder of standard essential patents to seek to collect
royalties related to the sale price of the licensee’s products without any moderation to take account
of the relative importance or value of the patents or the number of other patents that are essential
to the standard?

Question 3: In national proceedings for damages in respect of a breach of Article 102, is a national
court obliged to provide a passing on defence in order to comply with EU principles of unjust
enrichment, effective judicial protection and effectiveness?

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F. EXECUTIVE SUMMARY OF OBSERVATIONS

Question 1: Minimum Royalty Provision infringes Article 101

1. The Minimum Royalty Provision in the Agreement infringes Article 101: it operates effectively
as an RPM by way of vertical price fixing (an object restriction); alternatively, it distorts price
competition by artificially inflating the amount of royalty the Claimant has to pay.
2. Relevant factors in assessing whether the Minimum Royalty Provision is an object restriction
include: (1) detriment to the downstream party (price competition distorted vis-à-vis the counter-
factual); (2) the presence of an NPE as a contractual party; and (3) the duration of the restriction.
3. Given the strict line against restrictions on price competition, as a matter of principle and policy,
any upstream agreement setting a de facto price floor for the downstream agreement prima facie
infringes Article 101(1), irrespective of the type of upstream or downstream agreement. Whether
or not it is unlawful turns on Article 101(3). The economic and legal context of which the
agreement forms a part determines whether such price restriction is justified under Article 101(3).
4. Presently, the strong presumption against Article 101(3) is not rebutted: the restriction and the
Agreement are not indispensable; they are not reasonably necessary nor proportionate to the
existence and purpose of FRAND obligations (irrespective of the answer to Question 2).
Question 2(a): Application of the Huawei principles
5. The Huawei principles apply to an assignee without knowledge of the FRAND declaration at the
time of purchase for two reasons:
(1) The anti-competitive harm of seeking injunctions for SEPs after making a FRAND
declaration is not attenuated by the absence of such knowledge. Such harm means that, as the
ECJ recognized in Huawei, third parties have legitimate expectations that a FRAND licence
will be granted, and are thereby locked into the SEP. Furthermore, the assignee should be
obliged to grant a FRAND licence because only the assignee, but not the assignor, can grant
such a licence after the assignment.
(2) As a matter of policy, the law should encourage the assignee to scrutinize the patent’s
FRAND encumbrance. As the ECJ recognized in Huawei, infringers of the SEP are unlikely
to be aware of its validity and essentiality. By contrast, the assignee is in a better position to
make inquiries, not least because it deals with the assignor directly and is aware of the patents
at issue. The duty to inquire and its consequences are not disproportionate because the
assignee can ask a simple question or insert a standard term to ensure full disclosure of
FRAND encumbrances.

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6. Similarly, since the anti-competitive harm exists irrespective of the NPE status, a fortiori the
Huawei principles apply to NPE-assignees, which are more harmful in two respects: (1) since
NPEs neither require cross-licensing nor fear blocking patents, they have higher incentives to
seek disproportionate royalties; and (2) NPEs channel to themselves profits that would otherwise
be available for inventors or implementers to innovate, thereby harming technical development.
Question 2(b): Abusive royalties for SEPs
7. Under the EU law, it is abusive for a dominant undertaking to impose a price which is excessive
in relation to the economic value of the IPR provided. The economic value of SEPs should be
measured by an ex ante hypothetical negotiation before standardization. The value of SEPs
depends on (1) their marginal contribution to the standard as compared to other SEPs; and (2) the
incremental value of the standard to the final product as compared to other features. This
assessment is necessary to encourage the undertaking to innovate the next generation of standard.
It is also practical; it has been applied in the US.
8. It follows that, where an undertaking collects royalties without moderation in respect of the
relative importance or value of patents, the royalties will be excessive to the economic value of
the SEP, and thus constitute an abuse of dominance.
Question 3: No obligation on national courts to provide a passing on defence
9. As a matter of principle and policy, there is no obligation on national courts, and in the present
proceedings Ruritanian courts, to provide a passing on defence. In summary:
(1) An indirect purchaser’s right to sue does not arise on the facts. Absent any submissions on
their locus standi or likelihood of success in suing the infringer in Ruritania, this Court cannot
determine whether a passing on defence is justified on that non-existent basis. This Court
does not rule in abstraction.
(2) Notwithstanding the above, this Court should defer to national authorities to determine how
to best implement the Damages Directive to acknowledge the passing on element, without
necessarily providing a passing on defence, at least before the implementation deadline. The
proposed alternative is viable and complies with the objective of the Damages Directive.
(3) In any event, the strict application of a passing on defence as proposed is impracticable and
inexplicable on policy grounds. The more layers of parties there are in the chain, the more
likely the infringer is free from liability. The Court, by granting the defence, will effectively
find the infringer more ‘deserving’ to be ‘unjustly enriched’ by that illegal profit than the
direct purchaser, who is a victim of, and took no part in, the infringement.

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G. OBSERVATIONS ON QUESTION ONE

1. Claimant’s Position: It is submitted that the Minimum Royalty Provision in the Agreement
infringes Article 101: (1) it operates effectively as an RPM by way of vertical price fixing, and
thus restricts competition by object; (2) alternatively, it distorts price competition by object or
effect as it artificially inflates the amount of royalty which the Claimant has to pay.
2. Relevant Factors in assessing whether the Minimum Royalty Provision is an object restriction
include: (1) detriment to the downstream party (price competition distorted vis-à-vis the counter-
factual); (2) the presence of an NPE as a contractual party; and (3) the duration of the restriction.
(I) General principles
3. There being no exhaustive list,1 in order to determine an object restriction, regard must be had to
the content of the agreed provisions, the objectives sought to attain and the economic and legal
context of which the agreement forms a part.2
4. Article 101(1)(a), as well as Article 4(2)(a) of the TTBER, condemn hardcore restriction by direct
or indirect price fixing where agreements have as their object the observation of a fixed or
minimum price level. EU jurisprudence finds such direct or indirect restriction on price
competition repugnant.3
(II) Infringement of Article 101
5. Vertical Price Fixing: The specified rate (1.5% of net sales revenue) in the Minimum Royalty
Provision creates an irresistible incentive for the assignee-licensor (Elf) to charge the licensee
royalties at least at the specified rate. Put plainly, there is a compelling disincentive to lower the
‘selling price’ below the specified rate; otherwise, the assignee-licensor operates at a loss for
every unit sold by the licensee since it pays more to the assignor than it receives from the licensee.
6. Price Rigidity: It follows that the de facto price floor creates an objectionable price rigidity; the
price set by the assignee-licensor is ‘sticky’ and resistant to any downward change below 1.5%.
7. Technology Transfer Guidelines clearly prohibits such a de facto price floor / RPM:
(1) §117(a) reiterates the hardcore restriction under Article 4(2) of the TTBER, particularly
where ‘the restriction of a party’s ability to determine its prices when selling products to

1
Case C-209/07 Competition Authority v Beef Industry Development Society Ltd [2009] 4 CMLR 6
2
Vivien Rose and David Bailey (eds), Bellamy and Child: European Union Law of Competition (7th Edn, OUP 2013)
§2.113; C-513/06 GlaxoSmithKline Services v Commission [2010] 4 CMLR 50 [58]
3
Richard Whish and David Bailey, Competition Law (8th Edn, OUP 2015) §§13.35-13.39: ‘Price fixing in any form is
caught – it is clear from the decisions of the Commission and the judgments of the EU Courts that it is not just blatant
price fixing that is caught, but that Article 101(1) will catch any agreement that directly or indirectly distorts price
competition.' See also §16.108.

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third parties … amount[s] to a fixed or minimum sale price as a result of pressure from, or
incentives offered by, any of the parties.’ Plainly, the Minimum Royalty Provision amounts
to economic pressure from or commercial disincentive created by the assignor.
(2) §118 is highly instructive: ‘the fixing of selling prices can also be achieved through indirect
means… direct or indirect price fixing can be made more effective when combined with
measures that reduce the [assignor’s] incentive to lower its selling price.’
(3) Reference to §99 (‘an obligation on the licensee to pay a certain minimum royalty does not
in itself amount to price fixing’) must be treated with caution. It is distinguished as follows:
(a) §99 relates to minimum royalty obligations in a cross-licensing agreement between
competitors; Johnsson and Elf are neither competitors nor cross-licensors/licensees.
(b) Even if §99 applies to non-competitors, the relationship between Johnsson and Elf is not
one of licensor/licensee, but one of assignor/assignee.
(c) While ‘an obligation to pay a minimum royalty in an agreement … will not in itself
amount to price fixing[, ] an arrangement which creates a disincentive for the licensee
to sell below a certain price will do so.’4 ¶¶4-6 hereinabove are repeated.
(III) Relevant factors in assessing object restriction
8. Pro-competitive Effects Irrelevant: Any ‘pro-competitive effect’ of the Minimum Royalty
Provision is irrelevant in determining whether it constitutes a restriction by object. Such effects
were for consideration, if at all, only under Article 101(3).5 This aligns with established case law
against any restriction on price competition: see ¶4 hereinabove and ¶13 hereinbelow.
9. Analogous with RPM: A retailer has sales revenue as: ‘Retail Price (Pr) x Retail Quantity Sold
(Qr)’. RPM fixes or specifies a minimum for Pr. Presently, the assignee-licensor has licensing
revenue as: ‘PBR (charging the licensee) x Net Sales Revenue’. By analogy, if the assignment
fixes or specifies a minimum for the downstream PBR, it amounts to an RPM in the IP context.
10. Detriment to Downstream Player: While it is not necessary to establish detriment to downstream
players and final consumers (i.e. higher price) to find an object restriction,6 it is submitted that
the existence of actual detriment is sufficient, but not necessary, to establish object restriction.7
(1) On the facts, the detriment suffered by the downstream player is evident – but for the

4
Bellamy and Child (n 2) §9.086
5
Bellamy and Child (n 2) §2.119; Joined Cases T-374/94, T-375/94, T-384/94 and T-388/94 European Night Services v
Commission [1998] 5 CMLR 718 [136].
6
Bellamy and Child (n 2) §2.093: The EU provisions are designed not only to protect the interests of consumers directly
(from increases in price, restrictions of supply or elimination of choice) but to protect the competitive structure of the
market, thereby indirectly protecting consumers; Case C-234/89 Delimitis v Henninger Bräu [1992] 5 CMLR 210
7
Bellamy and Child (n 2) §2.117

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Minimum Royalty Provision, and in fact the Agreement, Manzana would not be paying 2%
of the net sales revenue as royalty rates.
(2) Since Johnsson was willing to accept 1.5% from Elf in the Agreement, it must follow that
Manzana, in the counterfactual, would not have to pay Johnsson at any rate more than 1.5%.
11. Presence of NPE: For reasons set out in ¶¶28-31 hereinbelow, the presence of the NPE adds no
pro-competitive effect but poses anti-competitive harms. The mid-layer NPE assignee-licensor
merely operates as an extra layer between the upstream assignor and downstream licensee so as
to gain extra leverage on the licensee, hence distorting price competition. In particular, this feature
is aggravated by the fact that the present NPE is a ‘Hybrid NPE’ (an NPE assignee maintaining a
contractual relationship with a PE assignor), the model of which is the ‘most troubling’.8
12. Duration: The Minimum Royalty Provision creates a life interest in the revenue generated by the
patent with which the assignor has irrevocably parted via outright transfer of ownership. It gives
rise to an indefinite period of price rigidity, which the ECJ has repeatedly condemned.9
(IV) Proper analysis as a matter of principle and policy
13. Proper Analysis: Since policy dictates a strict line against any restriction on price competition
(see ¶4 hereinabove), it is submitted that as a matter of principle and policy, any upstream
agreement setting a de facto price floor for the downstream agreement, hence detrimental to the
downstream players and final consumers, prima facie infringes Article 101(1). Whether it is
unlawful turns on Article 101(3). This analysis applies irrespective of the type of upstream or
downstream agreement as long as a de facto price floor arises. It is for the economic and legal
context of which the agreement forms a part to determine whether such restriction on price
competition are justified under Article 101(3).
14. Licensing and Sub-Licensing Agreements are subject to the analysis set out in ¶13 hereinabove:
(1) Echoing the Technology Transfer Guidelines, the Claimant accepts that PBR in itself is not
anti-competitive if there exists one and only one agreement, be it assignment or licensing
agreement,10 and that ‘most licence agreements do not restrict competition and create pro-
competitive efficiencies.’11 However, ‘licence agreements that do restrict competition may
often give rise to pro-competitive efficiencies, which must be considered under Article 101(3)

8
Fiona M Scott Morton and Carl Shapiro, ‘Strategic Patent Acquisitions’ (2014) 79 Antitrust LJ 463
9
Technology Transfer Guidelines, §140; Case T-67/01 JCB Service v Commission [2006] 5 CMLR 23 [131]
(notwithstanding other inapplicable points, the ECJ cites various authorities and condemns rigidity in price structure.)
10
Technology Transfer Guidelines, §99 and §184.
11
Technology Transfer Guidelines, §9.

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and balanced against the negative effects on competition.’12

(2) Pro-competitive effects are irrelevant in assessing object and will only be relevant in the
Article 101(3) analysis: see ¶8 hereinabove. The choice of words in the Technology Transfer
Guidelines that pro-competitive efficiencies of anti-competitive licensing agreements ‘must
be considered under Article 101(3)’, and not under Article 101(1), is strikingly similar.
(3) Hence, there is real force in the analysis set out at ¶13 hereinabove even where the upstream
and downstream agreements are licensing and sub-licensing agreements as long as both have
PBRs. Whether they are unlawful depends on Article 101(3). Article 101(3) often is of avail
(see ¶14(1) hereinabove), but one must look at the particular economic and legal context.
15. Cf. Distribution Agreements: It is misconceived to equate any wholesale (lump sum or fixed)
price charged under an upstream agreement with the PBR in an upstream agreement:
(1) Once a retailer commits to a wholesale price (which is not dependent on sales revenue), the
price becomes a sunk cost. It does not and should not affect the retailer’s pricing strategy. It
does not set any price floor nor create any disincentive not to lower the selling price: e.g., the
retailer may sell perishable goods below the wholesale price to dispose of excess stock.
(2) The upstream assignee’s commitment to the PBR in the Minimum Royalty Provision is not
a sunk cost; its payment obligation only begins when the downstream licensee produces and
sells products. The payment obligations of both the assignee and the licensee arise at the same
time. The PBR is directly relevant to the assignee’s pricing strategy: see ¶5 hereinabove. The
assignee did not (on the facts) and cannot charge different prices to bypass the price floor.
(V) Effect restriction and inapplicability of Article 101(3)
16. Effect Restriction: In any event, by reason of the aforesaid, it is submitted that the Minimum
Royalty Provision restricts competition by effect. Price competition is indisputably distorted; the
royalty that Manzana has to pay is artificially inflated from 1.5% to 2%: see ¶10 hereinabove.
17. Article 101(3): The burden of raising ‘convincing arguments and evidence’ to demonstrate that
all four criteria under Article 101(3) are satisfied lies with the Defendant.13 There is a strong
presumption against Article 101(3) especially for hardcore restriction such as price fixing.14
18. Regardless, Article 101(3) is of no avail. The Claimant briefly dismisses any such reliance:
(1) The Agreement with an NPE assignee does not contribute to improving production or

12
ibid.
13
Article 2 of Regulation 1/2003; Case C-68/12 Protimonopolny Urad Slovenskej Republiky v Slovenska Sporitel’na AS
[2013] 4 CMLR 16 [3].
14
Alison Jones and Brenda Sufrin, EU Competition Law Text, Cases and Materials (5th edn, OUP 2014) 669.

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distribution of goods or to promoting technical or economic progress: see ¶¶28-31

hereinbelow. It is submitted that the FRAND commitments suffice in this regard.
(2) Neither the Agreement nor the Minimum Royalty Provision is indispensable. As regards the
former, the alleged efficiency of effective enforcement by the NPE assignor is
disproportionate to the anti-competitive harms (see ¶¶28-31 hereinbelow); the restrictive
agreement is not reasonably necessary to yield such efficiency. As regards the latter, the
alleged efficiency of adequately rewarding the assignor for patent development through PBR
can be achieved by an obvious alternative – directly licensing at 1.5% of net sales revenue to
the Claimant instead. In fact, prior to the Agreement, Johnsson has already been in licensing
discussions with the Claimant.
(3) FRAND obligation, from the licensees’ viewpoint, ensures that licensees pay a uniform, non-
discriminatory fee to incorporate SEPs in their products. As submitted at ¶20 hereinbelow,
the FRAND obligation binds all successors; it attaches to the SEP. It follows that all licenses
for the same SEP, irrespective of the identity of the licensor and the licensee, are set at a
uniform price. However, the Agreement with a PBR is inherently inconsistent with the
FRAND obligation: it artificially adds a royalty differential between Elf as the assignee and
Manzana as a pure licensee. It is a disguised form to facilitate ‘discriminatory’ pricing; its
object is to put Elf in a better position vis-à-vis Manzana, who has to pay a discriminatory
mark-up (0.5%) to Elf, for the same use of the SEPs. The discriminatory effect of the
Minimum Royalty Provision and the Agreement (a) contradicts the purpose of a FRAND
obligation and (b) poses additional anti-competitive harm to which the purported efficiencies
are disproportionate. Overall, the balance tilts against any Article 101(3) justification.
(VI) Conclusion
19. Given the factual matrix and economic and legal context, the Minimum Royalty Provision in the
Agreement is in breach of Article 101 and renders the Agreement void.

H. OBSERVATIONS ON QUESTION TWO (A)

20. Claimant’s Position: It is submitted that, if an undertaking acquires a dominant position by

purchasing a FRAND-encumbered SEP, then it has to abide by the principles laid down in Huawei,
even if: (1) it is unaware of the FRAND declaration until after the date of purchase; and (2) it
does not operate on the market for products incorporating the technology, i.e. it is an NPE.
21. Summary of the Huawei Principles: In Huawei, the ECJ held that a proprietor of an SEP which
has given a FRAND undertaking to the SSO may seek an injunction only if:
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(1) The SEP holder has alerted the alleged infringer of the infringement; and, after the infringer
has expressed its willingness to conclude a licensing agreement on FRAND terms, has
presented an offer on such terms; and
(2) The infringer continues to use the patent in question without a diligent response to that offer.
22. Reasoning in Huawei: The ECJ justified its restriction of the exercise of an IPR by a dominant
undertaking on the following bases:
(1) The patent at issue is essential to a standard established by an SSO;15
(2) The patent at issue obtained its SEP status only in return for the proprietor’s FRAND
undertaking given to the SSO in question;16 and
(3) A FRAND undertaking creates legitimate expectations on the part of third parties that the
proprietor of the SEP will in fact grant licences on such terms.17
(I) First factor: awareness of the FRAND declaration
23. Claimant’s Position: It is submitted that it is not a defence for the proprietor of a FRAND-
encumbered SEP to allege that, at the time of purchase, it had no knowledge of the FRAND
declaration. The Claimant relies on two grounds.
24. First Ground: Anti-competitive Effect Does Not Depend on Knowledge: In line with the reasoning
in Huawei, the anti-competitive effect of seeking an injunction for a FRAND-encumbered SEP
does not depend on whether the assignee has knowledge of the FRAND declaration at the time of
purchase; the act of seeking an injunction is equally anti-competitive.
(1) According to the ECJ, the FRAND declaration creates legitimate expectations on the part of
third parties that the SEP holder will in fact grant a FRAND licence. In other words, the
FRAND declaration has locked the industry into both the standard and the relevant SEP. The
purpose of the Huawei principles is to fulfil such legitimate expectations. The lock-in effect
is created at the time of declaration, and is not attenuated by the fact that the SEP is transferred
to another undertaking which has no knowledge of the FRAND declaration.
(2) More importantly, where there has been an assignment of the SEP, all proprietary rights are
transferred to the assignee. However, the lock-in effect of the SEP subsists. To fulfil the
legitimate expectations that the SEP will in fact be licensed on FRAND terms, the Huawei
principles must be extended, such that the assignee is obliged to grant licences on FRAND
terms notwithstanding the assignee’s lack of relevant knowledge.

15
Huawei [49].
16
Huawei [51].
17
Huawei [53].

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(3) Additionally, the US FTC, in its N-data decision,18 considered that, where the assignor has
made an open declaration to grant a patent if it is incorporated into a standard, and the
assignee breaches that prior commitment, the assignee violates Section 5 of the FTC Act. The
FTC considered that the assignee’s seeking of higher royalties is anti-competitive because of:
(a) increased royalties associated with the manufacture, sale, use or importation of products
that implement the standard;
(b) increases in price and/or reductions in output of products implementing the standard;
(c) decreased incentives on the part of manufacturers to joint standard setting activities; and
(d) decreased willingness to rely on standards established by SSOs.
(4) The FTC’s theory of anti-competitive harm similarly does not depend on whether the
assignee had knowledge of the prior commitment at the time of purchase. Neither is the anti-
competitive effect attenuated by an assignment to a subsequent holder without the relevant
knowledge.
25. Second Ground: Policy Consideration: It is submitted that, as a matter of policy, the assignee
should have a duty to comply with the Huawei principles, even in the absence of the relevant
knowledge. This duty will encourage the assignee to exercise care in checking whether the SEP
is FRAND-encumbered. For example, the assignee may seek confirmation from the assignor that
the SEP is not FRAND-encumbered, and seek contractual damages from the assignor if the
confirmation turns out to be a misrepresentation.
26. The above policy consideration is justified because, as between the implementer may pay
excessive royalties and the assignee who may receive less royalties, the law should favour the
implementer. As the ECJ recognized in Huawei, ‘in view of the large number of SEPs composing
a standard…it is not certain that the infringer of one of those SEPs will necessarily be aware that
it is using the teaching of an SEP that is both valid and essential to a standard’.19 By contrast,
the assignee is (1) well informed of the particular patents that it receives, (2) often experienced in
asserting patents, (3) often an expert in the relevant industry; and (4) directly dealing with the
original patent holder. Hence, the assignee is in a better position to inquire into any SEP status
and FRAND declaration. Thus, the assignee should have the duty to inquire and bear the loss
arising from failure to do so.
27. It is also submitted that the burden on the assignee is not disproportionate. The duty to inquire

18
In the Matter of Negotiated Data Solutions LLC, File No. 051 0094.
19
Huawei [62].

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into any SEP status and/or prior FRAND commitment can easily be discharged during negotiation.
In particular, the assignee may insert a standard term, to the effect that the assignor has disclosed
all potential encumbrances which may arise due to the patent’s SEP status and the assignor’s prior
FRAND commitments, such that the assignor is liable to make good any loss arising from
inadequate disclosure. Such a clause will transfer both the duty of disclosure and the loss of
royalties due to the FRAND declaration, back to the assignor who has made the FRAND
declaration and is in the best position to know the essentiality and validity of the SEP.
(II) Second factor: status as an NPE
28. Claimant’s Position: It is submitted that, despite the NPE status, the Huawei principles should
apply equally, because the anti-competitive harm (see ¶¶24 hereinabove) is not attenuated by the
NPE status. On the contrary, it is submitted that a fortiori, the Huawei principles should apply to
NPEs because they cause more anti-competitive harm than PEs in at least two respects.
29. First Anti-competitive Harm: Incentive to Reap Disproportionate Royalties: NPEs do not produce
standard-compliant products. It follows that NPEs do not require cross-licensing from
implementers holding complementary SEPs for the same standard. Lacking the incentive to cross-
license means that NPEs are more likely to extract disproportionate royalties than to accept cross-
licensing agreements. Also, since NPEs are not exposed to the risk of blocking patents, NPEs are
more likely to extract unreasonable royalties, without the fear that other implementers holding
blocking patents may retaliate by an injunction.20 Similarly, litigation costs in relation to NPEs
are high, typically ranging from USD 650,000 to USD 25 million per case.21
30. Second Anti-competitive Harm: Rent Seeking and Reduction of Investment: NPEs do not invent,
and merely reap profits out of existing patents. Thus, if the profit from inventing and
implementing a patent is channelled to NPEs, there is likely a net drop in the total investment
expenditure.22 In other words, NPEs are more likely than PEs to ‘[limit] production, markets or
technical development to the prejudice of consumers’. 23 The net drop in total investment
expenditure is evidenced by a study, which has pointed out that firms which have been the target
of lawsuits by patent trolls reduce their R&D investment by roughly 20% relative to ex ante
identical firms.24

20
Scott Morton and Shapiro (n 8).
21
Executive Office of the President, Patent Assertion and US Innovation (June 2013)
<www.whitehouse.gov/sites/default/files/docs/patent_report.pdf> accessed 8 April 2016.
22
Scott Morton and Shapiro (n 8).
23
Article 102(b).
24
Lauren Cohen, Umit G Gurun and Scott Duke Kominers, ‘Patent Trolls: Evidence from Targeted Firms’ (2015) Harvard
Business School Finance Working Paper No 15-002 <http://ssrn.com/abstract=2464303> accessed 8 April 2016.

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31. A rivalling observation is that part of the royalties collected by NPEs is paid back to inventors
either as a lump sum purchase price, or as in the present case, as a running royalty proportionate
to the final products’ revenue. It may follow that there is no, or a little, loss of net investment
expenditure. However, it is submitted that, in reality, much of the royalties extracted from the
implementer is channelled to the NPE.25 Thus, a study has found that just a small fraction of
settlement sums or royalties, estimated at 25%, is paid back to inventors for further R&D.26

I. OBSERVATIONS ON QUESTION TWO (B)

32. Claimant’s Position: It is submitted that collecting royalties without any moderation in respect of
the relative importance or value of the patents is an abuse of dominance under Article 102.
33. General Legal Approach: Generally, both the ECJ27 and the Commission28 consider that, PBR for
IPR on the basis of the revenue of final products does not constitute an abuse of dominance.
However, such a remuneration model may amount to an abuse if the royalty is excessive.29
(I) Excessive pricing
34. Definition of Excessive Price: According to settled case law of the ECJ, a dominant undertaking
abuses its dominant position, if it has made use of the opportunities arising out of its dominant
position in such a way as to reap trading benefits which it would not have reaped if there had been
normal and sufficiently effective competition.30 Further, Article 102(a) expressly recognises that
such abuse arises in ‘directly or indirectly imposing unfair purchase or selling prices’. ‘Unfair
purchase price’ includes a price which is excessive in relation to the economic value of the service
provided,31 or which is ‘unjustified by any objective criteria, and if it is particularly high’.32 This
line of case law applies equally to IPR.33
35. Impediment of Normal Competition in the Present Case: In the present case, it is clear that, but
for the essentiality of SEPs after standardisation, the industry would not have been locked into

25
Scott Morton and Shapiro (n 8).
26
ibid.
27
In Case C-52/07 Kanal 5 v Föreningen Svenska Tonsättares Internationella Musikbyrå (STIM) [2008] ECR I-9275, the
licensor of musical works collected royalties from broadcasting companies as a percentage of their revenue deriving from
television directed at the general public. The Court held that those royalties must be analysed with respect to the value of
that use in trade and those royalties were, in principle, reasonable in relation to the economic value of the musical works.
28
The Commission states, at §184 of the Technology Transfer Guidelines, that ‘In cases where the licensed technology
relates to an input which is incorporated into a final product it is as a general rule not restrictive of competition that
royalties are calculated on the basis of the price of the final product’.
29
Kanal 5 (n 27) [27]-[28].
30
Kanal 5 (n 27), [27]; Case 27/76 United Brands and United Brands Continentaal v Commission [1978] ECR 207 [249].
31
Kanal 5 (n 27) [28]; United Brands (n 30) [250].
32
Case 40/70 Sirena v Eda [1971] ECR 3169 [17].
33
Kanal 5 (n 27).

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the particular SEP, and the opportunity for the SEP holder to reap profit would not have been
available. The issue is how to assess the economic value of SEPs, which, if exceeded, renders the
royalties in question abusive.
(II) Proper benchmark for the economic value of SEPs
36. Mechanism for Measuring Economic Value: It is submitted that the proper mechanism is the ex
ante competitive price, which is the price which the SEP holder and the infringer would have
agreed to in a hypothetical negotiation before the industry is locked into the standard. This
mechanism is applied by the Commission,34 in the US35 and agreed to by leading academics.36
Adopting this mechanism, the assessment comprises of two stages:37
(1) Contribution of the standard to the final product: This stage (the ‘Pie Stage’) ascertains the
value of the standard from the final product, based on the relative importance of the standard
and other features of the final product. The Pie Stage reflects the fact that it is the standard as
a whole, but not individual SEPs as such, which adds to the value of the final product.38 At
this stage, the maximum royalty that the infringer will agree to is the profit it expects to gain
from using the SEPs, i.e. the incremental value the standard adds to the final products. 39 It
follows, from the incremental nature, that the importance of the royalty must be relative to
other features and other patents.
(2) Contribution of the SEP(s) in question to the standard: This stage (the ‘Slice Stage’)
distributes the value of the standard to all SEPs according to their marginal contribution to
the standard.40 It is wrong to infer from the complementary nature of SEPs that each SEP is
equally valuable, because each SEP solves a particular technical problem and involves a
particular investment risk.41 Dividing the value of the standard by the number of patents,
which is a logical consequence of wrongly treating SEPs as equally valuable, also leads to
over-declaration of SEPs.42

34
Concerning standardization agreements, the Commission states, at §289 of the Guidelines on Horizontal Co-operation
Agreements, that ‘it may be possible to compare the licensing fees charged by the company in question for the relevant
patents in a competitive environment before the industry has been locked into the standard (ex ante)’
35
In Georgia-Pacific Corp v US Plywood Corp 318 F Supp 1116 (SDNY 1970), the Court held that a reasonable royalty
is ‘which a prudent licensee…would have been willing to pay as a royalty and yet be able to make a reasonable profit
and which amount would have been acceptable by a prudent patentee who was willing to grant a license’.
36
J Sidak, ‘The Proper Royalty Base for Patent Damages’ (2014) 10(4) Journal of Competition Law & Economics 989.
37
J Sidak, ‘The Meaning of FRAND, Part I: Royalties’ (2013) 9(4) Journal of Competition Law & Economics 931, 1009.
38
ibid 953.
39
ibid 990.
40
ibid 1010.
41
ibid 1018.
42
ibid 1019.

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37. Correct Approach at the Slice Stage: In calculating each SEP’s slice, one paramount consideration
is to compensate the SEP holder adequately, in order to keep its incentive to invest in valuable
inventions for the next generation of standard.43 This can be done only by rewarding the patent
holder based on the marginal contribution of the SEP to the standard, and to the downstream
product implementing the standard.44 Thus, the value of a particular SEP (or a particular portfolio
of SEPs, as in the present case) must be measured, so far as practicable, on an individual basis
and relative to other SEPs for the same standard.
(III) Practicality and evidence
38. Methods to Measure the Relative Importance of SEPs: In measuring the economic value of a
particular SEP (or a portfolio of SEPs), the courts can consider the following factors:
(1) Comparable licensing agreements: Licensing negotiations generally take place between
sophisticated industry members, who are capable of observing the relative strength of the
licensed portfolios.45 Thus, comparable licensing agreements provide more direct evidence
of economic value, subject to: (a) the patents included in the licensing agreement; (b) the use
of the standard; (c) the inclusion of other consideration in the agreement (such as cross-
licensing); and (d) any licensing-related litigation.46 On the facts, one comparable agreement
is the royalty rate at which Johnsson charged other implementers before assignment.
(2) Market research reports: Research institutes may have studied the individual share of SEPs
in the standard based on credible methods. For example, in relation to the LTE standard,
Signals Research Group47 and ABI Research48 have each published a report based on the
‘approved contribution method’,49 and concluded that Ericsson was the largest contributor,
making contributions at 18% (Signals Research Group) and 27% (ABI Research).
(3) Expert evidence: Parties may also adduce expert evidence as to the relative importance of
SEPs amongst themselves. In particular, the expert may come from the industry, who can
appreciate the strength of portfolios.
39. Practicality of Measuring the Relative Importance of SEPs: It is submitted that the above methods
are economical and reasonably practicable. The two-stage mechanism is empirically feasible with

43
ibid 994.
44
ibid.
45
ibid 1001.
46
ibid 1002.
47
Signals Research Group LLC, The Essentials Of Intellectual Property, Quantifying Technology Leadership In The
Development Of The LTE Standard (September 2010) <www.ericsson.com/res/docs/2010/101220_
lte_contribution_whitepaper.pdf> accessed 8 April 2016.
48
Philip Solis and Peter Cooney, Standards Leadership Within the 3GPP (ABI Research June 19 2013).
49
ibid 1014.

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the support of research institutes and the reliance on expert evidence. It has been applied by the
US courts.50 It is also supported by academic literature as practicable.51
40. Conclusion on Excessive Pricing: It is submitted that the economic value of a particular SEP or
portfolio of SEPs is determined by reference to the ex ante competitive price. The proper royalty
rate is relative to the value of other features in the same final product (the Pie Stage) and other
SEPs for the same standard (the Slice Stage). It follows that collecting royalties without
moderation in respect of the relative importance or value of patents will be excessive to the
economic value of the SEP or portfolio of SEPs. In turn, such royalties constitute an abuse of
dominance under Article 102(a) by imposing an unfair purchase price.

J. OBSERVATIONS ON QUESTION THREE

41. The present analysis asks whether the fact that the direct purchaser (Manzana), who prima facie
suffered loss due to the infringer (Elf)’s conduct, has passed on part of such losses to the indirect
purchasers (end consumers) should provide the infringer (Elf) with a passing on defence.
42. An indirect purchaser’s entitlement to sue and the passing on defence are plainly linked; if the
indirect purchaser is not entitled to sue the infringer, there is no basis for the passing on defence.
43. Claimant’s Position: It is submitted that as a matter of principle and policy there is no obligation
on national, specifically Ruritanian, courts to provide a passing on defence. In summary:
(1) An indirect purchaser’s right to sue does not arise on the facts. Absent any submissions on
their locus standi or likelihood of success in suing the infringer in Ruritania, this Court cannot
determine whether a passing on defence is justified on that non-existent basis.
(2) Notwithstanding the aforesaid, this Court should defer to national authorities to determine
how to implement the Damages Directive to acknowledge the passing on element, without
necessarily providing a passing on defence, at least before the implementation deadline.
(3) In any event, the strict application of a passing on defence as proposed by the Defendant is
inherently impracticable, the result of which is inexplicable on policy grounds.
(I) Indirect purchaser’s entitlement to sue not arising on the facts
44. No Ruling in Abstraction: This Court does not advise on hypothetical questions when giving a
preliminary ruling.52 Any normative argument on whether the indirect purchaser ought to have

50
In re Innovatio IP Ventures, LLC Patent Litigation, No. 11-cv-09308 (ND Ill October 3 2013).
51
Sidak (n 37) 1009
52
Case 244/80 Pasquale Foglia v Mariella Novello (No. 2) [1982] 1 CMLR 585 [18] (on Article 177, predecessor of
Article 234 of the EC Treaty and Article 267 of the TFEU).

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standing to sue is irrelevant since there is no indirect purchaser on the facts; this Court would be
deciding in abstraction on whether the indirect purchaser has the standing to sue in Ruritania.
45. Hence, if this Court considers this issue is unsettled, this Court cannot simply assume, let alone
rule, that the indirect purchaser can sue in Ruritania. Neither is there jurisdiction to decide on
consequential matters (i.e. justify a passing on defence) on any such hypothetical basis.
(II) Qualification of indirect purchaser’s right to sue by Ruritanian law undeterminable
46. It is submitted that the position remains unsettled, at least in terms of the extent to which any
indirect purchaser’s substantive right to sue and claim damages is qualified by national rules. 53
47. While Manfredi may suggest that an indirect purchaser can claim damages, the ECJ explicitly
holds that it is for ‘domestic legal system[s …] to prescribe the detailed rules governing actions
for safeguarding rights, provided [that] they do not render practically impossible or excessively
difficult the exercise of [EU rights] (principle of effectiveness).’54
48. No Information as to Domestic Legal Rules: There is no available indication as to what relevant
substantive Ruritanian law on causation and remoteness as well as procedural mechanism are in
place domestically to govern the claim amongst these multiple parties.
(1) To illustrate, Ruritanian law might only permit claims (including competition law claims)
against a party with which a claimant had contracted or directly dealt. In other words, on the
facts, the indirect purchaser can only sue Manzana, and Manzana can only sue Elf.
(2) This arrangement does not offend the principle of effective judicial protection. It safeguards
the indirect purchaser’s substantive right to claim damages for his loss (albeit not from the
primary infringer). Importantly, it defeats any justification for a passing on defence.
(III) Deference to Ruritanian authorities due to future implementation of Damages Directive
49. Damages Directive: Ruritania has not yet implemented the Damages Directive, the
implementation deadline of which is December 2016. The considerable amount of time until the
deadline is a strong, if not determinative, factor in this Court’s deference to the national legislature
such that the latter can decide how to best give effect to the Damages Directive alongside pre-
existing domestic laws. Any decision of this Court (save the denial of a passing on defence) would
disrupt the status quo pending transposition of the Damages Directive in Ruritania, and impose a

53
Bellamy and Child (n 2) §16.066: ‘Although the rulings of the Court of Justice in Courage v Crehan and Manfredi
evidently preclude the application of at least some conditions previously imposed in some jurisdictions as qualifying the
right to bring a damages claim, the extent to which Union law overrides rules of national law in this field has still to
be determined as private enforcement develops.’ (emphasis added)
54
Joined Cases C-295/04, C-296/04, C-297/04 and C-298/04 Manfredi v Lloyd Adriatico Assicurazioni SpA [2006] 5
CMLR 17 [71].

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substantive defence in a particular manner and disregard national autonomy.

50. Principle of Direct Effect Inapplicable: Where the implementation deadline has not expired, a
directive cannot have direct effect (i.e. confer rights under the directive on individuals).55 The
Claimant accepts that, from the date upon which a directive has entered into force, courts should
‘refrain as far as possible from interpreting domestic law in a manner which might seriously
compromise’ its objectives.56 It is however submitted that denying a passing on defence does not
seriously compromise the objective of the Damages Directive: see ¶¶51-53 hereinbelow.
51. The Objective of Damages Directive is to recognize the fact that ‘an overcharge was passed on
to the claimant, taking into account the commercial practice that price increases are passed on
down the supply chain’,57 and to ensure that ‘compensation for actual loss paid at any level of the
supply chain does not exceed the overcharge harm caused at that level.’58 It is submitted that the
passing on defence is not an objective, but merely one, out of many, means to achieve it.
52. Recognition of the Passing On Element: This Court should not dictate the precise formulation of
a passing on defence before the implementation deadline, but there are many alternatives open to
this Court which (1) would not interpret domestic law in a compromising manner and (2) would
give adequate deference to the national legislature: see ¶53 hereinbelow. It is only ‘in principle
appropriate [to provide] the passing-on of actual loss as a defence’.59 It is submitted that this
recognition of the passing on element approach during this interim period gives full effect to the
objective of the Damages Directive. Recital 44, which stipulates that national courts should ‘have
appropriate procedural means’ to ensure fair compensation, supports the observation that the
Directive is concerned with the passing on element, but not a substantive defence.
53. Plausible Alternative: To illustrate, the direct purchaser claims for full value of the loss (including
the loss passed on) from the infringer, but accounts for the passing on element by way of
undertaking to this Court that it will distribute the passed on loss to its own purchasers.
(1) Cement Cartel II shows that under German law, direct and indirect purchasers are joint and
several creditors, where each can sue the infringer directly for the damage sustained. If only
the direct purchaser sues, it can recover the full overcharge and will become liable to sub-
purchasers to distribute the damages to the extent that the overcharge was passed on.60

55
Case 148/78 Pubblico Ministero v Ratti [1980] 1 CMLR 96 [47].
56
Case C212/04 Adeneler v Ellinikos Organismos Galaktos (ELOG) [2006] 3 CMLR 30 [123].
57
The Damages Directive, recital 41 and art 14.1.
58
The, Damages Directive, recital 44 and art 12.2.
59
The Damages Directive, recital 39.
60
Bellamy and Child (n 2) §16.089, citing Case 2 U 10/03 Kart., judgment of the Berlin Higher Regional Court
(Kammergericht) of 1 October 2009. Importantly, even if one must provide a passing on defence, Cement Cartel II shows

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(2) This enshrines the principle of effectiveness as the direct purchaser is in the best position to
distribute the damages to indirect purchasers for their loss. The strict application of a passing
on defence would require the indirect purchasers to mount their individual claims, the
difficulties of which are well-documented, and may result in ineffective enforcement and
attainment of the objective of the Damages Directive.
(3) This accords with the principle of unjust enrichment and fair distribution such that the direct
purchaser is not over-compensated for loss not actually suffered, and the infringer is not
retaining the illegal profits. While there is a possibility that the direct purchaser does not fully
distribute the overcharge passed on due to administrative complications, it is submitted that
there is an equal (if not higher) possibility that the infringer is not liable to fully compensate
all indirect purchasers due to litigation difficulties or tactics.
(IV) Insurmountable difficulties arise in multi-level cases
54. For the passing on defence to be justified on grounds of fairness and effective enforcement, it
must be premised on the ultimate indirect purchaser being able to sue, regardless of the number
of purchasers in between the indirect purchaser and the infringer. Assuming there are four layers
instead of the present three (namely the Infringer, Direct Purchaser, Indirect Purchaser 1, and
Indirect Purchaser 2), the Indirect Purchaser 2 may find it extremely difficult to prove a valid
claim against the infringer due to increasingly complex issues of causation and remoteness.
55. From the perspective of the Infringer, as long as the Direct Purchaser has passed on an overcharge
(assume all losses) to Indirect Purchaser 1, the Infringer will not be liable. The analysis now
hinges on whether the Indirect Purchaser 1 will sue the Infringer, and if it will, whether the
Infringer can again establish a passing on defence such that the Indirect Purchaser 2 ought to sue.
56. The more layers there are, the more likely the Infringer will be free from liability. By granting a
passing on defence, this Court will be condoning an infringement, finding the Infringer more
‘deserving’ to be ‘unjustly enriched’ by that illegal profit than the Direct Purchaser, who is a
victim of, and took no part in, the infringement. This is plainly inexplicable on policy grounds.
(V) Conclusion
57. To avoid the risk of ruling in abstraction, and due to the need for judicial deference and the highly
preferable alternative submitted hereinabove at ¶53, the passing on defence should be denied.

that there are different formulations to provide one (which does not contradict the Damages Directive art 13): the passing
on defence can only be applied by the infringer when both the direct and indirect purchasers are joined in the same
proceedings. On the present facts, repeating ¶44 hereinabove, and as in Cement Cartel II, the indirect purchasers are not
joined in the proceedings. Therefore, the mechanism in ¶53(1) was applied in Cement Cartel II and can apply on the
present facts.

19