THE INTERFACE BETWEEN COMPETITION LAW AND INTELLECTUAL PROPERTY RIGHTS

Introduction The premise of intellectual property rights is that recognizing and rewarding the innovators and creators of intellectual work, augurs well for industrial and technical progress as it spurs invention and innovation. It also infuses efficiency and stimulates competition in new products, new markets and new technologies which is the life-breath of market driven economies; the consequential positive impact of which is felt by consumers as well. On the other hand, competition law and policy also has a vital role to play in market based economies, as it ushers an environment of free and fair play of market forces. It carves space for new entrants in the market by putting fetters on monopolistic anti-competitive behaviour of dominant enterprises and by checking collusive tendencies. It functions on the touchstone of consumer welfare and economic efficiency. Therefore, a common thread runs through Competition policy and Intellectual Property Law as they intersect at the point of fostering innovation, efficiency, consumer welfare and economic growth. Yet, an inevitable chasm exists in the sphere of monopoly rights which is the essence of IPRs. Concomitantly, the abusive exercise of these very monopoly rights is antilogous with the immutable tenets of competition policy. The monopoly rights as granted by IPRs could lead to substantial market power (though not necessarily) which may be used to annihilate competition in the market by exclusionary conduct (refusal to deal) by dominant enterprises. Likewise, anti-competitive behaviour could be in the form of collusive activities of a combination of IPR holders. IPRs also afford an opportunity to the right holders to manoeuvre the prices in a manner which enable them not only to recoup the R&D costs but also reap unprecedented

profits. These are but only a few examples of how IPR propelled market power could trample competition. An indisputable function of law is to strike an efficacious balance between the conflicting interests and to reconcile the evident anomalies in the socio-economic system. This is precisely what Competition Law and Policy in various jurisdictions strives for. The constant and inevitable tension between IPRs and competition policy is sought to be resolved in various major jurisdictions with the aid of flexibilities in law, guidelines and through judicial interpretations. This paper delves into the methods and the approach adopted by countries like USA, Canada, Australia, Japan and the European Union in order to understand how the legal procedures bridge the gap between the two divergent areas of law. An understanding of the nuances of law and its applicability in various countries shall facilitate an analysis of the lessons that can be derived for India as a vibrant and growing economic power. Therefore, this paper attempts to answer the following questions The meaning and rationale for Intellectual Property Rights The Balancing of IPRs and competition policy in major jurisdictions USA, EU, Canada, Japan and Australia The lessons for India Developing countries perspective

Intellectual Property Rights Meaning and Raison detre IPRs are intangible property rights conferred for tangible fruits of innovative endeavour, creative expression and commercial goodwill. The term is a compendious one and embraces patents, copyright, trademarks, industrial designs, lay-out designs of integrated circuits as well as geographical indication. These provide a protective umbrella to human ingenuity and intellectual work against unwarranted encroachments by conferring exclusive rights to the authors, creators, innovators or the owners (such as employers).

If we juxtapose the benefits reaped out of IPRs, against the impending perils of exclusion and monopoly, we may find that the advantages of having an efficacious IPR regime outweigh the disadvantages. The rationale behind Intellectual Property Rights is that it fosters a vibrant socioeconomic structure. To expatiate upon the reason detre of IPRs in greater detail one may emphasize that the contemporaneous knowledge driven economies thrive on innovation, enterprise and industrial technical progress and therefore is it considered expedient to bestow upon, the innovators, creators and entrepreneurs certain exclusive rights so as to further encourage them to invest, invent and innovate. These exclusive rights are in the form of intellectual property which not only rewards the innovators and creators of intellectual work for the efforts expended by them, but also allows them to recoup the costs of investments and research & development (R&D). The exclusivity of IPRs connotes that the owner has the right to make, use and sell the invention/creative work, to the exclusion of others. This provides sufficient leeway for recovering the costs and for making further investments in R&D activities, thereby paving way for increased dynamic efficiency. Furthermore, information which is the quintessence of future research and development flows into public domain, since the conferment of rights to innovators is conditioned by the prompt disclosure of invention. Dissemination of sufficient information about the invention enables others to carry out further research in the related field, even when the IPR (patent) subsists. An inevitable and positive outcome of constant research and development is that competition on merits is fostered and the consumers are placed at the vantage point of choosing from a variety of available goods and services in the market. Competition and fairness in the market is also the hallmark of trademarks. The economic rationale of trademarks is to dispel any confusion appertaining to the source of goods or services. Prudence demands that an entrepreneur who earns goodwill by maintaining consistent standard of quality, and wins the confidence

of consumers, should be allowed to protect his commercial reputation by means of trademarks, which distinguish the goods of one from another. Moreover, information search costs with regard to myriad commodities in the market, is considerably reduced with the aid of trademarks, thereby increasing efficiency. Besides the economic rationales of IPRs, various ethical, moral and philosophical justifications have been put forth. One of the greatest proponents of property rights John Locke emphatically articulated that the right to property (including intangible property) is the natural right of a person. This approach is embedded in the moral principle that one must own what he produces. Ethical considerations portend that a person should have the right to derive benefits from the fruits of his labour. Therefore it is pertinent that the rationale behind IPRs is not only economic, but also moral and ethical. The larger public interest is an overriding factor in maintaining the sanctity of any of the rights conferred by law and this is as apposite in case of IPRs as other rights. Thus, the fetters placed by competition law must also be guided by the overall public interest and should not be in the form of an unbridled exercise of power, so as maintain a fine balance between IPRs and competition policy. The quest for striking a balance has driven the competition authorities in various jurisdictions to formulate various laws, rules and guidelines, along with a plethora of case law which not only guide them towards an efficacious competition regime, but would also be a valuable insight for us to deal with cases appertaining to intellectual property rights.

INTERPLAY BETWEEN ANTI-TRUST LAW AND IPRs THE POSITION IN USA

The US constitutional mandate of promoting the progress of Science and Useful Arts1, forms the bedrock of copyright and patent laws. There has been a conscientious effort in the United States to stimulate artistic creativity and innovation, which is evident in the creative judicial exposition of Intellectual Property Laws. The courts have more often than not, manifested their penchant for broad and expansive interpretation in the realm of IPRs, resulting in patents being granted to live, human made micro-organism2, computer software3 and business method4 as well. On the other hand there is an equal emphasis on anti-trust law which aims to create an environment of free and fair trade, whilst improving economic efficiency and consumer welfare. The Anti-trust law in United States is primarily rooted in the Sherman Act of 1890 and the Clayton Act of 1914. Section 1 of the Sherman Act prohibits every contract, combinationor conspiracy, in restraint of trade or commerce.5 Under this provision some agreements in restraint of trade, such as price fixing cartels and market allocation agreements are treated as illegal per se. Most agreements, however,

Under Article I, section 8, clause 8 the Congress is granted power to promote the progress of science and useful arts, by securing for limited times, to authors and inventors, the exclusive right to their respective writings and discoveries. 2 Diamond v Chakravarty 447 U.S. 303 (1980) 3 Diamond v Diehr 450 U.S. 175 (1981) 4 State Street Bank & Trust Co. v Signature Financial Group, Inc. 149 F.3d 1368 (Fed. Cir. 1998) 5 Section 1, Sherman Act Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.

are judged under the rule of reason6, which calls for evaluation of purpose, power and competitive effects.7 Section 2 of the same Act prohibits conduct that monopolizes, or attempts to monopolize any part of trade or commerce. However, under this provision, claims of monopolization and attempts to monopolize are always judged under a full blown rule of reason. Purpose is inferred from a limited set of conduct identified as predatory, including certain pricing below cost and unjustified refusals to deal.8 The Clayton Act of 1914 declares that tying, exclusive dealing and stock mergers are illegal where the effect may be to substantially lessen competition or tend to create a monopoly in any line of commerce. The Act offences (including price discrimination, mergers and exclusionary conduct) call for proof that the conduct under scrutiny may substantially lessen competition.9 Section 5 of the Federal Trade Commission Act, gives the FTC broad latitude to attack unfair methods of competition and unfair or deceptive acts or practices. Against the backdrop of anti-trust laws, there seems to be a constant tussle between individuals inalienable right to property (including IPRs which confer the right of monopoly and exclusivity) and the general freedom of trade and commerce. The apparent tension between IPRs and anti-trust laws is subsumed under the modern approach of treating IPRs and competition policy as complementary to each other and the underlying theme is to strike an
The rule of reason, first enunciated in Standard Oil case (1911) implies that a fact based approach should be adopted for the purpose of evaluating the reasonableness of the alleged anti-competitive conduct. It is in the form of weighing the pros and cons of the purpose and eventual consequence of the conduct and if the pro-competitive effects outweigh the anti-competitive harm, then the conduct is deemed reasonable 7 Rudolf Peritz, pg 190, The Interface between Intellectual Property Rights and Competition Policy, edited by Steven Anderman (Cambridge University Press 2007) 8 Ibid 9 Ibid
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appropriate balance between the two. Perhaps the most profound impact has been that of innovation economics, which exhorted the anti-trust authorities to take a flexible and comprehensive view of both intellectual property and anti-trust law. If one perforates through the annals of economic history in the United States, one may perceive that the dawn of twentieth century witnessed a perceptible shift from the torpid economics of price competition to the economics of innovation competition, primarily under the influence of Joseph Schumpeter who asserted that it is competition by innovation that truly improves social welfare. The competition that counts is competition from the new commodity, the new technology, the new sources of supply, the new type of

organizationcompetition which commands a decisive cost or quality advantage and which strikes not at the margin of the profits and the outputs of the existing firms but at their foundations and at their very lives. He argued that to survive in capitalist competition, incumbents must withstand a perennial gale of competition in the form of the new consumer goods, the new methods of production or transportation, the new markets, the new forms of industrial organization.

With the growing realization that competition which matters most is the competition on merits and that innovation is the key to sustained economic growth and consumer welfare, the anti-trust authorities began to highlight the congruence between competition policy and intellectual property rights, rather than the potential tensions between the two. This is explicit in the antitrust guidelines jointly issued by the Department of Justice and Federal Trade Commission which portend that there is an inherent innovation nexus between IPRs and competition policy.

United States: 1995 Antitrust Guidelines for the Licensing and Acquisition of Intellectual Property10 The essence of these guidelines was to accentuate the nexus between Intellectual Property Law and Competition policy. The fundamental precepts as articulated by the Department of Justice and Federal Trade Commission emphasized that Intellectual property and other forms of property should be placed on an equal pedestal, without being oblivious of the inherent differences between IPRs and other property as far as the ease of misappropriation is concerned.11 It should not be presumed that the existence of IPRs confer market power upon the owner.12 Competition policy and IP laws are intertwined with the common objective of promoting innovation and consumer welfare, and the licenses that blend the complementary factors of production produce procompetitive results.13 Not only were the areas of convergence between competition policy and IP laws highlighted, but also certain novel features introduced, such as innovation markets, horizontal and vertical relationships, steps to be followed in conducting rule of reason analysis and anti-trust safety-zone with respect to licensing transactions. The three distinct markets in which competition may be affected by a licensing agreement were identified as the markets for goods, the technology markets and the innovation markets. The assessment of

10 11

Available at http://www.usdoj.gov/atr/public/guidelines/0558.pdf last visited on July 2, 2008. 2.1 The Agencies apply the same general antitrust principles to conduct involving intellectual property that they apply to conduct involving any other form of tangible or intangible property. 12 2.0 (b) The Agencies will not presume that a patent, copyright, or trade secret necessarily confers market power upon its owner. IP Guidelines, 1995 13 Ibid at 2.0

innovation markets would have to revolve around the impact of licensing arrangements on the investment in R&D. The concept of an innovation market includes those firms which possess the specialized assets or characteristics which are thought to be necessary in order to successfully conduct research and development which might result in new or improved products or processes. Participants in an innovation market include not only firms which are currently participating in the relevant goods or technology markets, but other firms which while not active in such markets, nonetheless have the assets necessary to enter the market at some point in the future.14 One factor that shall be taken into account is the number of firms with the capabilities required to conduct necessary research and development. If the number of firms with the required capability is small, it is likely that the innovation market concept will be evoked. On the other hand, if the number of firms with the required capability is very large, then the regulators will generally conclude that the innovation market is competitive, and that it is unlikely that any single firm or plausible aggregation of firms could acquire a large enough share of those specific assets which are necessary for innovation to have an adverse impact on competition.15 Further, the guidelines make it clear that the anti-trust analysis of any particular licensing arrangement will be based upon the kind of relationship the parties share.16 In most cases, purely vertical relationships may not dampen competition in the market, but there is no presumption to that effect.17 Conversely, merely the existence of a horizontal relationship does not necessarily imply an adverse effect on competition.18 However, the most pernicious horizontal arrangements such as price fixing, market or customer
14 15

Allan Gutterman, pg 245, Innovation and Competition Policy, (Kluwer Law International, 1997) Ibid 16 3.3, IP Guidelines, 1995 17 Ibid 18 Ibid

allocation, or agreements to reduce output are deemed per se unlawful; while other horizontal restraints, shall be scrutinized under the rule of reason19. The rule of reason implies a fact based approach for the purpose of evaluating the reasonableness of the alleged anti-competitive conduct. It is in the form of weighing the pros and cons of the purpose and eventual consequence of the conduct and if the pro-competitive effects outweigh the anti-competitive harm, then the conduct is deemed reasonable.20 Therefore the guidelines eschew formalistic approaches to the treatment of licensing practices, and provide for a case-by-case examination of their actual effects in the context of licensing arrangements, in the light of relevant economic and legal factors.21 Anti-trust scrutiny of licensing arrangements would mainly arise when they harm competition among entities that would have been actual or likely potential competitors in a relevant market in the absence of license.22 Thus, the guidelines have been influenced by the Chicago School emphasis on preventing restraints between competitors, rather than by the Harvard School concern with safeguarding individual freedom of choice in vertical relationships.23 The guidelines also offer a valuable insight into the procedure to be followed for application of rule of reason. First, an inquiry is to be made whether the restraint has an anti-competitive effect.24 If so, consideration will then be given to whether or not the restraint produces offsetting pro-competitive effects, such as by facilitating the efficient development and exploitation of new technology.25 If such offsetting benefits are established, an assessment
See Standard Oil decision (1911) On the other hand, per se unlawful conduct can be described as one which is patently anti-competitive and no plausible justification could mitigate the deleterious impact of such conduct. To exemplify, price fixing, reduction in output, dividing geographical markets are all per se unlawful. 21 UNCTAD report on Competition Policy and the exercise of Intellectual Property Rights, 2002, available at www.unctad.org/en/docs//c2clp22r1.en.pdf last visited on July 7, 2008. 22 Ibid 23 Ibid 24 4.2, IP Guidelines, 1995 25 Ibid 4.4
20 19

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will be made as to whether the restraint is reasonably necessary in order to achieve the efficiencies. If it is and the efficiencies outweigh the anticompetitive effect, the licensing arrangement will typically not be challenged.26 The anti-trust safety zones related to licensing transactions created a safe haven for intellectual property owners by allowing them to place certain restraints in licensing arrangements which would not invite the scrutiny by anti-trust authorities, unless some exceptional circumstances existed. To fall within the ambit of safety zone, the restraint should not be one which is derided under the per se rule. Apart from this, one of the three additional criteria should be met27: The licensor and its licensees should not collectively account for more than 20 percent of each relevant market affected by the restraint, in case of goods market. At least four independently controlled substitute technologies must exist in the technology market. In case of innovation market, there should be at least four additional independently controlled entities capable of conducting research and development that would be a close substitute for the licensing parties activities.

In order to understand the interplay between IPRs and anti-trust law in the United States, it is essential to delve into the rubric of anti-trust cases involving intellectual property. To begin with, the cases involving duty to license and compulsory licensing form a considerable part of the interaction between IPRs and competition policy. Compulsory licenses are "involuntary contracts between a

26 27

Ibid 4.2 Ibid 4.3

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willing buyer and an unwilling seller imposed or enforced by the state."28 Compulsory licenses are basically the abrogation of an IP right - an extra-ordinary legal instrument whereby the State allows itself or third party (typically the competitor) to have access to, produce, use or sell the IP protected product or process without the consent of the IP owner. Such mandatory and involuntary licenses as compelled by law may be granted with respect to patents, copyrighted works or other exclusive rights. In case of patents the Compulsory license provides a safeguard against lack of use of a patented invention or misuse of the patent holders monopoly rights in order to protect the public interest.29 The same principle may be applied in case of copyrights and other exclusive rights. As a general matter, the US antitrust laws do not impose on individual firms, even monopolies, a duty to do business with anyone or otherwise to make other facilities available30. The position can be succinctly summarized with the aid of the following case: Hartford-Empire Co. v United States31 The court asserted that a patent owner is not in a position of a quasi-trustee for the public or under any obligation to see that the public acquires the free right to use the invention. He has no obligation either to use it or grant its use to others. However, there have been some decisions over the years sometimes termed essential facility cases imposing duty to deal or decreeing compulsory licenses. In fact in US the principle of granting involuntary compulsory licenses is inextricably interwoven with the concept of essential facility which developed in relation to access to physical infrastructure. Essential facility is a facility or infrastructure which is necessary for reaching customers and/ or

28

Christopher A. Cotropia, Compulsory Licensing under TRIPS available at http://www.cotropia.com/bio/Chapter26--Cotropia--PatentLawHandbook.pdf last visited on May 30, 2008. 29 www.kommers.se/.../Rapport%20The%20WTO%20decision%20on%20compulsory%20licensing Rudolf Peritz, pg 200, The Interface between Intellectual Property Rights and Competition Policy, edited by Steven Anderman (Cambridge University Press, 2007). 31 323 U.S. 386 (1945)
30

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enabling competitors to carry on their business.32 The essence of this concept is captured appositely in the Terminal Railroad Association case. United States v Terminal Railroad Association33 A group of railroads which jointly owned the only railroad switching yard across the Mississippi River at the important city of St. Louis prevented competing railroad services from offering transportation to and through that destination. The Supreme Court required the railroads group to give access to non-members; and concomitantly held that such conduct constituted both an illegal restraint of trade and an attempt to monopolize. Likewise in Lorain Journal case34, the Supreme Court considered whether the defendant, the only local newspaper circulating news and advertisements in northern Ohio, violated the Sherman Act by refusing to accept advertising from businesses that placed advertisements with a small radio station. The Court approved an order requiring the newspaper to accept advertisements as it was considered an indispensable medium of advertising. Therefore, through the course of such decisions was born the essential facilities doctrine and the accompanying remedy of compulsory access.35 This doctrine is certainly not an independent cause of action but a strand of the monopolization claim. It has been articulated as a subset of the so-called refusal to deal cases which place limitations on a monopolists ability to exclude actual or potential rivals from competing with it. Hence, Where facilities cannot practicably be duplicated by would-be competitors, those in possession of them must allow them to be shared on fair terms. It is illegal restraint of trade to foreclose the scarce facility.36

32

H. McQueen, Charlotte Waelde, Graeme Laurie, pg 853, Contemporary Intellectual Property Law & Policy, (Oxford University Press, 2007). 33 224 U.S. 383 (1912). 342 U.S. 143, 146-49 (1951). Rudolf Peritz, pg 200, The Interface between Intellectual Property Rights and Competition Policy (Cambridge University Press, 2007). 36 Hecht v. Pro-Football, Inc., 570 F.2d 982, 992 (D.C. Cir. 1977).
35 34

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In the realm of IP monopoly, the federal circuit in Intergraph case37, trimmed the ambit of essential facilities doctrine by holding that only when the facility owner and the user compete in a downstream market that requires access to the facility, will the doctrine apply. In this case, the plaintiff Intergraph argued that Intel had an affirmative obligation to continue supplying it with chips, technology and interoperability information because Intel products were the de facto industry standard and thus essential facility to do business in the industry. Intel dominated the market with well over 80 percent share of microprocessor chip sales, thus Intergraph asserted that the refusal to deal was monopolizing conduct in violation of Sherman Act.38 However, the court held that Intel and Intergraph were not competitors and since they did not compete in downstream market, a compulsory license could not be granted. Another important case is that of Eastman Kodak Co. v. Image Tech. Inc.39. The Supreme Court emphasized that power gained through some natural or legal advantage such as patent, copyright or business acumen can give rise to liability if a seller exploits his dominant position in one market to expand his empire into the next. In this case, the plaintiff won its monopolization claim that Kodaks practice of refusing to sell patented parts to independent service providers was an unreasonable restraint of trade that violated Sherman Act section 2. A perusal of the above decisions makes it amply clear that in US, apart from mere ownership of an IPR, some additional exclusionary conduct is essential for the grant of compulsory and involuntary license. It is important to note that in the recent and significant case of Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP40 the U.S.

3 F. Supp. 2d 1255 (N.D.Ala. 1998), reversed, 195 F.3d 1346 (Fed. Cir. 1999) Section 2 of Sherman Act makes any attempt to monopolize any part of interstate or foreign trade a criminal offence. 39 504 US 451, 482-3 (1992) 40 540 U.S. 398, (2004).
38

37

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Supreme Court stated that requiring a monopolist to deal with a competitor can chill the very conduct the antitrust laws are designed to protect. The case involved a class action law suit alleging that Verizon by refusing to share its local exchange facilities with other providers as required under the

Telecommunications Act of 1996, engaged in anticompetitive conduct i.e. refusal to deal, and leveraged monopoly power to its advantage. In an opinion, authored by Justice Scalia, the Supreme Court held that Verizons obligations under the 1996 Act did not mean that those obligations were enforceable under the Sherman Act. Rather, the issue was whether Verizons conduct violated a pre-existing duty under Section 2 of the Sherman Act to deal with rivals. The court emphasized that generally, the Sherman Act does not restrict a traders right to deal with whomever he pleases. The most important pre-requisite for a monopolization claim as the court asserted, was that the defendant should possess monopoly power in the relevant market and willfully acquire or maintain that power in a manner different from the normal development of monopoly power.41 Thus, the court found no anti-trust violation on part of Verizon and maintained that anti-trust laws cannot transcend beyond the normal statutory duties to deal. Though this case was not essentially entwined with IPRs, nonetheless it may have ramifications for cases involving essential facility and compulsory licensing. Intellectual property lawyers and, judging from the Trinko decision, the U.S. Supreme Court, both seem to want the competition authorities to not interfere in technologically complex legal areas involving intellectual property rights that they do not fully understand, because such interference undermines the incentive to innovate. While in some cases this may hold true, in other cases a detailed analysis of the facts may reveal that the true purpose of a refusal to license is both exclusionary and anticompetitive. The reality of the underlying
41

The normal development of monopoly power is the result of superior product, business skill or historical accident.

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purpose of such refusals may lead to a reduction in productivity and innovation and an undermining of consumer welfare, both of which are contrary to the very purpose of antitrust laws.42 In Re Independent Service Organizations Anti-trust litigation (the XEROX case)43, it was alleged that Xerox had monopolized the markets for service of Xerox high speed copiers and printers, and thereby violated Section 2 of the Sherman Act. The ISOs claimed that Xeroxs decision to set prices on its patented parts much higher for ISOs than for end-users was monopolizing conduct and was an attempt force ISOs to raise prices. The ISOs contended that Xeroxs policy of refusing to sell them its patented parts would prevent them from competing in the separate relevant market for service of Xerox machines and ultimately would lead to their elimination from the market. The Court stated that holders of intellectual property rights are not given the privilege to violate antitrust laws. However, generally a patent holder is not obliged under the antitrust laws to license or sell its intellectual property, and there is no violation of the Section 2 for mere refusal to license unless: The patent was obtained through fraud on the Patent and Trademark Office. The refusal was objectively baseless and the intent was to interfere directly with the business relations of a competitor, The refusal was part of an otherwise unlawful tying strategy. Besides cases on compulsory licensing of intellectual property and the essential facility doctrine, there are some significant decisions on industry standardization of IP. The inherent merits of an industrial standard as a yardstick for product manufacturing, assimilates the benefits of low search costs and simplified compliance. In some instances, as in standardization of railroad track or football
42

Daniel Kanter, IP and Compulsory Licensing on both sides of the Atlantic, available at www.whitecase.com/.../article_kanter_ip%20and%20compulsory%20licensing.PDF last visited on May 15, 2008.
43

203 F.3d 1322 Fed Cir 2000

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field dimensions, or of personal computer component interfaces or Internet message protocols, industry wide compliance has been crucial to growth and progress.44 On the darker side, there are obvious disadvantages in the realm of competition, since it paves for cartelization, product homogeneity, entry barriers and exclusion of rivals. FTC v Dell Computer45 highlights the abuse of standard setting initiatives by IP holders. In the present case Dell held patents for VL-bus, a computer component for transferring instructions between computers CPU and peripherals. Under the rules requiring disclosure, the standard setting organization compelled Dell to disclose its patents, but Dell certified that the proposed standard did not violate its IPRs. However, once the standard was adopted, Dell asserted infringement of its patent by the standard. The FTC alleged that the conduct amounted to an unfair method of competition under S.5 of the FTC Act. The commissions complaint specifically charged that industry acceptance of the new standard was delayed, and that uncertainty surrounding acceptance of the standard raised the cost of implementing new design. Other firms avoided using the new bus because they were concerned that the patent dispute would reduce would reduce its acceptance as a standard46. The enforcement action was settled, with Dell agreeing not to enforce its undisclosed patents.

44 45

Steven Anderman, pg 195 121 F.T.C. 616 (Federal Trade Commission 1996) 46 UNCTAD report on Competition Policy and the exercise of Intellectual Property Rights, 2002, available at www.unctad.org/en/docs//c2clp22r1.en.pdf last visited on July 7, 2008.

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Intellectual Property Rights & Competition Law in CANADA

At the root of IP law "lies a concern to avoid overextending monopoly rights on the products themselves and impeding competition"47 The above observation made by the Canadian Supreme Court is resonant of the general consensus over complementarily between competition law and intellectual property rights and the thrust is on accentuating the pro-competitive effects of IPRs. Looking through the prism of IP laws, it is evident that the fetters on the period of protection and the indispensable requirement of disclosure breed competition in innovation which is the paramount guiding principle of knowledge driven economies. Palpably, it is for this reason that the Canadian Competition Bureau portends that IP laws and competition laws work together to promote an efficient economy; that the Competition Act generally applies to conduct involving IP in the same way that it applies to conduct involving other forms of property; and that the exercise of an IP right is not necessarily anticompetitive.48 Apart from the latest guidelines, the Canadian law also aims to bring about a harmony between IPRs and competition law by creating various exceptions. There are also some interesting Canadian cases which throw light on the interaction between these two supposedly divergent areas of law. Let us examine the Canadian position in greater detail.

An overview of the Competition Act 198649

The primary objective of competition law and policy is to foster competition, consumer welfare and efficiency. The Canadian Law also focuses on these immutable objectives and explicitly provides that: The purpose of this Act is to

47 48

Kirkbi AG v. Ritvik Holdings Inc., [2005] 3 S.C.R. 302 Competition Bureau, Intellectual Property Enforcement Guidelines (September 2000), available at http://strategis.ic.gc.ca/pics/ct/ipege.pdf last visited on July 3, 2008
49

R.S.C. 1985, C-34, available at http://laws.justice.gc.ca/en/C-34/.

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maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, in order to expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada, in order to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and in order to provide consumers with competitive prices and product choices.50 The Act aims at uprooting any conduct or arrangement that would substantially or unduly prevent or lessen competition. Parties will be found to have substantially prevented or lessened competition where an arrangement or conduct will permit them to obtain and exercise unilaterally or interdependently with others, a materially greater degree of market power than in the absence of that arrangement or conduct.51 However, these limitations do not apply in cases where the impact on competition is a result of superior competitive performance or is offset by greater gains in efficiency.52 Among the major anti-competitive activities, conspiracy, refusal to deal, abuse of dominance, price maintenance and exclusive dealing are the most pernicious and for our purpose of understanding the law in Canada it is important to have a brief overview of the relevant provisions. 1. The Act makes conspiring to impede competition a criminal offence. It is unlawful for two or more persons to knowingly enter into an agreement that prevents or lessens competition unduly.53 2. When the customers business interests are substantially jeopardized due to their inability to secure adequate supplies of a product on usual terms

Section 1.1 of the Competition Act, 1986. Richard F. D. Corley, Navin Joneja, Prakash Narayanan, The Competition/ Intellectual Property Interface Present Concerns and Future Challenges, available at http://www.competitionbureau.gc.ca/epic/site/cb-bc.nsf/en/02285e.html last visited on July 21, 2008.
51 52 53

50

Ibid Section 45

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of the trade, then the refusal to deal could be considered anti-competitive and the tribunal may order the supplier to supply the product on usual trade terms.54 The adverse impact on competition by the refusal to deal is an indispensable consideration. 3. It is a criminal offence for any person who is engaged in the business of producing or supplying a productor who has the exclusive rights and privileges conferred by a patent, trademark, copyright etc. to attempt to influence upward or to discourage the reduction of the price by any means or to refuse to supply a product to or otherwise discriminate against any other person because of low pricing policy of that person.55 4. The abuse of dominance56 as provided by the Act could be unilateral or collusive in nature. The three relevant ingredients for constituting abuse of dominance are there should be dominance in the relevant market57, the dominant enterprise or undertakings must engage in anti-competitive acts58, and the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market. It is pertinent to mention that, the Act provides for exceptions in favour of superior competitive performance59 and an act in pursuance of mere exercise of IPR or enjoyment of any interest derived under IP statutes60. 5. Exclusive dealing, tying and market restriction are manifested in the Act61 as anti-competitive. These provisions can be applied in case of anticompetitive activities of IP holders as well; subject to certain exceptions

Section 75 Section 61 56 Section 79 57 Ibid, one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business 58 Section 78 lists out certain anti-competitive acts but the list is only illustrative and not exhaustive. 59 Subsection 79(4) 60 Subsection 79(5) 61 Section 77
55

54

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such as conditions can be imposed by the IPR (trademark) holder under franchise exemption. Moreover, when the products are technologically tied, then it is not considered as tied selling under the Act.62 6. Pursuant to Section 32 of the Act, remedial orders may be issued declaring any agreement or license relating to the anti-competitive use void; restraining any person from carrying out any or all of the terms of the agreement or license; ordering compulsory licensing of the IP right (except in case of trademarks); expunging or amending a trademark; or directing that other things be done to prevent anti-competitive use of the IP right.63 However, according to the IP Guidelines, the Commissioner will consider recommending the use of Section 32 only if the following conditions are met64: The conduct at issue involves the mere exercise of an IPR; No appropriate remedy is available under another statute; The IPR holder is dominant in the relevant market and the IP is an essential input or resource for other firms seeking to compete in the relevant market; The exercise of the IPR (example refusal to deal) prevents other firms from effectively competing in the relevant market; and Invoking a special remedy would not reduce incentives to invest in R&D in the economy.

The Canadian Competition Bureau enunciated a set of guidelines in 200065, reflecting upon the interplay between IPRs and competition policy. A general

62 63

Subsection 77(4) John Bodrug, The interface between IP law and Competition Act, available at http://www.dwpv.com/images/The_Interface_Between_IP_Law_and_the_Competition_Act.pdf last visited on July 21, 2008.
64 65

Ibid Intellectual Property Enforcement Guidelines (IPEG) 2000

21

consensus on the convergence of IPR and competition policy in fostering efficient economy is aptly reflected in the IPEG. There is recognition of the fact that IP is the engine of economic growth in the knowledge based economies since it stimulates the development in new technology, artistic expression and the dissemination of knowledge66. Further, the IPEGs are inherently congruent with the US approach on treatment of IPRs at par with other forms of property. However, an impressive advancement is made on bifurcation of the conduct of IPR holders Conduct involving mere exercise of IPRs and Conduct involving something more than the mere exercise of IPRs The mere exercise of IPR has been explicitly defined as the exercise of owners right to unilaterally exclude others from using the IP right or to decide whether to use or not use IP right itself67. In case of conduct involving mere exercise of IPRs, the Commissioner shall consider referring the matter to the Attorney General of Canada, who shall proceed under Section 32 of the Canadian Competition Act. This section deals with some special remedies in cases where IPR is used to impede competition and is applicable only when some concurrent requirements are met. These requirements portend that - a remedy under Section 32 should not adversely alter the incentives to invest in research and development in the economy; the alleged competitive harm stems directly from the refusal and nothing else; and no appropriate remedy is available under the relevant intellectual property statute.68 In case of conduct involving more than the mere exercise of IPRs, the Bureau shall only intervene to challenge licensing agreements if they reduce

IPEG paragraph 1Adequate intellectual property plays an important role in stimulating new technology, artistic expression and the dissemination of knowledge all of which are vital to the knowledge based economy 67 IPEGs paragraph 4.2.1 68 Richard F. D. Corley, Navin Joneja, Prakash Narayanan, The Competition/ Intellectual Property Interface Present Concerns and Future Challenges, available at http://www.competitionbureau.gc.ca/epic/site/cb-bc.nsf/en/02285e.html last visited on July 21, 2008.

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competition substantially or unduly relative to that which would likely have existed in the absence of the license69. In such cases the Commissioner may proceed under one or more of the general provisions of the Act, such as abuse of dominance, refusal to deal, conspiracy, or price maintenance provisions.70 For any inquiry to be complete, it is essentially important that the judicial precedents must be taken note of. Therefore, the significant cases appertaining to conspiracy, abuse of dominance, refusal to deal, price maintenance etc. have been referred below. One of the recent cases: Apotex Inc. v Eli Lilly and Co.71, explains the interrelation between IPR and Competition law. In this case Apotex contended that the assignment of patents to Eli Lilly by a Japanese company infringed Section 45 of the competition Act, since it was an agreement resulting in undue lessening of competition. The Federal Court of Appeal held that when the assignment increases the assignees market power in excess of that inherent in the patent rights assigned, then such an assignment would fall to tatters when tested at the touchstone of Section 4572. Section 50 of the Patents Act, which provides for assignment of a patent, does not override Section 45 of the Competition Act, since it only makes a provision for authorizing the assignment. Following the harmonious construction principle, the court emphasized that Section 50 of the Patents Act and Section 45 of the Competition Act are not antithetical and can operate simultaneously. However, the court held that the assignment of a patent may, as a matter of law, unduly73 restrain competition.

69 70

IPEGs, paragraph 4.1 John Bodrug, The interface between IP law and Competition Act, available at http://www.dwpv.com/images/The_Interface_Between_IP_Law_and_the_Competition_Act.pdf last visited on July 21, 2008. 71 2005 FCA 361 72 According to Subsection 45(1), conspiracies that unduly restrain trade are unlawful. 73 In R v Nova Scotia Pharmaceutical Society (1992) 2 S.C.R. 606 the Supreme Court of Canada described undueness as a serious or significant effect on competition depending upon two important factors: presence of market power in the relevant market and the conduct being deleterious to competition.

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Further, there are various cases with regard to refusal to deal, which reflect the position that generally, the right granted by the Parliament to exclude others is fundamental to IPRs and cannot be considered to be anti-competitive74. The competition tribunal has taken recourse to the exception provided in Section 79(5) in order to protect the legitimate interests of IPR holders. The underlying principle is that when there is nothing more than mere exercise of the right granted by IP statute, then the resultant effect on competition may not be considered to be harmful. The attempt is to strike a balance between the individual rights of IPR holder and competition in the market. An apt example is the case of Warner Music75, wherein the Commissioner claimed that Warner must supply licenses to BMG so as to enable it to manufacture, sell and distribute the sound recordings created from the master recordings owned by Warner. The tribunal held that under Section 75, the product which the supplier refuses to provide must be in ample supply or abundant. A copyright license is an exclusive legal right and since exclusivity is inextricably interwoven with such right, it cannot be in ample supply. Further, the court also stressed that copyright license is not a product as mentioned in Section 75. Applying the same rationale of protecting legitimate rights of IPR holders, the competition tribunal in Tele-Direct case76, refuted the allegation that the dominant provider of telephone directory advertising services in Canada had abused its dominant position by refusing to license its Yellow Pages trademark to competing telephone directory advertising companies. An exception provided by Section 79(5) says that an act in pursuance of mere exercise of an IPR is not an anti-competitive act. It is only legitimate for an IP holder to be guided by the competitive considerations, and the selective refusal to license a trademark is not an anti-competitive act. It is the prerogative of the right holder to maintain
Canada (Director of Investigation & Research) v. Warner Music Canada ltd. (1997), 78 C.P.R. (3d) 321 (Competition Tribunal) 75 Ibid 76 Canada (Director of Investigation & Research) v. Tele-direct (Publications) Inc. (1997), 73 C.P.R. (3d) (Comp. Trib.)
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the distinctiveness of his/her product given the qualitative considerations and the reputation that trademark protects. Therefore, the tribunal held that the IPR holder has the exclusive right to determine whether or not, and to whom, to grant license. However, it has already been explained that when the conduct constitutes something more than mere exercise of IPR, then the deleterious impact on competition can be scrutinized by the authorities. Kirkbi AG v. Ritvik Holdings Inc.77 is the case which gives an insight into the operation of IPRs and depicts how IP holders may try to perpetuate their monopoly behind the veil of these exclusive rights. Kirkbi was the manufacturer of LEGO products for which it held various patents in Canada and elsewhere. LEGO enjoyed a substantial market share which was the result of monopoly power conferred by IPR. Once the patents expired, the Kirkbi tried to preserve its market position by attempting to register the patterns on LEGO blocks as a trademark or design, with the intention of perpetuating its monopoly over the product and foreclosing competition in the market. However, the expiry of patents ushered competition and products which were virtually identical to LEGO flooded the market, the most aggressive competitor being Ritvik Holdings. Since Kirkbi could not get the pattern on LEGO blocks registered as trademark (because it was a utilitarian or functional feature of the product), it asserted unregistered trademark rights in the product, alleged violation in the form of passing off by Ritvik and sought permanent injunction to prevent marketing of Ritviks Mega blocks, coupled with damages. The Supreme Court of Canada reiterated what the lower courts had held. The court emphasized that once a patent expires, the product falls into public domain and it cannot be used to extend monopoly. The law of intellectual property discourages attempts to bring the monopoly position back in another guise. Moreover, the function of a trademark is to indicate the source of the product so as to enable the consumers
77

2005 SCC 65

25

to differentiate between the products. A trademark does not intend to inhibit the competitive use of utilitarian features of a product. What Ritvik did was purely competitive and so the court pointed out that: Competition between the products using the same technical processes or solutions, once patent rights are out of the way, is not unfair competition. It is simply a way the economy and the market are supposed to work in modern liberal societies.

Interaction between Competition Law and Intellectual Property Rights the Japanese Perspective
Japan as one of the most vibrant economies of the world, thrives on the innovation, invention and enterprise. Therefore, the thrust on intellectual property rights is a vital component of the Japanese legal system. This is evident from the manner in which intellectual property law was exalted to the top of its agenda in the year 2002 when the Prime Minister vowed to transform the country as an IP nation. However, the policy of promoting and sustaining fair trade and competition buttresses Japans economic paradigms with the same fervour and thus is equally emphasized. The Law Concerning Prohibition of Private Monopolisation and Maintenance of Fair Trade enacted in 1947, (hereinafter referred as Antimonopoly Act) aims at prohibiting private monopolization, unreasonable restraint of trade and unfair trade practices, by preventing excessive concentration of economic power and by eliminating unreasonable restraint of production, sale price, technology and the like, and all other unjust restriction of business activities through combinations, agreements and otherwise78. In essence the law aims at fostering free and fair competition, ushering economic democratization and protecting the interests of consumers.

Section 1 (Purpose), The Law Concerning Prohibition of Private Monopolisation and Maintenance of Fair Trade, 1947.

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Primarily three types of activities are deemed to sap competition private monopolization, unreasonable restraint of trade, and unfair trade practices. Any business activity impeding the entry of others into the market can be deemed to be an act of private monopolization, the aim of which is to acquire greater market power. While private monopolization could be individual or collective in nature, unreasonable restraint of trade is essentially in the form of concerted action (cartelization) among entrepreneurs to fix, maintain or increase prices, or to limit production, technology, products, facilities, or customers or suppliers. Further, for an act to fall under the third category i.e. unfair trade practice, must obliterate competition in the market and such acts could be in the form of unjust discrimination against other entrepreneurs, dealing at unjust prices, unjustly inducing or coercing customers of a competitor to deal with oneself, dealing with another party on such terms as will restrict unjustly the business activities of the said party, dealing with another party by unjust use of ones bargaining position, or unjustly interfering with another entrepreneurs business activities.79 The Federal Trade Commission issued guidelines on unfair trade practices in the year 1982 and designated sixteen categories of trade practices as unfair trade practice80. However, the Antimonopoly Act creates an exception in favour of intellectual property rights under Section 21 which reads thus the provisions of this act shall not apply to acts that qualify as the exercise of rights under the Copyright Act, the Patents Act, the Utility Model Act, the Designs Act, or the Trade Mark Act.

Section 2(9), Antimonopoly Act, 1947 The Fair Trade Commission issued guidelines designating sixteen categories of trade practices as unfair trade practice within the meaning of Antimonopoly Law. The categories include concerted refusal to deal, other refusal to deal, discriminatory pricing, discriminatory treatment on transaction terms, discriminatory treatment in a trade association, unjust low price sales, unjust high price purchasing, deceptive consumer inducement, customer inducement by unjust benefits, tie-in sales, dealing on exclusive terms, resale price restriction, dealing on restrictive terms, abuse of dominant bargaining position, interference with competitors transaction and interference with internal operation of a competing company, available at http://www.aippi.org/reports/Vortrag_kondo.pdf last visited on July 7, 2008.
80

79

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The application of this exception is subject to the imperatives of competition and efficiency in the market. The interrelation between Section 21 and the Antimonopoly Act has been well explained in the guidelines issued by FTC.

The FTC published guidelines on anti-trust rules for patent and know-how licensing agreements in the year 1968, which primarily dealt with the prohibition of unfair business practices in international agreements and were heavily biased towards a protection of Japanese licensee.81 The guidelines of 1989 introduced a distinction between clauses that were always lawful (white clauses), clauses that in certain circumstances would constitute unfair trade practices (grey clauses), and those that were always deemed unlawful (black clauses).82 The most recent publication of guidelines was in the year 1999, which for the first time explicitly dealt with the interrelation between IPRs and the AMA. However, the overwhelming concern in all these guidelines was to deal with cases in which licensees research capabilities were unduly fettered or the position of IPR holder was used as a leverage to impose such restrictions as would dampen competition. Limiting the research capacity of licensee whittles competition in innovation and includes clauses appertaining to unilateral grant-back or disallowing the licensee to further develop the licensed technology. Other clauses such as those mandating tie-in sales or resale price maintenance schemes are equally pernicious.83 The main principles of the 1999 guidelines are as follows84 : 1. With respect to patent licensing agreements, there are some acts that are considered to be an exercise of rights under the IP statutes, such as restrictions on territory, duration or field of use of the license. However, if those acts are in the form of an unwarranted encroachment upon the
Christopher Heath, pg 260, The Interface between Intellectual Property Rights and Competition Policy, edited by Steven D Anderman (Cambridge University Press 2007) 82 Ibid 83 Ibid pg 261 84 Ibid pg 254, 255, 256, 261, 262, 266
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business activities of other parties, then the same may be evaluated by the Commission, firstly under Section 23 (now Section 21) of the AMA an then on the basis of the eventual impact on competition. Even those acts which are not a part of the licensing agreements and are solely concerned with the exercise of rights under the IP statutes, such as decision to license or not to license a patent etc. shall be evaluated by the FTC in context of their impact on competition. 2. Though section 23 (1) (now 21) places the acts in pursuance of exercise of rights under the IP statutes, outside the purview of AMA, nonetheless under clause (2) if the said acts are considered to deviate from or run counter to the purposes of the IPR system, the said acts will no longer be deemed to fall under the exception and will be subject to AMA. 3. The Commission shall take note of any restrictions placed on the sale or use of patented products, after exhaustion the patents or after the patented product falls into public domain. Such matters shall be dealt with by the Commission in the same manner as the sale of products in general under the AMA. 4. The guidelines declare that following vertical restraints as unlawful: abuse of bargaining position by imposing an obligation to pay royalties after expiration of the patent right; licensing more than one patent as a package if unnecessary for the technology involved; requiring the licensee to assign rights over improvement inventions without compensation or granting licenses for improvement inventions without corresponding obligations of the licensor; prohibiting the licensee from challenging the patented technology, from manufacturing competing products or employing competing technology after the expiration of the licensing agreement; preventing the licensor from asserting his own IP rights against the licensor; restricting the licensee in sales activities of the patented products or any other restrictions having a measurable impact on the market.

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Usually all clauses limiting the licensee will be judged against the prohibition of an abuse of a dominant bargaining position85: where the licensor is found to be in a dominant bargaining position, any restricting clause may be deemed unlawful unless there are justifying reasons. Also, retail price maintenance schemes are a violation per se. 5. The FTC for the first time in these guidelines offered a systematic approach on how to deal with private monopolization and undue restraints of trade in connection with IPRs. The acts of prohibited private monopolization are: forming patent pools and cross licensing agreements and refusing to grant licenses without justifiable reasons to new entrants or existing undertakings, or taking other measures that have the effect of impeding the market entry of other undertakings; acquiring patents and behaving as described above; and using licensing terms aimed at exclusion of outsiders.

Cases In Nihon Record II86 - An attempt by the manufacturers of audio discs to prevent the shops from renting out these discs to customers was held by the FTC to be anti-competitive. Pertinently, the rights over the copyrighted discs were exhausted by the first sale of these discs and to limit the free distribution of such products, by enforcing a boycott against the shops renting the discs was held to be anti-competitive. However, in the present context, the approach followed by FTC would be inappropriate since the rights of rental and distribution have now been recognized as enforceable.87

Abuse of a bargaining position may occur when the licensee requires the license for the continuation of his business and is thus forced to give in to the licensors demands even when detrimental to the licensees business. Additional factors would be the market position of licensor and licensee, difference in size between licensor and licensee etc. 86 FTC, December 15,1983, 389 Kosei Torihiki 34, Nihon Record II 87 See Article 8, 9, 12, 13 of WIPO Performers and Phonograms Treaty, 1996.

85

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Likewise in the case of Sony Computer Entertainment88 the company which supplied PlayStation products required the dealers to comply with a policy of no discount and no second-hand sales. The FTC held such conduct to be anticompetitive since it constrained the retail price of the new PlayStation software; ignoring the rights of rental and distribution which may have rested with the company. The opinion is interesting insofar as the FTC did not look at the rights formally allocated to the copyright owner, but to the objective behind the exercise of such rights.89 The FTC, in its decision held that: Section 21 Antimonopoly Act is deemed to have been enacted for the purpose of confirming that even if acts are considered to be the exercise of rights under the Copyright Act, if those acts are considered to deviate from or run counter to the purposes of the IP protection system considering their effect on orderly competition, those acts will no longer be regarded as acts considered the exercise of rights, and the AMA shall apply to them therefore, even if as argued by the defendant, the PlayStation software is considered a cinematographic work which is given additional distribution rights, and if the act of prohibiting the sale of second hand articles is within the scope of distribution rights, such act would still deviate from or run counter to the purpose of the IP protection system. Pachinko Machine Manufacturers case90 deals with patent pooling91 by ten manufacturers of pachinko machines, who collectively held the market share of 90 percent. With the passage of time, these enterprises held all relevant patents in the technology and formed a trade association of manufacturers having nineteen members, constituting almost all the producers and developers of pachinko machines in Japan, and owing the responsibility of managing the licenses for

FTC, August 1,2001, 612 KoseiTorihiki64, Sony Computer Entertainment Christopher Heath, pg 268, The Interface between Intellectual Property Rights and Competition Policy, edited by Steven D Anderman (Cambridge University Press 2007)
89

88

FTC, 20 June 1997, 4 Zeitschrift fur Japanisches Recht 148, Pachinko Slot Machine Patent pool means a consortium of at least two companies agreeing to cross-license patents and other IP rights relating to a particular technology.
91

90

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patent rights. The licensing policy obligated the members not to grant licenses to outsiders i.e. non-members of the association. When the majority of shares of one of the members were purchased by an outsider, the association refused the extension of the license. Further, the association also refused to grant license on behalf of an ex-member who had formed a joint venture with an outsider for joint production of pachinko machines. It was found that the policy adopted by the association severely crippled competition in manufacture of the machines and the activities of participants were regarded as private monopolization. Therefore, the Commission ordered the participants to abolish the patent policy of termination of license in case of takeover and the refusal to grant license. The most relevant example of bundling is the Microsoft case92 on bundling Word and Outlook with Excel. Microsoft was the leader in spreadsheets program Excel in 1994. However, in the field of word-processors and rescheduling management programs, Ichitaro of Just Systems and Organizer of Lotus were respectively more popular than the products of Microsoft (Word and Outlook). Thus, Microsoft started following the policy of bundling Word and Outlook with their Excel spreadsheet program. The PC manufacturers who pre-installed application programs in PCs wanted only Excel which they could not obtain without other bundled products. The FTC regarded the tying of licenses of Excel with Word and Outlook as an act of unfair trade practice. It held the licensing of a computer program to manufacturers of personal computers with an obligation to license also other programs of the same software maker with a significant market share constitutes an unfair trade practice and is unlawful. Some unreasonable obligations imposed by licensor in licensing agreements also whittle competition. For example - obliging the licensee to pay the licensing fee even after the expiration of IPR is absolutely unjust and anti-competitive. Similarly, imposing undue restrictions on the research and development
92

FTC, December 14, 1998 (1999) 30 IIC 478, Microsoft

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activities of the licensee, with regard to licensed technology is equally pernicious and would invite the wrath of competition authorities. A significant case involving unreasonable licensing conditions is that of Asahi Electrics93 in which the licensor disallowed for all times, the export of any products making use of licensed technology into Japan. Therefore, even after the expiration of the contract, the licensee - a Taiwanese company (Choshun Petrochemicals), could not export the licensed technology based products to Japan. This was perhaps an attempt to divide markets and thwart competition. Further, the Taiwanese

company itself added a similar clause to a contract for the sale of technical knowhow. The clause limited the export sales and was considered to be an undue limitation of licensees business and thus unenforceable. An interesting case depicting how IPR could be used as a tool to snub the entry of new competitors in the market is Hokkaido Shimbun94. Hokkaido Shimbun was the publisher of a newspaper distributed around the island of Hokkaido (the second largest island in Japan). Another publisher planned to launch a newspaper in the area of Hakodate. In order to prevent the new competitor from publishing the new newspaper, Hokkaido Shimbun asked various news agencies not to provide news to the new competitor and also asked the local companies not to place advertisements on the new newspaper. Concomitantly, Hokkaido Shimbun filed a lot of trademark applications for newspapers covering almost all conceivable trademarks that could be used by the new competitor for example Hakodate Shimbun. The conduct of Hokkaido Shimbun was described by the Commission as constituting an act of private monopolization. It ordered the withdrawal of all trademark applications filed by Hokkaido Shimbun in so far as they were associated with the area of Hakodate.

93 94

FTC, 20 September 1995, 42 KTIS FTC, February 28, 2000, available at http://www.aippi.org/reports/Vortrag_kondo.pdf last visited on July 7, 2008.

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The Interaction between IPRs and Competition Law in Australia

Unhindered competition and inexorable innovation are the driving forces for economic growth; and this is equally true for the medium sized economies like Australia, as it is for the economically more advanced countries. However, to achieve the twin objectives of competition and innovation; the careful balancing of two potentially divergent areas of law is a sine qua non. In its quest for maintaining this delicate balance between IPRs and Competition law, the Australian government constituted the Intellectual Property and Competition Law Review Committee (IPCRC). Under its terms of reference the Committee had to report on the various restrictions on competition that were contained in Australian Intellectual property legislation and to evaluate those restrictions from the perspective of costs and benefits to the community as a whole.95 This cost-benefit approach to competition policy issues has been entrenched by the Competition Principles Agreement of 1995, an intergovernmental agreement between federal, state and territory governments96. This agreement was itself the product of a nationally co-ordinated approach to competition policy that had been initiated by the Council of Australian Governments in 199197. The constitution of IPCRC bears testimony to the fact that there is a growing realization of the need to harmonize the pertinent tension between IPRs and Competition policy. The primary focus of this committee was on the exemptions to IPRs under S.51 (3) of the Trade Practices Act and the basis for granting compulsory licenses in Australia. An overhaul of these factors by the committee can be best understood by delving into those legal provisions under TPA, which are intertwined with IPRs and competition.

Peter Drahos, Imelda Maher, Innovation, Competition, standards and intellectual property: policy perspectives from economics and law, available at www.sciencedirect.com last visited on July 25, 2008 96 Ibid 97 Ibid

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The Law
For the efflorescence of a free and fair economic structure, the Australian Trade Practices Act of 1974 prohibits any unilateral or collusive conduct which obliterates competition in the market. Section 45 of the Act prohibits anticompetitive agreements. These agreements could be in the form of price fixing among competitors (S. 45 A) or collective boycott and collective licensing etc., which are per se illegal and are deemed to lessen competition substantially. Likewise the exclusionary provisions98 are also prohibited under the per se rule ingrained in S. 45 (45 (2) (a) (i)). Section 46(1) prohibits a firm with substantial market power99 from taking advantage of that market power for the purpose of (a) damaging one of its competitors; (b) preventing a person from entering a market; or (c) deterring someone from engaging in competitive conduct in a market. Section 47 strikes at anti-competitive vertical conduct while Section 48 deals with resale price maintenance which is also per se illegal. Section 50 of the TPA prohibits the acquisition of shares or assets from another entity where the effect is likely to be substantial lessening of competition. So the acquisition of any IP asset is exposed to the competition test, just like a merger through acquisition of shares. Authorization is available in case of an acquisition that is in the net public benefit regardless of its effect on competition100. It is important to note that Sections 88 and 90 of the Australian Trade Practice Act provide for administrative exemption of conduct, that although may lessen

For example - If competitors agree to restrict the persons to whom they will supply, perhaps only to supply the product to the collective licensing agent, their agreement is an exclusionary provision. 99 Market power has been explained as A firm possesses market power when it can behave persistently in a manner different from the behaviour that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions or the ability of a firm to raise the prices above supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product Frances Hanks, pg 331, The Interface between Intellectual Property Rights and Competition Policy, edited by Steven Anderman, (Cambridge University Press, 2007) 100 Ibid pg 334

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competition, would be likely to result in a net public benefit. The Australian test for authorization is not constrained by requirements that consumers are allowed a fair share in the resulting benefit or that competition not be eliminated. In Australia the chief public benefit that might justify anti-competitive conduct is simply the achievement of efficiency which encompasses allocative, productive and dynamic dimensions.101 Apart from the above provisions, the inherent tussle between IPRs and competition law is sought to be resolved with the aid of Section 51 which has been fraught with some limitations, to be discussed later. Under S.51 (1) (a), the exclusivity conferred by IPR, does not take precedence over competition law. If an IP owner engages in anti-competitive conduct such as refusal to license or creation of geographic territories for its licence, then he/she cannot take the plea of doing it under the statutory rights conferred by IP legislations. The conduct shall be subject to the overriding imperatives of fostering and sustaining competition in the market and the provisions of TPA will apply. Further, S. 51(3)102 exempts certain conduct (imposing of an IP licensing condition) from the application of several key prohibitions under Part IV of the

Ibid pg 319 Section 51(3) of TPA provides: A contravention of a provision of this Part other than section 46, 46A or 48 shall not be taken to have been committed by reason of: (a) the imposing of, or giving effect to, a condition of: (i) a licence granted by the proprietor, licensee or owner of a patent, of a registered design, of a copyright or of EL rights within the meaning of the Circuit Layouts Act 1989, or by a person who has applied for a patent or for the registration of a design; or (ii) an assignment of a patent, of a registered design, of a copyright or of such EL rights, or of the right to apply for a patent or for the registration of a design; to the extent that the condition relates to: (iii) the invention to which the patent or the application for a patent relates or articles made by the use of that invention; (iv) goods in respect of which the design is, or is proposed to be, registered and to which it is applied; (v) the work or other subject matter in which the copyright subsists; or (vi) the eligible layout in which the EL rights subsist; (b) the inclusion in a contract, arrangement or understanding, authorizing the use of a certification trademark of a provision in accordance with rules applicable under Part XI of the Trade Marks Act 1955, or the giving effect to such a provision; or
102

101

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TPA including S.45 (anti-competitive agreements), S.47 (anti-competitive exclusive dealing) and S.50 (anti-competitive acquisition of assets)103. However, the exemption under this provision does not apply to S.46 (misuse of market power) or S.48 (resale price maintenance). The wording of S.51 (3) does not spell out the particular relationship that must be present between the relevant underlying IP right and the condition imposed, but merely states that the condition must relate to the subject matter of the relevant IP right104. Justice Mason expounded the meaning of relates to test in the case of Transfield v. Arlo105, by stating that: S.51 (3) recognizes that a patentee is justly entitled to impose conditions on the granting of a license or assignment of a patent in order to protect the patentees legal monopolyS. 51(3) determines the scope of the restrictions the patentee may properly impose on the use of the patent. Conditions which seek to gain advantages collateral to the patent are not covered by S. 51(3). The collateral advantage test seems to be an attempt to strike a balance between the interests of IPR holders and competition law. When the conduct of the IP holder transcends beyond what is legitimately mandated by the IPR, so as to gain any commercial advantage beyond its scope, then the conduct shall not be protected by S.51(3). To exemplify, any conditions imposed to maintain the specific quality or standard of a licensed product is inextricably related to the IP protected product itself and therefore exempted under this provision. But a
(c) the inclusion in a contract, arrangement or understanding between: (i) the registered proprietor of a trademark other than a certification trademark; and (ii) a person registered as a registered user of that trademark under Part IX of the Trade Marks Act 1955 or a person authorized by the contract to use the trademark subject to his or her becoming registered as such a registered user; of a provision to the extent that it relates to the kinds, qualities or standards of goods bearing the mark that may be produced or supplied, or the giving effect to the provision to that extent.
103

Gilbert Tobin, Intellectual Property Rights and Competition Law, available at http://www.findlaw.com.au/article/2236.htm last visited on July 7, 2008
104 105

Ibid (1980) 144 CLR 83

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condition precluding the licensee from dealing in products that compete with the licensed product does not relate to the licensed IP. It rather appertains to the excluded product and therefore falls outside the scope of protection.106 Similarly, a condition that requires a licensee to acquire other goods or services from the licensor would seem to be a classic instance of seeking to gain an advantage that is collateral to the licensed IP107. The bundling of other products seem to leverage the power of the licensed IP beyond the scope of the property right. According to the Australian guidelines, the conditions related to bundling or tying are outside the protection of S. 51(3) because they do not relate to the licensed product. But it is not clear as to what happens when tying is a device for greater efficiency. For example a tie of materials to be used as inputs in the manufacture of a patented product might be explained as a means of maintaining quality in the licensed product, so that the licensors reputation is not damaged by the licensee108. When tying is used to protect the value of the IP or to get in the revenue that measures its value, the tying condition would survive Masons collateral advantage test. So section 51 (3) would shield tying in these circumstances from the full force of the competition provisions in the TPA.109 Besides the relates to conundrum, there are other criticisms put forth against the exemptions embedded in S.51 (3). Firstly, the exception does not apply to the prohibitions of misuse of market power under S. 46 and resale price maintenance under S. 48. Secondly, it is also pertinent to mention that other intellectual property rights such as know-how, confidential information and plant breeders rights fall outside the purview of this provision. Thirdly, applying only to the conditions in assignments or licenses, S 51(3) does not exempt the assignments in themselves and refusals to
See Frances Hanks, pg 322, The Interface between Intellectual Property Rights and Competition Policy, edited by Steven Anderman, (Cambridge University Press, 2007) 107 Ibid pg 323 108 Ibid 324 109 Ibid
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license or assign.110 Moreover it is also not clear as to what happens in case the licensor stipulates the minimum price at which the products that embody the IP may be sold. If price stipulation is deemed to relate to the licensed product then the same shall be protected within the ambit of exemption. In such cases it would be difficult to draw the line between legitimate prices and prices which may secure a collateral advantage for the licensor. Given the inherent anomalies, it was considered expedient to overhaul the provision and the IPCRC constituted by the government examined these provisions in greater detail to come out with its recommendations.

An Overview and Analysis of the Recommendations of IPCRC

The Intellectual Property and Competition Review Committee (Ergas Committee) was constituted to evolve a strategy to forge coherence between IPRs and Competition Law. The impact of IP law on competition was to be analyzed through the prism of intellectual property legislations appertaining to patents, copyright, trademarks, designs and circuit layout, so as to determine whether the IP system is sufficiently accustomed to meet the needs of consumer welfare, efficiency and unhindered competition. The IPCRC reviewed provisions related to compulsory licensing and S.51 of the Trade Practices Act, besides making some other recommendations on the interaction between IPRs and competition law. Compulsory licensing111 has been considered a potent tool for rectifying market failure since it mitigates the rigours of abuse of dominant position by arbitrary refusal to deal or license. The Australian Patents Act makes a

110

Ibid 321

Compulsory licenses are basically the abrogation of an IP right - an extra-ordinary legal instrument whereby the State allows itself or third party (typically the competitor) to have access to, produce, use or sell the IP protected product or process without the consent of the IP owner. Such mandatory and involuntary licenses as compelled by law may be granted with respect to patents, copyrighted works or other exclusive rights.

111

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provision for compulsory licensing under S.133 which is founded on the yardstick of public interest and failure to exploit the patent112. However, the IPCRC recommended that the criteria of public requirement should be replaced with the competition test in the market. Accordingly, compulsory licenses should only be granted if the following conditions are met113: Access to the patented invention is required for competition in the relevant market; There is public interest in enhanced competition in that market; Reasonable requirements for such access have not been met; The order will have the effect of allowing these reasonable requirements to be better met; and The order will not compromise the legitimate interests of the patent owner, including that owners right to share in the return society obtains from the owners invention, and to benefit from any successive invention, made within the patent term, that relies on the patent. The thrust of the above recommendation seems to be a concern for the legitimate interest of the patent holder. There is an overwhelming tilt towards IPRs and the basis for the grant of a compulsory license is that it should be indispensable for enhancing competition in the market. Further, the enhancement of competition should be material and substantial114. Though the recommendations of IPCRC with regard to compulsory licensing are in consonance with TRIPS mandate, nonetheless, adoption of the IPCRCs approach would result in more stringent conditions for the grant of a

According to Section 133 of the Patents Act, the Federal Court may grant compulsory license if it is satisfied that: (a) the reasonable requirements of the public in respect to the invention have not been satisfied, and (b) the patentee has given no satisfactory reason for failing to exploit the patent 113 See Frances Hanks, pg 316, The Interface between Intellectual Property Rights and Competition Policy, edited by Steven Anderman, (Cambridge University Press, 2007)
114

112

Ibid

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compulsory license in Australia than those currently in place in Canada, the United Kingdom and the United States115. Therefore the Government announced that the IPCRC based compulsory license provision shall not replace but complement the current provision. Moreover, the focus of the government has been on the rights of competitors. It was concerned that the IPCRC proposal may not cover situations where the non-working of an invention has some negative impact on the public interest, which is not dependant on the competition in the market116. Consequently, the competition test has been introduced as an additional test, while the public interest test firmly holds ground. One of the areas where the amendment may have an impact is where a large player takes advantage of its market power by refusing to license patent to one of its competitors, in order to keep that competitor out of a market. This conduct could amount to a misuse of market power. Therefore, the competitor may be able to apply for a compulsory licence under the new competition test, even though the patent holder is exploiting the patented invention and the reasonable requirements of the public are being met.117 As mentioned above the exemption contained in S. 51(3) is fraught with certain anomalies which these recommendations sought to rectify. In view of the committee, in order to maintain an appropriate balance between the needs of the IP system and the wider goals of competition policy, a careful re-framing of the section was required. The committee recommended the following changes Including amendments to S. 51 (3) to ensure that a contravention of Part IV of the TPA shall not be taken to have been committed by reason of the imposing of conditions in a license, or the inclusion of conditions in a contract, arrangement or understanding, or a refusal to license, that relate
115

See Richard Murphy, The long arm of competition law, available at http://www.minterellison.com/public/connect/Internet/Home/Legal+Insights/Newsletters/Previous+Newsle tters/A+-+D+The+long+arm+of+competition+law last visited on July 25, 2008 116 Ibid 117 Ibid

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to the subject matter of that intellectual property statute, so long as those conditions do not result, or are not likely to result, in a substantial lessening of competition. The intended change to apply to the refusal to license or refusal to contract by the IP owner as well. S. 51 (1) (a) (i) of the TPA to be amended to include all relevant IP statutes. Apart from the above mentioned changes in context of S. 51, the IPCRC also recommended that the ACCC provide guidelines on how it will enforce the provisions so as to provide sufficient guidance to IPR owners as to the types of behaviour likely to result in substantial lessening of competition. The committee believed that the approach it proposed will ensure the efficient development and use of IPRs and ensure that these rights are not exploited to extend market power beyond the scope of the right initially granted118. The policy rationale underlying the recommendations of IPCRC (Ergas Committee) was expressed in the following words: The committee recognizes that the IP legislation confers upon the intellectual property holder a series of exclusive privileges designed to promote innovation. Given that these rights are conferred by legislation, they should be able to be effectively exercised even when this involves (as it generally must) the exclusion of others. However, these rights should not be capable of being used to go beyond the market power those rights directly confer. That is, the right holder should not be allowed to extend the statutory right into a wider right of exclusion with the effect of substantially lessening competition119

The Governments Response

As mentioned above, with regard to the IPCRC recommendations on compulsory licensing, the government accepted the competition test as an additional test, while the public interest test firmly holds ground.
118 119

See note 17 Ibid

42

As regards the IPCRC recommendations on section 51, the government partly accepted the essential elements of the recommendations. The government now seeks to amend S. 51(3) so as to extend the exemption to cover IP rights under the Plant Breeders Rights Act 1994. However, the government does not intend to adopt the substantial lessening of competition test to all provisions of Part IV of the TPA. The fetters placed on the exercise of IPRs in the form of prohibition on misuse of market power (S.46) and resale price maintenance (S. 48) shall continue to operate. On the other hand IP licensing that would otherwise contravene the per se prohibitions under the TPA (price fixing, exclusionary provisions, third line forcing etc) will be subject to a substantial lessening of competition test. Further, the guidelines are to be issued by the ACCC120 to help clarify when IP licensing conditions might be exempted under S. 51(3), when IP licenses and assignments might breach Part IV of the TPA, and when conduct that is likely to breach Part IV might be authorized.

Judicial Precedents
One of the most fundamental tests applied in various cases involving competition issues is the taking advantage test. The premise of this test is that if an enterprise is dominant in the market or enjoys substantial market power, then its conduct shall be judged on the touchstone of the use of that market power. A firm uses its market power if it acts in a way which it could not afford, in a commercial sense, if it were operating in a competitive market.121 Perhaps, the essence lies in using the dominance or rather abusing the dominance (defined in terms of market power) in the market, so as to tilt the scales of any commercial advantage in favour of the firm exercising and enjoying such power. I see it as essentially a three step test, involving the following questions:

120 121

Australian Competition and Consumer Commission Ibid pg 331

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1. Whether the firm/enterprise enjoys substantial market power? 2. Whether it uses that power to its advantage? 3. Whether taking advantage of the market power evinces the purposes spelt out in S.46? An affirmative answer to the above questions portends that the conduct is violative of S.46 of the Trade Practices Act if it is aimed at achieving any of the proscribed purposes set forth in S.46(1). Such conduct could be in the form of refusal to deal or fixing high or discriminatory prices. When it comes to the conditions or restrictions in licensing arrangements, the conditions that merely carve up IP among various customer groups are cases of conditions that relate to IP and thus fall within the exemption of section 51(3). Such conditions would only contravene the Act if their imposition constitutes a misuse of market power under section 46. (Melway Publishing v Robert Hicks)

Market Power

Conduct of the Dominant firm

Taking Advantage

Damaging the Competitors

Preventing entry into the market

Deterring from engaging in competitive conduct 44

Queensland Wire Industries v. Broken Hill Pty Co Ltd122 is a case which is entwined with both refusal to deal and fixing high prices. Though, essentially it is concerned with a tangible property i.e. steel, nonetheless it gives us valuable insight into the legal reasoning with regard to treatment of property rights vis-vis its impact on competition. In the present case, instead of out rightly refusing to supply steel to Queensland Wire Industries, BHP asked for an unreasonably high price in lieu of the product. The court deemed it to be constructive refusal to deal and observed that a unilateral refusal to deal can be taking advantage of market power in contravention of S.46. Thus, the test is whether or not the defendant would have been likely to act in the same way if it had lacked market power if the answer is yes then this indicates that there has not been a taking advantage of market power.123 There seems to be an inherent bias towards fostering competition in the market, regardless of the owners right to exclude others from its property. An IP owner with substantial market power may be axed on every refusal to deal, on the misguided presumption of taking advantage even though the refusal is more a matter of expediency rather than calibrated choice. To escape such petulant frustrations, one may take the plea of having a practice of not licensing its products in which it is not dominant.124 It may also be able to articulate the business reasons that would lead it to self exploit regardless of its power. Maybe the success and reputation of the IP depends on services to be delivered on distribution, services which the owner believes it is best placed to provide, or which it would not entrust to others who do not share its interest in the propertys overall success. The possible explanations are legion. They will

(1989) 167 CLR 177 Gilbert Tobin, Intellectual Property Rights and Competition Law, available at http://www.findlaw.com.au/article/2236.htm last visited on July 7, 2008 124 See Frances Hanks, pg 332, The Interface between Intellectual Property Rights and Competition Policy, edited by Steven Anderman, (Cambridge University Press, 2007)
123

122

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succeed, by displacing the market power explanation, if the court is satisfied they are real.125 An interesting case related to tying and bundling is that of Universal Music Australia Pty Ltd v. ACCC126 - UMA (Universal Music Australia ltd) enjoyed a market share of only 20% but sought to foreclose competition from imports. The court held that even though it held only 20% of the market, its conduct of stopping competition from imports constituted substantial lessening of competition. The case involves a refusal by UMA to supply CDs to those Australian retailers who imported CDs at a lesser cost than supplied by UMA. These were the CDs which were already available with UMA, but were bought from outside Australia at lesser price. However, since the record stores could not source all their business offshore as some of the titles were available only with the Australian distributor, they sought them from UMA. The supply was refused on the reasoning that if u want any CDs from me, you must not get any that I can supply; from anyone else. This was seen as tying and was deemed to be

substantial lessening of competition in the market for sound recordings in Australia, since the products were highly differentiated and the introduction of price competition in Universal titles would have spilled over to competition between other record companies.

125 126

Ibid (2003) FCAFC 193 (decided on 22 August, 2003)

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Interplay between IPRs and Competition policy European Union Policy Imperatives
The European Community Competition policy is deeply entwined with the objective of attaining market integration and the approach of EU competition authorities has tilted in favour of free and fair play of market forces. Intellectual property rights on the other hand have not been as freely granted as in the United States. Concomitantly, the exercise of IPRs has also been subject to the scrutiny of competition authorities. The competition rules in EU have been influenced by two fundamental doctrines127: (a) competition rules apply not to the existence but to the exercise of IPRs (b) restraints upon competition are justified when they are reasonably necessary to safeguard the specific subject matter of an IPR. In practice however the European Court of Justice (ECJ) has not consistently based its reasoning upon the existence/exercise and specific subject matter doctrines, relying instead upon a standard economic analysis of the type used in non-IPR cases128. The substantial case law in EC on the interface between IPRs and competition policy shall enable us in understanding the essence of above observation. It is important to note at the same time that the EC commission has acknowledged that an important part of its policy for encouraging innovation in the EU is a harmonized system of IPRs that can be used effectively to protect new products and technology129. The policy tension between the need for strong IPRs and the desire for effective price competition and vibrant markets is exacerbated if one adopts the Schumpeterian view that there is a positive relationship
Revised report by UNCTAD secretariat on Competition policy and the exercise of Intellectual property rights available at www.unctad.org/en/docs//c2clp22r1.en.pdf last visited on July 25, 2008 128 Ibid 129 Duncan Curley Innovation, Intellectual Property and Competition a legal and policy perspective available at http://www.stockholm-network.org/downloads/publications/d41d8cd9-Experts%20series%20%20curley-formatted%20with%20cover.pdf last visited July 7, 2008
127

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between innovation and market power, i.e. the larger firms possessing IPRs are best placed to reinvest the monopoly profits that they have earned in risky R&D and as such they are the main drivers of technological and innovative progress in the society.130 It is in this context that the quest for evolving a coherent approach towards IPRs and competition policy is expedient and is well recognized by the EU competition authorities by formulating the R&D and IPR licensing block exemptions. Not only do these exemptions add flexibility to the EU approach, but also the EU treaty mirrors a similar approach. The European Commission has recognized that activities such as co-operation in the conduct of innovative research, technology transfer and the licensing of IPRs between firms can assist in development and exploitation of risky new technologies, thereby enabling more and better products to be brought to market and allowing greater consumer choice. Thus, even if agreements for the carrying out of R&D or the licensing of IPRs are caught by Article 81(1)131, these agreements often have procompetitive benefits. The pro-competitive effects can be taken account of by means of Article 81(3), which (if the conditions in Article 81(3) are met) cancels Article 81(1)132. We shall delve into the nuances of EU law in greater detail to understand the policy imperatives, their implications and their application.

Ibid Article 81 of the EC treaty prohibits joint conduct between undertakings which is anti-competitive in nature i.e. in the form of price fixing, controlling production, market sharing etc. 132 Ibid
131

130

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Outline of the main EU treaty competition provisions

The broad objectives of achieving a single European market for goods and services whilst maintaining free and fair competition are bolstered by the provisions of the EC treaty. The treaty strikes at unilateral and joint anticompetitive conduct and articles 81 and 82 list out the various activities which are deemed to have a pernicious impact on competition. While Article 81 regulates joint conduct, primarily cartels; Article 82 concerns itself with unilateral conduct of large firms with substantial market shares. It prohibits dominant undertakings from conducting themselves in a manner that constitutes an abuse of their market power and attenuates competition. The abuse of dominance could be in the form of coercive tying arrangements, price manipulations, refusal to deal or refusal to license etc. In any conduct involving abuse of dominance, it is pertinent for the European Commission to define the relevant market133 before analyzing the position of the undertaking in that market. If the undertaking is dominant in the market (which is usually determined on the basis of market share enjoyed by the particular enterprise), and concurrently abuses its position in the market to leverage the commercial advantages in its favour, then the conduct of such undertaking falls foul of the provisions under Article 82 of the treaty. The text of these two articles lists out the types of conduct which fall to tatters on the touchstone of competitiveness.

Article 81134

1. The following shall be prohibited as incompatible with the common market:

all agreements between undertakings, decisions by association of undertakings and concerted practices which may affect trade between Member States and

The relevant market is defined as a market constituting products goods or services which are regarded as substitutable by the consumers on the basis of their price, use and characteristics. 134 Article 81 of the EC treaty as available at http://ec.europa.eu/comm/competition/antitrust/overview_en.html last visited on July 7,2008

133

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which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. 2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void. 3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of: - any agreement or category of agreements between undertakings; - any decision or category of decisions by associations of undertakings; - any concerted practice or category of concerted practices; which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

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Article 82135 Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling or other unfair trading conditions; (b) limiting production, markets or technical development to the detriment of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

These two main provisions of the EC treaty which combat anti-competitive behaviour list out almost similar activities which are deemed to obliterate competition in the market. Under Article 81(2), it has been made amply clear that any conduct which falls foul of Art. 81(1) shall be automatically void. However, innocuous agreements which promote technical and economic progress, foster consumer welfare and efficiency as mentioned in Article 81(3), preclude the application of Art. 81(1) and 81(2). This is an important exception in favour technical co-operation among enterprises. On the other hand, Article 82 gives sufficient leeway to the Commission to scrutinize the conduct of a dominant enterprise with regard to its impact on competition in the relevant market. Conduct which imposes unfair purchasing or selling conditions, or limits the production in any way or involves coercive tying
135

Ibid

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or bundling by putting obligations on the parties to accept supplementary conditions which are not linked to the contracts as such, is violative of this provision. In the succeeding chapters we shall see how the Commission has interpreted this provision to deal with the dominant enterprises when they engage in monopolistic behavior. Most of the cases involve those enterprises which hold substantial market power, and at the same time enjoy the exclusivity conferred by intellectual property rights.

Carving out exemptions in favour of Innovation

Since promoting innovation is the paramount consideration in the contemporaneous knowledge based economies, it is essential that the law also keeps pace and accustoms itself with the shifting economic paradigms. Keeping in view the unquestionable need for research and development, the European Commission has issued block exemptions in favour of R&D and IPR licensing. If a contract complies with the terms set out in a block exemption, it is legal and enforceable and the detailed competition rules often do not need to be considered further. The block exemptions are therefore said to provide a safe harbour or a safety zone for certain contracts136. The R&D Block Exemption137 In the present scenario, innovation is considered to be the driving force behind economic growth. However, innovation not only requires human ingenuity, but also investment. This is especially true in case of pharmaceutical sector which invests huge amount of money and effort in R&D activities. Likewise, in any other sector, the risk of investing huge sums of money in R&D activities is weighed by the consequential revenues that the innovation may generate. IPRs are the answer to such innovative endeavours since exclusivity offered by IPR for

136 137

See note 130 Commission Regulation (EC) No. 2659/2000 available at http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32000R2659:EN:HTML last visited July 7,2008

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a limited period gives an opportunity to the investors to recoup the costs of investment. On the other hand, some firms or undertakings may not be able to carry out R&D activities on their own. They require additional material resources to bring about innovation and for this reason; they consider sharing the costs of R&D with other firms as a viable option. Coalescing for the purpose of R&D activities is considered to be pro-competitive rather than anti-competitive in nature. The R&D block exemption acknowledges that research and development agreements do not generally give rise to competition concerns because such cooperation often gives rise to new, technologically superior products thereby enhancing technical progress and overall consumer welfare138. Therefore, this exemption is in the form of carving out an exception in favour of R&D, which is the quintessence of growth in modern economies. However, there is a sufficient safeguard against misuse of this exemption in the form of a provision for blacklisting any contractual provision that restricts the freedom of one of the parties from carrying out its own research and development in an unconnected field139. The adoption of this block exemption mirrors the concern for ironing the creases in competition and IPR interface, since it advances the goal of achieving dynamic efficiency which is the basic premise for IPRs and competition alike.

The IPR licensing block exemption140 This exemption is also known as the Technology Transfer Block Exemption Regulation (TTBER). It portends that Art.81 (1) shall not apply to certain types of licensing arrangements, which are entered into by parties with smaller market shares. Article 2 exempts technology transfer agreements entered into between two undertakings permitting the production of contract products. They remain exempt

138 139

See note 130 Ibid 140 Commission Regulation (EC) No. 772/2004 available at http://eurlex.europa.eu/LexUriServ/site/en/oj/2004/l_123/l_12320040427en00110017.pdf. last visited on July 7,2008

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until the last qualifying IPR expires or the know-how ceases to be confidential141. Such an exemption allows the companies to benefit from the synergies arising out of their respective technological expertise. Licensing is also an effective way of disseminating technology, leading to innovation and ultimately new and better products for consumers142. In order for an agreement to come within the block exemptions safe harbour, the contracting parties market shares must be below certain percentage thresholds. Undertakings with more than a 30% individual share of a relevant product market or a relevant technology market are unable to take advantage of the block exemption. If two undertakings are competitors on either a relevant product market or a relevant technology market, their combined market share must be less than 20% in order to come within the block exemption143. Further, Art.4(1) contains a blacklist of hardcore restrictions that prevent the application of the exemption if the parties are competing undertakings, and Art.4(2) a list of restrictions if that prevent the application of the regulation if the parties are not competing. Article 5 lists provisions to which the exemption does not apply, although they are severable and do not prevent the regulation applying to other provisions.144

141

Valentine Korah, pg 46 Intellectual Property Rights and the EC Competition Rules, (Hart Publishing Oxford and Portland, Oregon 2006)

142 143

Note 130 Ibid 144 Note 142

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The Judicial Precedents

The competition policy under Article 82 of the EU Treaty has been used to restrict the abusive commercial conduct of individual owners of IPRs, particularly where the IPR protects a market standard or a de facto monopoly. This form of regulation has extended to excessive pricing, but has been more frequently focused on the IPR holders conduct towards innovators who are downstream of an IPR protected industrial standard including refusals to deal and refusals to license.145 Article 82 in the system of EC competition law regulates undertakings which have been found to occupy positions of dominant market power, such as monopolies or near monopolies. It not merely prohibits exploitative pricing or limitations of output, but also concerns itself with the use of market power to damage effective competition in markets by preventing access to markets or driving out existing competition. It has been interpreted to prohibit anti-competitive or exclusionary abuses such as refusal to supply without justification.146 In essence, this provision of EU Treaty has been the conduit pipe for implementing compulsory licensing, which can be understood by perforating through a series of important cases. The first such case is AB Volvo v Erik Veng147 Volvo held the design right in the UK over front wings for cars. Veng imported panels into UK from Italy and Denmark where they had been manufactured without Volvos consent. Volvo alleged infringement of its UK registered designs. Vengs defense was that Volvos refusal to grant license was an abuse of dominant position when Veng was willing to pay a reasonable royalty for license. The question before ECJ was whether refusal to grant license by Volvo was an abuse of dominant position? The ECJ said:

Steven D. Anderman and Hedvig Schmidt, pg 39 The Interface between Intellectual Property Rights & Competition Policy (Cambridge University Press, 2007). 146 ibid 147 Case C-238/87 [1988] ECR 6211, [1989] 4 CMLR 122

145

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An obligation imposed upon the proprietor of protected design to grant to third parties, even in return for a reasonable royalty, a license for the supply of products incorporating the design would lead to the proprietor thereof being deprived of the substance of his exclusive right, and that a refusal to grant such a license cannot itself constitute an abuse of a dominant position. Outlining the circumstances, under which refusal to license may be deemed to constitute abuse of dominance, the court said that Article 82 may be attracted if an undertaking holding a dominant position involves in abusive conduct such as arbitrary refusal to supply spare parts to the independent repairers, the fixing of prices for spare parts at an unfair level, or a decision no longer to produce spare parts for a particular model even though many cars of that model are still in circulation Therefore, the significance of this case lies in determining the boundaries of compulsory licensing. It is pertinent that merely a refusal to grant license may not be anti-competitive in nature. Such refusal should be arbitrary, so as to compel involuntary compulsory licensing, in order to mitigate the rigours of abusive conduct. In the landmark case of Magill148, broader and more flexible approach was adopted Magill, a Dublin company, was the compiler of a comprehensive weekly television guide combining the listings of three television companies broadcasting in the UK and Ireland. Since these listings were protected by copyright, Magill inevitably required a license, the grant of which was refused by these companies. The ECJ affirmed the grant of compulsory license by the Commission, on grounds of Article 82, and held that copyright itself did not justify a refusal to license in the exceptional circumstances, where there was a consumer demand for the new product, where the TV companies had a de facto monopoly over the listings by virtue of their scheduling of TV programs, where a
148

Joined cases C-241/91P and C-242/91P RTE, and ITP v. Commission (1995) ECR I-743.

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license of the listings was an indispensable input for the comprehensive TV guide and where they were not themselves supplying the product to the consumers. A more recent case is that of IMS Health v. NDC Health149 IMS was the largest supplier of sales data and other information on pharmaceutical services to pharmacies in Germany using a brick like structure, which divided Germany into 1860 areas or bricks, corresponding to a particular geographical area. This structure became the market standard for delivery of such pharmaceutical information and was protected by copyright. NDC developed a similar structure, deriving from IMS and the German court prohibited NDC from using any structure derived from IMS. On a referral from the German court, the ECJ emphatically reiterated that all the criteria of the exceptional circumstances, as stated in Magill, must be fulfilled in order for a compulsory license to be granted. In the absence of such exceptional circumstances, the IP owner has the exclusive right of reproduction, and a refusal to grant license even by a dominant undertaking, cannot, of itself, constitute an abuse of Article 82. The court reasserted that the three cumulative criteria must be met for a refusal to be regarded as abusive: The undertaking which requested the license must intend to offer new products or services not offered by the owner of copyright and for which there is a potential consumer demand. The refusal cannot be objectively justified The refusal must be such as to exclude competition on a secondary market. In this case it was for the national court to determine whether the brick structure constituted an indispensable factor in the downstream supply of regional pharmaceutical sales data.
149

Case C-418/01, IMS Health GmbH & Co. v. NDC Health GmbH & Co. KG (2002).

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The above cases reflect, to an extent that the American doctrine of essential facility has been the conduit to enforce compulsory licensing, albeit in a different form. A significant and recent case involving the interaction between IPRs and competition is - The Microsoft case150 - The Commission found that Microsoft was overwhelmingly dominant on the market for operating systems for client personal computers (client PCs). Not only did it supply over 90% of them, its dominance was protected by high entry barriers: the ability to leverage from existing products; indirect network effects; and learning or switching costs. The Commission alleged inter alia that Microsoft had extended its dominant position (quasi monopoly) over operating systems for client PCs for many years, to the adjacent markets in operating systems for servers. The Commission decided that withholding the information necessary to design competing programmes for work group servers compatible with the Windows was an abuse and risked eliminating competition from the server market, stifling innovation and reducing consumers choice by locking them in. The Commission decided that this foreclosed competitors from designing work group servers fully compatible with Windows. The Commission found several circumstances that in combination made the circumstances special: Microsofts refusal to supply the complainant, Sun Microsystems, was part of broader conduct of not supplying vendors of work group servers with information necessary to achieve interoperability. The Commission added that Microsofts conduct created a significant risk of eliminating competition in the supply of work group servers and harming consumers. The Commission also objected to Microsoft tying its media player to the operating system for PCs, but this does not relate to whether competition law should trump IPRs.

[2004] 4 CMLR 1231, Valentine Korah The interface between intellectual property rights and competition in developed countries, available at http://www.law.ed.ac.uk/ahrc/SCRIPT-ed/vol2-4/korah.asp last visited on July 22, 2008

150

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However, given the Commissions approach with regard to evolving exemptions appertaining to R&D and licensing and the overwhelming policy objective of fostering innovation in the European Community, it can be concluded that EC competition laws accept that the achievement of an economic monopoly by means of investment, R&D and intellectual property rights is a legitimate course of conduct for a firm, a form of competition on the merits. EC competition law also in most cases gives recognition to the right of IPR owners to prevent copying even if the exercise of this right denies access to markets to competitors. Further EC competition law acknowledges that the pricing of IPRs, even by dominant firms, must include a return which adequately reflects the reward/incentive function of IPRs.151

Steven Anderman pg 38, The Interface between Intellectual Property Rights and Competition Policy, (Cambridge University Press 2007)

151

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Conclusion The lessons for India- A developing country perspective

The imperatives of unfettered competition and innovation are indispensable for attaining sustained economic growth. As we have already seen, the balancing of competition with innovation is an extremely difficult task since there is an apparent tension between the tenets of IP law and Competition policy. While IP law aims at providing protection to the creators and innovators of intellectual work, by conferring exclusivity upon them; competition policy strikes at the exclusivity which hampers free and fair trade. This tension between IPRs and competition policy is sought to be resolved by the competition authorities in major jurisdictions such as US and EU. The law in these countries developed and matured over the years to accommodate the interests of both innovation and competition. However, competition law and policy is in its nascent stage in most of the developing countries and the interface between IP law and competition policy poses a conundrum to these nations. There is also a realization among these countries that innovation is the key for efflorescing of the economy. Therefore the primary concern is the procompetitive treatment and exercise of IPRs. The Indian economy is bustling with a lot of energy and exuberance especially after the dawn economic reforms in 1991. The focus on liberalization, globalization and privatization made it expedient for us to concentrate on the aspects of competition and innovation equally. Therefore, after 1991, law also kept pace with the shifting economic paradigms as was reflected by the amendments brought about in the MRTP Act. To face the newer challenges posed by a vibrant economy like ours, it was vital for us to evolve new strategies of growth while cherishing the ideals of economic democratization manifested in the constitution of India. The Competition Commission of India was established with the aim of fostering competition, preventing practices having an adverse

60

effect on competition, protecting consumers interests and ensuring freedom of trade by various participants in the economy. At the same time, India also tailored and accustomed its IP laws to be in tandem with the TRIPS agreement. One can easily infer that equal thrust on innovation and competition is a matter economic expediency for India. However, the tussle between IPRs and competition cannot be resolved unless a clear cut policy approach is laid out. The Competition Act 2003 explicitly carves out exceptions in favour of the exercise of intellectual property rights. Section 3(5) of the Act contains the following provision: Nothing contained in this section shall restrict (i) the right of any person to restrain any infringement of, or to impose reasonable conditions, as may be necessary for protecting any of his rights which have been or may be conferred upon him under (a) the Copyright Act, 1957 (b) the Patents Act, 1970 (c) the Trade and Merchandise Marks Act, 1958 or the Trade Marks Act, 1999 (d) the Geographic Indications of Goods (Registration and Protection) Act, 1999 (e) the Designs Act,2000 (f) the Semi-conductor Integrated Circuits Layout-Design Act, 2000 (ii) the right of any person to export goods from India to the extent to which the agreement relates exclusively to the production, supply, distribution or control of goods or provision of services for such export.

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Section 3 of the Indian Competition Act prohibits anti-competitive agreements between enterprises and lists out the conduct which is deemed to have a deleterious impact on competition. Such conduct includes determining purchase or sale prices, limiting production or supply, allocating geographic markets or product market, bid rigging or collusive bidding etc. However, the exception as created by clause (5) of the section reflects the policy of striking a balance between the legitimate interests of IPR holders and competition in the market. The advanced countries and major trading blocs like US and EU have taken recourse to tools such as compulsory licensing in order to mitigate the impending perils of abusive conduct of dominant enterprises. The applicability of such a provision in India cannot be precluded since the Indian Patent Act makes an explicit provision for compulsory licensing. This would be more relevant in the realm of pharmaceuticals where competition in the generic drugs may be foreclosed by dominant undertakings. Compulsory licences can be used, both in the context of IPRs and of competition laws, to remedy anti-competitive practices. Article 31(k) of the TRIPS Agreement, explicitly provides for the granting of such licences in the case of patents152. It is pertinent to mention that the power to enact laws on compulsory patent licensing arises from several international agreements such as the World Intellectual Property Organization (WIPO) Paris Convention for the Protection of Industrial Property153, the relevant provisions of which were incorporated into the World Trade Organization

Carlos M. Correa Intellectual property and Competition law exploring some issues of relevance to developing countries, available at http://www.iprsonline.org/resources/docs/corea_Oct07.pdf last visited on July 25, 2008 153 Paris Convention, Article 5, states that [e]ach country of the Union shall have the right to take legislative measures providing for the grant of compulsory licenses to prevent the abuses which might result from the exercise of the exclusive rights conferred by the patent, for example, failure to work.

152

62

(WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)154. TRIPS provides a leeway to the Member States to smoothen the creases created by potential conflict between competition policy and IP law. Articles 8, 31 and 40155 deserve a special mention. Members may adopt measures necessary to protect public health and nutrition and to promote the public interest in sectors of vital importance to their socio-economic and technological development.156 Further, TRIPS handles compulsory licenses as an exception to the agreement's minimum requirement that all Member States afford a patentee a right of exclusivity during the complete patent term. TRIPS portends a set of circumstances that establish a floor at which any Member State is allowed to issue compulsory license. The compulsory licenses that are allowed fall into two categorieswhere there is an overriding public interest or where the patent rights are being used in an anticompetitive manner.157

Compulsory Licensing in the United States, China, Japan, Germany & India Article by Raj S. Dav, Jon Wood, Susan K. Finston, Zhongyi Tao, Zheng Zha and others
http://www.ipo.org/AM/CM/ContentDisplay.cfm?ContentFileID=6484&FusePreview=Yes
155

154

The following part of Article 40 is relevant for our purpose 1. Members agree that some licensing practices or conditions pertaining to intellectual property rights which restrain competition may have adverse effects on trade and may impede the transfer and dissemination of technology. 2. Nothing in this Agreement shall prevent Members from specifying in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market. As provided above, a Member may adopt, consistently with the other provisions of this Agreement, appropriate measures to prevent or control such practices, which may include for example exclusive grantback conditions, conditions preventing challenges to validity and coercive package licensing, in the light of the relevant laws and regulations of that Member. Available at http://www.wto.org/english/tratop_e/trips_e/t_agm3d_e.htm#8 last visited July 29, 2008

156 157

Article 8 of TRIPS Article Compulsory Licensing under TRIPS by Christopher A. Cotropia http://www.cotropia.com/bio/Chapter26--Cotropia--PatentLawHandbook.pdf

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In the realm of national laws, following are the examples that specify when Compulsory licenses can be issued158: Refusal to enter into a voluntary licensing agreement on reasonable commercial terms (e.g. in the German and Chinese patent laws); Public interest (e.g. in the Swedish law); Public health and nutrition (e.g. provisions in the French law ) National emergency or situation of extreme urgency; Anti-competitive practices on the part of patent holders Dependent patents; No or insufficient working of the invention in the national territory. Thus, it is evident that compulsory licensing can potentially combat some of the most pernicious circumstances including anti-competitive practices. For our purpose such activities as having a dampening effect on competition are the main focus of attention. India can undoubtedly tailor its laws to suit the peculiar requirements. The Competition Commission of India may use the potent tool of compulsory licensing to countervail the harmful effect of IPRs on competition. This approach must be subject to the TRIPS provisions which entail that the compulsory license should be issued on individual merits and the IPR holder must be appropriately remunerated etc. 159Therefore India can
158

www.kommers.se/.../Rapport%20The%20WTO%20decision%20on%20compulsory%20licensing

Article 31of TRIPS lays out conditions to be met for compulsory licensing Other Use Without Authorization of the Right Holder Where the law of a Member allows for other use of the subject matter of a patent without the authorization of the right holder, including use by the government or third parties authorized by the government, the following provisions shall be respected: (a) authorization of such use shall be considered on its individual merits; (b) such use may only be permitted if, prior to such use, the proposed user has made efforts to obtain authorization from the right holder on reasonable commercial terms and conditions and that such efforts have not been successful within a reasonable period of time. This requirement may be waived by a Member in the case of a national emergency or other circumstances of extreme urgency or in cases of public noncommercial use. In situations of national emergency or other circumstances of extreme urgency, the right holder shall, nevertheless, be notified as soon as reasonably practicable. In the case of public noncommercial use, where the government or contractor, without making a patent search, knows or has demonstrable grounds to know that a valid patent is or will be used by or for the government, the right holder shall be informed promptly;

159

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fully use the flexibilities allowed by the TRIPS Agreement to determine the grounds for granting compulsory licences to remedy anti-competitive practices relating to IPRs160. Further, the doctrine of essential facilities can be made use in India to combat abusive conduct of dominant enterprises. Developing countries (like India) may draw interesting lessons from the application of the concept of refusal to deal and the essential facilities doctrine in developed countries. However, there are no rigid models and developing countries can elaborate their own approaches on the matter in order to respond to their public

(c) the scope and duration of such use shall be limited to the purpose for which it was authorized, and in the case of semi-conductor technology shall only be for public non-commercial use or to remedy a practice determined after judicial or administrative process to be anti-competitive; (d) such use shall be non-exclusive; (e) such use shall be non-assignable, except with that part of the enterprise or goodwill which enjoys such use; (f) any such use shall be authorized predominantly for the supply of the domestic market of the Member authorizing such use; (g) authorization for such use shall be liable, subject to adequate protection of the legitimate interests of the persons so authorized, to be terminated if and when the circumstances which led to it cease to exist and are unlikely to recur. The competent authority shall have the authority to review, upon motivated request, the continued existence of these circumstances; (h) the right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization; (i) the legal validity of any decision relating to the authorization of such use shall be subject to judicial review or other independent review by a distinct higher authority in that Member; (j) any decision relating to the remuneration provided in respect of such use shall be subject to judicial review or other independent review by a distinct higher authority in that Member; (k) Members are not obliged to apply the conditions set forth in subparagraphs (b) and (f) where such use is permitted to remedy a practice determined after judicial or administrative process to be anti-competitive. The need to correct anti-competitive practices may be taken into account in determining the amount of remuneration in such cases. Competent authorities shall have the authority to refuse termination of authorization if and when the conditions which led to such authorization are likely to recur; (l) where such use is authorized to permit the exploitation of a patent (the second patent) which cannot be exploited without infringing another patent (the first patent), the following additional conditions shall apply: (i) the invention claimed in the second patent shall involve an important technical advance of considerable economic significance in relation to the invention claimed in the first patent; (ii) the owner of the first patent shall be entitled to a cross-licence on reasonable terms to use the invention claimed in the second patent; and (iii) the use authorized in respect of the first patent shall be non-assignable except with the assignment of the second patent. Available at http://www.wto.org/english/tratop_e/trips_e/t_agm3d_e.htm#8 last visited July 29, 2008

160

Note 154

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interests161. In countries like US and EU the essential facilities doctrine has been used as a potent tool for granting of compulsory licences so as to allow third parties to have access to IP protected products and technologies. The plethora of case law that has developed in this area throws light on some of the conditions and circumstances under which the doctrine of essential facilities is applied to IPRs. The most frequently enunciated pre-requisites are - refusal to deal without any objective justification; exclusion of competition in secondary market by denying access to essential facilities which are deemed to be industry standards and are indispensable for producing new goods for which there is consumer demand; extending and perpetuating monopoly in other markets in ways different from normal development of monopoly power (example unlawful tying). Under the India law, these could fall within the ambit of Section 4. The Competition Act, 2002 (S.4) prohibits the abuse of dominance by enterprises. Section 4(2) (c) articulates that abuse of dominant position consists in indulging in practice(s) resulting in denial of market access. Further, section 4(2) (e) expatiates that such abuse could also be in the form of using the dominant position in one relevant market to enter into, or protect, other relevant market. These provisions are very much in line with the principles adopted by EU and US courts in cases involving refusal to deal and essential facilities. However, India can evolve its own principles with regard to application of essential facilities doctrine without dampening the growth of innovation and enterprise. The specific area of concern could be the pharmaceutical industry and the refusal to grant third parties access to essential technology (such as to manufacture a medicine) may provide sufficient grounds.162 From the developing countries perspective, it is important to note that South African Competition Commission
161 162

held

that pharmaceuticals

firms

(GlaxoSmithKline

and

See note 154 Ibid

66

Boehringer Ingelheim) were indulging in anti-competitive conduct by abusing their dominant positions in their respective anti-retroviral (ARV) markets, by denying a competitor access to an essential facility163. An inherent proclivity can be felt in terms of similar conditions prevailing in developing countries. Therefore, considering the expediencies in these countries, pharmaceutical products may well be treated as essential facilities. Likewise, developing countries like India could also adopt the EU approach wherein the law casts a general duty upon dominant firms to supply the essential facilities to competitors (unlike US). In some cases, even if the facilities are not essential the denial of access by a dominant firm is nonetheless scrutinized from the perspective of abusive conduct, considering its impact on competitors in secondary market. The essence lies in adopting the rule of reason approach with regard to cases involving refusal to deal, which would lend flexibility to the application of essential doctrine. Pertinently, in India, S.4 (2) (e) of the Competition Act is the vanguard for preventing abusive conduct by IP owners and ushering competition in secondary markets. Apart from the above measures, it is indeed essential to maintain the level of granting patents in the context of novelty, non-obviousness and industrial applicability. The American practise of granting patents very liberally has ignited a profound debate as it has been contended by critics that frivolous and low quality patents end up creating monopoly in products or processes which are obvious. Thus, India can draw timely lessons from US in context of granting patents to only genuine inventions by strictly implementing the patentability criterion. In the end, I would like to point out that a set of guidelines for the application of competition laws to intellectual property rights are an indispensable requirement for maintaining an efficacious balance between IPRs and
163

Ibid

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competition policy. The guidelines may be in the form of broad policy objectives or they may be intricately detailed. The most suitable approach would be to synthesise the best features available in various jurisdictions in order to cater to the Indian requirements. Any other gaps may be filled by a case to case approach applying the rule of reason. At this point I would like to summarize some of the well accepted principles in various jurisdictions 1. The US approach as also adopted in Canada is that of treating IPRs at par with other property rights. This seems to be a viable option for India as well since it lends simplicity to the application of competition laws. 2. Most of the jurisdictions recognize that the existence of IPRs does not necessarily confer market power. This is a rational presumption and may be adopted by the Competition Commission of India in dealing with cases involving intellectual property rights. The legitimate interests of IPR holders must be taken into account since unbridled exercise of power by the competition authorities may thwart innovation. 3. The premise of IP guidelines could be that competition and IPRs are not at loggerheads. Rather they complement each other in encouraging innovation, efficiency and consumer welfare. Such an approach echoes the Schumpeterian view on competition on merits and would augur well for dynamic efficiency. 4. The guidelines could list out the anti-competitive conduct of IP owners under a per se category. This would enable the holders of IPRs to exercise their rights in a manner which is congruent with competition policy. If the conduct which is per se illegal and anti-competitive is listed out by the Commission in its guidelines, it may lead to reduction in the number of cases falling foul of the competition laws.

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5. The

exemption

in

favour

of

agreements

in

research

and

development, on lines of EU exemption may go a long way in encouraging innovation whilst maintaining healthy competition in the market. 6. The definition of market could be bifurcated into markets for goods, services and technology or innovation. This would reduce the complexity and enable the Commission to address situations in which IP is used to charge excessive prices for or prevent access to protected technologies. 7. Lastly, the impact of IPRs on the market substantially varies depending upon the legal and socio-economic contexts in which they apply. Thus, the static-dynamic efficiency rationale applicable to a developed country does not necessarily hold in low income countries. High levels of IPR protection may have significant negative distributive consequences in the latter without contributing or even impeding their technological development. As a result, competition authorities may legitimately give static efficiency precedence over dynamic efficiency considerations and challenge, for instance, situations of excessive pricing emerging from the exercise of IPRs164. Therefore, in case of India also it is necessary for to identify as to whether static efficiency precedes dynamic efficiency or vice versa. In my view, it may be analysed and dealt with on a case to case basis. For example in case of competition in the pharmaceutical sector, both static and dynamic efficiency would matter. Static efficiency matters as the prices of essential drugs must not be manipulated by those having monopoly rights so as to reap unprecedented profits at the cost of public welfare. Thus, the scales may tilt in favour of competition policy. On the other hand, dynamic efficiency is equally relevant so as
164

Note 154

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to encourage innovation in this sector and in such cases the tilt would be towards protection of exclusivity of IPRs so that there remains sufficient incentive to invest in R&D. The challenge in the end is to strike a balance.

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BIBLIOGRAPHY 1. Allan Gutterman, Innovation and Competition Policy (Kluwer Law International, 1997) 2. H. McQueen, Charlotte Waelde, Graeme Laurie, Contemporary Intellectual Property Law & Policy (Oxford University Press, 2007). 3. Steven D Anderman, The Interface between Intellectual Property Rights and Competition Policy (Cambridge University Press 2007) 4. Valentine Korah, Intellectual Property Rights and the EC Competition Rules (Hart Publishing Oxford and Portland, Oregon 2006) 5. www.usdoj.com 6. www.unctad.org 7. www.cotropia.com 8. www.kommers.se 9. www.whitecase.com 10. www.strategis.ic.gc.ca 11. www.laws.justice.gc.ca 12. www.competitionbureau.gc.ca 13. www.wto.org 14. www.aippi.org 15. www.sciencedirect.com 16. www.findlaw.com.au 17. www.minterellison.com 18. www.stockholm-network.org 19. www.ec.europa.eu 20. www.eur-lex.europa.eu 21. www.law.ed.ac.uk 22. www.iprsonline.org 23. www.ipo.org

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