Regulation of intellectual property rights through competition law
It is accepted that once an intellectual property right is exploited by means of a license or some equivalent consensual agreement or arrangement, the effect on trade is properly a matter for competition law. Within the European Union, this is so whether the attack is upon an agreement or a concerted practice (art 101) or goes to the acquisition and exercise of market power (art.102). At both the national and international level, the general issue is likewise conceded.
In light of the above, examine how competition law has regulated intellectual property rights
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Regulation of intellectual property rights through competition law
Table of contents
Executive summary 3
IPR’s and Policy 4
Competition law & Policy 5
Regulation of IPR’s through competition law 6
Exclusionary licensing agreements 7
IPR’s and abuse of a dominant position 8
IPR’s as elements of mergers and cooperative agreements 9
Refusal to deal 10
Compulsory licensing 12
Intellectual property rights (IPR’s) are fully subject to general competition principles because they confer upon the owner, a monopoly position, and freedom of contracting in accordance with individual preferences resulting from any property, whether tangible or otherwise, as that restrain competition. Although competition law has no impact on the very existence of IPR’s, it operates to regulate the exercise of property rights to ensure that it’s done within the proper limits and bounds inherent in the very ownership of intellectual assets. Broadly, competition laws regulate related issues in the following areas: exclusionary terms in licensing of specifically with regard to restrictive clauses in licensing agreements, use of IPR’s to illegitimately abuse a dominant position, use of IPRs as elements of mergers and acquisitions, and refusal to deal. Incidences of IPR related practices that curtail free market competition are treated, under competition/ antitrust laws as grounds under which a compulsory license can be granted, despite the objection of the license holder, a common practice in both developing and developed worlds.
IPR’s laws and competition law are bound by innovation economics and the legal rules, regulations, and guidelines that seek to balance the scope of each policy. According to Pham (2008), the protection of intellectual property is meant to encourage innovation which results in gains to consumers through the development of new products and services and growth in economic output. IPR’s protection gives innovators the rights to legally exclude for a given period of time, other parties from realizing the gains of the new knowledge, and specifically from the commercial use of the processes and products based on such new innovation.This means that innovators and holders of IPR’s gain from a short-term monopoly on their new innovation, so as to recoup the investment utilized in the research, development and innovation process. This not only serves to reward them for their work but also provides the much-needed incentives and motivation to invest in further innovation.
On the other hand, competition law is regarded as the most basic mechanism through which market distortions can be curbed, anticompetitive practices can be curtailed, monopolies and abuse of monopolies can be prevented and resources can optimally be allocated in the market, leading to consumer benefits in terms of fair prices, better quality of products and variety of choices. Competition law, therefore, ensures that monopolistic power and other bad market practices that are attributable to IPR’s are not excessively compounded, extended or leveraged at the expense of competition, and ultimately the consumer. In seeking to protect and enhance market competition, competition laws encourage innovators to invest in innovative products, services, and technology so as to gain the first mover advantage, thus competition laws stimulate innovation as a competitive input consequently enhancing consumer welfare. In light of the above, this paper examines the how competitive laws have regulated IPR’s
IPR’s and policy
US Federal Trade Commission (2003) defines IPR’s as composite ideas, creative expressions and inventions and the willingness of the public to bestow status on them. Such rights give the owner the legitimate authority to exclude others from access, use and enjoyment of the benefits of the subject matter for a given, often limited time period, and subsequently, the right to license others, under commercial market arrangements, to exploit the innovations where they themselves are not best placed. The legal instruments that protect IPR’s are patents, trademarks, trade secrets, copyrights, industrial designs etc. The economic rationale for the protection of IPR’s is that they promote, encourage and enhance innovation, its commercialization and dissemination through the establishment of enforceable property rights for inventors of novel and useful services and products, protecting originality, and consequently preventing the rapid duplication from negatively affecting the commercial value of such innovations, which would consequently erode the motivation to innovate at the expense of consumer welfare. This explains the economics behind patents and copyright laws. For industrial designs and trademarks, the rationale for intellectual property protection is based on incentives for their investment in developing quality rather than the innovation itself. Trade secrets, on the other hand, are protected for their role in fostering sub-patentable and other incremental innovations.
Competition law and policy
According to Pham (2008), competitive policy and law are those government measures that directly impact on the structure of the industry and behavior of enterprises in the market, with the aim of promoting the efficiency and effectiveness of the market and maximizing the welfare of consumers. It comprises of a set of policies that encourage market competition such as liberal trade policies, economic deregulation etc. and legislation and judicial decisions which specifically aim at preventing or discouraging anticompetitive business practices such as concentration and abuse of market power, thereby preserving competition in the market, also known as competition/antitrust laws. An effective competition law promotes the creation of a conducive business environment that improves market efficiency, leading to effective allocation of resources. It also prevents artificial barriers to entry, facilitates access to markets while encouraging other pro-competition activities.
Regulation of IPR’s through competition law
Just like any other individual property, IPR’s are subject to the principles of antitrust laws, due to the conferment of autonomy of decision in contracting and competition as per individual preferences. While competition law has no impact on the existence of IPR’s per se, it regulates the exercise of such property rights within proper limits and bounds which are inherently within the exclusive conferment of the ownership of such IPR’s. It is at this point that implementers and legal practitioners have to deal with the challenges of practical implementation and the tension that arises when the use of IPR’s gives rise to competition concerns due to the anticompetitive nature embodied in such rights. In Brazil, for instance, both patent law and the antitrust laws contain basic guidelines that govern the subsisting relationship between competition and the exercise of industrial property rights. To this end, antitrust laws require the examination of the effects of patents, industrial designs, trademarks and other IPR’s on market efficiency and competition. Authorities are also expected to scrutinize copyrights and unpatented technology, which are regarded as elements that impact on the market competitive structures.
In South Africa, the juxtaposing relationship between IPR’s and the competition law are covered under the South African Competition Act 89 of 1998. This act applies to all business activities in their jurisdiction, including all IPR’s. All types of intellectual property are therefore scrutinized under the provisions of the Act in relation to horizontal or vertical restrictive practices and the abuse of market dominance.
According to Pham (2008), broadly, there are four IPR’s related issues that are affected by competition law; exclusionary terms in the licensing of IPR’s, specifically the inclusion of clauses that are restrictive like exclusive dealing arrangements, restraining of territorial boundaries, licensing contracts that comprise of tying or grant back requirements etc.; use of IPR’s as a tool for promoting unlawful market practices such as abuse of dominance; IPR’s as elements of cooperative arrangements such as mergers; refusal to deal. The discussion that follows highlights how competition law regulates and restricts the enjoyment of IPR’s.
Exclusionary licensing agreements
Licensing is one of the most important parts of IPR’s, specifically industrial property rights. As opposed to the restriction of competition, it’s a channel that extends opportunities for other traders by enhancing the connection with the parent property right holders through agreements that promote competition, using the protected patent as an input, to disseminate the protected technology, knowledge, products and services. What makes licensing agreements anticompetitive, and consequently subject to antitrust laws are the specific contractual agreements and conditions that create restrictions. Like any other transfer of property, the key principle of competition in relation to licensing lies with the drawing of a clear distinction between the effects of horizontal and vertical agreements or both. Vertical licensing agreements are those that affect complimentary activities and are viewed as tools of coordination of downstream licensee incentives with the interests of the patent holders in order to reduce transaction costs and opportunistic behavior of free riders. Under competition law, vertical licensing agreements are often treated leniently, although issues of price fixing attract more scrutiny and are banned in most jurisdictions. Additionally, licensing agreements may have a horizontal relationship where likely or potential competitors would be, in the absence of such licensing agreements. Although not necessarily anticompetitive, they are likely to cause competition concerns especially in instances where intellectual property holders of substitutable technology enter into licensing agreements in order to set agreed prices for the competing products. Other horizontal agreements such as joint ventures can also lead to adverse anticompetitive effects and are therefore brought under antitrust scrutiny.
IPR’s and the abuse of a dominant position
By their very nature, IPR’s create an economic exclusivity, albeit for a limited period. This exclusivity does not often establish the ability to exercise market power and even in the event that such power is conferred, the dominant position in itself doesn’t constitute an infringement of antitrust law and does not demand of the holder to license others to enjoy those rights. In practice, authorities in charge of competition are often concerned with abuse of power by any dominant player, regardless of the source of much power, therefore, competition laws deal with each case depending on merit.
Over the years, there have been incessant arguments on the dominant position of Microsoft Inc, the patent holders of Windows Operating system. Microsoft enters into agreements with Original Equipment Manufacturers (OEMs) to install its operating system in their hardware, which is sold to consumers. Retailers of these OEM’s are not party to this license, which is expressly between the end user and Microsoft, which results in unique injury to users due to the restrictive and exclusionary tendencies. It denies them the benefits of choice, competition, technological innovation and substitutable supply. In a case brought against the company, the European Commission ruled that while Microsoft was the legitimate owner of the patent, it had infringed on article 82 EC by abusing its dominant position in two ways. First, its refusal to supply competitors with ‘interoperability information’ and secondly, by restricting the availability of windows media player, consequently restricting competition in the multimedia market. The commission imposed a EUR 497 Million fine and demanded corrective action in a stipulated timeline.
As an Element of Mergers and Cooperative Arrangements
Where firms engage in mergers or acquisitions or the creation of joint ventures, there is the likelihood that the instruments of transfer will include provisions concerning the use, disposal and licensing of IPR’s of the various parties. In practice, these provisions may end up restricting competitions, sometimes to a large and unacceptable degree. The test for whether these restrictions are acceptable or otherwise is their relationship with the main transaction, whether they are necessary and reasonably ancillary to the transaction per se. If so, then they are acceptable and are not restricted under competition law. If they are not ancillary to the transaction, they are deemed to be repugnant to the rules of fair competition. The remedy the anticompetitive aspect of the merger is found in the obligation to license out the intellectual property right as was the case in Boeing/McDonnell Douglas case where the merger was cleared only on condition that the airplane makers obtained the licenses to the underlying know-how and patents that were held by Boeing. In Sandoz/Ciba-Geigy case, the concerns of the European Commission relating the market dominance position with regard to Methoprene was only allowed after an undertaking to grant licenses on reasonable and fair terms to allow for its production.
Refusal to Deal
The premise of intellectual property law is that intellectual property holders have no obligation to license their innovation to others, a principle that holds true even when the firm in question possesses a monopolistic market position on the strength of the ownership of its intellectual property. An antitrust decision made by the US Supreme Court identified the ability to exclude others from benefiting from the use of a new patent as the ‘very essence of the rights that are conferred by ownership of the patent’ as it the discretion of a property owner to use or not to use their property without motive or question. Additionally, from the perspective of competitive law/intellectual property right interface, questions may be asked on whether any duty exists. Courts in the US and EU have on occasions ruled that the refusal to deal/license a patent is a violation of competition law, but have never provided a clear direction on whether such refusal to deal amounts to anticompetitive behavior where intellectual property is involved. This slightly differs with Brazil, where Article 21 of the antitrust law deems the inadequate and non-exploitative use of IPR’s and technology by a company as a strong indicator of a violation of competition rules.
In the Magill case (RTE andI ITP v Commission) involving the issues concerning whether the holder of a copyrighted TV program had the authority to exclude competitors from the market for weekly TV guides. The ECJ ruled that the refusal to license was an abuse in such exceptional circumstances since there were no other potential substitutes, it prevented product innovation which contravenes article 82, created an abusive leverage in a secondary market and thus lacked a legitimate justification. In the defense, it was argued that it was in the exercise of IPR’s, however, this was rejected and the holder of the intellectual property right refused the right to license. To conclude this case, the court focused on whether this behavior was subject to competition laws or not.
Finally, while the acquisition of IPR’s such as patents through due process doesn’t violate the competition law nor is it illegal for anyone to accumulate intellectual properties as long as it is done legally and in good faith, competition laws hold that when one individual party aggressively engages in the accumulation, even non-use, and the enforcement of IPR’s over the essential inputs in a given market with intentions to destroy market efficiencies, such conduct may be the subject of antitrust liability. The remedy to this violation may, therefore, be a duty to license the IPR’s to others or government imposed compulsory licensing regimes.
A compulsory license is defined as an involuntary contract that subsists between a willing buyer and an unwilling seller, often imposed and enforced by the authorities.Pham (2008), notes that the most prevalent compulsory licensing provisions apply where a dependent patent is being denied, where a patent is not put to use/work and where an invention relates to the production of food and or medicines. addition, compulsory licensing may be enforced as a remedy in cases of violation of competition laws, misuse of patents, where the patent or invention is important to national security, or where the acquiring entity is sovereign. These cases identify the need to satisfy the greater good of the public as opposed to the private interests of the holder of the intellectual property to exercise these exclusive rights. The acquiring party should, however, compensate the owner of the intellectual property through financial remuneration, who is still able to exercise their rights against any non-licensed parties who may infringe on the intellectual property.
With regard to competition law, compulsory licensing can be granted where the holder of the intellectual property refuses to license or engages in anti-competitive behavior. Refusal-to-deal as a ground in which a compulsory license can be granted has been in use in many jurisdictions such as China, Israel, and Argentina. In the United Kingdom and other nations that follow the British legislation and legal model, a compulsory license order may be issued in incidences where such refusal to deal leads to a non-supply of an export market, the working of any other invention, that makes a substantive contribution is hindered or in some cases prevented or where the establishment or the development of industrial or commercial activities in the nation would be unfairly prejudiced.
In South Africa, compulsory licensing occurs where an intellectual property holder refuses to grant a license on reasonable commercial terms, where a new or existing trade, industry or agriculture is prejudiced, and consequently, it is in the public interest to grant the license. With regard to the presence of anti-competitive business practices, the Competition Act of Canada, for instance, grants the Federal Court the powers to nullify trademarks, to award patent licenses, to cancel existing licenses and generally abridge patents or trademark rights where such IPR’s have been hitherto used to unduly injure trade or unduly curtail market competition.
As noted above, while the role of IPRs is to protect new inventions from free-riders, allow innovators to recoup their investment in inventions while encouraging further investment in new inventions, non-regulated use of IPR’s may result in anticompetitive behavior among IPR holders, at the detriment of consumer welfare. Competition laws are therefore necessary to ensure that there are efficiency and effectiveness in the market which maximizes consumer welfare. To this end, competition laws encourage market competition through liberal trade policies that aim at preventing anticompetitive business practices such as abuse of market power, which may result from the benefits conferred under IPR’s.
Pham, Alice ‘‘Competition Law and IPR’s: Controlling Abuse or Abusing Control?’’ (2008), CUTS International, Jaipur, India
US Federal Trade Commission ‘‘To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy’’, (2003), Chapter 1, p.2
T-201/04 Microsoft v Commission
RTE and ITP v Commission (Magill case)