Intellectual Property and Restraints of Competition
1. Protection of intellectual property and protection of competition
There is an apparent conflict between the protection of intellectual property and the protection of competition. Intellectual property rights grant their holder a right limited in time to the sole use of a specific intellectual property. This is intended to act as a stimulus for innovation and creative achievements that, given the nature of knowledge as a public good, would otherwise not be created to the extent desirable. At the same time, however, intellectual property rights open up to the holder a field of competitive conduct in which he is entitled to exclude his competitors. The grant of such a statutory monopoly is at first sight difficult to reconcile with the notion of freedom of competition.
The disputes concerning the relationship between the law against restrictions on competition and intellectual property rights date far back. At an early stage and for a long time, it was felt that the aims of the protection of intellectual property and competition were in contradiction with each other. While intellectual property rights were intended to reward the individual for his intellectual or commercial achievement, competition law ensured that competition was maintained precisely by preventing or monitoring the creation of monopoly positions.
The inclusion of technical progress as an essential factor for the process of competition in the 1950s and 1960s led to a new view of the relationship between the two fields of law: even if there might be a short-term conflict between the guarantee of intellectual proprietary rights and the protection of competition, in the long term their objectives are in harmony. The system of intellectual property protection, by granting exclusive positions, is needed as a precondition for the striving for innovation, with all the risks that it often involves. The technical progress thus promoted creates an increase in competition at the level of research and development, which in turn encourages further innovations. Both—intellectual property protection and freedom of competition—are thus directed at promoting innovative activity.
Admittedly, there is no conflict between the legal policy objectives of intellectual property protection and freedom of competition. However, it is not possible to eliminate all tension between them, since, although they pursue the same objective, they apply different means. The relationship between competition law and intellectual property rights has therefore been referred to in recent years as one of complementarity. According to this point of view, intellectual property and the protection of competition are to be regarded as equal and necessary elements of a dynamic legal and economic system. Intellectual property rights, by attributing specific intellectual assets to the individual, secure the preconditions for competition for these assets and as a result determine the content of this competition. However, they do not automatically and without restriction have a positive effect, but are always reliant on effective competition. Friction arises above all in the search for usable criteria that reconcile competition law and intellectual property law interests in a manner that is satisfactory for all parties.
In general, two basic principles are taken as the starting point. First, intellectual property rights are subject to the same basic competition law rules that apply to rights to corporeal property. Despite their special features, they are neither particularly suspicious nor do they require particular protection. It follows from this—which brings us to the second principle—that intellectual property rights of themselves do not confer market power to their proprietor. Legal and economic monopolies can, but need not, correlate. It is therefore more correct, in the case of intellectual property rights, not to speak of statutory monopolies but rather (only) of exclusive rights.
Unlike other legal systems—such as Swiss law (Art 3(2) of the Cartel Act) or German law prior to the 7th Amendment of the Act against Restraints of Competition in 2005 (§§ 17 and 18 ARC, old version)—primary Union law does not contain any special rules for intellectual property rights. Articles 101 ff TFEU/81 ff EC are applicable without restriction to the acquisition, exercise and exploitation of industrial property rights and copyright if the elements of these provisions are satisfied. Previous attempts in the literature to remove intellectual property rights and their contractual or unilateral exploitation from the application of competition law have been unambiguously rejected by the ECJ. By doing that, the court has developed a distinction between the existence of the right, unaffected by Union law, and its exercise, which can be regulated by Union law (ECJ Joined Cases 56 and 58/64 – Grundig v Consten [1966] ECR 321). Since the concrete existence of an intellectual property right is manifested precisely in the right to exercise it, this distinction, however, is hardly more than an empty formula. Of decisive importance for the competition law assessment of the exclusionary powers inherent to intellectual property rights is rather the question whether their exercise is necessary to safeguard rights that constitute the specific subject matter of the particular right. However, the court does not limit itself to the formal reference to the specific subject matter of the proprietary right, but instead always carries out an analysis of the legal and commercial context of the conduct in question.
Unlike at the national level, the search for criteria to solve the conflict between intellectual property and competition protection at Union level faces a further obstacle, namely the requirement to maintain cross-border trade. The particular market integration function of the EC competition rules (competition (internal market)) has had a strong effect on their application to restrictions of competition linked to intellectual property rights. Thus from the very start, competition rules focused on agreements concerning the exploitation of intellectual property rights aimed at or resulting in a compartmentalization of national markets. As early as 1966, the ECJ held that the agreement between Grundig and Consten concerning the registration of the trademark GINT in France was incompatible with the competition rules of the Union, since its purpose was to ensure that Consten as sole distributor enjoyed absolute territorial protection against parallel imports (intellectual property (exhaustion of rights)). In the application of the competition rules to license agreements, a particularly important objective of the European Commission and the Union courts has been to reconcile the right holder’s freedom to dispose of the right with the European integration policy aim to merge national markets. As a basic principle, the rule in the Union is that the assertion of intellectual property rights by the parties to a licence must not go beyond the degree of territorial protection permitted by competition law. Accordingly, licence clauses that aim at excessive territorial protection will deprive the entire agreement of the benefit of the block exemption (block exemption regulations).
The EU competition law reforms that have been implemented since the end of the 1990s in the light of a more economic approach have also extended to the assessment of restrictions of competition related to intellectual property rights. This development has particularly affected the competition rules applicable to licensing agreements. The Technology Transfer Block Exemption Regulation (TTBER) (Reg 772/ 2004) that entered into effect in May 2004 transfers the market share model to the field of technology transfer agreements and requires as the central criterion for exemption that specific market share thresholds are not exceeded (see 3. below). In the field of unilateral conduct too, the European Commission intends to subject conduct based on intellectual property rights on the part of a market dominant enterprise to an economics-oriented approach. Thus the Communication on Guidance on the enforcement priorities to abusive exclusionary conduct published by DG Competition at the end of 2008 deals with the refusal to grant a license as a particular form of refusal to supply. Yet, the Commission is bound in this area by the narrow criteria developed by the Union courts (see 4. below)
Developments at the Union level have had a decisive influence on the national legal systems. Overall, a trend towards the Europeanization—and hence also to the economization—of the Member States’ legal systems can be observed. A typical example is German law. With the 7th Amendment of the Act against Restrains of Competition, the German legislature completely harmonized German law with European law in the field of restrictive agreements. § 2(2) ARC now contains a dynamic reference to the Union block exemption regulations. For the German competition rules on licensing agreements, this means the definitive abandonment of the inherency doctrine that was vehemently criticized in the literature. § 17 ff ARC, which codified the inherency doctrine and only applied the cartel prohibition (prohibition of restrictive agreements) to licensee restrictions that went beyond the scope of the intellectual property right, have now been abrogated.
3. Restrictive agreements
The prohibition in Art 101(1) TFEU/81(1) EC covers all agreements related to the exploitation of intellectual property rights that have as their object or effect the prevention, restriction or distortion of competition and that may affect trade between Member States. Due to the fundamentally pro-competitive effects that are associated with the contractual exploitation of intellectual property rights, it is the application of the exemption conditions of Art 101(3) TFEU/81(3) EC which has now become the focus of competition law assessment.
The TTBER constitutes the central provision within the exemption system for licensing agreements. It is based on the assumption that technology transfer agreements that fall within its scope of application typically satisfy the conditions of Art 101(3) TFEU/81(3) EC. The concept of the technology transfer agreement covers both bilateral licences for technical rights (patents (patent law), utility models, designs (industrial design law), plant variety protection rights and software protection (copyright and patent law)) and the provision of know-how. Other licensing agreements not covered by the TTBER (in particular multilateral agreements and trademark and non-software related copyright licences, provided that they constitute the main subject matter of the agreement) are subject to individual assessment within the framework of the legal exception of Art 101(3) TFEU/ 81(3)EC. In this context, the Commission applies by analogy the principles set out in the TTBER to multilateral agreements and copyright licences for the reproduction and distribution of protected works. If the technology transfer takes place within the framework of a research and development cooperation, and if it involves the contribution of the technology to the cooperation or the distribution or the use of the research results between the cooperation partners, the even more specific provisions of the Block Exemption Regulation for Research and Development Agreements (Reg 1217/2010) apply.
By adopting the TTBER in 2004, the Commission transferred the more economic approach to the field of licence competition law. Unlike a formalistic approach, in a market-oriented and effects-based approach the relevant focus is on the specific effect of an agreement on competition. Unlike its predecessor regulation (Reg 240/96), the TTBER applies the principle that ‘everything that is not expressly prohibited is permitted’. Article 2 contains a general exemption for bilateral technology transfer agreements permitting the production of contractual products. However, the exemption is subject to compliance with two additional conditions. First, the contracting parties must not exceed specific market share thresholds. A distinction is made between horizontal (joint market share < 20 per cent) and vertical agreements (individual market share < 30 per cent) (vertical agreements in EU competition law). The competitive relationship between the contracting parties and their market power are then taken as the central criteria for the definition of the scope of the exemption. What lies behind this is, on the one hand, the economic view that the negative effects of vertical agreements on intra-brand competition only outweigh their competition-promoting effects on inter-brand competition if market power is involved. On the other hand, the basically anticompetitive potential of horizontal agreements is recognized. As a second condition, certain clauses—price fixing, production restrictions, allocation of markets and customers and R&D restrictions (hardcore restrictions)—must not be included in the licence contract. This is intended to ensure that the block exemption only benefits restrictions on competition that satisfy the conditions of Art 101(3) TFEU/81(3)EC with sufficient certainty.
Technology transfer agreements that do not fall under the TTBER, because for instance the market share thresholds are exceeded, are subject to individual assessment on the basis of the conditions of Art 101(3) TFEU/81(3) EC. With the exception of hardcore restrictions, there is no presumption of illegality. In the Guidelines that accompany the TTBER, the Commission explains the analytical framework for such an individual assessment. Account should be taken, inter alia, of factors such as the type of agreement, the market position of the contracting parties as well as their competitors and purchasers of the contractual products, the existence and extent of restrictions to market access and the degree of maturity of the market.
The new TTBER has led to an extensive approximation of European licence competition law to US law. Thus the Antitrust Guidelines for the Licensing of Intellectual Property, which set out the enforcement practice of the US cartel authorities, likewise assume that licence contracts promote competition. In terms of regulatory method, the Guidelines also provide for a ‘safety zone’ for licence contracts in which the contracting parties remain below a joint market share of 20 per cent. Similarly to the hardcore restrictions in the TTBER, price-fixing agreements, production restrictions and horizontal market allocation are regarded as per se infringements. However, unlike the stricter European provisions—in particular with respect to territorial protection clauses—the US Guidelines pursue a significantly laxer approach with regard to vertical agreements.
Attempts in the 1970s and 1980s to adopt an International Code of Conduct on the Transfer of Technology under the patronage of the UNCTAD failed above all due to differences of opinion between the industrialized and the developing countries. The most detailed provision at international level for monitoring anti-competitive practices in licence contracts is to be found in Art 40 TRIPS. Following a general acknowledgement of the detrimental effects that certain anticompetitive licensing practices can have on trade and on the transfer and dissemination of technology (para 1), this provision allows the WTO member states to list such practices (including exclusive grant-back conditions, conditions preventing challenges to validity and coercive packaging licensing) in their legislation and take appropriate measures to prevent or control them (para 2). However, there is no obligation for the member states to prevent restrictions on competition in licence contracts.
4. Abuse of dominant position
As mentioned above, intellectual property rights of themselves do not confer market power on their proprietor. Admittedly, intellectual property rights prevent third parties from imitating the subject matter of protection. However, in the normal case there are substitutive products (or services) not covered by the proprietary right. Consequently, goods and services protected by intellectual property rights rarely constitute a separate market. Instead, in a first step, they are to be attributed to the relevant market. The relevant market is defined according to the general competition law criteria, particular importance being attached to the distinction between technology and licensing market and product market. In the second stage, the position of the right holder on the market thus defined must be determined.
Unlike its US counterpart (s 2 Sherman Act), Art 102 TFEU/82 EC does not prevent the acquisition but merely the abuse of a market dominant position. According to the established judicial practice of the ECJ, the fact that an intellectual property right has been acquired or is exercised by a market dominant enterprise does not constitute an abuse unless there are also exceptional circumstances that establish abusive conduct. In spite of its variety, the conduct of a dominant right holder can as a matter of principle be classified under the categories of abusive exploitation, abuse of market structure and exclusionary abuse. Thus, for instance, unjustifiably high or discriminatory prices for licence fees are subject to the competition law prohibition on abuse. The imposition of unreasonably high user fees by collecting societies also satisfies the requirement for abusive exploitation.
In recent times, the focus has been on cases of exclusionary abuse. A market dominant undertaking, for instance, acts abusively within the meaning of Art 102 TFEU/82 EC by obtaining a proprietary right through providing incorrect or misleading information to a patent office (GC Case T-321/05 AstraZeneca, [not yet reported]). Particularly difficult is the question under what conditions the refusal to grant a licence by a market dominant holder infringes the prohibition on abuse. The Union courts have upheld abuse if the following exceptional circumstances apply: (1) access to the protected products or services is indispensable to carry on a particular commercial activity; (2) the refusal of a licence is capable of eliminating all competition on a secondary market; (3) the refusal of a licence also prevents the development of this market to the disadvantage of consumers in the sense that the appearance of a new product for which there is at least a potential demand is foreclosed; and (4) it is not objectively justified (ECJ Case C-418/01 – IMS Health [2004] ECR I-5039 and GC Case T-201/04 – Microsoft [2007] ECR II-3601). However, the General Court has facilitated the application of the prohibition on abuse to such constellations by extending the condition of the prevention of a new product to mean a restriction of technical progress to the detriment of the consumer.
Literature
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