Intellectual Property Rights and Competition

OVERVIEW
Intellectual Property Rights and Competition
Introduction
There is an inevitable tension between the creation of exclusive IPRs and competition policy, which
promotes competitive markets in order to create efficiencies for the benefit of consumer welfare.
Competition law is sceptical towards firms with market power, which can be bolstered by IPRs.
This is reflected in both UK and European law
Competition law provides one significant limit to the market power an IPR can bestow – it can
constrain the commercial strategies and behaviour of firms with market power whether or not IPRs
exist
Competition law is able to constrain the manner in which the right owners exercise their intellectual
property right relying on the existence/exercise dichotomy
Theory of Competition
Competition law seeks to regulate the behaviour of firms in the market place, competition between
firms will benefit consumers because firms will:
➢ Be unable to charge artificially high prices;
➢ Continuously innovate to create new goods;
➢ Make available those products necessary to meet consumer demand.
Stimulating innovation
‘Society must provide sufficient rewards to incentivise entrepreneurs to innovate’
This can be done by returning their investment in time and resources as well as allowing for some
profit.
The rewards must compensate the entrepreneur for investment in failed ideas because not every
creation will be commercially successful
Innovation – the development of new ideas, methods and products carry some risk of failure and the
reward must be sufficiently high to retain the incentive in spite of the risk.
What level of reward is sufficiently high and when does a reward in the form of exclusive rights start
to negatively affect prospects for future innovation?
IPRs provide rights owners with their reward – a period of proprietary exclusivity which imposes
legal barriers around the creation, protecting it and preventing competitors from taking, adopting or
adapting it
Central to the concept of proprietary exclusivity is the ability to control the use of the creation and
exploit it; i.e the ability to derive profit from it
In some circumstances the right owner may enjoy a position of significant market power as a result
of the creation, or as a result of entering into an agreement with other firms in the market.
Lawfully acquired market power is unproblematic in itself but competition law imposes an onus on
those with SMP to only act in a way that is objectively justifiable for commercial reasons
Those with SMP can continue to compete on the basis of normal commercial practice, e.g product
development, meeting consumer demand, quality and price but competition law prevents other
international or negligent activities which may force competitors from the market or exploit
consumers.
EU an UK Competition Law Framework
In the EU and the UK competition law is most commonly enforced by the respective competition
authorities, but sectoral regulators in the UK (Office of Communication – Ofcom and Ofgem) also
have powers to enforce UK
In the EU competition law it is enforced by the European Commission and by a designated national
competition authority (NCA) of any Member State
UK competition law is primarily administered by the Office of Fair Trading (OFT) and the UK
Competition Commission (CC) which appeals against their decisions being heard by the Competition
Appeal Tribunal in the first instance
Responsibilities of the CMA
In situations where competition could be unfair or consumer choice may be affected, the CMA is
responsible for:
investigating mergers
conducting market studies
investigating possible breaches of prohibitions against anti-competitive agreements under
the Competition Act 1998
bringing criminal proceedings against individuals who commit cartels offences
enforcing consumer protection legislation, particularly the Unfair Terms in Consumer Contract
Directive and Regulations
encouraging regulators to use their competition powers
considering regulatory references and appeals
Competition and Markets Authority
Formed in 2013 this is a non-governmental department responsible for strengthening business
competition and preventing and reducing anti-competitive activities.
It began operating in April 2014 when is assumed of the functions of the previously existing
Competition Commission and Office of Fair Trading which were abolished.
EU an UK Competition Law Framework
The core provisions of UK competition law are very closely modelled on EU competition law since the
Competitions Act 1998 entered into force in March 2000 which allows for consistency in
enforcement and a greater level of legal certainty in the business community
Sanctions generally involve the imposition of significant fines on firms – known as undertakingsfound to have infringed competition law
EU and UK competition authorities have the power to impose fines of up to 10% of the total
worldwide turnover of the undertakings involved in the breach (Intel Corp)
Categories of anti-competitive conduct
Competition law normally comprises provisions dealing with 3 distinct forms of activities that can
lead to anti-competitive effects:
(a) co-ordinated conduct between 2 or more undertakings, normally akin to some form of agreement
(secret price fixing cartels)
(b) unilateral conduct which is either presumed to be anti-competitive or where there is evidence of
anti-competitive effects;
(c) mergers and acquisitions which if permitted would result in anti-competitive effects on the
market post merger
Article 101 TFEU
In the field of IP European law is especially concerned about the following practices under Article
101:
Tying (a patentee insisting that a licensee of a process purchase all raw materials for operating the
process from the patentee); charging royalties on non-patented products; obliging a licensee to
disclose all the new technical information they learn to the patentee
Co-ordinated Conduct
Article 101 TFEU and s.2 Competition Act 1998 both prohibit agreements (I a very broad sense),
decisions of associations of undertakings and concerted practices between 2 or more undertakings
where either the object or effect of the agreement is to prevent, restrict or distort competition
Article 101
Prohibits cartels and other agreements that could disrupt free competition in the EEA’s common
market.
Any assessment under Article 101 consists of two parts:
1) whether an agreement has an anti-competitive object or actual (or potential) anti-competitive
effects;
2) The second step, only becomes relevant when an agreement is found to be restrictive of
competition under Article 101(1), is to determine the pro-competitive benefits produced by that
agreement and to assess whether these pro-competitive effects outweigh the anti-competitive
effects.
Co-ordinated Conduct
Competition law is particularly sceptical towards horizontal agreements (between undertakings
operating at the same level in the supply chain) given the detriment to consumer welfare that results
from co-ordination between competitors.
Vertical agreements – between undertakings operating at different levels in the supply chain, can
also give rise to competition concerns
Article 101(3) TFEU and s.9 CA 1998 provide for individual exceptions to the main prohibition, (Article
101(1) and s.2 CA 1998) on the basis of specified criteria
Unilateral Conduct
Article 102 TFEU and s.18 CA 1998 both prohibit unilateral ant-competitive conduct. These provisions
are mainly concerned with abuse of a dominant position.
This involves a single undertaking deemed to be ‘dominant’ on the relevant market due to its high
level of market power and which is found to have abused that position of dominance by engaging in
anti-competitive conduct further limiting the competitive constraints in the market.
The operation of Article 102 TFEU is therefore dependant on;
(i) the undertaking has a position of dominance, requiring an assessment of the relevant market
definition and then an assessment of market strength
(ii) that position is being abused by the dominant undertaking by engaging in anti-competitive
conduct
Article 102 and s.18 CA 1998 must balance the competing interest to prevent dominant undertakings
from effectively foreclosing the market to current and potential competitors against that of
maintaining sufficient incentives to spur innovation and invetsment
These competing interests are visible in the context of IP.
Right owners also found to hold a dominant position may be found to infringe competition law for
refusals to licence IP in exceptional circumstances, (Magill), patents in the pharmaceutical sector.
Merger and Acquisitions
EU and UK competition law both provide for distinct systems of merger control order to review
transactions that would combine two or more undertakings into the one undertaking
Unlike provisions on co-ordinated and unilateral conduct, EU and UK merger control are mutually
exclusive.
The European Commission will have exclusive competence to decide on the legality of a merger
under competition law if EU competition law has jurisdiction
Harmonisation Directives and EU-wide Rights
The tension between competition law and IP may also be resolved either through harmonisation of
IPRs to include EU-wide exhaustion or the creation of unitary EU-wide rights
The difference in national IP laws which provide potential barriers to trade between Member States
have become the subject of harmonisation measures under Article 114 TFEU
Copyright, design, trade marks and protection for databases, computer programs and semiconductor chips have all been the subject of such harmonisation
Competition Law II
The Relevant market
This term usually understood to mean a place where business is done between companies
It is only behaviour on the relevant market that is taken into account when looking to the behaviour
of these companies/businesses.
How should the relevant market be defined?
The starting point is generally to look at those products which are in competition
If a market is defined too widely then it is unlikely that ant-competitive conduct will have an adverse
effect
Intra Brand Competition
Competition exists at different levels between businesses in the market place
A manufacturer may produce a particular product;
Wholesalers may purchase that product from the manufacturer and retailers who sell the product to
the consumer may compete with each other in the downstream market
This is Intra brand competition – competition between distributors of the same brand
This is where competition exists between suppliers of competing brands, eg two different brands of
coffee.
Such competition is normally between different firms that have developed brands or labels for their
product in order to distinguish them from other brands sold in the same market egment
Block Exemption Regulations
The Commission may, pursuant to Article 101(3) TFEU, issue block exemptions relating to licences and
sharing of IP
A block exemption specifies those conditions under which certain types of agreements are exempted
from the prohibition laid down in Article 101(1) TFEU.
When an agreement fulfils the conditions set out in a block exemption regulation, the agreement is
automatically valid and enforceable
Technology Transfer Block Exemption Regulation
Technology Transfer Block Exemption (TTBE) cover technology transfer agreements.
The TTBER came into force in 2004 and replaced the TTBE and has its own set of guidelines
The TTBER has since been updated (2014) and is relevant to undertakings which enter into technology
transfer (licensing) agreements where those agreements deal with patents, know-how, software
copyright or a mixture of IPRs.
Dominant Position
Article 102 TFEU refers to undertakings which occupy a dominant position.
A dominant position relates to a position of economic strength enjoyed by an undertaking on the
relevant market
The key test is that an undertaking must be able to hinder the maintenance of effective competition
and be able to act to an appreciable extent independently of competitors and consumers, without loss
of customers and/or competitor activity in response
Intellectual Property Rights and Competition Law:
in balance or in conflict?
The Lisbon Objectives
“To be the world’s leading knowledge-based economy by 2010”
Lisbon Council, March 2000
The Lisbon Objectives and Intellectual Property Rights
“In the context of the Lisbon objectives, there is a need for strong IP protection to foster innovation in
Europe”
Deputy Director General Stoll, DG Internal Market (European Commission), at The Pan-European IP
Summit, Brussels, 2 December 2004
Intellectual Property Rights – basics
▪ Monopoly or quasi-monopoly rights
▪ Examples: patents and copyright
They are exclusionary rights
The role of competition policy in fostering innovation
“It is a longstanding topic of debate in economic and legal circles: how to marry the innovation bride
and the competition groom”
“Contrary to what some might think, competition is a necessary stimulus for innovation”
Mario Monti, European Commissioner for Competition Policy, January 2004
“IP law and competition law have a complementary role to play in promoting innovation to the
benefit of consumers”
Mario Monti, European Commissioner for Competition Policy, January 2004
European competition law – basics
The EC Treaty
– Article 81
– Article 82
Article 81
Article 81 regulates joint conduct (e.g. cartels)
Article 81 can impact on IP license agreements, technology transfer agreements and other IP pooling
arrangements
The European Commission’s approach to IP license agreements and Article 81 was substantially
modified and modernised in 2004, with the aim of encouraging technology licensing in Europe
The Technology Transfer Block Exemption
Article 81 and the Lisbon Objectives
The new rules on technology licensing will effectively contribute to the dissemination of technology
within the European Union, in line with the objectives set at the Lisbon Council
European Commission Press Release, April 2004
Article 82
Prohibits undertakings with a dominant position on a particular market from conducting themselves
in a way which amounts to an abuse of their market power, in circumstances where the abusive
conduct is incapable of objective justification
Article 82 is concerned with unilateral conduct
Policy behind Article 82
• The functioning of competition is disturbed not only by cartels (see Article 81) but also by
economic predominance
• Increasing market domination corresponds to a decreasing intensity of competition
• Lack of competition lessens the incentive of a dominant firm to increase overall performance
by means of cost reduction and innovation
The Role of Economics Analysis in the EC Competition Rules
D. Hildebrand, 2002
Restricting access to technology – an abuse?
A dominant firm may fall foul of Article 82 by restricting access to the use of technology, to the
detriment of consumers – Article 82(b)
Intervention by the European Commission
A dominant position may be based on control over access to the technology, e.g. through the
ownership of intellectual property rights…
…and so in certain circumstances the European Commission will intervene…
When will the European Commission intervene?
The Magill case
“Exceptional circumstances”
In recent years, the European Commission has taken a more interventionist stance in cases where it
believes IPRs are being “abused”
The IMS Health case
The IMS Health case
▪ not a “new” product (as in Magill)
▪ merely a “me too” product
▪ and yet the European Commission intervened
The Microsoft case
Microsoft refused to supply interoperability information to Sun Microsystems, so as to allow Sun to
offer its own work group server operating system product, in competition with Microsoft’s own work
group server product
The European Commission decided in March 2004 that this was an abuse of a dominant position under
Article 82
Microsoft was ordered to disclose information so as to allow its competitors to compete on an equal
footing with Microsoft…
Compulsory Licensing?
…even if this required Microsoft to license its IP to its competitors (including 3 patents!)
What intellectual property rights?
“The interoperability information requested by Sun constitutes valuable intellectual property
protected by copyright, trade secret laws and patents”
Microsoft submission to the Commission of 17 October 2003
The Commission’s position
“It is implicit in Sun’s request that Sun intends to be provided with specifications that it will then be
able to implement in its products. It is possible that such a use could be prevented by Microsoft
relying on intellectual property rights. Furthermore, the specifications at issue may constitute
innovations that are currently not disclosed and are protected by trade secrecy”
Paragraph 190 of the Commission’s Decision
“It cannot be excluded that ordering Microsoft to disclose [its] specifications and allow […] use of
them by third parties restricts the exercise of Microsoft’s intellectual property rights”
Paragraph 546 of the Commission’s Decision
The Commission argued that Microsoft was stifling innovation in the market for work group server
operating systems…
“The major objective justification put forward by Microsoft relates to Microsoft’s intellectual property
over Windows. However, a detailed examination of the disclosure at stake leads to the conclusion
that, on balance, the possible negative impact of an order to supply on Microsoft’s incentives to
innovate is outweighed by its positive impact on the level of innovation in the whole industry
(including Microsoft)…”
Paragraph 783 of the Commission’s Decision
“[T]he need to protect Microsoft’s incentives to innovate cannot constitute an objective justification
that would offset the exceptional [Magill-type] circumstances identified”.
Paragraph 783 of the Commission’s Decision
Intellectual Property Rights and Competition Law:
in balance or in conflict?
The Commission’s arguments proceed on the basis that if Microsoft was allowed to continue its
leveraging practices there was a risk that innovation in the work group server operating systems
market would be stifled…
…but the Commission’s arguments do not appear properly to address the wider effect of the
Microsoft decision, which may erode the IP protection available to certain (dominant) companies
Microsoft’s position
“A crucial part of this case rests on the rights of companies to invest in research and development,
innovate, produce new products to meet customer demand and then retain the right to earn a return
on that investment”
Chris Parker, Director of Law and Corporate Affairs, Microsoft (May 2006)
What is the right balance?
Report prepared by the Economic Advisory Group for Competition Policy, as part of the European
Commission’s recent review of policy under Article 82 (July 2005):
“…even if a refusal to deal harms consumers in the short-run, it may be socially beneficial in the longrun. If the bottleneck is the result of investment or innovation activities of the dominant firm then
forcing the firm to give its competitors access to the bottleneck is an expropriation of the returns of
the firm’s efforts. This may discourage this and other firms from investing in the future, and it may
reduce incentives to innovate. Tolerating a (temporary) monopoly may be the best way to promote
investment and innovation incentives…”
Intellectual Property Rights and Competition Law:
in balance or in conflict?
According to Microsoft, the European Commission has…
“[committed]…the biggest encroachment on intellectual property in European competition law
history”
“…opened the vaults of a bank” to hand money out to passers-by
Microsoft’s Counsel, Ian Forrester QC, before the Court of First Instance, April 2006
Conclusions
An Article 82 policy review is underway. The Microsoft decision is on appeal to the Court of First
Instance.
Watch this space