COMPETITION LAW

RECONCILING COMPETITION AND INTELLECTUAL PROPERTY LAW – THE ROLE OF COMPETITION LAW IN

REGULATING INTELLECTUAL PROPERTY RIGHTS

Submitted to Submitted by: Mr Shouvik Chatterjee Bal Krishna Tripathi - 357Faculty, Law Kunal Gokhale - 366National Law University Rahul Bhandari – 374

Sameer S. Raichur- 381

INTRODUCTION

Competition policy and intellectual property rights (IPRs) have evolved

historically as two separate systems of law. Each has its own legislative goals and each its

own methods of achieving those goals. There is a considerable overlap in the goals of the

two systems of law because both are aimed at promoting innovation and economic

growth.1 Yet there are also potential conflicts owing to the means used by each system to

promote those goals. IP laws generally offer a right of exclusive use and exploitation to

provide a reward to the innovator, to provide an incentive to other innovators and to bring

into the public domain innovative information that might otherwise remain trade secrets.

Competition authorities regulate near monopolies, mergers and commercial agreements

with the aim of maintaining effective competition in markets. This regulation

occasionally results in limits being placed on the free exercise of the exclusive rights

granted by IP laws.2

In recent decades, competition authorities and courts have prohibited conduct by

intellectual property owners which was otherwise lawful under intellectual property

rights legislation, because it contravened the rules of competition law. This has occurred

in four main spheres of activity of IP owners. First, cases have been brought by the

competition authorities in the USA, the EU and Japan to place limits on the

anticompetitive commercial conduct of individual owners of IPRs where they protect a

market standard or de facto monopoly.3 The competition issue presented in these cases

has generally been the IP owner’s exclusionary conduct towards innovators and potential

competitors on markets which are secondary to and dependent upon an IPR protected

industrial standard or de facto monopoly. The anticompetitive conduct has tended to take

the form of a ‘refusal to deal’, ‘refusal to license’, ‘refusal to provide proprietorial

software interface codes’, or a ‘tie-in’ or illegal ‘bundling’, but the act is prohibited

1 http://www.angelfire.com/folk/jerry/mydocu/IPRComp.htm2 http://www.springerlink.com/content/v56003865388l37r/3 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=594522

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because it is viewed as an attempt to ‘lever’ the IP reinforced market power in the

‘primary’ market into exclusionary conduct in the secondary market. Secondly, the

competition authorities in the USA, the EU and Japan have created a detailed framework

of regulation for certain terms of bilateral IPR licensing agreements, whether by means of

official guidelines or legislation. Thirdly, the practices of collecting societies, R&D

agreements and patent and technology pools have raised the issue of the appropriate

treatment of cooperation between competitors in IP related fields under the competition

rules. Finally, in the field of mergers and acquisitions, the owners of intellectual property

rights have found that competition authorities have intervened on occasion to limit IPR

owners from acquiring competing technologies4 as well as to require compulsory licences

of IPRs to third parties as a condition of merger approval.

As modern commercial practices involving the use of intellectual property rights

have encountered these forms of ‘second tier’ regulation by competition authorities,

concerns have been raised about the nature of the accommodation between the two

systems of law. First, to what extent and on what basis do the competition authorities and

the courts have authority to limit the exercise of intellectual property rights in these

ways? If IPRs are granted by laws which have their own elaborate system of checks and

balances, why is it necessary for competition law to add a second layer of legal regulation

to the exercise of IPRs? It appears as if the competition authorities in a number of

jurisdictions take the view that their role is a form of public law regulation while the

exercise of an IPR is essentially the exercise of a private property right. Certainly, in the

USA and the EU, the competition authorities have at times described IPRs as ‘essentially

comparable’ to any other form of private property for the purposes of the competition

rules.5 To what extent do legislation and judicial decisions support the competition

authorities in that view?

Secondly, despite the use of this description, when competition law is actually

applied to the exercise of IPRs, in these same jurisdictions, concessions are often

consciously made within the competition rules to the unique nature of intellectual

property rights: to their legislative and, in the USA,6 their constitutional basis as well as

4 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52004DC0293:EN:NOT5 http://www.usdoj.gov/atr/public/speeches/9848.htm6 http://www.law.northwestern.edu/journals/njtip/v7/n2/njtipv7n2.pdf

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to their contributory role in the process of innovation. Indeed, the compatibility between

the aims of the two systems tends to ensure that the normal exercise of the prerogatives of

intellectual property rights is consistent with the competition rules. The competition rules

applied to IPRs, either explicitly or implicitly, almost inevitably acknowledge a form of

‘comity’ between the two systems of law. Yet, the forms of comity developed within the

competition rules in different legal system have tended to differ from system to system.

A third issue raised by the emergence of an extra layer of regulation of IPRs by

the competition authorities is to what extent could and should the various IPR laws

themselves, the patent, copyright, and design rights laws be reformed in order to reduce

the extent of the ‘external’ regulatory role now played by competition law.7 To what

extent does the experience of interface cases suggest that the IP laws can enhance the

nature and degree of comity by embarking upon a process of ‘internal’ reform? Some

issues of reform that have been considered are: (i) the optimum width and duration of

patent and copyright protection; (ii) the issue whether industrial copyright laws should

provide for compulsory licensing where innovation is improperly obstructed by IP

owners along lines similar to patents; (iii) the extent to which industrial copyright such as

software programs and databases should be subject to interoperability obligations under

IP law; and (iv) the extent to which IP laws can and should acknowledge when the IPR

itself creates a monopoly and place limits on the scope of the IP protection. 8 Underlying

these enquiries is perhaps the largest policy issue of all: what is the most appropriate

relationship between competition policy and IPRs in a growing industrial economy?

If we look at the major legal systems with extensive experience of the coexistence

of the two fields of law, the EU, the USA and Japan, we can see considerable variation in

their chosen forms of accommodation. The major legal systems have generally accepted

that there are cases where the market maintenance concerns of competition law can

prevail over the exercise of IPRs associated with substantial market power. However, the

nature of this accommodation varies considerably with each system; both in terms of

method and where the line is drawn.9 Moreover, the experience of these countries makes

it plain that the true extent of variation cannot be appreciated by a cursory examination. 7http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1339992_code110134.pdf?abstractid=1339346&mirid=18 http://www.againstmonopoly.org/index.php?chunk=&limit=\9 http://www.oecd.org/dataoecd/44/28/41165822.pdf.

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To see it clearly and accurately requires a look in some depth. For example, in Japan, at

first sight its competition law gives an extensive legislative immunity to intellectual

property rights; the Japanese Antimonopoly Act exempts intellectual property rights from

the scope of its application. Yet, on closer examination, the provision has not been

interpreted as an overall exemption to all exercises of intellectual property rights but can

be limited in cases of private monopolisation or undue restraint of trade

In the EU and US, in contrast, there are no explicit legislative immunities in the

competition rules of Articles 81 and 82 of the European Treaty or Sections 1 and 2 of the

Sherman Act. Instead, the general competition rules in both legal systems have been

given judicial and administrative interpretations that result in their application to the

exercise of IPRs in extreme cases. Both systems have created wide general norms of

competition law which if not modified can apply to limit the exercise of IPRs. Yet, on

closer examination, the application of the general competition rules in the US and the EU

has resulted in the evolution of judicial and administrative doctrines which apply special

rules and even self-denying ordinances acknowledging to a considerable extent the sui

generis nature of IPRs, their constitutional foundations in the USA and their legislative

foundations in the EU.10 Sometimes these forms of comity are given expression in special

rules explicitly designated for IPRs. One example is offered by the ‘exceptional

circumstances’ test devised by the European Court of Justice when applying Article 82 to

an issue of abusive refusal to licence by an IP owner. More often, there are powerful

partial immunities or safe havens built into the logic of the general competition rules

when they are applied to the acts of the conduct of the IP owner. Often this is the logical

outcome of the two systems of law pursuing similar aims. For example, both US and EU

competition law make it clear that if a company grows by internal investment in R&D

and IPRs to a position of significant market power that is perfectly lawful under the

competition rules. Moreover, if the owners of IPRs wish to charge high prices for their

successful products protected by IPRs, the risks of investment ex ante will be respected

by the competition rules in each legal system albeit in different ways. The normal

exercise of IPRs is by judicial doctrine viewed as lawful under the competition rules but

10 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1398845

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each system has its own line where the exercise of an intellectual property right is not

viewed as normal under the competition rules.11

OBJECTIVE In this paper, the researchers will make an attempt to study the interaction between

intellectual property rights and competition law by focusing on the manner in which the

former is restricted and regulated in light of the latter. For this purpose, the researchers

will rely primarily on a study of the EC competition law and US Antitrust law. The

creation of a common market arching over separate domestic jurisdictions of individual

member states in the EC is distinct from the US legal regime that deals with a single

jurisdiction, and so, the two will be dealt with separately. In relation to the EC

competition law, the researchers will focus on the application of Articles 81 and 82 in

matters of intellectual property and the manner in which the municipal courts and the

European Court of Justice (ECJ) have interpreted the provisions to restrict certain

practices of IP rights holders as anti-competitive. The researchers will deal with the issue

of licensing agreements as an integral aspect of intellectual property rights and the

manner in which such agreements have been analysed by the courts and the tests

developed to indicate the validity of the same. Also, the researchers will look at the

development and use of the ‘essential facilities’ doctrine in relation to intellectual

property, especially in relation to the concept of ‘abuse of dominant power’ as contained

in Article 82. While studying the US legal regime, reliance will be placed on the Sherman

Act, § 1 and 2 that prohibit contracts in unreasonable restraint of trade or acts of

monopolization where either the interstate or foreign commerce of the US is involved.

The researchers will also briefly deal with § 337 of the Tariff Act of 1930 in view of its

relevance to competition in intellectual property and the 1995 guidelines12 as providing a

basis for the interface between intellectual property rights and antitrust laws. In

conclusion, the researchers will look at the provisions of the Monopolies and Restrictive

11 http://www.clasf.org/CompLRev/Issues/Vol1Issue2Article1.pdf.12 The 1995 Antitrust Guidelines for the Licensing of Intellectual Property, issued by the US Department of Justice and Federal Trade Commission, stresses on the fact that for the purpose of antitrust analysis, intellectual property should be regarded as essentially comparable to any other form of property. See Elhavge, E. & Geradin, D., Global Competition Law & Economics, Hart Publishing, 2007, pp –201.

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Trade Practices Act, 1969 and the Competition Act, 2002 that are relevant to the

regulation of intellectual property rights and the manner in which the principles and

theories developed in the EC and US jurisdiction may be applied in the Indian legal

regime.

COMPATIBILITY BETWEEN THE TWO SYSTEMS OF LEGAL REGULATION

Even without a legislative immunity for IPRs, the case law interpreting the competition

legislation in the countries studied demonstrates that the competition rules create certain

self-denying ordinances to ensure that there is an extensive reconciliation between the

two systems of legal regulation. This is entirely to be expected since, within each legal

system, the different means used by intellectual property rights legislation and

competition law operate in many ways in conjunction rather than in conflict with each

other. IP laws, such as patent and copyright laws, confer an exclusive right to exploit an

invention or creation commercially for a limited period as an incentive to creation and

innovation. These rights are essentially ‘negative’ rights; they prevent copying of the

protected innovations.13 They do not ensure profitability but if the IPR is combined with a

successful product, the legal exclusivity provides a stimulus to innovation by acting both

as a reward to the inventor/creator and as an incentive to innovation more generally. In

the case of patents, without the protection of exclusivity, firms may choose to keep their

innovative ideas secret as opposed to disclosing them in their patent claims. This stimulus

to the spread of information is also a stimulus to innovation resulting in new products and

processes entering existing markets and creating new markets. In these ways, intellectual

property rights can actually enhance the forces of competition.

Moreover, each IP law, as well as competition policy, strikes its own balance between

protecting early innovators and protecting the claims of ‘follow on’ innovators. IP laws,

such as patent and copyright laws, strike an ‘internal balance’ between the rewards for

13 http://www.iprcommission.org/papers/word/govt_response/govt_response.doc.

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‘the improvements on earlier invention by later innovators’, and the rewards to ‘early

innovators … for the technological foundation they provide to later innovators’.14

As Merges and Nelson have pointed out: ‘Ultimately it is important to bear in mind that

every potential inventor is also a potential infringer. Thus a strengthening of property

rights will not always increase incentives to invent; it may do so for some pioneers, but it

will also greatly increase an improver’s chances of becoming enmeshed in litigation.’15

In copyright, the idea/expression dichotomy operates to ensure that copyright contributes

to common knowledge while protecting the originator or creator from copying the

expression of his or her work. In other words, IP laws usually attempt to strike a balance

between providing sufficient incentives to innovation by the creator/inventor and

avoiding the protection of any single innovation operating as a disincentive to cumulative

‘follow on’ innovation.

At the same time, the basic doctrines of modern competition law work in conjunction

with IP laws by acknowledging their positive role in the process of innovation in at least

five major respects. 16

First and foremost, both the US and the EU 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’.

Secondly, and relatedly, both EU competition law and US antitrust law

acknowledge that the pricing of IPRs, even by dominant firms, must include a

return which adequately reflects the reward/incentive function of IPRs as well as

the ex ante investment risks of their owners.

Thirdly, the competition laws in both systems in most cases give recognition to

the right of IPR owners to prevent copying even if the exercise of this right denies

access to markets to competitors.

14 http://www.essex.ac.uk/economics/discussion-papers/papers-text/dp581.pdf.15 http://www.iprcommission.org/papers/word/final_report/chapter6wordfinal.doc.16 http://www.iprcommission.org/papers/text/conferences/day_2.txt

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Fourthly, the competition laws in both systems no longer automatically assume

that the legal monopoly conferred by IP laws, such as patent and copyright

legislation, automatically amounts to an economic monopoly or even confers

market power. That issue is left to be established empirically.

Finally, in their analysis of IP licensing agreements both systems of competition

policy work with the presumption that the licensing of IPRs is in general pro-

competitive in its effects.

Nevertheless, modern competition policy, does act in reserve to prevent the excesses of

private property owners in order to maintain effective competition on, and access to,

markets,17 operating as a ‘second tier’ of regulation of intellectual property rights.

It is also worth noting that the Agreement on Trade Related Intellectual Property Rights

(TRIPS) spells out at various points that there is a role for competition policy to

supplement the intellectual property rights policy of the Treaty. In formal terms, it does

not require such laws. It permits them. For example, Article 8 (2) TRIPS states that

‘Appropriate measures, provided they are consistent with the provisions of this

Agreement, may be needed to prevent the abuse of intellectual property rights by right

holders …’ Article 8 also makes it clear that in principle Member States may enact

legislation to prevent practices by the right holder that adversely affect the international

transfer of technology. Moreover, in Article 40, the TRIPS agreement specifies the types

of licensing practices or conditions relating to intellectual property rights which restrain

competition and impede the transfer and dissemination of technology including exclusive

grant-back conditions, coercive package licensing and clauses preventing challenges to

the validity of the IPR. Nevertheless, as this note and the following studies will show, it

is wise not to have a system of IPR legislation which is unaccompanied by a system of

competition law.18

17 http://www.oecd.org/dataoecd/9/22/43067294.pdf.18 http://www.patentoffice.nic.in/research_studies/mohanty_report_oct_mar_2008.pdf.

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INTELLECTUAL PROPERTY LAW AND COMPETITION LAW – EU PERSPECTIVE With regards to the European Union, the interface between IP law and

competition law is best understood by a study of the provisions of the EC Treaty that seek

to restrict the rights conferred upon an IP holder, in the interests of free trade and fair

competition in the market. There are essentially three such categories of provisions: (a)

Article 81 of the EC Treaty that is applicable to anti-competitive agreements, (b) Article

82 of the Treaty that deals with the issue of abuse of dominant position, and (c)

provisions relating to the free movement of goods with the common market of the EU.

ARTICLE 81 – ANTI-COMPETITIVE AGREEMENTS

Article 81 of the EC Treaty seeks to prohibit ‘anti-competitive agreements’ and in

the context of IP law, this refers to licensing or assignment agreements that fall within the

criteria specified by the provision.19 It is interesting to note that the concept of licensing

and assignment are quite different in IP law. While the former refers only to an

agreement for the transfer of certain interests arising out of the rights held by the IP

owner, the latter is an agreement for the transfer of such rights in entirety. Therefore, in a

licensing agreement the IP owner retains his rights and transfers only the interests, while

19 Article 81 of the Treaty states: “1. The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and 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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in assignment the right itself is transferred. However, this distinction is of no importance

in competition law, since both licensing and assignment agreements are treated in a

similar manner and are subject to the same tests as laid down in article 81.

Licensing agreements usually contain certain standard provisions and clauses that

relate to the manner and extent to which rights (or interests) are being transferred by the

IP holder to the licensee. These clauses would address the issue of (a) territoriality, i.e.,

the territories in which the licensee can exercise his right under the agreement, (b)

exclusivity, granting the licensee exclusive rights (even against the IP holder) to exploit

the intellectual property in question, (c) quantum of royalty to be paid to the IP holder,

(d) non-competition clause, (e) no-challenge clause, etc. Previously, the Commission

would more often than not, allow the various terms of IP licensing agreements and would

rarely deem any such provision to be invalid or ‘anti-competitive’ since it was believed

that the IP licensing agreement was essentially an extension of the exclusive rights of the

IP holder and thus, valid in law.20 However, the landmark case of Consten and Grundig v.

Commission21, marked a perceptible change as the assignment of trademark and an

exclusive distribution agreement between a German producer and a French distributor,

that was sought to be relied upon by the distributor to block imports from Germany into

France, was held to be invalid as per Article 81 and not within the scope of protection in

Article 81.3.22

One of the most important cases on the issue of applicability of Article 81 to IP licensing

agreements, is LC Nungesser KG and Kurt Eisele v. Commission23 (popularly known as

the ‘Maize Seed Case’). This case dealt with the grant of an exclusive license to

commercially exploit a modified variety of maize seed. The licensee, Eisele, was a

German resident and he sought to enforce his right in the German Courts to block parallel

imports. The ECJ in this case, created a unique distinction between ‘open’ and ‘closed’ 20 In the 1960s, the Commission had stated that certain limiting terms in IP licensing agreements would nonetheless be valid and not fall within Article 81 of the Treaty. This view was articulated in the so-called ‘Christmas Notice’. See Colston C., Middleton K., Modern Intellectual Property Law, Routledge Cavendish, 2005, pp –85 available at http://books.google.co.in/books?id=4yyNCkV6MvAC.21 [1966] 1 CMLR 41822 In this case, Grundig, a German manufacturer of electrical goods appointed Consten as its exclusive distributor in France and also assigned the GINT trademark to Consten to support its exclusivity in France. The ECJ, agreeing with the Commission, held that the assignment was distortive of competition as it conferred absolute territorial protection upon the distributor enabling it to prevent parallel imports in the Community. See note 8. 23 [1983] 1 CMLR 278.

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licenses. Closed licenses were defined by the courts as the agreements that not only grant

exclusive marketing rights to the licensee but also seek to restrict third parties, by

prohibiting them from distributing the product in that territory. Therefore, closed licenses

according to the court were violative of Article 81. Open licenses however, only confer

rights upon the licensee and do not restrict third party rights, and are therefore, allowed

by the law.24 The researchers would like to point out that the understanding of ‘closed’

and ‘open’ licenses as presented by the ECJ in this case is flawed in as much that an

exclusive license would necessarily be a closed license as it would always restrict third

parties from exploiting the product in the territory in which licensee is granted exclusive

rights. Thus, the application of this principle would mean that an exclusive license would

always be in violation of Article 81. However, the Commission and the ECJ have

subsequently applied this principle in a number of cases as they move towards a more

restrictive reading of IP licensing terms in light of competition law requirements. In the

case of Velcro SA v. Aplix SA25, it was held that if the licensing agreements relates to a

technology that is not novel, then even an open license would not be valid. Also, in Tetra

Pak v. Commission26 the court ruled that the Maize Seed doctrine would not be applicable

when a dominant undertaking takes over an important technology. Thus, a greater stress

on competition meant that there was a resultant stifling of the freedom of IPR protection.

While these cases focused primarily on the restrictive territoriality clauses in the

IP licensing agreements, the landmark case of Windsurfing International v.

Commission27, brought attention to the fact that even non-territorial restraints in the

licensing agreement may be held to be invalid and anti-competitive. In this case, a US

company that developed windsurfing equipment had given granted a number of licenses

in relation to its patents in Germany. The Commission while deliberating upon the scope

of the patent claim, held that various restrictive clauses in the licensing agreement such as

the requirement to fit the rigs only to the boards approved by the licensor, not sell the rigs

24 See Furse, M., Competition Law of the EC & UK, 6th Edition, Oxford University Press, 2008, pp – 439, 440.25 [1989] 4 CMLR 15726 [1990] ECR II-30927 [1986] 3 CMLR 489

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individually but sell them as part of the entire equipment, not challenge the validity of the

IP licensed, were violative of Article 81 of the Treaty.28

It is important to note that there have been exceptions created for certain classes

of agreements in the EU, such as, Technology Transfer Agreements. There exist specific

regulations that deal with such agreements and the general provisions of Article 81 do not

apply in respect of these agreements. One such regulation is the Block Exemption

Regulation 772/2004 that creates exceptions for agreements relating to transfer of

technology. The reason for creating these special regulations was identified in the

regulation itself, as necessary to improve economic efficiency and be pre-competitive.29

By virtue of Article 4 of the Regulation, the licensor may make restrictions in the

agreement based on the type of use of the product and also impose territorial restrictions

to a certain extent. Thus, these clauses, which would otherwise be invalid, are granted

validity by the regulation. However, in instances where the regulation does not apply, the

general provisions of the Treaty would prevail.

It is also important to note that different forms of Intellectual Property often merit

different degrees of protection in terns of the validity of licensing agreements with regard

to competition law. In the Campari decision30, the Commission distinguished between the

application of Article 81 to licensing agreements for trademarks and patents by stating:

“Although a non-competitive clause in a licensing agreement concerning industrial

property rights, based on the result of a creative activity would constitute a barrier to

technical and economic progress, this is not the case with the licensing agreements being

considered here (i.e., trademark licensing agreements).” 31 Further, in the Coditel Case32,

it was held that absolute territorial protection in cases of licensing of performances would

not be a violation of Article 81, since the subject matter of a performance right is the right

to profit from it each time it is shown.

28 See Furse, M., Competition Law of the EC & UK, 6th Edition, Oxford University Press, 2008, pp – 439, 440.29 See Recital (5) of the Regulation.30 (1978) OJ L70/6931 See Furse, M., Competition Law of the EC & UK, 6th Edition, Oxford University Press, 2008, pp – 441.32 [1981] 2 CMLR 362

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ARTICLE 82 – ABUSE OF DOMINANT POSITION

As has been stated earlier, competition law does not seek to prohibit any

undertaking from attaining a dominant position but rather aims at preventing any abuse of

such dominant position.33 There are primarily five ingredients to Article 82 of the EC

Treaty: (a) there must be abuse of some form, (b) by one or more undertaking, (c) in a

dominant position, (d) within the common market or a substantial part of it, (e) the abuse

must actually or potentially affect trade between the member states. Article 82 lists

certain examples of what may constitute an abuse, and although ‘refusal to deal’ does not

feature within the examples, it has been held in a number of cases such as the

Commercial Solvents Corp. v. Commission34 and United Brands v. Commission35, that

refusal to deal falls within the scope of article 82.36 Refusal to deal may either be a

refusal to supply in cases of actual physical property or refusal to license, in cases of

intellectual property. In this paper, the researchers will focus on the latter aspect of

refusal to deal.

The observations of the Commission in relation to the application of Article 82 can be

best illustrated by a study of the case series dealing with the same. Through the course of

these cases the Commission has tried to lay down certain guidelines to establish

circumstances when a refusal to license would amount to an abuse under article 82. First

in the line of cases, are the Volvo Case37 and the Renault Case38. Both these cases dealt

with essentially the same fact situation, where Volvo and Renault had design rights on

certain car body panels, and refused to license the same to independent repairers. The

33 Article 82 states: “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 prices or other unfair trading conditions;(b) limiting production, markets or technical development to the prejudice 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.”34 [1974] ECR 22335 [1978] ECR 20736 See “Abuse of Dominant Position & IPR”, Estelle Derclaye in Competition, Regulation & the New Economy, ed. Cosmo Graham, Fiona Smith, Hart Publications, Oxford, 2004, pp- 56-5737 AB Volvo v. Erik Weng (UK) Ltd. [1988] ECR 621138 [1988] ECR 6039

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court referred to the case of Parke Davis v. Probel39, to state that mere exercise of an IP

right would not under normal circumstances constitute and abuse under article 82. Thus,

there would have to be present certain exceptional circumstances when the exercise of the

right would amount to an abuse.40 Next came the case of Magill41. In this case, the

individual radio and television broadcasters had copyright over their own program

schedules and refused to license the same to Magill, who wanted to publish a

comprehensive weekly guide, spanning all broadcasting stations. The Commission for the

first time identified certain conditions when a refusal to license would become an abuse;

(a) when there is prevention of the appearance of a new product which the IPR holder did

not offer and for which there was potential consumer demand, (b) the refusal is not

justified, and (c) the IPR holder reserves for himself a secondary market. On the basis of

these tests, the Commission went on to conclude that the refusal to license the broadcast

listings was indeed an abuse under article 82. Subsequently, in Ladbroke42 when the

French societies that held copyright over pictures of horse races, refused to license them

to a Belgian Bookmaker, for rebroadcast, the Court elaborated upon the Magill test but

came to a different result. This case sowed the seeds for the introduction of the “Essential

Facilities Doctrine” as it stated that refusal to license would lead to an abuse when such

refusal was in relation to a product or service for which there was no actual or potential

substitute. Later in the case of Oscar Bronner v. Mediaprint43, the Commission held that

the refusal to supply distribution services was not an abuse on the basis of a tripartite test,

namely, (a) the refusal to supply must lead to the elimination of all competition in the

market, (b) the refusal cannot be objectively justified, (c) the service is such that there

exists not actual or potential substitute for the same. Thus, the essential facilities doctrine

was adopted more wholly in this instance. The next case flowing directly from the

Bronner test is IMS Health Inc. v. Commission44. In this case, IMS Health (“IMS”)

39 [1968] ECR 5540 In this case, the court did not specify the nature of such exceptional circumstances but gave certain examples of the same, such as, refusal to supply spare parts to repairers, fixing prices of spare parts at unreasonably high levels. The refusal to license design rights was not deemed to be an abuse under article 82. 41 RTE and Independent Television Productions v. Commission cases C 241 and 242/91P [1995] 4 CMLR 41842 Tierce Ladbroke v. Commission [1997] ECR II-92343 [1998] ECR 779144 [2002] 4 CMLR 2

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provided services of data collection pertaining to pharmaceutical sales and prescriptions.

In pursuance of its business, it created an “1860 brick structure,” which segmented

Germany into sales blocks. The purpose of the brick structure was to partition zones or

bricks that divide Germany into the maximum number of geographical units that permit

data collection without the ability to match the data to a specific pharmacy, as this would

contravene German data protection rules. The 1860 brick structure soon developed into a

de facto industry standard and came to be widely used by German pharmaceutical

companies to analyze sales trends, measure market shares, and gauge the performance of

sales representatives. IMS claimed copyright over its brick structure and successfully

brought actions before German courts against competitors using the structure. During the

course of these national proceedings, one competitor, NDC Health (“NDC”), complained

to the Commission and alleged that IMS’s refusal to license the brick structure amounted

to an abuse under Article 82. The Commission applied the three-step test that had been

laid down in the Bronner judgment and found in favor of NDC and imposed a

compulsory license on IMS. On appeal however, the Court of First Instance, overruled

the decision of the Commission. The CFI held that the only other case where compulsory

license had been issued was the Magill case and in the opinion of the CFI, the facts of the

IMS case were different from that of Magill and so the compulsory license should not be

granted. Thus, the court sought to establish that the standard of “exceptional

circumstances” to constitute abuse was very high and should remain so.

Finally, one of the most recent cases dealing with the issue at hand is the case of

Microsoft Corporations v. Commission45. Here, the issue was Microsoft’s refusal to

provide certain codes necessary for ‘interoperability information’ to its competitors, who

claimed that the withholding of such codes by Microsoft amounted to excluding

competitors in the market for developing server systems compatible with Microsoft

operating systems. The Commission overrode objections raised by Microsoft and ruled

that such codes should be made available to other players. Indeed, the court also argued

that the disclosure of ‘protocols and not source codes’ would not infringe any IP rights of

Microsoft and any financial damage that they suffered would not be of much significance

in view of their market strength. Thus, while the series of cases discussed above seek to

45 [2005] 4 CMLR 18

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stress on the importance of protecting the rights of the IP holder, by maintaining a high

threshold of ‘exceptional circumstances’ when exercise of such rights would be an abuse

under article 82; this case, in certain respects is a step in a backward direction as it seeks

to curb IP holder rights to a greater extent than is necessary.

INTELLECTUAL PROPERTY LAW AND ANTITRUST – US PERSPECTIVE The fundamental premise of US Antitrust laws is present in § 1 and 2 of the

Sherman Act. § 1 seeks to prohibit “every contract, combination or conspiracy in restraint

of trade” and § 2 is aimed at the “prohibition of monopolies or attempt at monopolies.”

As has already been discussed in this paper, the grant of IP rights does not necessarily

translate into a monopoly and so § 2 of the Sherman Act would not be violated by the

exercise of such rights by the IP holder under normal circumstances. Such rights would

also include the right to license the IPR.

As early as 1926, in the case United States v. General Electric46, the US Supreme

Court upheld the right of the IP owner to license his rights and even recognized the

validity of certain restrictive clauses in the licensing agreement. In this case, General

Electric had patent over the making, using and vending of modern electric bulbs using

tungsten filaments and had licensed the right of making such bulbs to certain licensees.

However, in the licensing agreement GE had sought to enforce provisions for limiting the

sale and price of the bulbs by the licensees. The court justified the agreement on the

grounds that the patentee has a right to make a profit from his invention and could thus

lawfully restrict the sales of the licensees in order to himself, sell the products at a greater

profit. Therefore, in this case the court opted for a very broad view of the IP right in its

relation to antitrust practices.47

However, subsequently, the opinion of the court started changing, as it did in the

EC; primarily in relation to restrictive licensing agreements and patent pooling

agreements. The courts started functioning on the premise that because the policy of free

and open competition embodied in the Sherman Act is a powerful one, once the owner

decides to transfer a part of his rights to the property, may of the antitrust rules applicable

46 272 US 476 (1926)47 See Elhavge, E. & Geradin, D., Global Competition Law & Economics, Hart Publishing, 2007, pp –193, 194.

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to other agreements will come into play.48 In United States v. New Wrinkle49, the court

ruled against price-fixing mechanisms in patent pooling agreements. Here, two

manufacturers of ‘wrinkle’ finish enamels combined to form a new entity (New Wrinkle)

and assigned several patents to the new entity. The agreement also specified the

minimum prices at which the products would be sold. The court held the agreement to be

in violation of the Sherman Act both in purpose and in result. Previously in the case of

United States v. Line Material50, the court had struck down a cross-licensing agreement

between two firms for granting each other royalty free licenses, but which sought to fix

the resale price of the products sold to the other licensees. Differentiating the case from

the GE decision, the court had held that while cross-licensing agreements were not per se

invalid, the inclusion of the price fixing provision rendered it unlawful. Thus, the court

came to the conclusion that while the GE decision remains valid it does not apply to

situations where a group of patentees act in concert to fix the price to their advantage.51

Through the 1970s the US courts and agencies followed a strict position of

disallowing restrictive licensing agreements, categorizing them as anticompetitive in

design and effect. The policy led to the formulation of the “nine no-no’s” of patent

licensing, which were the nine types of restrictions that would normally be challenged as

per se violative of the Sherman Act. However, with time this position changed as it

became apparent that the purposes of antitrust law and intellectual property law, were

indeed, consistent. In 1995, the Department of Justice and the Federal Trade Commission

jointly issued the Antitrust Guidelines for the Licensing of Intellectual Property

(commonly known as “IP Guidelines”) that dealt with the antitrust aspects of IP licensing

agreements. These guidelines reflect the position of the law in the US and have been used

in number of instances to resolves disputes in this issue.

Preliminarily, these guidelines state that the Department will approve the

delineation of relevant market and the measurement of market share in the intellectual

48 See Joelson, M., An International Antitrust Primer, 3rd Edition, Kluwer International Law, 2006, pp –182.49 342 US 371 (1952)50 333 US 287 (1948). Also see United States v. United States Gypsum Co. 333 US 364 (1948). In this case, the court invalidated a licensing agreement in which the defendant had incorporated price fixing restrictions. 51 See Hovenkamp H., etc, IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law, Aspen Publishers Online available at http://books.google.co.in/books?id=camWcufG5z4C

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property area in the same way that it treats such questions under Section 1 of the 1992

Horizontal Merger Guidelines. When complicating factors preclude the delineation of

a relevant market in which the licensed technology competes, the Department may

focus its attention on effects in the associated goods markets both downstream and

upstream. The guidelines also define the horizontal and vertical aspect of licenses

involving intellectual property. A licensing arrangement has a horizontal component

if it involves the acquisition of rights to technologies that are economic substitutes for

the technologies that the licensee owns or controls. When a licensing arrangement

affects the activities that are in a complementary relationship, the license arrangement

has a vertical component. Some examples given by the guidelines for a vertical

relationship are when the licensee and licensor stand in a buyer-seller relationship or

operate at different levels of the chain of production and distribution. According to

the guidelines, there are three types of licensing arrangements that may raise antitrust

concerns and therefore might be viewed as restraints on competition. They include

the restriction on collateral or competing goods or technologies, contractual

provisions that penalize licensees for dealing with suppliers of substitute

technologies, and acquisitions of intellectual property that lessen competition in a

relevant antitrust market. The guidelines delineate three views that the Department

will take when analyzing a licensing restraint. In addition to the time tested per se and

rule of reason analyses, the Department has created a “Safety Zone”. Among the

restraints that have been held per se unlawful are naked price-fixing, output restraints,

and market division among horizontal competitors, as well as, certain group boycotts

and resale price maintenance. If there is no “efficiency-producing integration of

economic activity” and the restraint is one that is usually scrutinized with per se

treatment, the Department will challenge the restraint under the per se rule.

Otherwise, licensing arrangements will be afforded the “rule of reason” analysis.

Under the “rule of reason” analysis, the Department states that it will first inquire as

to whether the restraint has an anti-competitive effect and, if so, whether the restraint

is reasonably necessary to achieve pro-competitive benefits that outweigh those anti-

competitive effects. The guidelines also create a “safety zone” stating that the

Department will not challenge a restraint in a licensing agreement if (a) the restraint

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is not of a type that normally warrants condemnation under the per se rule and (b) the

licensor and its licensees collectively account for no more than 20% of each relevant

market affected by the restraint.52

CONCLUSION In India, there exists barely any jurisprudence on the relationship between

competition and IP law. § 15 of the MRTP Act 1969 that talks about the restriction of the

application of orders made under the Act, excludes patents from its scope but does not

specify about other IPRs. § 3 (5) of the Competition Act 2002 grants the power to impose

reasonable conditions for protecting the rights of the IP holder. However, there have been

no case laws in India that have sought to apply, explain or indeed, expand the scope of

these minimalist provisions. It would appear therefore, that in the event of a dispute the

courts would have to rely on the principles developed in the EC and US jurisprudence.

BIBLIOGRAPHY

52 See Elhavge, E. & Geradin, D., Global Competition Law & Economics, Hart Publishing, 2007, pp –200-203. Also see http://library.findlaw.com/1999/Aug/1/128019.html

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Furse, M., Competition Law of the EC & UK, 6th Edition, Oxford University Press, 2008

Whish, R., Competition Law, 6th Edition, Oxford University Press, 2008.

Joelson, M., An International Antitrust Primer, 3rd Edition, Kluwer International Law, 2006

Elhavge, E. & Geradin, D., Global Competition Law & Economics, Hart Publishing, 2007

“Abuse of Dominant Position & IPR”, Estelle Derclaye in Competition, Regulation & the New Economy, ed. Cosmo Graham, Fiona Smith, Hart Publications, Oxford, 2004

Colston C., Middleton K., Modern Intellectual Property Law, Routledge Cavendish, 2005 available at http://books.google.co.in/books?id=4yyNCkV6MvAC.

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