UK: Horseracing Databases and Memory Technology – What is a Fair Price?

Two recent decisions demonstrate how competition legislation can affect the pricing conduct of companies with interests in data and IT. They are summarised briefly below.

In late 2006, the Court of Appeal was asked to decide whether prices charged by the British Horseracing Board ("BHB") for access to pre-race data were excessive. Of most interest to companies in the IT industry is the question of when a price charged by a dominant company for access to information or other assets that it controls may be excessive so as to infringe competition law.

The trial judge had concluded that the prices charged by the BHB to Attheraces ("ATR") were so far in excess of the cost of compiling the data and creating the database as to be clearly excessive. He suggested that a price would be excessive if it was significantly in excess of the economic value of the asset. He held that the "economic value" could be assessed by measuring the cost of production (here, the cost of compiling a database) plus a reasonable rate of return.

This judgment caused much consternation for companies with assets such as databases and IP rights. Often the direct cost of acquiring or creating such assets can be very low, and the use of a bare "costs plus" test to decide whether a price was fair posed a significant threat to the freedom to set prices or fix royalties. The possibility of very narrow market definitions, leading to a risk of dominance, increased the commercial uncertainty.

On 2 February, the Court of Appeal rejected the approach of the trial judge, holding that he had been wrong to find that the "economic value" of an asset was the cost of compilation plus a reasonable return. The Court of Appeal did not decide how "economic value" should be assessed, but indicated strongly that a key factor is likely to be the value of the product to the purchaser.

The second interesting development was the US Federal Trade Commission ("FTC") decision to impose maximum royalty rates for some Rambus DRAM technology. This will bar Rambus from collecting royalties in excess of the rate imposed by the FTC. This is very unusual. Competition authorities generally resist any suggestion that they should set selling prices or royalties.

The FTC has made it clear that the imposition of a maximum royalty (diminishing to 0% over time) must be seen against the background of Rambus’ conduct in the process whereby industry standards were set for certain types of computer memory saying:

"The order is designed to remedy the effects of the unlawful monopoly Rambus established in the markets for computer memory technologies that have been incorporated into industry standards for dynamic random access memory – DRAM chips."

Standards bodies are increasingly important in the IT, telecommunications and related electronics industries. Many such bodies require members to license standardised technology on FRAND ("Fair Reasonable and Non-Discriminatory") or RAND ("Reasonable and Non-Discriminatory") terms. The FTC’s approach to assessing the level of a reasonable royalty in the standards context will be of interest for companies in heavily standardised sectors.

The European Commission has been carrying out a parallel investigation into Rambus’ conduct and its effects in Europe.

Ref: 1. Attheraces v. British Horseracing Board [2007] EWCA Civ 38 (2 February 2007) 2. In the matter of Rambus Inc. Opinion of the FTC on Remedy, (5 February 2007). See www.ftc.gov.

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