The Intellectual Property and Antitrust Review: Russia
The interaction between antitrust and intellectual property (IP) is widely discussed by the business community and the Russian competition authority, the Federal Anti-monopoly Service (FAS). In general, IP matters are mainly scrutinised by the FAS and its regional offices within the framework of unfair competition cases, as well as in situations where the anticompetitive effect arising from the exercise of IP rights is considered. Thus, antitrust issues are primarily governed by Federal Law No. 135-FZ dated 26 July 2006 on Protection of Competition (the Competition Law), while liability for violations of the anti-monopoly regulations is mainly established (in addition to the Competition Law) by the Code on Administrative Offences.
Currently, the Competition Law contains a limited number of provisions envisaged to address IP issues. Apart from the clauses on unfair competition and transactions with an IP element subject to merger control, IP rights are specifically mentioned in the following instances: further to Article 10(4) of the Competition Law the prohibitions on abuse of dominance do not apply to conduct associated with the exercise of exclusive rights to IP or equivalent means of individualisation of a company, products, works or services; and similarly, under Article 11(9) of the Competition Law, the prohibitions against anticompetitive agreements are not applicable to agreements on granting or transferring IP rights or equivalent means of individualisation of a company, products, works or services.
The FAS views the above immunities as obsolete and refers to the EU and US regulations; it seeks to exert control over unilateral conduct and contractual arrangements in the area of IP, and to look into existing practices in terms of their compliance with the Competition Law (in particular, in relation to the pharmaceutical industry and other markets of 'social importance'). Likewise, the competition authority remains a proponent of compulsory licensing and liberalisation of parallel imports, claiming that such reforms can ensure a level playing field. Although these initiatives are criticised by certain practitioners and right holders, the FAS is adamant about seeing these changes implemented. Most recently, draft laws aimed at dealing with the digital economy and removing the IP-related exemptions, as well as dealing with parallel imports and compulsory licensing, have been elaborated.
The FAS is entrusted with monitoring compliance with Federal Law No. 38-FZ on Advertising dated 13 March 2006; its practice regarding violations of the relevant provisions also includes interaction with IP.
IP relations as such are dealt with in a comprehensive manner in Part IV of the Russian Civil Code, which includes an exhaustive list of IP rights and various legal methods for their protection. It stipulates some general requirements concerning their use and enforcement. Overall, the Russian legislation provides for civil, administrative and criminal liability for the infringement of IP rights.
Further, in line with the Competition Law provisions under Part IV of the Civil Code the protection of a trademark can, inter alia, be disputed or invalidated in full or in part if the actions of a right holder associated with granting protection to a trademark or to a different confusingly similar trademark are viewed as unfair competition.
Russia is a party to a number of the most important international treaties and conventions covering different IP aspects, including the Convention Establishing the World Intellectual Property Organization, the Paris Convention for the Protection of Industrial Property, the Madrid Agreement Concerning the International Registration of Marks and the Madrid Protocol, the Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks, and the Agreement on Trade-Related Aspects of Intellectual Property Rights. The Paris Convention in particular is often applied and referred to by the FAS in its decisions.
In addition to Part IV of the Civil Code, certain (mostly technical) IP issues are regulated by the orders of the Federal Service for Intellectual Property (Rospatent). Rospatent is the main body in the field of IP and is also responsible for the major registration formalities. In accordance with the Competition Law, the FAS's decisions on violations of the Competition Law (unfair competition) are to be sent to Rospatent for the legal protection of trademarks.
The FAS and Rospatent cooperate on the basis of an agreement entered into in 2010 that defines the scope of interaction and information exchange between these bodies. For the most part Rospatent provides assistance and consultations to the FAS in the course of investigations involving IP. For example, as part of this cooperation FAS officials pointed out the need to review certain approaches to patenting to create opportunities for Russian generics to enter the market. According to Rospatent, however, the solution to this problem lies in the area of legislation on the circulation of medicines rather than patents. As to the key FAS legislative proposals (compulsory licensing in situations where the refusal to use certain IP rights results in violations of the Competition Law, as well as removal of IP exemptions from the Competition Law), Rospatent officials usually speak in favour of a more balanced approach, which would guarantee protection of IP rights and legitimate interests of right holders.
For completeness, the Russian Intellectual Property Court (the IP Court) was launched in 2013, which has led to an increase in professionalism and a sound legal approach with regard to judgments in IP cases, not only from the Court, but also across the Russian court system as a whole. To a certain extent, the practice of the IP court is related to the intersection of IP and antitrust; it considers appeals against the FAS's decisions on unfair competition in cases relating to the acquisition of exclusive rights to the means of individualisation of a company, products, works or services.
Year in review
i Key legislative and policy developments
The correlation between IP and antitrust is definitely among the topical issues. The FAS always advocated the repeal of the exemption relating to IP (as mentioned above, IP matters are formally outside the scope of the Competition Law), but this idea was not eventually reflected in the Fourth Anti-monopoly Package that came into effect on 5 January 2016. Still, the competition authority is committed to changing the current regime so that the Competition Law would be fully applicable to IP relations and potentially right holders' anticompetitive practices.
The FAS has prepared a set of amendments to the Competition Law with a view to streamlining the application of antitrust rules to the digital economy and IT companies (in light of its fairly recent investigations). The provisions that eliminate the existing IP immunities can be found in the draft law; many practitioners note that, in this case, an exhaustive list of anticompetitive and abusive practices should be drawn up to ensure the balance. As part of this initiative, the competition authority proposed to establish the status of internet platforms and aggregators enjoying market power (big data ownership is used as the basis), introduce an additional ground subjecting a transaction to merger clearance (transaction value) and introduce more detailed rules concerning the review of merger clearance notifications. IP-related remedies, involvement of trustees responsible for monitoring and facilitating compliance with a binding order issued as part of merger control review, which provides for the transfer of rights to IP and technology, and compulsory licensing issues are also under discussion. It remains unclear when and to what extent these initiatives are going to be enacted.
Still, for the time being, the legislative developments concerning the correlation between IP and antitrust were mainly in the area of unfair competition. The Competition Law contains a separate chapter devoted to this violation; it sets out seven instances that constitute unfair competition. The list is not exhaustive so other conduct and practices not expressly mentioned in the Competition Law may be considered as unfair competition. The rules on unfair competition became substantially more detailed and now contain some new provisions (for instance, provisions on disparaging statements and creating confusion with a competitor's business or products). These developments were in line with the existing trend in the law enforcement and judicial practices, as well as the FAS's general intention to look up to the best global practices (e.g., EU practices).
The FAS and its regional offices are actively looking into unfair competition practices, but the number of decisions establishing violation is lower than in previous years (before the 2016 amendments) owing to the fact that in certain instances (particular types of unfair competition violations), the FAS is required to issue a warning: a specific request to terminate anticompetitive behaviour. If an undertaking complies with the requirements contained therein within the timeline set forth in the warning, formal proceedings cannot be initiated. Similarly, in this case, a company cannot be held liable for an antitrust violation (i.e., no fines shall be imposed). This procedure allows the infringing party to deal with the antitrust risks in a relatively straightforward manner.
In the past, the practice of the FAS was not always consistent; as a result, its role was somewhat conflicting. The 2016 amendments gave additional leverage to the Russian competition authority in its fight against unfair competition. In parallel, Rospatent and the IP Court are creating a more uniform enforcement practice regarding the review of disputes associated with unfair competition practices related to trademark registration.
ii Recent case law
Recent cases support the FAS outlook on the interplay between IP and antitrust: as long as right holders can benefit from the existing exemptions provided for in the Competition Law, there is always room for abuse and anticompetitive conduct (i.e., according to the competition authority, IP rights should not create any benefits in terms of the circulation of the products in the market). Therefore, this practice suggests that antitrust restrictions can be applied to arrangements that are not directly related to agreements on granting IP rights.
In the highly publicised Google case,2 the FAS considered Google a dominant undertaking on the market of 'pre-installed application stores on Android OS' to be circulated in Russia. The non-Russian companies of the group (Google Inc and Google Ireland Limited), as the providers and right holders of Google mobile apps and services, were viewed as dominant undertakings.
Google provided the manufacturers of mobile devices with Google Play for pre-installation on Android OS mobile devices. In this respect, the following actions of Google were viewed by the FAS as abusive:
- mandatory and exclusive pre-installation of other Google apps and services together with Google Play;
- mandatory and exclusive pre-installation of Google's search engine together with Google Play;
- mandatory placement of pre-installed apps on the screen of mobile devices (specific screen placement); and
- imposing a prohibition (or economic incentives) on the manufacturers, preventing them from dealing with Google's competitors and pre-installing competing products on Android mobile devices.
Together with the decision, the FAS issued a binding order prescribing Google to complete actions aimed at terminating the violation and restoring competition in the market, including by way of modifying all existing contractual arrangements with Google's partners and informing the customers (users of mobile devices) of the possibility of deactivating the pre-installed Google apps and search engine, and installing alternative competing apps as well as changing the placement of app icons on the screen.
The FAS's decision was challenged by Google; however, after unsuccessful appeals, the company decided to enter into a settlement agreement with the authority, pay a significant fine and comply with the FAS requirements. The intersection of IP and antitrust was specifically considered and addressed in the FAS's decision. In the course of both the FAS administrative proceedings and the court proceedings, Google claimed that the IP exemption provided for in Article 10 of the Competition Law should apply to the conduct in question, as it essentially relates to IP licences. The FAS looked into the agreements entered into by Google and, inter alia, came to the conclusion that the restrictions imposed by Google went beyond the exercise of exclusive rights to separate apps by Google (considering that Google Mobile Services cannot be viewed as a single IP object). All contractual issues other than the use of IP are out of the scope of a 'pure' licence agreement and are not covered by the exemption. The FAS also mentioned that some of the restrictions established by Google were not in any way related to IP (e.g., prohibition on installing competitors' products on the same terms as those distributed by Google). The courts (confirming the FAS's conclusions) referred to the Teva case3 and stated that, in the case of 'mixed' agreements that contain both licensing and other terms, the 'additional' conditions must comply with the antitrust regulations.
Furthermore, in its landmark decision on parallel imports in the case of PAG LLC,4 the Russian Constitutional Court established that while the national principle of exhaustion of IP rights (the regional exhaustion rule within the Eurasian Economic Union) is in line with the Russian Constitution, right holders do not enjoy absolute protection against parallel imports. The antitrust aspects were not directly considered; nonetheless, the Constitutional Court pointed out that the IP immunity provided for in the Competition Law cannot be invoked and used to justify the abusive or unfair conduct of right holders.
According to the Constitutional Court, a right holder exercises its IP rights in bad faith if it restricts imports of certain goods into Russia, establishes unfair (inflated) prices in the Russian market or prevents imports in compliance with foreign sanctions imposed against Russia (that alone is a sign of bad faith). Russian courts may refuse to apply (in full or in part) legal remedies associated with parallel imports if, as a result of the bad faith practices of a right holder, their application poses a threat to life, health or public interest. The importation of counterfeit (fake) products and parallel imports (importation of original products without a right holder's consent) shall be treated differently, so the actual circumstances of the case shall be considered by the courts. Ultimately, it is up to the federal lawmakers to amend the existing rules as to the legality of parallel imports and establish the differentiated liabilities and remedies for these instances. This decision encapsulates a new outlook on parallel imports, so further developments may be expected in court practice. More recently, the Plenum of the Russian Supreme Court has also provided additional comments based on the above position of the Constitutional Court.5
Interestingly, in the same Resolution the Supreme Court commented on the use of trademarks in contextual advertising. Thus, if an advertiser uses trademarks as keywords when placing advertisements on the Internet, including search engines, such actions can be recognised as an act of unfair competition. The Plenum did not clarify whether such actions can be recognised as trademark infringement. There have been cases in court practice where such actions were recognised as an infringement, but this practice is not well established.
There have been some important changes in the court practice associated with compulsory licensing. For instance, in a 2018 case relating to Celgene's patent for lenalidomide,6 a Russian court, for the first time, granted a claim for a compulsory licence (not associated with the antitrust concerns, however). Under Article 1362 of the Russian Civil Code, a holder of a patent for a dependent invention is entitled to seek a compulsory licence for an existing patent (where a holder of the original 'first' patent refuses to enter into a licence agreement on the terms that are in line with the established practice) through court proceedings. Such a claim may be granted if a holder of a patent for a dependent invention manages to prove that the invention can be viewed as an important technical achievement and has significant economic advantages over the invention or utility model of the holder of the 'first' patent. The court of first instance agreed with the arguments presented and granted a compulsory simple (non-exclusive) licence. Although the appeal proceedings ultimately resulted in the parties entering into a settlement agreement and the decisions of lower courts being overturned, this decision may have a considerable impact on further court practice in the area.
In a way, the IP-related aspects of merger control were considered when the competition authority reviewed the notorious Bayer/Monsanto deal; the FAS eventually prescribed Bayer to transfer certain technologies (molecular selection of specific crops) to Russian recipients and provide non-discriminatory access to the digital farming platform following the commercial launch of products in Russia.
Licensing and antitrust
i Anticompetitive restraints
As mentioned above, the prohibitions of the Competition Law are not supposed to apply to the actions and agreements relating to providing, granting or disposing of IP rights (including trademarks and patents). An undertaking granting exclusive rights to use its IP is entitled to control and impose restrictions on the licensee.
The parties enjoy certain discretion when drafting licence agreements as the Civil Code provisions as to their contents are rather broad. Clearly, the licence agreements that cover IP issues only will benefit from this exemption; nonetheless, in many situations it is rather challenging to establish whether the immunity is available and can be relied on by the companies involved. By way of illustration, agreements on the exercise of IP rights may contain extensive requirements for the products to be distributed in a particular manner and in this way give rise to competition concerns. The prevailing position supported by the FAS is that the IP exemption does not apply to the conduct and arrangements concerning the circulation of goods manufactured with the use of IP rights; the antitrust regulations will apply in full.
It is noteworthy that duly formalised franchise agreements do not fall under the antitrust prohibitions (for vertical agreements) and are considered admissible (notwithstanding the market share held by the parties to such agreements). Although, pursuant to the Civil Code, they may contain a range of restrictive clauses, including non-compete obligations, it is still possible that the FAS will seek to invalidate such clauses if it comes to the conclusion that competition is affected (taking into consideration the market situation and the parties' position).
ii Refusals to license
Formally, there are no restrictions on the right holder's 'monopoly'; as mentioned above, the concept of abuse of dominance is not supposed to apply to the exercise of IP rights because of the exemption provided by Article 10(4) of the Competition Law. Nonetheless, the competition authority pays particular attention to the matter and wishes to address the problems associated with unsubstantiated refusal to license.
Generally, under the Civil Code, compulsory licensing based on a court decision is available in relation to inventions, utility models, industrial designs and selection inventions. Still, it is rarely used and for the time being is not envisaged being used to address antitrust concerns. The right holders (patent owners) can be forced by a court decision to grant a compulsory licence if the IP is not used for a specific period or a different right holder cannot use its IP without infringing the rights in question. The applicable licensing terms are determined by the court. However, the law does not elaborate on how such terms shall be defined, apart from the requirement that they are non-exclusive and that the licence fee shall not be lower than fees payable in comparable circumstances.
This is, however, a civil remedy that is not immediately connected with infringements of the Competition Law. FAS officials state that in the absence of legislative mechanisms, such licences have never been granted with a view to improving or restoring competition in the market. The competition authority is willing to change this situation (particularly, in respect of the pharmaceutical market) and has drafted a set of controversial amendments in this respect. Again, it is unclear if (and to what extent) this proposal is going to be enacted.
iii Unfair and discriminatory licensing
The antitrust implications of unfair pricing or royalty terms have been considered to a limited extent, also in light of the IP exemptions.
iv Patent pooling
Russian legislation does not deal directly with the creation of patent pools; at present the Competition Law does not cover matters concerning patent pooling. In many situations such arrangements may contain provisions that go beyond the scope of licensing (e.g., pricing policies).
Consequently, they will be assessed in terms of compliance with the general requirements of the Competition Law as to anticompetitive agreements and, for this reason, should not create anticompetitive restraints. Taking into account the recent practice of the competition authority and the initiative to expand the scope of antitrust regulations to include IP arrangements, further developments can be expected.
In situations where a 'quasi-pooling' project is structured as a joint venture or a series of deals with assets or shares, the merger control rules may need to be considered.
v Software licensing
As suggested, for example, by the Google case, the FAS has not elaborated any specific approach applicable to software licensing; the general Competition Law prohibitions and exemptions apply.
vi Trademark licensing
The FAS exercises the same approach as outlined above to the trademark licensing. One of the key priorities of the FAS in relation to trademarks is the problem of parallel imports as the Russian legislation remains controversial. The authority has always viewed parallel imports as an efficient way of removing possible restrictions of competition and has already tried to implement the relevant principles into its practice; for instance, even in 2017, it issued warnings to right holders (manufacturers of automotive parts and medical devices) that did not allow importation or ignored the request of a parallel importer. More importantly, the decision of the Constitutional Court on parallel imports has a direct impact on the FAS's analysis and review of right holders' conduct.
The Russian statutes, regulations and case law give very limited consideration to the adoption of proprietary technologies in industry standards and the associated antitrust implications, including potential dominance issues. There are no specific requirements that would provide for the availability of a proprietary technology to a market player that wishes to use the standard.
In light of the above, the issue of potential abuse of a dominant position in this particular context was not examined by the Russian competition authority.
iii Licensing under FRAND terms
Russian legislation does not provide for the concept of fair, reasonable and non-discriminatory (FRAND) licences granted by the owners of standard-essential patents under competition laws and the rules of standard-setting organisations. Therefore, such licensing practices cannot be used as a defence in Russia. The antitrust regulations are equally silent on the matter. The Civil Code provides a general principle in accordance with which civil rights cannot be used to restrict competition or to abuse a dominant position. However, in the absence of rules on FRAND, this provision can hardly be applied in relation to standard-essential patents.
iv Anticompetitive or exclusionary royalties
The Russian competition authority has not looked into the anticompetitive effect of royalties in this respect, and has never issued guidelines or clarifications on the impact of royalty provisions.
Intellectual property and mergers
i Transfer of IP rights constituting a merger
The incorporation of a company can be caught by the Russian merger clearance requirements if its charter capital is paid up by the shares, participatory interests or fixed or intangible assets of another company (or a combination of participatory interests and assets); and a new company, as a result, acquires: more than 25 per cent of the voting shares in a Russian joint-stock company; more than one-third of the participatory interests in a Russian limited liability company; or fixed or intangible assets located in Russia that amount to more than 20 per cent of the total book value of the fixed and intangible assets of the transferor (or a combination of shares, interests and assets). Practically speaking, such transactions are highly uncommon.
Under Article 28(1)(7) of the Competition Law, the acquisition of the fixed assets (except for land plots and non-industrial buildings or premises) or intangible assets (e.g., trademarks) of a company (or a combination of fixed and intangible assets) by virtue of a transaction or a series of related transactions is subject to merger clearance if the book value of the acquired assets located in Russia exceeds 20 per cent of the total book value of the fixed and intangible assets of the transferor (for companies not operating in the financial markets). The available decisions of the competition authority suggest that the cleared transactions mainly involve the transfer of fixed assets (rather than IP alone).
In certain instances, the definition of the 'location' of intangible assets can be problematic; in the absence of any statutory provisions or guidelines in this respect it is generally assumed that the intangible assets are located in Russia if they are duly granted protection in Russia under Part IV of the Civil Code.
The following jurisdictional thresholds apply to the transactions involving the transfer of IP rights: the aggregate worldwide value of assets of the acquirer's group and the target's group of companies exceeds 7 billion roubles and the aggregate worldwide value of assets of the target's group of companies exceeds 400 million roubles; or the aggregate worldwide turnover of the acquirer's group and the target's group of companies from the sale of goods, works and services during the most recent calendar year exceeds 10 billion roubles and the aggregate worldwide asset value of the target's group of companies exceeds 400 million roubles.
Deals relating to IP rights are reviewed and assessed by the FAS in the same way as all other transactions subject to merger clearance. The FAS remains the sole authority responsible for the enforcement of the merger control rules, also in the area of IP. Regardless of whether the transaction covers the transfer of IP rights or not, the general substantive test is used by the FAS. The authorities have not issued any guidance as to the application of the test to IP-related mergers. The 'restriction of competition' criterion lies at the heart of the substantive analysis; as a general rule, the transactions are not to lead to the restriction of competition (including as a result of creation or strengthening of a dominant position).
Finally, competitors are required to obtain the prior approval of the FAS for conclusion of agreements on joint activities (irrespective of whether IP rights are included in the transaction scope or not) in Russia if the following turnover or asset-based thresholds are exceeded: the aggregate worldwide value of assets of the groups involved exceeds 7 billion roubles; or the aggregate worldwide revenue of the groups for the past year exceeds 10 billion roubles. The concept of agreement on joint activities, in particular, covers the establishment of joint ventures. The term 'agreement on joint activities' is rather broad so in principle it may catch not only joint ventures, but also other commercial arrangements aimed at establishing cooperation.
ii Remedies involving divestitures of intellectual property
The Competition Law does not provide for any remedies aimed at addressing antitrust concerns in the context of transactions with an IP element. By way of background, structural remedies are not widespread in the FAS's practice because of a number of factors, including administrative barriers (practical application), which are often cited by FAS officials. Behavioural remedies are clearly preferred by the competition authority.
Although the remedy of divestiture of assets is available to the FAS, a corresponding practice has not developed. Examples of other remedies that may be used by the competition authority include conclusion, amendment or termination of agreements, granting access to assets or sharing certain industrial property rights, and performance of various business, technical or other requirements. IP-related remedies might be introduced into the Competition Law should the proposed draft law be enacted (notably, divestiture is being discussed).
i Sham or vexatious IP litigation
This concept is undeveloped in Russia; the antitrust implications of sham or vexatious IP litigation have not yet been analysed. The relevant matters are mainly considered from the general civil and procedural perspective as abuse of rights.
ii Misuse of the patent process
In certain instances, anticompetitive conduct associated with the manipulation of the patent process can be considered as unfair competition.
iii Anticompetitive settlements of IP disputes
By way of background, settlement agreements similar to those available in the United States or the European Union are not applied in Russia; as a consequence, their validity and enforceability as such are not obvious. In any case, the settlements of IP disputes have not yet been analysed by the FAS and the courts from an antitrust perspective.
Thus, should an arrangement of this kind (e.g., providing for exclusion payments to potential generic entrants in the pharmaceutical sector) be scrutinised by the competition authority, the general provisions of the Competition Law prohibiting abuse of dominance and anticompetitive agreements will be applied. Patent disputes involving generic manufacturers, in particular, are somewhat uncommon and are mainly resolved outside Russia. The competition authority is focused on other matters concerning the Russian generics market, such as interchangeability (primarily, in relation to the public procurement) and possible introduction of compulsory licensing.
Outlook and conclusions
As suggested by various comments made by FAS officials and the available draft laws, additional amendments to the Competition Law can be reasonably expected and should, among other things, deal with more detailed rules in the area of merger control and the digital economy, as well as correlation between IP and antitrust regulations (abolition of the IP immunities and introduction of compulsory licensing, in particular in the context of merger control).
In addition, from an antitrust perspective, the concept of antimonopoly compliance has finally been introduced to the Competition Law. Implementing an antimonopoly compliance system is not compulsory. Companies can apply to FAS to get confirmation that their internal documents on antimonopoly compliance are in line with the legislation. The FAS believes that putting in place antimonopoly compliance will help prevent violations by companies, including dominant entities. At the same time, the new law is silent on whether liability can be mitigated or excluded in case of violations by companies that have implemented a compliance system cleared with the FAS.
1 Maxim Boulba is a partner and Maria Ermolaeva is an associate at CMS Russia.
2 FAS Case No. 1-14-21/00-11-15, court Case No. A40-240628/2015.
3 FAS Case No. 1-10-279/00-18-13, court Case No. A40-42997/2014.
4 Ruling of the Constitutional Court No. 8-P dated 13 February 2018.
5 Resolution No. 10 dated 23 April 2019 on applying Part Four of the Russian Civil Code.
6 Court Case No. A40-71471/2017.