Competition vs. IP law tension refocused: Fair play on the IPR field š LL.M. Thesis by Oliviero Magagnini
“[I]f the small manufacturer takes out a patent, he is likely to be harassed by infringements: and even though he may win ‘with costs’the actions in which he tries to defend himself, is sure to be ruined by them if they are numerous.”
ALFRED MARSHALL, Principles of Economics (1890)
Table of Contents Table of Cases........................................................................................................... 6 Table of Legislation ................................................................................................ 10 Table of Abbreviations............................................................................................ 13 CHAPTER I: INTRODUCTION ................................................................................ 14 CHAPTER II: ECONOMIC APPROACH TO IPRS (AND INNOVATION).............. 19 A. The economic rationale of IPRs.......................................................................... 20 B. IPRs as a distortion of competition ..................................................................... 22 1. The theory of monopoly ................................................................................... 22 2. IPRs as ‘monopolies’....................................................................................... 23 C. IPRs as an incentive to innovation— and its diffusion ......................................... 24 1. Growth economics........................................................................................... 25 2. Innovation diffusion......................................................................................... 27 D. Welfare cost-benefit analyses ............................................................................. 27 1. Patent length and scope................................................................................... 28 2. Patent licensing............................................................................................... 31 E. The current economic framework: the ICT era .................................................... 32 1. Economies of scale .......................................................................................... 34 2. Technological interdependence ....................................................................... 34 3. Network effects................................................................................................ 38 4. Dynamic competition....................................................................................... 39 5. Strategic use of IPRs ....................................................................................... 42 F. Summing up........................................................................................................ 46 CHAPTER III: COMPETITION LAW APPROACH TO IPRS................................... 49 A. Introduction........................................................................................................ 50 B. Cartels ................................................................................................................ 51 1. Historical and comparative background: the European focus on market integration........................................................................................................... 52 2. The current EC legal framework: the new TTBE.............................................. 56 3. Trade-marks and copyright licences ................................................................ 60 4. Cross-licensing and IPRs pools ....................................................................... 61 C. Abuse of dominant position or ‘monopolization’................................................ 63 1. Exploitative practices: excessive pricing.......................................................... 64 2. Refusal to license............................................................................................. 66 3. Tying............................................................................................................... 72 4. Abuses of legal process.................................................................................... 74 D. Merger control cases........................................................................................... 76 1. The European expansion of competences......................................................... 76 2. Merger control and IPRs ................................................................................. 77 D. Evaluation .......................................................................................................... 79 CHAPTER IV: RE-FOCUSING THE DEBATE......................................................... 83 A. A problem of fairness within the IPR field.......................................................... 84 1. Dynamic competition within the IPR field........................................................ 84 2. The IPR field and its competition implications................................................. 84 3. Looking for solutions....................................................................................... 88 4
B. IP system reform ................................................................................................ 88 1. The ongoing U.S. patent reform....................................................................... 89 2. Reverse discrimination and litigation insurance schemes ................................ 91 3. â€˜Public procurementâ€™- based proposal............................................................. 94 C. Calls for Corporate Social Responsibility............................................................ 95 D. Antitrust intervention.......................................................................................... 97 1. Intervention based on the patent system malfunction ....................................... 97 2. Intervention based on a dynamic approach?.................................................... 98 E. Selection of the preferred approach................................................................... 100 CHAPTER V: CONCLUSIONS ............................................................................... 103 Bibliography ......................................................................................................... 106
Table of Cases European Community European Court of Justice Joined cases 56 and 58/64 Consten and Grundig v Commission,  ECR 299. Case 78/70 Deutsche Grammophon v Metro SB,  ECR 487 Case 6/72 Europemballage and Continental Can v Commission,  ECR 215 Joined Cases 6/73 and 7/73 Istituto Chemioterapico Italiano and Commercial Solvents v Commission,  ECR 223 Case 15/74 Centrafarm v Sterling,  ECR 1147 Case 16/74 Centrafarm v Winthrop,  ECR 1183 Case 26/75 General Motors Continental v Commission,  ECR 1367 Case 51/75 EMI Records v CBS United Kingdom,  ECR 811 Case 27/76 United Brands and United Brands Continentaal v Commission,  ECR 207 Case 28/77 Tepea v Commission,  ECR 1391 Case 120/78 Rewe v Bundesmonopolverwaltung für Branntwein,  ECR 649 Case 258/78, L.C. Nungesser and Kurt Eisele v Commission,  ECR 2015 Case 144/81 Keurkoop v Nancy Kean Gifts,  ECR 2853 Case 35/83 BAT Cigaretten-Fabriken v Commission,  ECR 363 Case 311/84 CBEM - Télémarketing v CLT and IPB,  ECR 3261 Case 238/87 Volvo v Erik Veng,  ECR 6211 Case 395/87 Ministère public v Tournier,  ECR 2521 Joined Cases C-241/91 P and C-242/91 P RTE and ITP v Commission,  ECR I743 Case C-19/92 Kraus v Baden-Wuerttemberg,  ECR I-1663 C-333/94 P Tetra Pak International v Commission,  ECR I-5951 Case T-111/96 ITT Promedia v Commission,  ECR II-2937 Case C-7/97 Oscar Bronner v Mediaprint Zeitungs- und Zeitschriftenverlag, Mediaprint Zeitungsvertriebsgesellschaft and Mediaprint Anzeigengesellschaft,  ECR I-7791 Case C-418/01 IMS Health v NDC Health,  ECR I-5039 Court of First Instance Case T-51/89 Tetra Pak Rausing v Commission,  ECR II-309 Case T-51/89 Tetra Pak Rausing v Commission,  ECR II-309 Commission 6
Commission Decision relating to a proceeding under Article 85 of the EEC Treaty 72/25/EEC of 22nd Dec 1971, OJEC No L 13 (1972), 50-52 (IV/5 400— Burroughs/Delplanque) Commission Decision 72/237/EEC of 9th Jun 1972, OJEC No L 143 (1972), 31 (IV/17.545, 6.964, 26.858, 26.890, 18.673, 17.448— Davidson Rubber Co.) Commission Decision 75/94/EEC of 19th Dec 1974, OJEC No L 38 (1975), 10-13, relating to proceedings under Article 85 of the EEC Treaty (IV/23.013— Goodyear Italiana-Euram) Commission Decision 75/494/EEC of 18th Jul 1975, OJEC No L 222 (1975), 34 (IV/21.353— Kabelmetal/Luchaire) Commission Decision 75/570/EEC of 25th Jul 1975, OJEC No L 249 (1975), 27-30 (IV/28.967— Bronbemaling/Heidemaatschappij) Commission Decision 76/29/EEC of 2nd Dec 1975, OJEC No L 6 (1976), 8-15 (IV/26.949— AOIP/Beyrard) Commission Decision 87/500/EEC of 29th Jul 1987, OJEC No L 286 (1987), 36-43, relating to a proceeding under Article 86 of the EEC Treaty (IV/32.279— BBI/Boosey & Hawkes: Interim measures) Commission Decision 88/138/EEC of 22nd Dec 1987, OJEC No L 65 (1988), 19-44, relating to a proceeding under Article 86 of the EEC Treaty (IV/30.787 and 31.488— Eurofix-Bauco v Hilti) Commission Decision 88/501/EEC of 26th Jul 1988, OJEC No L 272 (1988), 27-46, relating to a proceeding under Articles 85 and 86 of the EEC Treaty (IV/31.043— Tetra Pak I (BTG licence)) Commission Decision 89/536/EEC of 15th Sep 1989, OJEC No L 284 (1989), 36-44, relating to a proceeding under Article 85 of the EEC Treaty (IV/31.734 — Film purchases by German television stations) Commission Decision of 11th Jun 1992 (Case IV/34.174— B&I Line/Sealink Harbours and Sealink Stena),  5 Common Market Law Reports 255 Commission Decision 94/811/EC of 8th Jun 1994, OJEC No L 332 (1994), 48–70, declaring the compatibility of a concentration with the common market (IV/M. 269— Shell/Montecatini) Commission Decision 97/816/EC of 30th Jul 1997, OJEC No L 336 (1997), 16-47, declaring a concentration compatible with the common market and the functioning of the EEA Agreement (IV/M.877— Boeing/McDonnell Douglas) Commission Decision of 9th Aug 1999, OJEC No C 254 (1999), 5, declaring a concentration to be compatible with the common market according to Council Regulation 4064/89 (IV/M.1378— Hoechst/Rhône-Poulenc) Commission Decision 2001/417/EC of 1st Dec 1999, OJEC No L 152 (2001), 1-23, declaring a concentration compatible with the common market and the functioning of the EEA Agreement (COMP/M1601— AlliedSignal/Honeywell) Commission Decision 2001/718/EC of 11th Oct 2000, OJEC No L 268 (2001), 28-48, declaring a concentration to be compatible with the common market and the EEA Agreement (COMP/M.1845— AOL/Time Warner)
Commission Decision 2001/718/EC of 11th Oct 2000, OJEC No L 268 (2001), 28-48, declaring a concentration to be compatible with the common market and the EEA Agreement (COMP/M.1845— AOL/Time Warner) Commission Decision 2004/237/EC of 17th Oct 2001, OJEC No L 82 (2004), 20-72, declaring a concentration to be incompatible with the common market and the functioning of the EEA Agreement (COMP/M.2187— CVC/Lenzing) Commission Decision 2004/322/EC of 2nd Sep 2003, OJEC No L 109 (2004), 1-63, declaring a concentration to be compatible with the common market and the functioning of the EEA Agreement (COMP/M.3083— G.E./Instrumentarium) Commission Decision of 24th Mar 2004, (abbreviated version) OJEC No L 32 (2007), 23-28, relating to a proceeding pursuant to Article 82 of the EC Treaty and Article 54 of the EEA Agreement against Microsoft Corporation (Case COMP/C-3/37.792— Microsoft) Commission Decision 2006/857/EC of 15th Jun 2005, OJEC No L 332 (2006), 24-25, relating to a proceeding under Article 82 of the EC Treaty and Article 54 of the EEA Agreement (COMP/A.37.507/F3— AstraZeneca)
United States Supreme Court E. Bement Sons v National Harrow, 186 U.S. 70 (1902) Standard Oil Co. of New Jersey v United States, 221 U.S. 1 (1911) Standard Sanitary Manufacturing v United States, 226 U.S. 20 (1912) United States v Terminal Railroad Ass'n of St. Louis, 224 US 383 (1912) United States v Colgate and Co., 250 US 300 (1919) United States v American Can Co., (D.Md. 1916) 230 Fed. 859, 892, (D.Md. 1916) 234 Fed. 1019, appeal dismissed, 256 U.S. 706 (1921) Standard Oil Co. and others. v United States, 283 U.S. 163 (1931) United States v Line Material, 333 U.S. 287 (1948) Sears, Roebuck and Co. v Stiffel Co., 376 U.S. 225 (1964) Walker Process Equip., Inc. v Food Mach. & Chem. Corp., 382 U.S. 172 (1965) Aspen Skiing Co. v Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) Verizon Communications Inc. v Law Offices of Curtis Trinko LLP, 540 US 398 (2004) eBay Inc. and others v MercExchange LLC, 547 U. S. ___ (2006), 126 S.Ct. 1837 Lower Courts MCI Communications Corp. v American Telephone and Telegraph, 708 F.2d 1081 (7th CIr. 1983) United States v. Flow International Corp. and Ingersoll-Rand Co., Civ. No. 94-71320 (E.D. Mich. filed Apr 14th, 1994)
Nobelpharma AB v Implant Innovations, Inc., 141 F.3d 1059, 1068-71 (Fed. Cir. 1998) United States v Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) United States v Gemstar-TV Guide Intâ€™l, Inc. and TV Guide, Inc., not reported in F.Supp.2d, 2003 WL 21799949 (D.D.C.), 2003 United States v General Electric Co. and Instrumentarium OYJ, not reported in F.Supp.2d, 2004 WL 602773 (D.D.C.), 2004 Federal Trade Commission American Home Products/American Cyanamid, FTC Docket No C-3557 Roche Ho. Ltd./Corange Ltd., FTC File No 9710103.
Table of Legislation International agreements Berne Convention for the Protection of Literary and Artistic Works of 9th Sep 1886, WIPO No WO001EN, 1-29. Paris Convention for the Protection of Industrial Property of 20th Mar 1883, WIPO No WO020EN, 2-20. Madrid Agreement Concerning the International Registration of Marks of 14th Apr 1891, WIPO No WO015EN, 3-20. Convention on the Grant of European Patents (European Patent Convention) of 5th Oct 1973, EPO 12th ed. (2006). Annex 1C of the Marrakesh Agreement of 15th Apr 1994 establishing the World Trade Organization, Trade-Related Aspects of Intellectual Property Rights (TRIPS).
European Community legislation Treaty establishing the European Community (formerly Treaty establishing the European Economic Community) of 25th Mar 1957, (consolidated version) OJEC No C 325 (2002), 33–184. Council Regulation 19/65/EEC of 2nd Mar 1965, OJEC No 36 (1965), 533-535, on application of Article 85(3) of the Treaty to certain categories of agreements and concerted practices. Council Regulation 139/2004/EC of 20th Jan 2004, OJEC No L 24 (2004), 1–22, on the control of concentrations between undertakings. Commission Regulation 2349/84/EEC of 23rd Jul 1984, OJEC No L 219 (1984), 15–24, on the application of Article 85(3) of the Treaty to certain categories of patent licensing agreements. Commission Regulation 418/85/EEC of 19th Dec 1984, OJEC No L 53 (1985), 5–12, on the application of Article 85(3) of the Treaty to categories of research and development agreements. Commission Regulation 556/89/EEC of 30th Nov 1988, OJEC No L 61 (1989), 1–13, on the application of Article 85(3) of the Treaty to certain categories of know-how licensing agreements. Council Regulation 4064/89/EEC of 21st Dec 1989, OJEC No L 395 (1989), 1–12, on the control of concentrations between undertakings. Council Directive 91/250/EEC of 14th May 1991, OJEC No L 122 (1991), 42-46, on the legal protection of computer programs. Commission Regulation 240/96/EC of 31st Jan 1996, OJEC No L 31 (1996), 2–13, on the application of Article 85 (3) of the Treaty to certain categories of technology transfer agreements. Commission Regulation 2790/99/EC of 22nd Dec 1999, OJEC No L 336 (1999), 21–25, on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices. 10
Commission Regulation 2658/2000/EC of 29th Nov 2000, OJEC No L 304 (2000), 3–6, on the application of Article 81(3) of the Treaty to categories of specialisation agreements. Commission Regulation 2659/2000/EC of 29th Nov 2000, OJEC No L 304 (2000), 7-12, on the application of Article 81(3) of the Treaty to categories of research and development agreements. Council Regulation 1/2003/EC of 16th Dec 2002, OJEC No L 1 (2003), 1–25, on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty. Council Regulation 139/2004/EC of 20th Jan 2004, OJEC No L 24 (2004), 1–22, on the control of concentrations between undertakings. Commission Regulation 772/2004/EC of 27th Apr 2004, OJEC No L 123 (2004), 11–17, on the application of Article 81(3) of the Treaty to categories of technology transfer agreements. Commission Notice of Apr 2004, OJEC No C 101 (2004), 2–42, Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements. Commission’s Notice of Dec 1962, OJEC No C 139 (1962), 2922-2923, on patent licensing agreements. Commission’s Notice of Jul 1968, OJEC No C 75 (1968), 3–6, concerning agreements, decisions and concerted practices in the field of cooperation between enterprises. Commission’s Notice of Dec 1997, OJEC No C 372 (1997), 5–13, on the definition of relevant market for the purposes of Community competition law. Commission’s Notice of Jan 2001, OJEC No C 3 (2001), 2-30, Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements. Commission Evaluation Report COM/2001/786 final of 20th Dec 2001, on the transfer of technology block exemption regulation N° 240/96— Technology transfer agreements under article 81. Communication from the Commission to the European Parliament and the Council COM/2007/165 final of 29th Mar 2007, Enhancing the patent system in Europe.
United States legislation Sherman Antitrust Act of 1890, as amended, 15 U.S.C. §§ 1-7. Clayton Antitrust Act of 1914, as amended, 15 U.S.C. §§ 12-27, 29 U.S.C. §§ 52-53. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Rules, Regulations, Statements and Interpretations under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 16 C.F.R. §§ 801-803. Antitrust Guidelines for the Licensing of Intellectual Property of 6th Apr 1995, Department of Justice, Antitrust Division, and Federal Trade Commission. Antitrust Guidelines for Collaborations Among Competitors of Apr 2000, Department of Justice, Antitrust Division, and Federal Trade Commission.
U.S. Code of Federal Regulations, Title 37— Patents, trademarks and Copyrights, §§ 1.16-1.20 and 1.492. Patent Reform Act of 2007 (H.R. 1908, S. 1145).
United Kingdom legislation Copyright, Designs and Patents Act 1988 [c. 48]. Broadcasting Act 1990 [c. 42].
Other United Nations Commission on International Trade Law (UNCITRAL) Model Law on Public Procurement of Goods, Construction and Services with Guide to Enactment of UNCITRAL 27th session (3rd may - 17th jun 1994).
Table of Abbreviations
(U.K.) Copyright, Designs and Patents Act (1988)
Court of First Instance
Corporate Social Responsibility
European Court of Justice
(former) European Economic Community
European Patent Office
Federal Trade Commission
Hart-Scott-Rodino (Act) (1976)
Information and communication technology
Intellectual property management
Intellectual property right(s)
(U.S.) Patent and Trademark Office
Research and development
Significantly impeding effective competition (test)
Small but significant non-transitory increase in price (test)
(Agreement on) Trade-Related Aspects of Intellectual Property Rights (1994)
Technology transfer block exemption
United Kingdom of Great Britain and Northern Ireland
United States of America
World Intellectual Property Organization 13
Chapter I: Introduction
The object of this thesis is legal; it deals with law, with two sets of laws in particular. And law has always evolved over time, trying to adapt to the changing circumstances of society. The tension between competition and intellectual property (IP) law is definitely not the oldest example, but it is a good one. Concepts such as economic efficiency have developed since the beginning of the 20th century, and competition and IP law— and thus their ongoing conflict— have been influenced by scientific and social changes. IP laws create temporary proprietary rights over non-tangible property— intellectual property rights (IPRs)— which would otherwise be freely appropriable and useable by third parties. 1 These proprietary assets, which take the form of inventive ideas, information, or reputation, (normally) have an economic value, since their implementation into economic activities (generally) leads to a more efficient use of resources. Therefore, even if proprietary, economic agents— usually enterprises— are willing to pay for them, and in that sense, the law admits them to be traded as any other tangible good.2 This mechanism is considered a key monetary incentive to innovation and creativity. Indeed, the first IPRs granted by states, patents to inventions, became generalized in England during the 17th century3 with the aim of promoting technical progress. Since then, other IPRs have been incorporated into the category in order to provide an incentive to other forms of creativity and savoir-faire: copyrights and neighbouring rights, trade-marks and trade names, analogous industrial rights— such as utility models, industrial designs, domain names and database rights— , sui generis rights— such as plant breeder’s rights, topographies of semiconductor products and business secrets (or know-how) have successively joined the group.4 For its part, modern competition or antitrust law was born in the U.S. at the end of the 19th century, with the purpose of preventing unilateral or multilateral commercial 1
Cf. W. CORNISH and D. LLEWELYN, Intellectual Property: Patents, Copyrights, Trade Marks and Allied Rights, 5th ed., Sweet & Maxwell (2003), pp. 3-4 and 6, and R. COOTER and T. ULEN, Law and Economics, 4th ed., Pearson Addison Wesley (2004), pp. 120-122. 2 The majority view is to legally consider and treat IPRs as the intangible equivalent to ordinary property. However, this is not a categorically settled matter, and one can still find recent legal opinions where they are regarded more as a statutory reward for disclosure of inventions. See F.H. EASTERBROOK, ‘Intellectual property is still property,’13 Harvard Journal of Law & Public Policy 1 (1990), 108-118. 3 Although the first patent law system is considered to be born in Venice in the 15th century: see e.g. C. MAY, ‘Publication Review: The International Political Economy of Intellectual Property Rights,’27 European Intellectual Property Review 5 (2005), 199. 4 This list is not universally accepted. For some the term intellectual property rights is to be understood in a rather strict or formal sense, including non-tangible assets formally recognized and protected by the law and excluding information only informally or semi-formally protected, typically business secrets or know-how, not generally considered ‘property’(see CORNISH/LLEWELLYN, pp. 9-10, for the position under common law ). Even more controversial is the issue of whether traditional knowledge sui generis protection could qualify as IP.
practices deemed detrimental to trade and, ultimately, consumers. 5 Specifically, this entailed combating entrepreneurial cartels, or trusts, and monopolies whose conduct harmed the national market, and ultimately consumers. In other countries, competition law systems proliferated along the 20th century— especially after World War II first and then following the fall of communism— to the extent that they are nowadays a reality worldwide. 6 In the case of (Western) Europe, the establishment of the European Communities carried about the adoption of supranational competition rules, which constitute a system with particular characteristics closely related to the European integration process. The tension between intellectual property (IP) and competition law is probably as old as the latter. In this regard, the traditional problem arises from the market power IPRs may confer to right owners,7 who are in that case in a position to restrict production and increase prices, or exercise that power to drive competitors out of the market without competing on the merits. However, not all conflicts with competition law necessarily derive from the market power IPRs can afford. In point of fact, supervisory bodies and courts have also thoroughly dealt with certain clauses of IPRs transfer contracts that, even if designed to overcome the risk of opportunistic behaviour by the parties, are likely to restrict competition. This ongoing debate has gained new momentum since the end of the nineties, from when on we have experienced a true “rediscovery of intellectual assets.” IPRs have become a more valuable asset for many companies, and its management— sometimes referred to as intellectual property management (IPM)— has been significantly refined in accordance.8 The boom of IPRs is probably related by the technological boom of the nineties. With the rise of the information and communication technology (ICT) and the birth of the socalled New Economy, IPRs seem to play a crucial role. In a world more and more based on knowledge and innovation as an object of business and a source of economic growth, knowledge protection becomes crucial. However, scholars have also mentioned other
These types of practices had however already been identified by courts, especially— though not solely— in common-law systems, during the 18th and 19th century, as crimes of monopole or engrossing, conspiracies in restraint of trade or abuses of the liberty of contracting; the Sherman Act proceeded to systematize the existent case-law. 6 Antitrust systems nowadays amount to more than 100 jurisdictions. See R. WHISH, Competition Law, 5th ed., Butterworths (2003), p. 1. 7 Despite IPRs are often described as ‘monopolies’in general scientific publications and have been deemed as such by courts during certain historical periods, monopolistic power is not intrinsic in them. 8 J.L. DAVIES and S.S. HARRISON, Edison in the Boardroom, John Wiley & Sons (2001), pp. 2-3 and 11.
reasons behind this phenomenon, especially, the increased conception of IPRs— and particularly patents— as bargaining, marketing or even intimidation business weapons. 9 Most probably, both factors are relevant and feed back each other. Businesses have realized that, precisely in the ICT era, strategic uses of IPRs are not limited to the protection of their inventions, but also relate to the control of other companies’ strategies and behaviour and to marketing and public relations. This, together with the fact that IP protection has been strengthened, has culminated in the integration of IPRs practices into the corporate strategy of most ICT companies. An IPR strategy is thus born, which goes beyond the traditional conception of IPRs as an appendix of R&D and innovation, having become a substantial part of strategic management. With IP re-gaining momentum in the ICT era, a new aspect joins the list of features characterizing the New Economy and that competition law has to face. Five elements can be pointed out in this connection: economies of scale— the circumstance where average production costs decrease as output increases— , network effects— which arise when the attractiveness of a product or service positively depends on the number of its users— , technological interdependence, high degrees of dynamism and innovation and, finally, the strategic importance of IPRs. While all these features are interrelated, the last two can be said to be two sides of the same coin, namely dynamic, as opposed to static, competition. A modern IPR strategy runs parallel to an innovation strategy, being both multi-stage action plans; in contrast, conventional marketing-mix decisions, which focus on price and quality, are one-stage action plans. Putting it simple: traditionally, competition has taken place in markets, sometimes with patents; in the New Economy, competition is for markets and for patents. This does not however mean that innovation and IPRs strategies are the same thing: they take place in different domains and can entail different consequences. While competition law has arguably reacted adequately in relation to some of the features characterizing the New Economy, especially in Europe, scholars have frequently criticized its outdated approach towards the phenomenon of dynamic competition.10 However, it is submitted that this is not an accurate version of the story. While it may well be true that competition legal practice has not been at ease when confronted to innovation markets, there are ever more visible signs of acclimatization to changing business environment situations as well. Where those signs are precisely less 9
DAVIS/HARRISON, n. 8 above, p. 7. Readings in this sense are numerous: see e.g. R. LIND and P. MUYSERT, ‘Innovation and Competition Policy: Challenges for the New Millennium,’24 European Competition Law Review 2 (2003), 87-92, pp. 88-89. 10
visible is in relation to dynamic competition for IPRs, to competition within the IPR field. Scholars have tended to lump the innovation and IPR strategies together. Eclipsed by the former, the fact that a true corporate IPR strategy has emerged has as such remained unexplored. And legal practice has kept paying attention to the static situation of IPRs as a potential source of market distortions, but not to the dynamics of competition in patented or otherwise protected innovations: they have looked at IPRs as exogenous factors in examining traditional competition, but not normally as endogenous factors, the outcome of the intercourse of the companies’IPR strategies. The present thesis calls for a shift of the focus of the discussion about the tension between IP and competition law to an increasingly important domain. It is its purpose to address the fact that ICT companies are consciously competing beyond the classical dimensions of price and quality, racing for innovation, but also making use of the legal protection offered by IPRs to qualified innovations— and sometimes of their ins and outs. Specifically, the thesis discusses the problem that the IPRs boom has revealed a problem of fairness, reflected in the imbalance of the current IP legal system in favour of large companies. Finally, it is submitted that mechanisms based on a more comprehensive approach to the described phenomenon should be brought into play to correct it. The study prioritizes the legal approach adopted in Europe; however, it also heavily builds on the important U.S. experience in this area. With the stated purpose in mind, the thesis is structured as follows. First, the economic implications of IP law are discussed: Chapter II goes through the different economic theories exploring the trade-offs involved. Next, Chapter III offers a description of the antitrust background behind the ongoing discussion, in order to subsequently identify and evaluate the doctrine’s ‘state of the art’regarding competition in the ICT era. Chapter IV focuses on the specific aspect of competition within the IPR field; problems associated to it are identified and proposals on how to address them are then summoned and evaluated. Chapter V concludes by discussing whether time may be ripe for a new type of antitrust enforcement.
Chapter II: Economic approach to IPRs (and innovation)
A. The economic rationale of IPRs Generally, IPRs have been seen by economists as an award to innovation and creativity. Economics agents are assumed to be guided by profits, and therefore IPRs to incentivize innovative activity. In words of STIGLITZ, “[A]n intellectual property regime rewards innovators by creating a temporary monopoly power, allowing them to charge far higher prices than they could if there were competition.”11 One must in any case distinguish between IPRs exclusively conceived to encourage innovation and other exclusive rights designed with different or additional purposes. Normally economists refer to patents as the archetypical IPR, but other IPRs may in fact serve functions different than incentivizing innovation. We should therefore pay a closer look at the different types.12 Patents confer exclusive exploitation rights to an invention to its patentee for a limited period of time, who can in this way seize the fruits of her invention meanwhile. In this regard patents are said to encourage innovation. But the grant of a patent requires also the disclosure of the invention. Therefore, the recognized purpose of patents is to inventivize both innovation and its disclosure or dissemination. Carrying out a function comparable to that of patents are less known legal instruments such as utility models and plant breeder’s rights. A legal variant bearing similarities to patents but not totally comparable to them is that of business secrets or know-how. Business secrets consist of private information available to the company and valuable in order to obtain a competitive advantage in the market. In some cases they consist of innovations which would be patentable but the company prefers not to disclose. In other cases it is non-patentable or otherwise formally protectable expertise or knowledge. Business secrets are protected by law, which enforces commitments not to divulge them by employees or other persons having access to them. However, they present important differences in comparison with patents. Their protection is not given in exchange for disclosure, so the purpose here is not to encourage dissemination. Apart from that, protection lasts until the information is publicly available, a date which is naturally uncertain.
J.E. STIGLITZ, ‘Intellectual-property rights and wrongs,’Daily Times (17th Aug 2005) (for the sake of transparency, note that in general this author is highly sceptical of IP protection). 12 See, generally, COOTER/ ULEN (n. 1 above), pp. 121, 123, 132 and 134. Cf. CORNISH/LLEWELYN (n. 1 above), pp. 6-11 and 12-18.
Copyrights, originally designed to protect artistic works, do not only cover their commercial exploitation, but also the moral aspect of the creation, namely the recognition of the author of the work. This was however the traditional case, as the scope of application of copyrights has progressively been widen in time so as to cover creations, such a computer software, which are more of an industrial rather than artistic nature. In contrast to patents, the breadth of protection of copyright is more limited, independent creation not being preventable. The scope of protection is even more limited in the case of trade-marks (and trade names). The economic function of trade-marks (and of trade names) is to single out goods or services produced by a firm (or the firm itself), in order to encourage its strive for excellence. They are hence considered to incentivize competition for a good perception of the product in the market. Striving for excellence entails however a struggle for better products and processes, so ultimately trade-marks, as competition itself, incentivize innovation to a great extent. Note however that in such a case no dissemination of knowledge is achieved; trade-marks are in this case used in combination with business secrets. On the other hand, although their scope of protection is the most limited of all IPRs, they can still confer market power, alone or in combination with other IPRs. In fact, this is the main economic reason business have to enhance their brand image: the possibility of differentiating their product from competing ones. Legal protection provided by trade-marks is therefore related to the rules on unfair competition, which prevent enterprises from imitating their competitorsâ€™ products, denigrating them or in general deceiving consumers.13 Despite their differences, all IPRs can be said to share a common function, that of promotion of creativity and innovation. This is the function economists have almost exclusively focused on, discarding other aspects, as the moral rights conferred by copyright. Conclusions drawn from the case study of patents can hence be extendable to other IPRs as long as the same incentivization logic applies. However, other aspects different than the provision of incentives to innovation cannot be included here. Moreover, in relation to the acceptability of IPRs, one can visibly distinguish two basic trends on the study of IPRsâ€” qualifications then abound. Economists thus tend to divide between those placing more emphasis on the study of the role played by IPRs as an 13
A function in-between that of patents, copyrights and trade-marks is the one industrial design rights have. Industrial designs protect the external appearance of an article. They entail the right to exclusive commercialization, but they also are protected as a means of identification of the product origin. Furthermore, a design might incorporate an artistic element, as in the case of copyright.
incentive to innovation and those focusing on the study of the monopolistic power they can create. Finally, it is only until recently that synthesizing economic analyses have attempted to strike a mathematical balance of the trade-offs involved.
B. IPRs as a distortion of competition 1. The theory of monopoly14 A more accurate understanding of how IPRs have been traditionally considered to distort competition requires a comparison of the economic models of perfect competition and monopoly, as presented in neo-classical economic literature.15 In perfect competition there are a very large number of buyers or consumers and sellers or producers who act independently, so that no seller is in a position to charge a price above that prevailing in the market (neither can a seller demand a price below it). Furthermore, goods sold are homogeneous, there is perfect information and no transaction costs among the agents, no scale economies are present in general nor are fixed costs in particular— no significant investments are needed to produce the good in question. 16 Under these conditions, the result of all market transactions is efficient: welfare is maximized.17 This situation markedly changes when the number of independent producers is reduced to one and a monopoly obtains. The monopolist in this case has the possibility of profitably increasing the product price, and she will do so until it is no longer beneficial. The result is a situation where the quantity of the good produced is smaller and the price at which it is sold higher than in perfect competition. Accordingly, the effects on the market are twofold: on the one hand, wealth is redistributed from consumers to producers given that a higher price is charged; on the other hand, a smaller number of transactions takes place in the market, hence general welfare is also diminished. It is this 14
An instructive explanation of the theory of monopoly is provided in L. WALRAS, Eléments d’économie politique pure, ou théorie de la richesse sociale (Elements of Pure Economics, or the theory of social wealth, transl. by W. Jaffé), 4th ed. (1899), rev. (1926) Eng. transl., George Allen and Unwin (1954), 1st ed. by Corbaz (1874), Lesson 41, §§ 376-387. 15 The theory of perfect competition and monopoly was developed by the neo-classical economists of the 19th century; among them the most remarkable were probably A. COURNOT, A. MARSHALL and L. WALRAS. 16 Economists sometimes prefer to refer to this situation as the absence of barriers to entry, but it has been highly controversial whether all significant fixed costs are entry barriers or not. See W.K. V ISCUSI et al., Economics of Regulation and Antitrust, 3rd ed., MIT Press (2000), pp 158-159, for an explanation of the conflicting views of BAIN (1956) and STIGLER (1968) in this regard. 17 This welfare is defined from an economic perspective and does not consider how wealth is distributed.
latter loss, called dead-weight loss, the one considered by economists to affect efficiency. The limitations of these basic models are numerous, but two can be already mentioned here. First, the monopoly model makes clear the importance of the number of suppliers (or customers) in a market— of what economists call the market structure, but, more broadly, what defines market power is hence the ability to offer a product to which no similar alternatives exist, i.e. substitute products. Second, the type of economic efficiency considered by these models is of a static or allocative nature: the costs of production are given and not affected by the agents’ behaviour. The possibility of affecting these costs over time is not considered.
2. IPRs as ‘monopolies’ Historically, economists have generally viewed IPRs as monopolies. The reasoning goes that IPRs, archetypically patents, expressly consist of the right holder’s faculty to exclude others from exploiting the invention, certainly including manufacturing it or using it for manufacture. The result is a new product market where there is only one producer by statute, in other words a statutory monopoly. Several have been the economists adopting this view of IPRs. ADAM SMITH (1776), when referring to letters patent that granted trade privileges to joint-stock companies in consideration of the risk of the venture, went on saying: “A temporary monopoly of this kind may be vindicated upon the same principles upon which a like monopoly of a new machine is granted to its inventor, and that of a new book to its author.”18 Similarly, J.S. MILL (1848) stated that “[t]he condemnation of monopolies ought not to extend to patents, by which the originator of a new process is permitted to enjoy, for a limited period, the exclusive privilege of using his own improvement,”19
MARSHALL (1890), when talking about “material goods,” wrote: “[T]hey include … shares in public and private companies, all kinds of monopolies, patent-rights, copyrights.”20 Over time, however, economists have refined the study of IPRs and come to realize that these so-called ‘exclusive’rights do not necessarily confer significant market power. The flaw in the reasoning explained above lies in taking for granted that a novel
A. SMITH, Inquiry into the Nature and Causes of the Wealth of Nations (1776), Vol. 5, Ch. 1, Part 3, Article 1. 19 J.S. MILL, Principles of Political Economy (1848), Vol. V, Ch. X, § 5. 20 A. MARSHALL, Principles of Economics (1890), vol. II, ch. 2.
creation does not have existing substitutes. First, even at the time of grant, this is not always the case. Innovations might consist of improvements of an existing product or process to produce it, so that exclusive rights to market them, such as patents, will not imply a monopoly on an irreplaceable type of product— there will be substitutes available, albeit probably of an imperfect sort. Second and more importantly, similar innovations to the one protected by the grant may come up in short time. It is true that IPRs protect against replication or imitation of an innovation or creation, but this does not mean that the appearance of items fulfilling a similar need is also prevented. This is clear-cut in the case of copyrights: it protects the original form of expression of an idea, and imitations of that creation will infringe the exclusive right; however, other creations similar in style or genre can serve the same function, and their appearance cannot be prevented.21 In the case of patents similar considerations obtain. Although in this case the fact of being original is not enough to ‘invent around’a patent— an inventive step over the state of the art being required— , not many patents are fundamental enough to prevent the registration or commercialization of similar innovations differing in minor technical specifications. 22 The general current trend portrays IPRs as a monopoly on an input of production (a specific technology), but not necessarily on the output resulting from it.23
C. IPRs as an incentive to innovation— and its diffusion
Although not all IPRs have the same scope of protection, they can be said to protect the result of technological, organizational, financial, business or cultural innovation, either directly or indirectly. 25 A different matter is, however, if such protection serves its intended function of boosting innovation. In this regard, though repeatedly trumpeted in modern— and not so modern— times, the analysis of IPRs as a vehicle to promote 21
Hence, different romantic novels could be considered interchangeable, for example. Cf. O. GRANSTRAND, The Economics and Management of Intellectual Property: Towards Intellectual Capitalism, Edward Elgar (1999), p. 48: the increasing technical complexity of inventions leads to more and more detailed patents, which are in turn easily invented around. Only in case of strategic patents can it be said that a true position of force is achieved. In recent years, however, it is true that the holding of a net of patents or patent portfolios can effectively prevent inventing around. Cf. Section E, subsection 5 below. 23 GRANSTRAND, p. 48. 24 Part of the selection of economics researchers presented in this section is based on a reading list prepared by Patrick Francois for his lectures on economic growth at the Tilburg University, The Netherlands, in 2002. 25 See Section A above. In the field of trade-marks and industrial designs there is an interesting article by G.M. GROSSMAN and C. SHAPIRO, ‘Counterfeit-Product Trade,’78 American Economic Review 1 (1988), 59-75, where their role in encouraging quality and reputation of the product is discussed. 22
economic growth did not start until well into the 20th century, when growth economists started to pay some attention to their contribution to technological change.
1. Growth economics Economic theories in the field of welfare and innovation have evolved in their appraisal of IPR— or, more concretely, patents. In the writings of SCHUMPETER (1942),26 one can find one of the first far-reaching economic descriptions of why market power incentives were necessary for innovation: he coined the term “creative destruction”to refer to the process by which, in the search of larger profits, firms come up with new inventions, but these are yet replaced by newer, better technologies developed by other firms in the search for profits, and so on. But apart from this contribution, initial neo-classical models in the field of growth economics did not pay much attention to patents as a means of giving an incentive to technological improvement. Thus, in the HARROD/DOMAR (1946) and the SOLOW (1957) models, 27 economic growth is reasoned to be only dependent on accumulation of capital or, at most, exogenous— not explicable. One path-breaking research in this context was the one conducted by ARROW (1962),28 who developed a model on R&D, innovation, imitation and their role in contributing to economic welfare. He found that R&D carried out by business was not at its optimum level due to the difficulty to fully appropriate its returns, and concluded that more patent protection could be a solution to the problem. This model has been revisited several times, economists in general recommending ARROW’S suggestion to be considered with caution, as too much patent protection may have adverse effects too, blocking innovation. More recently, more sophisticated models have sought to have technological change expressly explained by the formulae or endogenized. A remarkable attempt in this direction is made by ROMER (1990).29 His model supposes that the rate of innovation
J.A. SCHUMPETER, Capitalism, Socialism and Democracy, Routledge, 5th ed. (1996), pp. 81-86, 1st ed. by Harper & Bros. (1942). 27 See E.D. DOMAR, ‘Capital Expansion, Rate of Growth and Employment’, 14 Econometrica 2 (1946), 137-147, and R.M. SOLOW, ‘Technical change and the aggregate production function’, 39 The Review of Economics and Statistics 3 (1957), 312-320. The fundamental difference between the models is that SOLOW brings in the feature of decreasing returns in scale to capital, which leads to the conclusion that capital increases do not affect the rate of growth in the long run, the latter eventually only being influenced by productivity improvements not explained by the model, the technological change. 28 K.J. ARROW, ‘Economic Welfare and the Allocation of Resources for Invention,’National Bureau of Economic Research (1962), 609-662. 29 P. ROMER, ‘Endogenous Technological Change,’98 The Journal of Political Economy 5 (1990), Part 2: The Problem of Development: A Conference of the Institute for the Study of Free Enterprise Systems, S71-S102.
can be affected by the efforts made in the R&D field, 30 and it incorporates the idea that technical knowledge is non-rivalrous— i.e. that, unlike human and physical capital, it does not lose value by being used by many persons at the same time— and that its returns in terms of production are therefore not decreasing in scale. This yields two interesting conclusions: first, the long-term growth rate is found to depend on the population size of the economy considered; 31 second— and most important for our purposes— , due to the presence of scale economies derived from the non-rival nature of ideas, if inputs were to be paid at a competitive price, companies would make a loss. Distortions of competition— characteristically in the form of patents— would hence be required to make R&D a profitable activity. A different approach is also presented by the neo-Schumpeterian scholars, particularly GROSSMAN/HELPMAN (1991) and AGHION/HOWITT (1992).
In their models,
innovations are believed to follow a ladder of ‘creative destruction,’33 where new inventions replace old ones in the market, hence creating a succession of temporary monopolistic positions. Conclusions here are even more sympathetic to patent protection: the expected growth rate would depend on the efforts in R&D, and therefore incentives in the form of legal monopolies are fundamental to ensure economic wellbeing. Second generation growth models, such as the one presented by YOUNG (1998), where the idea of invention following a quality ladder is combined with the idea of increasing welfare returns to variety, 34 arrive to similar conclusions: while population growth can be a factor to be considered, patent policy matters in any case. The importance of IP protection for technological and economic growth is however not acknowledged by all economists, even nowadays. 35 Growth models based on human capital, headed by LUCAS (1998),36 take the view that it is fundamentally the workers’ knowledge and skills that drive economic growth. Especially empirical studies have
Note that in turn these efforts may be influenced by patent policy. Note that this could be used as an argument for market integration, e.g. the establishment of a common market in Europe. 32 G.E. GROSSMAN and E. HELPMAN, Innovation and Growth in the Global Economy, MIT Press (1991), pp. 84-110, and P. AGHION and P. HOWITT, Endogenous Growth Theory, MIT Press (1998), pp. 53-80. 33 This term is first used by J.A. SCHUMPETER, n. 26 above, p. 81. 34 A. YOUNG, ‘Growth without scale effects’, 106 The Journal of Political Economy 1 (1998), 41-63. The idea here is that the technology-based approach postulating increasing returns to variety in terms of welfare and the neo-Schumpeterian’s view of better quality products replacing obsolete ones can be combined. In this regard, quality is believed to foster growth and replace sluggish incumbent monopolists, while variety is assumed to contribute to consumer's welfare, however, the latter is also supposed to make it more difficult to improve the quality of products. 35 Cf. e.g. STIGLITZ’S critical stance, n. 11 above. 36 R.E. LUCAS, ‘On the Mechanics of Economic Development,’22 Journal of Monetary Economics (1988), 3-42. 31
tended to be very critical towards patent protection: according to a known research carried by MANSFIELD (1986),37 abolishing the patent system would only have critical consequences for certain specific industries whose business is based on heavy formal investment in R&D, as the pharmaceutical or chemistry industry. Much empirical research in this area remains however to be done.
2. Innovation diffusion Patents have also been analyzed— although less thoroughly— as an incentive to the diffusion of technology. One legal requisite for the grant of patent protection is the disclosure of the invention, but it has been generally considered a failure. 38 The option of licensing gains importance as a consequence— and this is the only tool for dissemination in the case of other IPRs, such as business secrets. Licensing can achieve greater technological diffusion in two senses: it facilitates the commercialization of technology— similarly to other cases of risky projects— by sharing risks between licensor and licensee,39 and it is an effective way of clearing mutually blocking patent positions, hence permitting the commercialization of the patented inventions without the thread of litigation. 40
D. Welfare cost-benefit analyses Given that two opposite effects for welfare are generally considered to arise when IPRs protection is granted, one would tend to think that the importance lies in striking the balance between the two, determining their optimum length and scope. However, economic models balancing the supposed trade-offs involved in patent protection began to be developed surprisingly late in the 20th century. 41
E. MANSFIELD, ‘Patents and innovation: an empirical study,’32 Management Science 2, 173-181. A recent study can be found in B. ROIN ‘The Disclosure Function of the Patent System (or Lack Thereof),’118 Harvard Law Review (2005), 2007-2028. 39 Cf., generally, C.W.L. HILL, G.R. JONES, Strategic Management: An Integrated Approach, 6th ed., Houghton Mifflin (2003), p. 282. 40 See e.g. GRANSTRAND, n. 22 above, p. 48. 41 Before this, economists— as other professions, for example lawyers and politicians— had expressed their view supporting or rejecting the IP system, but no thorough analysis of its pros and contras took place. 38
1. Patent length and scope The first serious attempt of this type was made by NORDHAUS (1964), 42 and regarded the optimum length of a patent. In his model, a company’s R&D is assumed to result in technology that reduces the costs of production, giving the company an advantage over its competitors and the possibility to make extraordinary profits, if the technology is patented, during the lifetime of the patent. It is further assumed that the returns to investment in R&D are decreasing in scale. This is a crucial assumption, for it leads to the first important result that the optimal level of R&D is always positive. There must hence be a sufficient level of patent protection so as to ensure supra-competitive benefits needed to finance the research expenses.43 Secondly, it obtains that the effects of patent length on welfare are not univocal: on the one hand, increasing the length of a patent postpones the moment when the invention goes to the public domain and is freely adoptable by all producers; on the other hand, it provides more incentives to a researcher to conduct more R&D and hence develop a superior cost-saving technology. The optimal patent length would thus strike the balance between the opposite effects. NORDHAUS’model obviously has its limitations. The costs of installing a patent system are not included in the equation and secrecy leakages and inventing around can affect the patentee’s ability to recoup the investment.44 The model also assumes that using the developed technology in-house or licensing it out are equivalent options. NORDHAUS’ contribution is however fairly informative of the trade-offs involved in patent policy, and in fact its results are transferable to other IP categories to a large extent: for example, similar trade-offs are involved in the case of business secrets, but the legislator has normally considered their length out of its policy disposal. 45 The most well-known critique is however that the model centres on the optimum length of a patent, disregarding its scope or breadth. Some policy variables can be included as affecting the length of a patent— for example judicial invalidation— , but not all of them are— e.g. competition policy. 46 In this regard, the model by GILBERT/SHAPIRO (1990) is
The present explanation of the model by W. NORDHAUS follows GRANSTRAND, n. 22 above, pp. 93-102. This is surprisingly in line with ROMER’S and neo-Schumpeterian authors’conclusions; see Section C, subsection 1 above. 44 GRANSTRAND, n. 22 above, pp. 100-103. This does not however invalidate the model, which could easily include sunk costs and even a higher degree of uncertainty by breaking up the discount rate— the rate at which future benefits are discounted in the present— into an interest rate and an added risk premium. 45 GRANSTRAD, n. 22 above, p. 98. 46 Except for affecting the uncertainty of future benefits and hence the discount rate: see n. 44 above. 43
more comprehensive. 47 This model focuses on patent length and breadth, defined in broader terms than the patent scope: it consists of the set of business practices consented to a patentee and is simplified in the model as the leeway given to the patentee to set non-competitive prices. 48 Therefore, patent breath is assumed to affect the benefits made by the patentee in each given moment of time, while patent length regards the overall time during which such benefits can be exacted. The model assumes that increasing patent breadth is increasingly costly for society, while extending the length is not. Consequently, the solution that maximizes welfare is a minimum patent breadth— i.e. to grant the patentee a minimum number of claims or to subject the patentee’s exercise of market power to strict controls— and maximum length— that is to say to grant as long patent as possible. Though refreshing, this model also presents important restrictions. To start with, there is heavily restrictive assumption that the environment is totally predictable, so the monopolist will have no uncertainty as to the future and will not mind recouping her investment in a very long period of time (in theory infinitive). Another restriction regards the assumption on the impact of patent breadth on welfare, which eventually implies certain characteristics about the consumers’ preferences and the sellers’ production costs, which will not always be realistic. 49 In fact, different assumptions about these preferences led to the opposite conclusions as to the optimal length and scope of a patent in the model developed by KLEMPERER (1990).50 Finally, a further assumption is that the state-planner or legislator knows exactly what the reward to the patentee for her inventive effort should be. In that case the stateplanner better give the reward to the innovator directly, for then the costs of establishing and running a patent system can be spared. In fact this critique has given rise to the search of less distortionary ways of establishing an appropriate reward for innovators. An interesting proposal was made by KREMER (1998),51 based on auction of patents. To be exact, this economist proposes the granting of patents to follow a number of steps: 47
R. GILBERT and C. SHAPIRO, ‘Optimal Patent Length and Breadth,’21 RAND Journal of Economics 1 (1990), 106-112. Other models on the scope of a patent were contemporary, the most important among them being P. KLEMPERER, ‘How Broad Should the Scope of Patent Protection Be?,’21 RAND Journal of Economics 1 (1990), 113-130. 48 Note that an economic price can be interpreted in a broader sense so as to include product quality, aftersales service, liability, and so on. In this regard, offering a product for a higher price can also be seen as offering a product of worse quality or under less favourable conditions or terms of contract. 49 E.g. scale economies are not supposed to be present and, as we shall see (Section E, subsection 1 below), this does not always hold in practice. 50 See n. 47 above. 51 M. KREMER, ‘Patent Buyouts: A Mechanism for Encouraging Innovation,’113 The Quarterly Journal of Economics 4 (1998), 1137-1167.
first an innovator would submit an application to the patent office, the latter would then publicly auction an exclusive right over the invention, once the bids are presented the patent office would ‘toss a coin’: if head, the highest bidder would be grated the patent, if tail, the invention would be freely available to society. In both cases the inventor would be paid the highest bid. This would ensure that the invention is valued at market price and the adequate reward is given to the inventor, the patent grant to the highest bidder in a percentage number of times52 would hence be a necessary evil in order to value the patent correctly, but in any case a lesser evil than current patent protection— where no patents are placed on the public domain by the state. 53 This proposal is however unlikely to be feasible— at least nowadays, as there are important practical problems. There would be a problem of free-riding systems— countries expecting other patent systems to adopt the proposal without adopting it themselves. Another problem is that all citizens would feel to pay for a patent only some would use. A further problem is that due diligence costs are not considered: bidders might not make a proper due diligence and hence a full-informed decision if their chances to obtain the patent is small. And inconsistencies may arise if half of the patents are on the public domain and half in private hands— though this would diminish by increasing the probability of the patent being brought to the public domain. Be it as it may, the proposal is however ground-breaking and indicative that the loss of static efficiency may not be indispensable in order to encourage innovation. The GILBERT/SHAPIRO (1990) model is in any case also interesting for introducing the differentiation between the grant of a patent and the actual exercise of it, i.e. what the owner is entitled to do with it— what the authors call breadth. The model, as the one by NORDHAUS, contemplates the two basic commercialization options available to a patentee: internal development or transfer of the technology by means of licensing. But this more contemporary model is also more far-reaching: the possibility of IP and especially antitrust policy post-grant intervention is considered in both cases. This intervention of course affects (the breadth and hence) the value of a patent, and therefore it has an impact on the incentives to innovate. It can consequently be seen that IPRs licensing intervention is another way of ‘adjusting’the degree of incentivization to innovate.54
The proposal is explained with the ‘coin toss’analogy in order to be better understandable, but ideally the percentage of times a bidder is randomly granted the patent should be as small as possible. 53 Except as regards, to a limited extent, compulsory licensing. 54 In the model the degree of intervention by antitrust agencies is thought to be the same for both options, but in practice one of them can be more restricted than the other.
2. Patent licensing The commercialization option of licensing has in fact been first studied in detail in a model by KATZ/SHAPIRO (1985).55 In a three-stage game where first an innovation is developed, secondly licensing may or not take place and thirdly undertakings compete with the resulting technologies, the authors point out that licensing can both affect a researcher’s
incentives to innovate and the level of diffusion of a technology.
According to the model, however, in the absence of contractual mechanisms with which to monitor a licensee’s output— and hence charge royalties per unit— , voluntary licensing of a technology will only take place when it does not consist of a fundamental improvement worth of excluding other companies from the market: according to this model, only incremental innovations would be voluntarily licensed. The fact that, in certain cases, voluntary licensing can in theory disregard socially desirable fundamental technology transfers has led economists to also study— though succinctly— the figure of compulsory licensing, i.e. the imposition to a patentee of a duty to license her competitor. The model by GILBERT/SHAPIRO (1996)56 however puts forward that this remedy might in fact be over-used by competition authorities, entailing the dangers of inducing the entry or permanence of inefficient producers and of diminishing the incentives to R&D by affecting to the patent value. The results in any case depend on the structure of the licence fee. Hence, if the case is about a fixed licence fee, there is a risk that a competition authority or court, by imposing a duty to deal, will inefficiently substitute the low-cost production of a bottleneck monopolist by too high-cost production of an entrant claiming access to a technology.57 In contrast, when the licence fee consists of royalties that support coordinated production— and hence set up a commercial relation close to integration— , 58 voluntary licensing will only take place if the joint benefits of the cooperating firms exceed those of the stand-alone one. Furthermore, if the licence is voluntarily granted, both firms will produce some quantity if there are diseconomies of scale, but only the more efficient firm will produce if marginal costs are constant or decreasing in scale. The problem in 55
C. SHAPIRO and M.L. KATZ, ‘On the Licensing of Innovations,’16 RAND Journal of Economics 4 (1985), 504-520. 56 R. GILBERT and C. SHAPIRO, ‘An economic analysis of unilateral refusals to license intellectual property,’93 Proceedings of the National Academy of Sciences USA (1996), 12749-12755. 57 This will take place when the licensed firm’s marginal cost is in the vicinity of the compelled licensor’s monopoly price and significantly above the latter’s production cost— otherwise the non-voluntary licence will be efficient. 58 Royalties based on sales will be more similar to a joint production scheme when the commission is set high, and rather closer to a fixed fee if small. Constraints on production, non-compete clauses, and so on, will add to the commercial operation being closer to a joint production scheme.
this case, especially in the presence of scale diseconomies, is that voluntary licensing facilitates an inefficient collusion. This will occur when the licensee’s costs would not be too high without licensing: in this case a valuable competitor from a welfare viewpoint is removed. In this case, although licensing will come to pass voluntarily, compulsory licensing could however be used as a bargaining thread. Nevertheless,
commercialization risk factor is not taken into account. Licensing can in fact be an economically different option than direct investment, as it can contribute to reduce the patentee’s commercialization risk. In practice, licensing can spare a licensor an important investment in commercialization of her investment, receiving an income in the form of royalties while retaining control over the business. 59 On the other hand, the formula adapts the payment of royalties to the success of the product being introduced; hence, it is also a safer option for a licensee than buying the technology up-front and assuming all commercialization risks.60 However, there is always a risk of moral hazard typical of a principal-agent problem, associated to the possibility of free-riding on the licensor— for whom there is particularly a risk of giving away business secrets to a potential competitor— or on her established business network, which is pondered by the licensor. On the other hand, much of the risk of entry is on the licensee, who takes that into account for its profitability analysis of the arrangement. The risk for the licensee further includes the one derives from making heavy investment in very specialized, illiquid assets. In that case, a hold-up problem may arise where the licensee can find herself at the mercy of the licensor. As it can be seen, the trade-offs here involved are similar to the ones analyzed in patent length and breath models— diffusion of technology versus necessary commercial restrictions— but additional effects may be present that make the analysis more complex. It is therefore no surprise that many economic implications of licensing have remained practically unexplored by economists.
E. The current economic framework: the ICT era The ongoing debate about the balance between IP and competition law has moved to ICT era. This new economic era, even sometimes described as the Third Industrial 59
Cf. HILL/JONES (n. 39 above). As it can be seen, what is the useful point about licensing is that it is a way to share risks in the commercialization of an invention. Therefore, assignment agreements can also serve this function where some degree of control of the business— and therefore risk— transferred is withheld by the assignor. 60
Revolution, 61 is best portrayed in western developed economies 62 as the increased importance of knowledge, to the detriment of physical work. Production, embedded in processes since the Industrial Revolution, is now more and more automated and computerized. It is managed by information technologies, normally programmes designed to be implemented in machines. The variety of consumption goods has increased and entertainment goods, especially media, driven by communication technologies, are on the rise. In this context, what to a greater extent counts for economics agents is knowledge, in the form of information, innovation and design. Within this framework, a number of features have been connected to the typical sectors of New Economy.63 One of them is the presence of economies of scale. Other, more distinctive, are technological interdependence, network effects, market dynamism and a renewed interest in IPRs. Interdependence is a feature frequently present in the ICT sector, where the increasing technological complexity of products and processes requires more and more specialization, but also a growing degree of coordination, cooperation and information exchange. Network effects, a particular manifestation of informational interdependence, easily arise in cases where community interaction is valued, such as in the communication industry: when users value a network by the number of other users that can interact within it, network effects are present. The result is that the attractiveness of a network heavily depends on the number of its users. This can pose a problem, because a network operator with more customers will per se be more attractive for consumers than an otherwise identical operator with fewer customers. Market dynamism relates to the move from classical competition in price and quality to competition in innovation: companies do not only primarily aim any longer at being the ones producing given items more efficiently, but at being the first ones to introduce new items or production processes into the market. Time-to-market is crucial. Finally, a fifth element is the renewed strategic importance given to IPRs. In an economy based on knowledge, owing knowledge is the business key. And IPRs are 61
For example, the term is used as a title by J. GREENWOOD, The Third Industrial Revolution: Technology, Productivity, and Income Inequality, AEI Press (1997). 62 For alternative perspectives in developing economies, see e.g. Brazil’s position in L.A. KOGAN, ‘Rediscovering the Value of Intellectual Property Rights: How Brazil’s Recognition and Protection of Foreign IPRs Can Stimulate Domestic Innovation and Generate Economic Growth,’8 International Journal of Economic Development 1/2 (2006), 15-678, p. 19: “Brazil has assumed a leading role in helping to promote a new global paradigm that calls for the current high technology, knowledge and information-based digital era to become ‘universally accessible,’‘open source,’and essentially ‘free of charge’to developing countries— i.e., ‘public international goods’”(for the sake of transparency, note that in general this author is highly sceptical of this position ). 63 See M. MESSINA, ‘Article 82 and the New Economy: need for Modernisation?,’2 Competition Law Review 2 (2006), 73-98, pp. 74-75, and, more generally, OFFICE OF FAIR TRADING, Innovation and Competition Policy, part I, OFT 377 (2002), pp. 22-35.
conceived with that purpose: to give property rights over ideas. Thanks to their existence, companies can commercially exploit knowledge to a larger extent. However, recent times have witnessed an IP revolution: companies have become more aware of the strategic— both defensive and offensive— uses of IPRs 64 and embarked on their accumulation: an ‘arms race’has started.
1. Economies of scale In the model of perfect competition we have introduced,65 one important assumption was that no significant investments or fixed costs were required to set up a production scheme. In reality, however, many businesses require a heavy initial investment in industrial capacity or product promotion. This is true for the ICT sector, although not really distinctive of it: economies of scale can be said to be a recurring feature in the economy since the First Industrial Revolution. When a heavy initial investment is needed to enter a market, there are important costs to recoup by a producer; these costs will add to the cost of production. Because each firm willing to enter the market will have to face these costs, the level of concentration of the industry— the number of firms present in it— starts to matter for a different reason than ensuring the absence of market power. Industry concentration in this case matters from the viewpoint of productive efficiency. This type of efficiency refers to how wisely are resources used in the production of a good: from this viewpoint, it might not be efficient that a large number of firms produce the same good, as they all will have to incur into entry costs and may hence unnecessarily duplicate facilities or equipment. Therefore, taking into account scale economies leads to the search for an optimum number of firms, each producing a certain amount of good at which total costs are minimized. This scale of production is known by economists as minimum efficient scale.66
2. Technological interdependence A classical postulate by ADAM SMITH reads: “[E]very individual necessarily labours to render the annual revenue of the society as great as he can.”67 In practice, however, this does not always hold, because in numerous occasions the actions of one person affect
See I. RAHNASTO, Intellectual Property Rights, External Effects, and Anti-trust Law: Leveraging IPRs in the Communications Industry, Oxford University Press (2004), pp. 6-7. 65 Cf. Section B, subsection 1 above. 66 The importance of taking productive efficiency into consideration has been especially emphasized by proponents of the Chicago School. See among them R.A. POSNER, ‘The Chicago School of Antitrust Analysis,’127 University of Philadelphia Law Review 4 (1979), 925-948. 67 A. SMITH (n. 18 above), vol. IV.
the welfare of another without it being taking into account by that firs person: pollution, land overuse or road congestion are examples thereof. These ‘unforeseen’effects of someone’s conduct on the welfare of others are commonly known as externalities and normally derive from the insufficient delimitation of property rights. For instance, when a resource— say, a lake with fishes— is exploited in common by various persons, each of them will tend to fish more— typically by saying: ‘it’s me or them’— than if they owned the lake in exclusivity. As a result, the resource will be over-exploited— too much fishing will take place and the number of fishes drop. This is a classic example known as the tragedy of the commons.68 A way to solve this type of problem— but not the only one— is to allot individual property rights over all goods: in the fishery example, if the lake belongs to only one person, she will use it— assuming economic rationality— in an optimal way. But, as shown by COASE (1960),69 even if property rights are clearly defined in this way, the equilibrium can be suboptimal where transaction costs are so high as to prevent optimal exploitation. In the New Economy, externalities are very likely to occur. Products and processes are increasingly complex, and firms tend to specialize in a very detailed function— say, manufacturing a cellular phone component or conducting R&D in fibre optics telecommunications. Consequently, firms increasingly need each other in order to perform: hardware assemblers need a wide array of components providers and researchers need other researchers’information or other firms to commercialize the results. If optimal cooperation takes place, all efforts are combined in an efficient way, and welfare is maximized. However, insufficient delimitation of property rights may lead to inefficient collaboration: for example, uncertainty as to who can own the improvement to a technology put in common by two companies may make the idea of cooperation fall through. Nevertheless, the problem may not precisely be about insufficient definition of property rights, but about the existence of too high transaction costs precisely derived from a multiplicity of IPRs. This latter problem is known as the tragedy of the anticommons:70 when a resource or group of complementary resources (e.g. technologies needed to manufacture a cellular phone) is subject to property and other exclusionary rights by too many owners, transaction costs which a prospective entrant has to incur in order to make use of the resources may have a deterrent effect. If 68
This is the title of an essay by G. HARDIN, ‘The Tragedy of the Commons,’Science Dec 1968, vol. 162, No 3859, pp. 1243-1248. 69 R.H. COASE, ‘The Problem of Social Cost,’1960 Journal of Law and Economics 3, 1-23. 70 This language twist of HARDIN’S work (n. 68) was popularized by M.A. HELLER, ‘The tragedy of the anticommons: Property in the transition from Marx to markets,’111 Harvard Law Review 3 (1998), 621689.
the transaction that would take place in the absence of such costs (e.g. because property of resources is more concentrated) is efficient, there is a market failure. What is interesting in this case is that it is not the absence, but the existence of a multiplicity of IPRs what makes the final outcome inefficient. Hence, IPRs can be a way to solve externalities, but may also be a source of inefficiency. 71 Are there ways to solve the tragedy of the anticommons? There are some. One is certainly to increase the concentration of property, but from a practical point of view this might not be feasible as it would entail expropriation— more subtle ways of encouraging propriety concentration, as the use of fiscal incentives, could however be an option. An alternative is the private initiative of establishing a special entity with the task of centralizing and rationalizing the management and negotiation of IPRs: examples of these are copyright collecting societies— although these have also the purpose of increasing the copyright owners’ bargaining power— and, in the technological sector, patent pools. Patent pools are assemblages of patents needed to use or develop a set of interrelated technologies. 72 These patents are made available to all members of the pool, either free of charge or in exchange for a fee or royalty, in which case a patent holding company will usually be set up to administer the patents. Patent pools can thus enhance welfare when complementary patents are bundled and made available more efficiently; however, they can also be a tool for anticompetitive behaviour when pooled patents are substitutes: in that case, a pool can be collusory.73 Moreover, in the absence of perfect competition, patent pools also increase welfare when patents are complementary for a reason other than eliminating transaction costs.74 Thus, when complementary technologies are licensed individually, (non-coordinated) prices set by each individual licensor do not take into account the negative effect a price increase will have on the demand of complementary technologies. As a result, in the absence of perfect competition for each complement, prices may be over-set and technology offer restricted. If all licensors however coordinate their pricing policies, they will take the complementary nature of their technologies into consideration; prices will tend to fall and innovation to be more available.
To this adds the phenomenon known as patent thicket: see subsection 5 below. In practice, patents pooled in this type of schemes might not be complimentary from a technical point of view, but rather a legal one, because they infringe on each other. 73 SHAPIRO, ‘Navigating the Patent Thicket: Cross-Licenses, Patent Pools, and Standard Setting,’in A. JAFFE et al. (eds.), NBER Innovation policy and the economy, vol. I, MIT Press (2001), 119-150. 74 SHAPIRO (2001), n. 73 above. 72
In any case, externalities can also be of a positive sort. Specifically, in the last years, economic growth theorists have shifted their attention towards the phenomenon of geographical concentration of industries’R&D: the typical example is Silicon Valley in California. It appears to be a pattern for research— though also for manufacture— to be located in specific geographical areas according to type, known as innovation clusters. As we have seen, 75 previous growth models had attempted to explain technological change based on efforts in R&D. However, empirical evidence did not quite support this scientific modelling: while the bulk of R&D tended to be carried out by large corporations, small enterprises in fact exhibited a no less than comparable level of inventiveness. 76 This led economists to look for factor other than formal R&D spending capable of explaining technological growth. Scholars hence turned to innovation clusters in search for an explanation. In this context, ACS/AUDRETSCH/FELDMAN (1994)77 put forward the explanation that, in innovation clusters, positive externalities are generate from which particularly small firms benefit when it comes to innovation. According to this view, ideas generated by formal spending in R&D by large corporations and institutes ‘spill over’to other firms of the cluster. Small firms then make use of these ideas to produce innovations, so that, on the whole, technological clusters result in a larger amount of innovative output than geographical dispersion of research. This perspective is in fact related to the idea of increasing returns in scale to knowledge propounded by ROMER and based on the non-rival nature of ideas. 78 If positive network externalities are present in the field of innovation, there exists a similar ‘problem’a in the case of negative externalities: in this case, by contrast, too little knowledge would be produced because large corporations would not take into account the positive impact of their research and knowledge development on small firms’innovative activity. The concrete process through which this knowledge spillover takes place remains however a mystery;79 further research will be needed until a clearer picture of the situation will develop.
See Section C, subsection 1 above. Z.J. ACS and D. B. AUDRETSCH, ‘Innovation in Large and Small Firms: An Empirical Analysis,’78 The American Economic Review 4 (1988), 678-690. 77 Z.J. ACS, D.B. AUDRETSCH and M.P. FELDMAN, ‘R & D Spillovers and Recipient Firm Size,’76 The Review of Economics and Statistics 2 (1994), 336-340. 78 See Section C, subsection 1 above. 79 D.B. AUDRETSCH and M.P. FELDMAN, ‘Knowledge Spillovers and the Geography of Innovation,’in Handbook of Regional and Urban Economics, vol. 4, Elsevier (2004), 2713-2739, pp. 2737-2739. 76
3. Network effects Network effects easily arise in cases where communication exchange is valued by the general public: when the number of users of a service has an impact on its attractiveness to consumers, network effects are present. A typical example is the telephone network: nobody would join a phone network to which no other users are connected, but many would be very interested in joining a world-wide network. Actually it was the telephone network the one studied by one of the first publications made on this subject by ROHLFS (1974). 80 Communication networks like this one are examples of so-called real networks, but also virtual networks can be present where no physical connection between the users exists: for example, the virtual network of compatible word processors. Network effects and technological interdependence are closely related features. The former alludes however to something more specific. Interdependence means that agents need each other in order to increase general welfare. Their coordination is therefore to be encouraged. In the case of network effects, the importance is simply on the number of users, there is in fact no need to coordinate conducts to achieve a better outcome, as a ‘snowball effect’is present that pushes into the social optimum direction: people will prefer the biggest network, so welfare will be maximized in that sense by mere individual actions. That is why scholars have coined the term the comedy of the commons81 to refer to this phenomenon. Nevertheless, there lies a quandary in the fact that network effects tend to tip first move winners and have therefore been feared for their potential to easily lead to superdominant market players. One of most well-known works discussing this is the one by KATZ/SHAPIRO (1985).82 This is because the ‘chosen’network might not be the most attractive to consumers as regards its technical features, but the presence of network effects overwhelm any quality differences that may exist. In that case, the ‘best’ network is not chosen, and again a market failure arises that would require coordination in order to correct it. Coordination in this case is however less feasible: how could one coordinate free consumers’choices, one of the pillars of modern economic systems? One alternative measure involves ensuring that competition among networks at the 80
See J. ROHLFS, ‘A Theory of Interdependent Demand for a Communications Service,’5 The Bell Journal of Economics and Management Science 1. (1974), 16-37. 81 This is the title of an article by C.M. ROSE, ‘The Comedy of the Commons: Custom, Commerce, and Inherently Public Property,’53 University of Chicago Law Review 3 (1986), 711-781. 82 M. KATZ and C. SHAPIRO, ‘Network Externalities, Competition and Compatibility,’75 The American Economic Review 3 (1985), 424-440.
initial stage takes place exclusively on the merits of the products being offered, so that the ‘best’ network wins. In doing so, supervision of the start-up market becomes important: a close follow-up of commercialisation policies, seeking to prevent a misleading advertisement of the invention— especially, that the number of users is not overstated— is highly recommended. In addition, network effects certainly increase the potential danger of tying practices, 83 for a company can leverage its outstanding position in one market to increase its presence in another, and if network effects can contribute to rapidly achieve dominance in the second market also. Therefore, tying practices should also be carefully scrutinized. Finally, one should prevent that foreclosure of distribution channels drives contesting networks out of the market. This solution is however of a ‘second best’type, because once the ‘best’network wins the race and becomes dominant, it may well rest on its laurels. It may prevent the entry of competitors solely on the basis of its more extensive— and therefore more attractive— network. An optimum solution can certainly be reached if network effects cannot be appropriated by a single firm. From there stems the importance of intercompatibility or interoperability: if all networks are compatible so that the user of one of them may at the same time take part in another, the result is rather one big network not appropriated by one single operator. In that case, the number of users of each network does not make a difference to consumers. Furthermore, welfare is also increased because of the network expansion: there would be more users ‘connected’to each other. This is certainly the reason why governments have encouraged technical interoperabilty. 84 All the same, the implementation of this alternative may not be optimally feasible in certain cases, for instance when achieving intercompatibility can necessitate the infringement of business secrets.
4. Dynamic competition The neo-classical models on perfect competition and monopoly have had an enormous impact on today’s socioeconomic thinking; however, important critiques have been made as to their static nature. As a matter of fact, A. SMITH— a classical economist— had already put forward the idea of competition as a force pushing towards progress,
Tying takes place when a seller induces the buyer to purchase an additional product (the bundled product) to the one actually requested (the bundling product). Tying can be of a contractual nature, when he bundling is stipulated in an agreement, or of a factual one, when in actual fact the purchaser does not have other reasonable option but to acquire also the bundled product. 84 See Chapter III, Section C, subsection 2 for a good example.
freedom of trade being the key to ensure that the right direction was followed.85 For neo-classical scholars freedom was not however enough. What mattered for them was the market structure: in the absence of competitors, a monopolist would simply live off its rents, and the market would solidify. In other words, without a competitive market structure there would simply be no competition. Furthermore, in an ideal situation of perfect competition no firm excels the rest; welfare is maximized when no firm can exercise market power. This idea continued to live in the theories of the Harvard School inaugurated by MASON (1939, 1949) 86 and which, in spite of rejecting the goal of perfect competition as unrealistic— shifting to the more attainable notion of workable competition— , kept on underlining the importance of market structure as a decisive factor in the performance of the market. This emphasis on structure had however an important drawback: it did not consider the evolution of competition over time, but preferred to derive consequences for the observation of the market at a specific moment in time instead. The first economist to model the idea of competition in time was STACKELBERG (1934).87 In his model two firms compete against each other, but one enters the market later. The model shows that this difference in time is crucial for the economic outcome: while two identical firms competing simultaneously would achieve the same market share, two otherwise identical firms competing in a sequential game do not. In particular, the established firm has a first-mover advantage which it exploits to reduce its competitor’s future market share and gain more profits thereby. In this model, although the market structure is more concentrated, with one firm being dominant, the general outcome is in principle more profitable for consumers, as the quantity offered is larger and the prices lower than in a simultaneous competition case and significantly larger than in monopoly. 88 This model carries along a critical message for neo-classical economics: the static view of the market, focused on its structure, may well not be a comprehensive one: facing the prospect of new competitors entering the market in later stages might be enough for the classically-feared ‘monopolist’to expand output beyond the monopolistic equilibrium point. Even in the presence of relative entry barriers— 85
See R.J. VAN DEN BERGH and P.D. CAMESASCA, European Competition Law and Economics, Intersentia (2001), pp. 18-19. 86 E.S. MASON, ‘Price and Production Policies of Large Scale Enterprises,’29 The American Economic Review 1 (1939), 100-103, and ‘The Current Status of the Monopoly Problem in the United States,’62 Harvard Law Review 8 (1949), 1265-1285. 87 H.F. VON STACKELBERG, Marktform und Gleichgewicht (Market and Equilibrium) (1934). The description here is based on R. GIBBONS, A Primer in Game Theory, Harvester Wheatsheaf (1992), pp. 61-63. 88 Although still lower than in perfect competition equilibrium.
fixed costs to be faced by entrants— , later models have shown that the thread of a potential competitor entering the market in a later stage can be sufficient for an incumbent monopolist to expand output beyond the monopolistic level. 89 However, as regards specifically the role played by innovation in the process competition, the most notorious contribution— and the school of though to which it gave rise— has already been studied in this thesis:
monopolies— or positions of market power— as temporary results of product and process innovation, their economic dominance was not to fear because other— ‘better’— monopolies would replace them as soon as new products and processes are developed, and even other, new markets opened. Market power is hence viewed as the consequence, but also the fuel of a process of competition in time rather than in space: it is the search of supra-competitive profits what triggers entrepreneurial efforts in innovation, and their efforts what makes society prosper. SCHUMPETER’S view, later elaborated by the Austrian School, 92 is interesting because it focuses on a different concept of efficiency other than allocative, known as dynamic efficiency. This concept refers to the optimal use of resources in a continuum of time, rather than on a specific moment. It hence takes into account technological progress, and the necessary incentives to be given in the present in order to achieve more efficient situations— fruits of technological progress— in the future. To put it simple: it focuses on what should happen tomorrow— and the day after tomorrow— and not today. This idea of dynamic competition, dovetailed with the Chicago School theory of contestable markets, 93 has caught on in the context of the New Economy. Indeed, markets of the ICT sector are regarded by neo-Schumpeterian scholars as fast evolving highly contestable, with firms competing for markets rather than within them and where high rates of innovation reduce the life-cycle of a product to the extent that any position of market dominance becomes an inexorably temporary phenomenon. 94
See the elaboration on the STACKELBERG model by SPENCE (1977, 1979) and DIXIT (1979, 1980) as explained in J. TIROLE, The Theory of Industrial Organization, MIT Press (1988), pp. 314-320. 90 See Section C, subsection 1 above. 91 SCHUMPETER, n. 26 above, pp. 81-106. 92 Among them Nobel-prize winner F. VON HAYEK. See VAN DEN BERGH/CAMESASCA (n. 85 above), pp. 38-39, for an overview. 93 This theory emphasizes the role of potential competition to the detriment of market structure: what is important is that markets are contestable— capable of being entered into by potential competitors— , the degree of concentration in an industry not being an indicator of how well the market performs. For an overview of this theory, see W. J. BAUMOL, J.C. PANZAR, and R.D. WILLIG, Contestable Markets and the Theory of Industry Structure, (1982), pp. 15-46. 94 See D.J. TEECE and M. COLEMAN, ‘The Meaning of Monopoly: Antitrust Analysis in High-Technology Industries,’43 Antitrust Bulletin 3-4 (1998), 801-857.
Forward-looking as this theory may be, the empirical evidence about the procompetitive effects that the higher dynamism of New Economy markets might have remains however ambiguous. Although it is almost certainly true to say that the rate of innovation has accelerated in recent years and the evolution of the industry speeded up, it is not clear that this is per se enough to ensure a more competitive environment. Particularly in the computer sector, we have witnessed the existence of persistent levels market power, regardless of the constant improvement of products and development of new markets. Besides, also the modern structuralist approach of the Harvard School has accommodated to include dynamic efficiency as an antitrust concern, supporting in fact the idea that it is precisely competitive pressure— derived especially from market structure— what drives technological change. 95 And about whether it is the latter or the former theory the most pertinent there is simply no empirical evidence. Be as it may, the idea of dynamic competition has all in all attracted a big deal of interest by economists, and a new scholar domain based on time-to-market competition has flourished: patent race economics. In this area of academic research, economic models simulate the struggle between two or more companies to be the first to innovate and acquire a strategic advantage over the rest. In these models one finds an interesting conclusion about competition in R&D: information lags may encourage competition more than situations of perfect information where an incumbent firm can more easily monitor potential entrants. 96
5. Strategic use of IPRs Along the last decade of the 20th century and the first decade of the 21st, especially in the ICT sector, a new business approach has gained general acceptance in relation to the management of IP (IPM). IP is not any longer been seen as a mere function of the R&D activities, reflecting them on the legal scene. Instead, IPM acquires at this time independence, becoming a new dimension of the corporate strategy. Thus, the IPR function stops being a mere administrative task of filing patent and other IP applications when an invention is produced, to become a more sophisticated tool of financial and strategic importance: an IPR strategy is formally born.
For a recent example, see I.L.O. SCHMIDT, ‘The suitability of the More Economic Approach for Competition Policy: Dynamic v Static Efficiency,’28 European competition Law Review 7, 408-411, p. 409: “[I]t seems more than doubtful whether a static theory can be applied in order to explain dynamic competitive processes appropriately. The only way to promote dynamic efficiency is to maintain effective competition as we still lack a convincing dynamic theory.” 96 Patent race models are numerous. A short overview can be found in TIROLE, n. 89 above, pp. 394-399.
The IPR strategy has been said to consist in turn of a set of key elements or substrategies: an IPR filing strategy, which identifies areas for new IPRs; IPR portfolio investment management; an IPR licensing and enforcement strategy; and an IPR environment strategy, which focuses on lobbying and IPR communication.97 Of these sub-strategies, the filing and the enforcement strategies have decisive consequences for how competition between companies is to be conceived. In this regard, while traditional IP practices was defensive, focusing on the protection of innovations and competitive advantages,
a corporate IPR strategy embraces more offensive aspects,
systematically monitoring potential infringements in order to cash royalties or gain access to competing technologies. These developments clearly have implications for competition. Companies will no longer solely compete in traditional dimensions— as prices and quality— or more modern dimensions— as innovation. They will also compete in strategic IPR positioning. This renewed interest for IPRs has also a quantitative effect. Because the strategic value of IPRs has increased, so has their demand: in the case of patents, the number of grants in the last decade has been the highest in history; in the U.S. the increase is about 70% over the previous decade. 100 To this have also contributed other factors, such as the improvement in the enforceability of IPRs, the extension of the scope of patent protection, 101 and certainly the new role of ideas in the New Economy. Moreover, probably at least the last of these factors might be a partial explanation for the refined strategic use of IPRs nowadays. In the New Economy, what determines the success or failure of most companies is knowledge. And in the kingdom of knowledge, ideas reign.
97 I. RAHNASTO, ‘IPR Strategies Determine the Future of European Businesses?,’IPRinfo, Special Issue (Sep 2006). 98 It is true that holding a ‘key patent’(a patent able to block competing innovation), except in very particular sectors as the pharmaceutical one, is very difficult. However, firms have realized that a large portfolio of IPRs— normally a combination of key trade-marks, patents, copyrights and business secrets— can do a lot to prevent inventing around. 99 I. RAHNASTO (n. 64 above), pp. 6-7. 100 In the U.S., utility patents granted per year soared from 111,984 in 1997 to 147,518 in 1998 and 153,485 in 1999, to reach a peak of 169,023 in 2003: see U.S. PATENT AND TRADEMARK OFFICE, U.S. Patent Activity - Calendar Years 1790 to the Present (2006), p. 4. In Europe, patents granted per year by the EPO dropped from 39,640 in 1997 to 27,523 in 2000, but almost doubled in 2001, to remain around that level since then— 53,259 patents granted in 2005 (and note that this figure does not include patents granted by national offices): see EUROPEAN PATENT OFFICE, Annual Reports 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004 and 2005. Worldwide, the number of patents granted per year has increased from approximately 500,000 in 1997 to more than 600,000 in 2004: see WORLD INTELLECTUAL PROPERTY ORGANISATION, WIPO Patent Report 2006, p. 31. 101 Indeed, awareness about the strategic importance of IPRs has increased both at the business and political levels. Among governments there is now a strengthened belief that IPRs are the key for innovation, which drives western economies growth in the technological era. This has led to an improvement in the degree of national and international IPRs protection: the signing of TRIPS in 1994 (see n. 196 below) is a clear example thereof.
Specifically, the strategic use of IPRs bears a clear relation to other features of the New Economy. For instance, a way for a company to solve the transaction costs problem characterizing the tragedy of the anticommons is to build up a large portfolio of patents overlapping with those that the company may infringe. In that case, the firm will have a shield in case of being sued for infringementâ€” it will be able to strike back by countersuing. 102 This can be a cost-effective alternative to licensing-in negotiation. Another example is that companies may appropriate the benefit of network effects if they own exclusive rights to a certain ICT product or technology, by preventing others from making rival products interoperable. On the other hand, the patent flooding can also be said to be self-enforcing. The use of the term arms race, in a clear analogy to the geopolitical situation during the Cold War, has become widespread to define the phenomenon, and it is indeed very illustrative thereof: companies have realized the value of patents both as defensive and offensive business instruments; at the same time, they take into account that other companies, realizing also that, are amassing patents; to that the former respond by building up more patents with which to defend themselves. On the other hand, the flood of applications to the patent offices leads to a poorer level of examination. The consequence is a large number of low quality patents overlapping each other, a phenomenon come to be known as patent thicket.103 And when there are many layers of overlapping patents related to an area of manufacture or research, it is fairly difficult to ascertain who owns what and hence business activity becomes riskier or is held up. A way to solve it is to acquire more patents to protect the business activity. The result is in any case a general engagement in patent accumulation. There is certainly a very close relation between the mechanics of an IPR strategy with the ones of an innovation strategy in dynamic competition. Indeed, both phenomena, unlike the other New Economy features, refer to conscious and systematic plans of actions over time. But in spite of this close relation, the IPR strategy has its own distinctive characteristics, derived from the legal nature of the playground. Hence, both strategies consist in dynamic plans of actions, but these actions take place at different levels, or rather, fields. Innovation takes place within a first-level field, which comprises technologies; these are ways of doing something new, typically solving a problem or filling a need. In contrast, IPRs are qualified technologies that are afforded legal 102
This will normally take the legal form of challenging the validity of the patent claimed to be infringed. See SHAPIRO (2001), n. 73 above. It is true however that this overlapping is also a result of the technical complexity prevailing in the ICT sector, which is in turn an element related to the technological interdependence of agents (cf. subsection 2 above). 103
protection in the form of enforceable exclusivity. So not all technologies are IPRs: they may not qualify for protection, the legal protection may have lapsed or simply not apply because of relinquishment or lack of fulfilment of necessary formalities (e.g. registration). From this follows that the study innovation strategies cannot be directly equated to the study of IPR strategies: the latter requires acquaintance with legal ins and outs, with the special legal characteristics of the background where actions are executed. The above is the reason why very few economic studies have tried to chart these waters. Classic patent race models do not normally take into account the legal nuances of the patent system, assuming inventions more or less directly ‘convertible’into patents, and that a single patent may be enough to protect an innovation. For their part, patent litigation models normally take litigations as given. 104 In recent times, however, the seed of a new ‘IPR strategy economics’can be said to have been planted. In this regard, the models by BESSEN (2004) and BESSEN/MEURER (2006) 105 carry out a more systematic analysis of the two main elements of modern IPR strategies— the patenting and litigation sub-strategies— and their interrelations to the innovation (R&D) strategy. The models overcome the conventional restrictions of former models— where, once a patent is obtained, its claims cannot be narrowed nor their validity challenged— by incorporating a likelihood of winning or losing in patent litigation into the variables considered by a company when deciding its filing strategy. In BESSEN’S model, companies decide the degree of R&D and of patenting activity they will carry out. When considering the latter, they take into account the profits that patents can yield; these benefits come in the form of royalties that can be asked in crosslicensing negotiations with other companies— cross-licensing aimed at avoiding patent thicket litigation. A company’s bargaining power in these negotiations depends on the probability of winning at patent litigation, which in turn positively depends on the number of relevant patents held by the company. In turn, the cost of building a patent portfolio depends on patentability standards: if standards are high, so is the cost. The result is that these standards crucially determine a company’s IPR strategy. If standards are low, it pays off to build patent portfolios and use it against other companies in order to extract rent from them. A low patenting standards environment of this type favours
Cf. e.g. M.J. MEURER, ‘The settlement of patent litigation,’20 RAND Journal of Economics 1, 77-91, p. 78, where the probability of a patent being invalidated by a court is already given. 105 J. BESSEN, ‘Patent Thickets: Strategic Patenting of Complex Technologies,’Research on Innovation, Boston University School of Law, working paper 0401 (2004), and J.BESSEN and M.J. MEURER, ‘Patent Litigation with Endogenous Disputes,’Boston University School of Law, working paper 0502 (2005).
incumbent firms to the detriment of entrant firms, which are levied a sort of ‘entry tax’ by the former through their aggressive IPR strategies. BESSEN’S model is certainly not a complete description of reality. The assumption that low patenting standards are a key factor in explaining patent accumulation may be too one-sided: as we have seen, the reasons behind the arms race are probably several and intertwined. Moreover, although it drastically improves the former economic study of IPR practices, it does not make any significant attempt into the direction of analyzing them in a qualitative sense; i.e. focusing also on the specific relation of one patent to another: it does not try to locate patenting practices within what we call the IPR field. But despite these restrictions, the conclusions of the model and its implications for welfare and wealth distribution gives food to thought: patent accumulation can not only lead to a wasteful activity— too many ‘bad’ patents being applied for— , but also discourage innovation— by making markets less contestable— and, last but not least, redistribute rents away from entrants to incumbents.
F. Summing up Economics has done significant progress over the last two centuries. Economic models have evolved in sophistication and realism. However, the restrictions of the assumptions used are still obvious, and consequently one shall be very careful when interpreting their results. On the other, hand, the evolution of the economic reality has been even faster than the theory. The old discussion about the balance between the market power potentially affordable by IPRs and their role as an incentive to innovation is still not closed; yet, in the New Economy, the debate gets probably even more complicated. However, before entering into such a more complex discussion, a stance towards the desirability of IP protection has to be adopted— otherwise there is no base on which to build any convincing theory. IPRs are certainly not the only valid incentive to innovation. Other types of incentives other than the grant proprietary rights over an idea have also proven to work in practice. From a pragmatic perspective, it can however be considered that, in the socioeconomic context of modern times, IPRs play a significant role as incentives to innovation. Modern economies increasingly consist of ICT products and services, items which are easily reproducible once conceived. At the same time, we are in the age of the all46
pervading corporate thinking. The ultimate decisions are taken in corporations in the name of profitability, where the rate of return is pivotal. Therefore, until a better— feasible— option to encourage innovation is found, we rather keep working with what we have. The distinctive features of the New Economy complicate even more— and that is quite much— the balancing of trade-offs. This is especially so because these features do not point all into the same direction: typically, to the threat of network effects the cure of market dynamism is presented. But there are many other interactions. The existence of technological interdependence brings about a greater need of coordination of business activity and determines important opportunities for growth derived from a free flow of ideas. Network effects clearly pose the thread of tipping one market player to the detriment of the rest, but present also beneficial effects for welfare when a dominant standard emerges; the quiz lies in finding the way to select that standard: compatibility can be an optimal solution, but forcing compatibility can affect the firms’incentives to innovate. Next, the dynamism of the industry poses the fundamental challenge of adapting competition theory, still significantly entrenched in the static model thinking of the 19th century. Finally, a last feature of the New Economy has not been studied much in depth. And it should, because their effects seem in practice remarkable. The rise of the strategic use of IPRs has inter alia led to a phenomenon of patent accumulation, wherefrom a number of consequences are already identifiable. First, the patent thicket phenomenon leads to a waste of resources derived from the firms’ over-investment in patents in order to, precisely, temper their effects on an individual basis. It also increases the firms’ transaction costs, both in the sense that licensing negotiations have to take place with multiple owners and that compliance verification costs skyrocket due to the overlapping of patents. Eventually, these effects have a number of consequences in different areas. Static efficiency is debilitated because of negotiation costs, which may lead to a decision by a prospecting manufacturer not to produce. As regards dynamic efficiency, the two types of transaction costs explained affect it negatively, as the incentives to innovation are diminished. But, moreover, the patent thicket phenomenon has an effect on income distribution: it benefits incumbents over entrants or, in quantitative terms, large firms over small ones. The issue of distribution of wealth has been rather ignored by modern economists, despite the important implications it may entail for the society’s welfare (for example, affecting the education level or the rate of crime). In this case, the
redistribution of wealth that takes place has an important impact on competition: it makes it tougher for small business to compete. The effects all in all involved, as it can be seen, are multiple. But it seems possible to basically group them in two sides: on the one hand, the technological interdependence of the industry and the market dynamism speak up in general for a smaller degree of normative intervention, if not encouragement of cooperation in the first case. On the other hand, the existence of network effects, coupled with economies of scale, and the patent thicket phenomenon can make a position of dominance more enduring, therefore requiring closer monitoring. It seems thus that the key lies in how to channel the business activity in the New Economy to the â€˜correctâ€™path, that is that of fruitful innovative cooperation, without falling into the trap of facilitating unmerited dominance by incumbent firms through the appropriation of network effects and the control of the IPR field. It seems therefore that IPRs are one of the keys in determining the type of intervention.
Chapter III: Competition law approach to IPRs
A. Introduction Both the EC and the U.S. competition laws envisage three main types of anticompetitive conduct: cartels, or concerted practices between enterprises restrictive of trade; abuse of dominant position or ‘monopolization,’in other words anticompetitive leveraging of economic power; and corporate mergers likely to diminish the degree of existent competition. But in spite of these similarities in their configuration, the actual stance competition legal practice has adopted on both sides of the Atlantic is different. Both generally and in cases of conflict with IP laws in particular, the application of EC competition law has been more regular in time, but technical economic analyses have usually been pushed into the background, while in the U.S. antitrust enforcement has been more cyclical, though also readier to consider economic reasoning. In the European Community (EC), the conflict between EC law and IP laws has usually been considered from a market integration perspective, thus closing off other efficiencybased considerations. In fact, this conflict has not only affected the rules on competition contained especially in Arts. 81 and 82 of the Treaty establishing the European Community (EC Treaty)106 and in the Merger Regulation,107 but also the provisions on free movement of goods in current Arts. 28 and 30 EC Treaty. EC institutional practice has hence focused its efforts on combating practices interfering with the single market imperative, with the establishment of a common market as a goal.108 It was not until the 1980s, and especially as of the 1990s, when other considerations started to play a leading role; competition law practice has increasingly adopted a more economics-based approach since then. In the U.S., on the other hand, antitrust law is basically contained in Sections 1 and 2 of the Sherman Act and Sections 7 and 7A of the Clayton Act.109 There are two national antitrust agencies, the Department of Justice and the Federal Trade Commission (FTC). 110 In this country, antitrust enforcement has suffered a more pendulum-like evolution than in the EC— though this is also due to its longest history. An initial stage 106
Treaty establishing the European Community (formerly Treaty establishing the European Economic Community) of 25th Mar 1957, (consolidated version) OJEC No C 325 (2002), 33–184. 107 Council Regulation 139/2004/EC of 20th Jan 2004, OJEC No L 24 (2004), 1–22, on the control of concentrations between undertakings. 108 GERBER, n. 112 above, pp. 100-103 and 111. 109 Sherman Antitrust Act of 1890, as amended, 15 U.S.C. §§ 1-7, and Clayton Antitrust Act of 1914, as amended, 15 U.S.C. §§ 12-27, 29 U.S.C. §§ 52-53. 110 Although only the Department of Justice can bring criminal proceedings. Apart from these agencies, state attorneys generals and ‘injured’private parties can instigate legal proceedings against offenders. See E.T. SULLIVAN and J.L. HARRISON, Understanding Antitrust and Its Economic Implications, 4th ed., Matthew Bender (2003), pp. 45-46.
of strong antitrust enforcement was followed by a more laissez-faire stance until the Great Depression, when market interventionism had its golden days. And though interventionism retreated after World War II, a certain fear of IPRs as potential monopolies lasted until the 1980s, particularly during the time known as the BlackDouglas era, 111 when IP enforcement was also judicially discouraged for fear of the monopoly potential of patents.
B. Cartels Cartels are the archetypical form of restriction of competition, and are banned both under Art. 81 EC Treaty and Section 1 of the Sherman Act. Practices such as price and output fixing and market sharing have long ago been condemned by the principal competition legal systems. In Europe, it is the latter practice the one having attracted more institutional attention, in agreements and practices normally involving licensing and, to a lesser extent, assignment of IPRs. The reason for the special emphasis placed by the EC institutions on preventing the isolation of national markets is the goal of economic integration.112 But market integration has been a general historical imperative, and hence the doctrine of exhaustion, derived in that context of the rules on free movement,113 heavily influenced the development of the competition rules in relation to IPRs agreements. However, in the last years a more modern trend as regards the transfer of technology is to be remarked; a more flexible, efficiency-based and unitary approach has come out. The possibility of licensing or assigning IPRs is provided for in the different international treaties. 114 Their use in the business world is widespread as a means of entering new markets, for entailing a relatively safe entry mode by which the licensor can share risks with the licensee. 115 In this regard, the tension has generally been 111
This 1940s and 1950s era is named after two judges of the U.S. Supreme Court, H.BLACK and W.O. DOUGLAS, well-known for their hostility towards patents, seeing them as a potential source of monopolistic power. See G. SOBEL, ‘Patent Scope and Competition: Is The Federal Circuit’s Approach Correct?,’7 Virginia Journal of Law and Technology 3 (2002), at http://www.vjolt.net, pp. 18-21. 112 See D.J. GERBER, ‘The Transformation of European Community Competition Law?,’35 Harvard International Law Journal (1994), 97-142, p. 98. 113 See n. 118 below. 114 See e.g. Convention on the Grant of European Patents (European Patent Convention) of 5th Oct 1973, EPO 12th ed. (2006), Arts. 72 and 73 (on patents) and Paris Convention for the Protection of Industrial Property of 20th Mar 1883, WIPO No WO020EN, 2-20, Arts. 6(3) and 6quater and Madrid Agreement Concerning the International Registration of Marks of 14th Apr 1891, WIPO No WO015EN, 3-20, Art. 9ter (on trade-marks). 115 See Chapter II, Section C, subsection 2 and Section D, subsection 2, above.
between the need to provide IPRs owners and licensees an incentive to introduce a new technology, and hence to allow certain exclusive ways to recoup risky investment, on the one hand; and the pursuit of practices restrictive of competition— particularly market partitioning practices as far as the EC is concerned— , on the other.
1. Historical and comparative background: the European focus on market integration In Europe, in the years following the signing of the Treaty of Rome (currently the EC Treaty), it soon became apparent that the EC institutions would not be most concerned about he possibility that licences of IPRs could entail efficiency-impairing restrictions, but about the thread they could pose to economic integration. Hence, after a short fairly lenient period towards IPRs licensing agreements, 116 institutional practice started to react against market partitioning clauses, such as the grant of absolute territorial protection entailing the foreclosure of allotted markets to any parallel importer.117 In fact, competition law enforcement ran parallel to the application of provisions on free movement of goods, which were also used to curtail the licensor’s faculty to prevent parallel imports of licensed goods back into the licensor’s territory.118 Institutional focus on market partitioning clauses in IPRs licensing agreements practically implied turning a blind eye to other IPRs practices.119 However, there was also recognition that a certain degree of territorial exclusivity was needed in order to incentivize the licensing of new technologies.120 A stable line had therefore to be drawn between permitted and illegal territorial protection, and this was eventually done by the
The Commission’s Notice of Dec 1962, OJEC No C 139 (1962), 2922-2923, on patent licensing agreements (§ I(A), (C) and (E)), adopted a very munificent attitude towards IPRs. The rights to arrange the manufacturing and distribution of a registered invention were regarded as an intrinsic characteristic of a patent; the stance was thus taken that output limitation, absolute territorial protection, quality standards compliance and non-competition clauses should be allowed. 117 Joined cases 56 and 58/64 Consten and Grundig v Commission,  ECR 299 (at 345-346). 118 Case 78/70 Deutsche Grammophon v Metro SB,  ECR 487 (paras. 11-13). This is known as the doctrine of exhaustion. In subsequent judgments, the application of this doctrine to other IPRs became apparent: it was repeated in relation to patents (Case 15/74 Centrafarm v Sterling,  ECR 1147), trade-marks (Case 16/74 Centrafarm v Winthrop,  ECR 1183) and models and designs (Case 144/81 Keurkoop v Nancy Kean Gifts,  ECR 2853). 119 Decisions of the Commission during the 1970s clearly reflect this. See the Commission Decisions relating to a proceeding under Article 85 of the EEC Treaty 72/25/EEC of 22nd Dec 1971, OJEC No L 13 (1972), 50-52 (IV/5 400— Burroughs/Delplanque), 72/237/EEC of 9th Jun 1972, OJEC No L 143 (1972), 31 (IV/17.545, 6.964, 26.858, 26.890, 18.673, 17.448— Davidson Rubber Co.), 75/494/EEC of 18th Jul 1975, OJEC No L 222 (1975), 34 (IV/21.353— Kabelmetal/Luchaire), 75/570/EEC of 25th Jul 1975, OJEC No L 249 (1975), 27-30 (IV/28.967— Bronbemaling/Heidemaatschappij), and 76/29/EEC of 2nd Dec 1975, OJEC No L 6 (1976), 8-15 (IV/26.949— AOIP/Beyrard). 120 S. PICKARD, ‘The Commission’s Patent Licensing Regulation— A History,’5 European Competition Law Review 2 (1984), 158-166, pp. 158-160.
European Court of Justice (ECJ) in Maize Seed.121 The Court proceeded to differentiate between the granting of territorial exclusivity which only affected the parties to the agreement (called open exclusive licence), and the covenants to preclude parallel imports, which also affected third parties (closed licence). The blue-print laid down in Maize Seed heavily influenced the EC competition legislation on IPRs licensing for almost three decades. Indeed, the Commission’s approach to IPRs licensing had evolved from initially considering IPRs licences as agreements falling outside the prohibition laid down in Art. 81(1) EC Treaty, to consider that such agreements were capable of being caught by Art. 81(1), though normally exemptible according to Art. 81(3) EC Treaty. This called for the approval of group exemptions, 122 where the institutional experience and case-law would be incorporated into. The block exemptions that ensued in the next 30 years, the first concerning patent licences,123 followed by a block exemption on the transfer of know-how124 and later on by the first Technology Transfer Block Exemption (TTBE), 125 which combined and repealed the two former, were imprinted ob by market integration concerns. They were drafted following a three-tier listing arrangement, with a list of contractual restrictions deemed automatically exempted according to Art. 81(3) EC Treaty, a second list of clauses generally considered not to infringe Art. 81(1) (commonly known as the white list) and a third catalogue of forbidden anticompetitive clauses (the black list). Grants of territorial protection were classified into one of the three sorts according to the degree of geographic market foreclosure. Hence, following the ruling in Maize Seed, exclusivity consisting of the grant of an open exclusive licence within a licensed territory, i.e. entailing the licensor’s commitment not to license others nor compete herself within it, was exempted. Also dispensed were contractual prohibitions to compete in the other licensees’ territories on one’s own initiative (termed active competition), while commercialization of the licensed products in other territories at the request of 121
Case 258/78, L.C. Nungesser and Kurt Eisele v Commission,  ECR 2015 (paras. 53, 57-58, 6061 and 64-65). 122 The Commission had in turn been empowered by the Council Regulation 19/65/EEC of 2nd Mar 1965, OJEC No 36 (1965), 533-535, on application of Article 85(3) of the Treaty to certain categories of agreements and concerted practices, Art. 1, to adopt regulations exempting certain categories of agreements, including inter alia contracts handling “industrial property rights.” 123 Commission Regulation 2349/84/EEC of 23rd Jul 1984, OJEC No L 219 (1984), 15–24, on the application of Article 85(3) of the Treaty to certain categories of patent licensing agreements (Arts. 1, 2 and 39, Arts. 1, 2 and 3. 124 Commission Regulation 556/89/EEC of 30th Nov 1988, OJEC No L 61 (1989), 1–13, on the application of Article 85(3) of the Treaty to certain categories of know-how licensing agreements. 125 Commission Regulation 240/96/EC of 31st Jan 1996, OJEC No L 31 (1996), 2–13, on the application of Article 85 (3) of the Treaty to certain categories of technology transfer agreements (Arts. 2 and 3).
customers therein (passive competition) was exempted for a maximum of 5 years. On the white list were quality standards (including technically necessary tie-ins), bestendeavours (including minimum royalties and quantities) and non-exclusive reciprocal grant-back clauses. 126 For its part, the black list encompassed three main types of banned clauses (in principle): hardcore restrictions— tying (unless technically necessary), 127 output limitation and price-fixing clauses— , provisions considered the result of an imbalance of bargaining powers— automatic extension and no-challenge clauses 128 — and, finally, covenants not to compete of a non-territorial nature— noncompete clauses outside the field of use and customer sharing agreements. The formalistic approach of these three block exemptions, entrenched in geographic criteria, gave rise to important problems. 129 To start with, the use of white and black lists had undesirable effects on the business conduct. In the search for legal certainty, enterprises also tended to adapt their contractual practice to the described conduct; this resulted in a straitjacketing effect: too formalistic, ill-suited agreements were concluded. 130 Additionally, the scope of application was too narrowly defined— excluding increasingly important business operations such as cross-licensing and patent pools. Accordingly, a flow of individual notifications suffocated the Commission, distracting its efforts from repressing plainly harmful restrictions. But apart from that, the economic logic behind the regulation, focused on market integration, had become seriously outdated after the formal completion of the internal market by 1993. With one of its main objectives having lost weight, other aims of EC competition law went up steps on the ladder at the turn of the century, when talks about ‘effects on the market’ were drawn into the academic and official discourse.131 This major policy shift did not only take place in the field of IPRs licensing: reforms of other vertical agreements block 126
The first TTBE later added exclusive mutual grant-backs of non-severable improvements to this list. Tie-in clauses were first on the black list when technically unnecessary, but later the first TTBE removed them from the catalogue, their competitive effects to be assessed individually. 128 A no-challenge clause is an undertaking not to contest the validity of a patent. This sort of clauses, together with the automatic extension type, was later removed from the list by the TTBE, their competitive effects to be assessed on a case-by-case basis. 129 This was reflected in Commission Evaluation Report COM/2001/786 final of 20th Dec 2001, on the transfer of technology block exemption regulation N° 240/96— Technology transfer agreements under article 81 (paras. 20, 26, 38-39 and 174-177). 130 Furthermore, the fixed rules of the block exemption occasionally led to contradictory results. For example, the regulation, in line with its predecessors, white-listed best-endeavour clauses, including the obligation to pay minimum royalties. If picked high enough, an obligation to pay minimum royalties coupled with a generic best-endeavours clause can have the same effect as a covenant not to compete, which was in fact black-listed: see R. WHAITE, ‘Licensing in Europe,’12 European Intellectual Property Review 3 (1990), 88-98., p. 91. 131 For discussion, see M. SIRAGUSA, ‘The Millennium Approaches: Rethinking Article 85 and the Problems and Challenges in the Design and Enforcement of the EC Competition Rules,’21 Fordham International Law Journal 1 (1998), 650-678, pp. 650-658. 127
exemptions had already paved the way and influenced the drafting of a new TTBE.132 A more economics-based approach was to be staged. If truth be told, the EC legal reform followed also closely the development of the U.S. antitrust approach to IPRs licensing. 133 In this country, antitrust enforcement in licensing situations had experienced a profound change. The traditional approach was reflected in a 1970 list prepared by the Department of Justice where licence clauses likely to conflict with antitrust law were depicted. 134 These included non-competing clauses outside the field of use, tie-ins, exclusive grant-backs, exclusive licensing provisions, sales bans of unpatented products and minimum price setting clauses. The rationale behind this list was a concern in ensuring that contractual restrictions on the economic freedom of the parties did not lead to a more restrictive economic outcome than if the licensing of patents did not take place.135 However, in the 80s this attitude started to change. In this sense, the licensing of IPRs began to be seen as mechanism of diffusion of innovation and progress, different than the one orchestrated by the IP system, particularly patent protection. Antitrust agencies realized that contractual restrictions could both increase the value of a patent and facilitate cooperation in its development and commercialization. Hence, a shift from the per se ‘nine no-no’s’rules into a ‘rule of reason’approach took place. This shift culminated in the adoption of the 1995 IP guidelines, 136 which were grounded on the main principle that antitrust intervention in IPRs licensing agreements should take place on the basis of a comparison between the anticompetitive effects that may derive from contractual restrictions with the pro-competitive effects that normally arise— e.g. by facilitating the
Specifically, the forerunners were: Commission Regulation 2790/1999/EC of 22nd Dec 1999, OJEC No L 336 (1999), 21–25, on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices, Commission Regulation 2658/2000/EC of 29th Nov 2000, OJEC No L 304 (2000), 3–6, on the application of Article 81(3) of the Treaty to categories of specialisation agreements, and Commission Regulation 2659/2000/EC of 29th Nov 2000, OJEC No L 304 (2000), 7-12, on the application of Article 81(3) of the Treaty to categories of research and development agreements. In addition, the TTBE needed to be adapted to the new EC competition procedure instituted by Council Regulation 1/2003/EC of 16th Dec 2002, OJEC No L 1 (2003), 1–25, on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, according to which the individual exemption procedure was abolished. 133 See E. VOLLEBREGT, ‘The New Technology Transfer Block Exemption: From Straightjacket to Moving Targets,’10 Computer and Telecommunications Law Review 6 (2004), 123-129, p. 123. 134 This list came to be known as the ‘Nine No-No’s.’See R. GILBERT and C. SHAPIRO, ‘Antirust Issues in the Licensing of Intellectual Property: The Nine No-No’s Meet the Nineties,’Brookings Papers on Economic Activity. Microeconomics (1997), 283-349, pp. 284-286. 135 GILBERT/SHAPIRO, n. 134 above, p. 286. The inclusion of exclusive licences on the black list is in any case surprising if one considers that U.S. antitrust enforcement was in principle free from market integration concerns: as we have seen, in the E.C., precisely where these concerns are more palpable, some degree of territorial exclusivity was permitted. 136 Antitrust Guidelines for the Licensing of Intellectual Property of 6th Apr 1995, Department of Justice, Antitrust Division, and Federal Trade Commission (§§ 2.3, 3.1, 3.2.3 and 3.3).
development or commercialization of technologies. In the context of this evaluation, regard was to be had to the economic relation between the contractual parties, i.e. whether they are actual or potential competitors or not. 137 Moreover, the 1995 IP guidelines introduced the concept of “innovation markets,”comprising the research on future products and processes. According to the guidelines, the consequences of IPRs licensing for these ‘future markets’ are to be taken into account when the firms’ contributions to the development of new products or processes are identifiable. Finally, the 2000 IP guidelines138 have built up into the direction pointed by their predecessors, though some aspects of the new approach have been also revised. In this connection, the 2000 IP guidelines do not place so much emphasis on the competing or non-competing economic relation of the contractual parties, recognizing that pro-competitive opportunities arise from the collaboration between competitions that normally outweigh negative effects on competition.
2. The current EC legal framework: the new TTBE Following a round of consultations, Regulation 240/96 was finally repealed by the new TTBE, Regulation 772/2004, currently in force, accompanied by guidelines on its interpretation and application. 139 Adopting a more economics-based approach in line with the new EC competition policy trend, and significantly influenced by the style of the U.S. 1995 IP guidelines, the new TTBE presents a wide array of changes in relation to its predecessor. The Commission finally abandoned the white and black lists structure, defining non-exemptible clauses in accordance with the business context in which the vertical transaction is carried out, i.e. taking into account the market share of the parties and whether they are competitors or not in the relevant product or technology market. Also, territorial protection and non-competition clauses are placed under the same umbrella as restrictions of competition— whether on geographic, product or technology markets being considered secondary. The result is that, except for resale price maintenance clauses— which are always banned— , the number of permitted restrictions now depends on three factors.
A further important novelty was the establishment of a ‘safety zone’below a certain market share (1995 IP guidelines, § 4.3), a feature the Commission would eventually incorporate into the new TTBE (see subsection 2 below). 138 Antitrust Guidelines for Collaborations Among Competitors of Apr 2000, Department of Justice, Antitrust Division, and Federal Trade Commission (§§ 3.1, 3.31 and 3.32). 139 Commission Regulation 772/2004/EC of 27th Apr 2004, OJEC No L 123 (2004), 11–17, on the application of Article 81(3) of the Treaty to categories of technology transfer agreements, and Commission Notice of Apr 2004, OJEC No C 101 (2004), 2–42, Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements.
The first factor is market share: the block exemption only applies to technology licensing agreements between undertakings whose market share is below 20 or 30%, depending on whether the parties are competitors or not— the Commission eventually got its own way.140 These market shares are to be assessed annually.141 Next, when it comes to the list of banned restrictions, a difference is made between competitors and non-competitors and, within the former category, between reciprocal and non-reciprocal agreements.142 If the licence is deemed non-reciprocal, the degree of exclusivity allowed to competing and non-competing undertakings is similar: mutual manufacturing exclusivity, restrictions of active and passive sales into the licensor’s, licensee’s or other licensees’ territories or customer groups and even output limitation clauses are in general permitted.143 Conversely, reciprocal licences between competitors face a longer black list: sole licences— where the licensor undertakes not to license others in a given territory— and non-competing obligations on the licensee outside the field of use are permitted, but neither mutual exclusivity, nor any type of restriction of active or passive sales into other territories are exemptible. Finally, a list of “excluded restrictions,” i.e. clauses that require individual assessment, includes exclusive grant-backs of severable improvements and no-challenge clauses, if contracting parties are competing undertakings, or the limitation of the right to conduct R&D activities for noncompetitors. The most controversial feature regarding the new TTBE is the introduction of market thresholds for the purpose of applying the block exemption. The traditional criticism, also levied at the previous attempts to introduce this measure, 144 is grounded on the complexity of market shares self-assessment.
But the European competition
Regulation 772/2004/EC, Art. 3. The distinction between competing and non-competing undertakings may not so easy to be made in practice: cf. Art. 1(1)(j) for definitions. 141 Cf. Reg. 772/2004, Art. 8(1). 142 “Reciprocal agreements”are cross-licences of competing technologies, including mutually blocking IPRs: cf. Reg. 772/2004, Art. 1(c) and (d). 143 Cf. Reg. 772/2004, Art. 4(1)(b) and (c) and (2)(b). There are nevertheless some differences: for competitors, bans of passive sales into other licensees’territories and resale bans characteristic of a selective distribution system— where commercialisation takes place through a network of authorized distributors— are also practices on the black list. Furthermore, if the parties are competitors, output limitations can only be imposed on the licensee (or only one licensee if licences are reciprocal), noncompete clauses are only exemptible on the licensee outside the fields of use or contract product markets. On the other hand, passive sales bans agreed between non-competing parties, except when referred to the licensor's territory or market, are only consented during the first 2 years. 144 During the drafting phase of the first TTBE, the Commission had planned to introduce market share tests in order to exempt territorial protection had to be abandoned after encountering heavy opposition by the industry, market shares being viewed as too complicated an indicator to estimate and monitor. See R. WHAITE, ‘The Draft Technology Transfer Block Exemption,’16 European Intellectual Property Review 7 (1994), 259-262, pp. 260-262. 145 See A. JONES and B. SUFFRIN, EC Competition Law, 2nd ed., Oxford University Press (2004), pp. 713714.
watchdog has certainly perceived that the time is ripe for the introduction of market share ceilings, as this feature is not exclusive to the new TTBE: market share tests had already been introduced in other ‘new style’ group exemptions on vertical and horizontal agreements.
Furthermore, the guidelines accompanying these block
exemptions and particularly the TTBE guidelines take considerable pains in providing specific methodological assistance. 147 There is however a more specific critic addressed at the introduction of market shares test in the sphere of technology transfers. According to some scholars, 148 the dynamic business environment that underlies these transactions makes it virtually impossible for firms to accurately predict their future market performance; hence, they might rapidly surge to high market shares up from secondary roles without seeing it coming. Another reason for disapproval of the market share ceilings that can be put forward is that they are continuous, i.e. they must be reassessed annually, something which may punish profitable projects: if the licensing of an untested technology recently developed results in a success story and the technology spreads out, the market share thresholds would probably be exceeded and the TTBE become inapplicable. On the contrary, less thriving ventures would still be covered. Hence, continuous market shares tests may have an adverse selection effect: there might be a tendency for less successful projects to be the ones to benefit from the block exemption in the first place. The new TTBE contains some provisions to mitigate both the lack of predictability and adverse selection effect: for instance, temporary upsurges over the threshold are allowed for a maximum period of two years.149 Moreover, it is true that the fact that a licensing agreement is not covered by the TTBE does not imply anything more than the need to consider its pro- and anticompetitive implications individually, and the guidelines state the Commission’s view that even agreements exceeding the TTBE thresholds but not containing black listed restrictions are unlikely to be anticompetitive where there are other technologies available.150
Cf. n. 132 above. TTBE guidelines, paras. 19-25. 148 See E. VOLLEBREGT, n. 133 above, p. 129. See also V. KORAH, Intellectual Property Rights and the EC Competition Rules, Hart Publishing (2006), pp. 53-54. 149 Reg. 772/2004, Art. 8. See also L. FULLWOOD and L. KERR, ‘Licensing Agreements in the E.U.: The Technology Transfer Block Exemption,’in N.J.L. BILLINGTON (ed.), IP for Business, vol. 1 in IP & Technology Programme, BNA International (2006), 31-34, p. 33. 150 TTBE guidelines, para. 131. 147
In spite of these caveats, there might however be a problem when it comes to “technology markets.”151 In principle, a technology market is to be defined following the same method as used to establish a relevant product market: technologies regarded by customers as substitutes to licensed IPRs shall be included within the segment.152 The way to calculate the parties’market shares should also be analogous: they would be their respective percentage of the total sales or— more willingly— royalties of all technologies competing in the relevant market. However, some problems arise here. A functional one is pointed out by the Commission: apart from requiring defining a separate relevant market different from the product market, data necessary for that— e.g. concerning royalties— will often not be available. That it is why the TTBE and its guidelines propose a different approach:153 to calculate the technology market share as the ratio of sales of products incorporating the licensed technology to the total sales of those products and their substitutes. There is however another objection, affecting the methodology of calculating technology market shares. Namely, it stems from the use of sales or royalties figures in order to assign market shares to different market players— otherwise a fairly conventional method. Sales figures ignore the use of freely available products in the market, i.e. products for whose use no price is charged. In conventional product markets this is not normally a problem, because there are not many freely available alternatives: for example, there are not many free alternatives to buying electrical appliances, except perhaps obtaining them from a re-giving or re-use network. In contrast, especially within the ICT sector, freely available technologies are common.
conventionally calculated market shares in the ICT sector can be overstated. The new approach also takes into account the phenomenon of “competition in innovation” or “innovation markets.”155 As opposed to static competition in existing 151
The need to take into consideration technology markets for the purposes of assessing market power derives, according to the Commission, from the fact that in many transactions within the ICT sector, the ‘products’being traded are simply technologies and not contract manufactured goods resulting therefrom. The inclusion of this reference is in line with the new approach to Art. 81 EC Treaty and its origin can be traced back to the specialization and R&D block exemptions and their accompanying horizontal cooperation guidelines, with which the TTBE guidelines shall be read together. See TTBE guidelines, para. 20, and Commission’s Notice of Jan 2001, OJEC No C 3 (2001), 2-30, Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements (paras. 47-52). 152 See TTBE guidelines, para. 22, and horizontal cooperation guidelines, paras. 47-48. 153 This approach is presented in Reg. 772/2004, Art. 3(3) and further explained in its guidelines, paras. 22-23. 154 This can be due to the fact that the technology is not made proprietary— typically because it is not registered when it is formally required— or, as it is usually the case with software, an open licence is granted (free software) or simply no price is charged for the use (freeware or to a lesser extent shareware). 155 Horizontal cooperation guidelines, para. 50. The TTBE guidelines (para. 25) allude to “innovation markets.”
markets, this sort of competition is dynamic: it is a struggle against other R&D players in the development of new products or processes. The inclusion of this type of markets is an important novelty, much in line with the developments in the U.S. The guidelines however consider that this type of market— implicitly defined as the market for current development of new products and processes— will only require definition when IPR licensing agreements can affect innovation and the on-going efforts in research by competing innovators (called “R&D poles”) can be identified.
3. Trade-marks and copyright licences There is no specific block exemption in trade-mark licensing, apart from the coverage provided by the new TTBE to trade-marks licences ancillary to the transfer of technology. 156 However, individual decisions by the EC institutions reflect that the same principles are handled as those informing the legal treatment of patents and know-how licensing. 157 This could seem somehow surprising from an economic viewpoint given the much narrower scope of protection afforded by trade-marks and their consequently lesser likelihood to create market power.158 But it is not so startling if one considers that most clauses subject to scrutiny regarded the allotment of commercial territories. 159 As regards the licensing of copyrights, although there is no specific block exemption applicable either, the new TTBE includes an important novelty in order to alleviate one of the most pressing problems that formerly derived from the lack of legal shelter: it specifically includes software copyright licensing agreements within its scope of application. 160 This is to welcome as finally ending the previous situation of uncertainty, where it was unclear whether agreements of this type could be included within any category of block exemption. And, although other copyright licences are not expressly covered, the Commission considers that the new TTBE can be applied to them by
Cf. Reg. 772/2004, Art. 1(1)(b). This lack of general legal coverage is certainly regrettable: see e.g. V. KORAH, ‘The Preliminary Draft of a New EC Group Exemption for Technology Licensing,’16 European Intellectual Property Review 7 (1994), 263-267, p. 264. However, it is true that trade-mark assignments and licences, unlike their patent or copyright-related contractual counterparts, are normally— though not always— one part of the fundamental commercial transaction. 157 E.g. Commission Decision 75/94/EEC of 19th Dec 1974, OJEC No L 38 (1975), 10-13, relating to proceedings under Article 85 of the EEC Treaty (IV/23.013— Goodyear Italiana-Euram) (paras. 2 and 14-16). 158 Cf. Chapter II, Section A above. 159 See e.g. Case 51/75 EMI Records v CBS United Kingdom,  ECR 811 (para. 28). See also Case 28/77 Tepea v Commission,  ECR 1391, where the exclusive assignment of trade-mark to a distributor in another state was held to be a means of preventing parallel imports. 160 Cf. Reg. 772/2004, Art. 1(1)(b).
analogy. 161 As a matter of fact, that had also been the stance in the past,162 again with market integration concerns playing the leading role.
4. Cross-licensing and IPRs pools163 Cross-licensing is the mutual exchange of IPRs between two persons (bilateral crosslicensing) or among more than two parties (multilateral cross-licensing). A legal definition of IPRs pools164 would be the multilateral cross-licensing of IPRs at a more formalized level, entailing the establishment of common legal framework and, on occasion, of a central administrative entity. The first patent pooling schemes were used in the U.S. at the beginning of the 20th century. 165 It was first used as a means of solving commercial disputes between companies derived from mutual patent infringements, although at times other motivations were behind, such as the coordination of commercial practices. Gradually, the Courts took the stand that this type of schemes were to be allowed in cases where the patentees did not go beyond their faculties as IPRs owners— for example, setting the price of the patents bundled— but that they should be outlawed when used as a facade for collusion— for example, when requiring licensees to resell at minimum prices. 166 This stance however started to change upon the 90s, when antitrust authorities realized the significant potential that the use of cross-licensing and pooling schemes could entangle in the New Economy. 167 Hence, antitrust intervention started to focus on the object of the transactions, and not only on their terms and conditions; in particular, the current competitive assessment of patent pools is appreciably based on the complementary or substitutive nature of the patents being aggregated. In relation to complementary technologies, it has furthermore become the mainstream view that a functional characterization of the concept should include patents of technologies mutually infringing on or blocking each other. This is because the pooling of blocking 161
TTBE guidelines, para. 51. See Commission Decision 89/536/EEC of 15th Sep 1989, OJEC No L 284 (1989), 36-44, relating to a proceeding under Article 85 of the EEC Treaty (IV/31.734 — Film purchases by German television stations), paras. 43-44 and 57. 163 See R.C. LIND et al., CHARLES RIVER ASSOCIATES, Multiparty Licensing, Report for the European Commission (2003), pp. 5-12 and 17-23. 164 Cf. the economic description in Chapter II, Section E, subsection 2 above. 165 See e.g. U.S. Supreme Court cases E. Bement Sons v National Harrow, 186 U.S. 70 (1902), Standard Sanitary Manufacturing v United States, 226 U.S. 20 (1912), and Standard Oil Co. and others. v United States, 283 U.S. 163 (1931). 166 Cf. United States v Line Material, 333 U.S. 287 (1948), at 310-311: “Nothing in the patent statute specifically gives a right to fix the price at which a licensee may vend the patented article.”Note that this approach eventually influenced antitrust agencies, as it became apparent with the adoption of the socalled ‘Nine No-No’s’list during the 70s (cf. subsection 1 above). 167 Cf. n. 136 above. 162
patents, by undoing legal— and, hence, commercial— stalemates, may in fact enable higher degrees of competition in existent or new markets, regardless of their technical nature. Back in Europe, the experience with cross-licensing and pooling schemes has historically been less remarkable. One type of IPRs pooling schemes was initially dealt with by the Commission in legislation regarding cooperation in R&D, 168 the common exploitation of IPRs being considered one of the ways of commercialising the joint research results.169 In the 1980s the Commission issued Regulation 418/85,170 on R&D cooperation agreements, where it was considered that the joint determination on how to exploit IPRs derived from the joint R&D could fall foul of Art. 81(1) EC Treaty when not necessary for the research. This regulation was later repealed by the current R&D block exemption, 171 which added the proviso that when R&D “poles”— areas of research— are identifiable, cooperation on innovation entailing the pooling of patents or know-how may also affect competition in innovation. But aside from these allusions to IPRs pools in R&D cooperation situations, the Commission had historically displayed reluctance to include cross-licensing and pooling schemes within the scope of the block exemption regulations, arguing to lack the adequate experience. Nonetheless, a drastic change finally came with the new TTBE, which is also meant to apply to bilateral cross-licences. 172 The TTBE covers the cross-licensing of either “competing technologies” or “non-competing technologies,” concepts which are very likely to relate, respectively, to those of substitute and complementary technologies used in U.S. antitrust practice. A clear indicator of this is that the TTBE definition of the market where technologies compete “includes technologies which are regarded by the licensees as interchangeable with or substitutable for the licensed technology” (emphasis added). 173 This interpretation makes sense, as the exemption requirements regarding non-competing (complementary or, at least, non-substitutive) technologies are
The technology transfer block exemptions have historically excluded patent and technology pools from their scope of application. See e.g. Reg. 772/2004, Recital (7). 169 In this context, the first communication was the Commission’s Notice of Jul 1968, OJEC No C 75 (1968), 3–6, concerning agreements, decisions and concerted practices in the field of cooperation between enterprises, § II(3)(c) in fine, where an agreement between joint researching firms not to license the results of the joint R&D is considered admissible. 170 Commission Regulation 418/85/EEC of 19th Dec 1984, OJEC No L 53 (1985), 5–12, on the application of Article 85(3) of the Treaty to categories of research and development agreements, Art. 2(d). 171 Regulation 2659/2000/EC (n. 132 above). See also its accompanying horizontal cooperation guidelines (n. 151 above), paras 50-51. 172 Cf. Reg. 772/2004, Art. 1 (c) and (d). 173 Reg. 772/2004, Art. 1(1)(j)(i).
far less stringent than in relation to competing (substitutive) ones.174 Furthermore, the TTBE subtracts from the ambit of competing technologies those which mutually infringe upon their respective IPRs; hence, it seems clear that the new TTBE has adopted a similar analysis of the competitive effects of cross-licensing schemes as the one adopted in the U.S. Multiparty cross-licensing and pooling schemes are however still nowadays outside of the scope of application of the TTBE. The Commission has in any case provided some guidance on how these situations will be dealt with.175 In this regard, the EC executive has stressed the need to ponder the pro-competitive effects in terms of elimination of transaction costs and efficient coordination against the anti-competitive thread that they may pose as regards price-fixing and foreclosure of alternative technologies when they aim at establishing a technological standard. For this assessment, again much importance is attached to the substitute or complementary nature of technologies within the pool.176 A similar situation to that of pooling arises, in relation to trade-marks, in the context of delimitation agreements. 177 One could say that delimitation agreements entail market sharing: by establishing for which products their trade-marks can be used, firms can actually be sharing out markets or commercial areas of influence. However, the ruling in BAT178 made clear that such agreements are not per se forbidden under EC law, so long as not going beyond their logic of settlement of trade-mark infringement disputes and are improperly exercised. Hence, from a practical point of view, ‘authentic’ delimitation agreements fulfil the same function as cross-licences or pools of mutually blocking patents: to put an end to a— real or potential— IPR dispute.
C. Abuse of dominant position or ‘monopolization’
See subsection 2 above. TTBE Guidelines, paras. 210-235. 176 Mutually blocking IPRs are not included here as complementary technologies; rather, the TTBE guidelines refer to them in the ambit of settlement and non-assertion agreements (paras. 204 and 209); this is however regrettable, because a correct functioning of technology pools may well necessitate the inclusion of blocking patents, and it is not clear that such inclusion can always be viewed as a mere nonassertion agreement. 177 Delimitation agreements, which are commonplace in business marketing practice, are contracts where the parties agree to on the scope (the covered products) of their respective trade-marks or of a split trademark. 178 Case 35/83 BAT Cigaretten-Fabriken v Commission,  ECR 363 (para. 33). 175
In the foundational years of the EC, current Art. 82 EC Treaty was ‘the ugly duckling’ of competition law provisions and seldom used. The reason laid in its complexity. It was clear from the provision that abuses of market power were forbidden; however, it was rather tricky to determine in which cases an abuse took place. 179 This situation differed with the practice in the U.S., where monopolization cases under Section 2 of the Sherman Act have been around for over a century.180 The first important abuse of dominance case had to wait until the 1970s. As laid down in Continental Can, 181 the establishment of dominance requires a definition of the relevant product and geographic market. In order to define the latter, regard is to be paid to the degree of interchangeability of the products or services considered, i.e. to whether there are close substitutes available. This principle has been given technical expression through the so-called Small but Significant Non-transitory Increase in Price (SSNIP) test, originally developed by the U.S. Department of Justice. 182 Once the market is defined, dominance has to be established, which is understood as the power of an undertaking to behave independently from its competitors, suppliers and purchasers.183 For that purpose, regard is to be had to the existence of potential competitors, i.e. undertakings which could switch their production to the products or services being considered.184
1. Exploitative practices: excessive pricing From an economic perspective, the most clear-cut case of abuse of a monopolistic position is the charging of monopolistic or exploitative prices. 185 In practice, however, it is not easy for competition authorities to ascertain at which precise level prices charged can be considered exploitative— it is easier to ascertain whether non-pricing practices 179
Political considerations played also an important role here, such as the concern not to interfere with national industrial policies: see GERBER, n. 112 above, p. 113. 180 The first § 2 landmark case in U.S. history was Standard Oil Co. of New Jersey v United States, 221 U.S. 1 (1911). See SULLIVAN/HARRISON, n. 110 above, p. 277. 181 Case 6/72 Europemballage and Continental Can v Commission,  ECR 215. 182 This test was developed in the U.S. in 1982 for merger cases analysis. The Commission adopted it in its Notice of Dec 1997, OJEC No C 372 (1997), 5–13, on the definition of relevant market for the purposes of Community competition law. The logic is that if a product experiences a relatively small increase in its price and consumers switch to other products as a consequence, the latter products are meeting a similar need; it will hence make economic sense to include them within the market being defined. The process is iterated until no demand substitutes turn up. Finally, unlike in the U.S., within the EC supply substitutability— i.e. the ease with which an undertaking can switch its production to supply the goods or services considered in the short term— has also been considered with the purpose of market definition in situations such as the one in Case T-51/89 Tetra Pak Rausing v Commission,  ECR II309. 183 Case 27/76 United Brands and United Brands Continentaal v Commission,  ECR 207, para. 65. 184 The existence of potential competition depends on the height of entry barriers, economic or legal obstacles preventing an entrant firm from competing with the incumbent firm under the same conditions. 185 Cf. Chapter II, Section B, subsection 1 above.
are likely to be the result of an abuse of economic power. In the area of IPRs there is in any case one more complication to this type of intervention: it interferes with the benefits an IPR holder can extract from her invention, affecting her incentives to innovate. The approach towards exploitative pricing in Europe differs diametrically— at least on paper— from the one in the U.S. 186 In the latter system, there is no legal prohibition of monopolistic pricing as such. 187 Particularly in the field of IPRs, courts have constantly taken good care that the holder of a “statutory monopoly” received the fruits of her invention. 188 Within the EC, by contrast, the EC Treaty itself envisages the “direct [imposition] of unfair purchase or selling prices”as an example of abusive conduct.189 In accordance, the ECJ has considered that the charging of a price “which is excessive in relation to the economic value of the service provided” constitutes an abuse of dominant position. 190 In theory, this rule applies to all ‘monopolists,’ regardless of whether they are statutory or not: this seems to be confirmed if one looks at the decisions in Volvo v Veng,191 where inter alia it was considered that the exercise of an IPR could amount to an abuse if prices of the product covered by the exclusive right were set at an “unfair” level, and SACEM II,192 in which the Court held that royalties charged by a national copyright collecting society could amount to an abuse where they were “appreciably”higher than in other Member States. Despite these theoretical differences between the EC and the U.S. approach to excessive pricing, practice has shown that the gap is not as large as it seems. First, the European ‘rule’of excessive pricing has not been applied in many occasions, the Commission being very reticent to pursue this type of conduct.193 What is more, particularly in the area of IPRs, the EC institutional approach has been very tactful; one can especially remark that in the 50 years of existence of the Community, no abuse of dominance
See M.S. GAL, ‘Monopoly pricing as an antitrust offense in the U.S. and the EC: Two systems of belief about monopoly?,’49 Antitrust Bulletin 1-2 (2004), 343-384, pp. 345-347. 187 Under U.S. antitrust law, only exclusionary conduct is illegal: “size and power, apart from the way in which they were acquired or the purpose with which they are used, do not offend against the law,”per United States v American Can Co., (D.Md. 1916) 230 Fed. 859, 892, (D.Md. 1916) 234 Fed. 1019, appeal dismissed, 256 U.S. 706 (1921). 188 See a discussion of the reasons behind in Sears, Roebuck and Co. v Stiffel Co., 376 U.S. 225 (1964), at 229-230. 189 Art. 82(a) EC Treaty. 190 Case 26/75 General Motors Continental v Commission,  ECR 1367 (paras. 11-12). 191 Case 238/87 Volvo v Erik Veng,  ECR 6211 (para. 9) 192 Case 395/87 Ministère public v Tournier,  ECR 2521 (para. 46). 193 Though there is very recent case where this provision has been ‘uncovered’: see Commission Press Release IP/07/1011 of 4th Jul 2007, Commission fines Telefónica over €151 million for over five years of unfair prices in the Spanish broadband market.
based on excessive pricing has been found to take place in which a patentee was involved.194 Secondly, although charging excessive prices is not an unlawful conduct per se in the U.S., it might constitute monopolization where its effects go beyond the mere exploitation of a market; an example is the charging of such an excessive price that it amounts in practice to a refusal to supply an essential facility. 195
2. Refusal to license Although international agreements expressly allow signatory states to introduce exceptions to the exclusive rights of IPRs holders,196 no EC secondary legislation has been approved in this sense, with the exception of the Computer Software Directive,197 which provides that reverse engineering of software to the extent needed to achieve interoperability shall not require the right holder’s authorization. In any event, the European courts have been considerably active, in the context of Art. 82 EC Treaty, in dealing with refusals by right holders to license their IPRs. The origin of the case-law on compulsory licensing can be traced back to the cases regarding ordinary refusals to supply. In this regard, the first refusal to deal case in the EC is the momentous Commercial Solvents,198 where a pharmaceutical raw material producer decided to cease selling the input to the manufacturer of an anti-tuberculosis drug in order to fabricate the drug itself. The ECJ ruled that this refusal to supply by the manufacturer, aimed at eliminating competition on the part of its customer, amounted to an unjustified abuse of dominant position within the meaning of current Art. 82 EC Treaty. Similar cases followed, such as Télémarkting.199 The stance adopted here has
The only exception could be Hilti: cf. n. 195 below. See Aspen Skiing Co. v Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) (at 599) and the subsection below. In Europe, cf. Commission Decision 88/138/EEC of 22nd Dec 1987, OJEC No L 65 (1988), 19-44, relating to a proceeding under Article 86 of the EEC Treaty (IV/30.787 and 31.488— Eurofix-Bauco v Hilti), para. 99, where the Commission seems to have treated the demand of an excessive fee for the grant of licences of rights as equivalent to refusing licensing. 196 Berne Convention for the Protection of Literary and Artistic Works of 9th Sep 1886, WIPO No WO001EN, 1-29, Arts. 11bis(2) and 13(1), referred to copyright, Annex 1C of the Marrakesh Agreement of 15th Apr 1994 establishing the World Trade Organization, Trade-Related Aspects of Intellectual Property Rights (TRIPS), Art. 31, referred to patents. For its part, however, compulsory licensing of trade-marks is not permitted under the Paris Convention (n. 114 above), Art. 6quater(1), and under TRIPS, Art. 21. 197 Council Directive 91/250/EEC of 14th May 1991, OJEC No L 122 (1991), 42-46, on the legal protection of computer programs, Art. 5(3). 198 Joined Cases 6/73 and 7/73 Istituto Chemioterapico Italiano and Commercial Solvents v Commission,  ECR 223. 199 Case 311/84 CBEM - Télémarketing v CLT and IPB,  ECR 3261. 195
been severely criticized by some scholars for its ignorance of welfare economics, as a typical case of protection of competitors instead of consumers. 200 Later on, during the 80s, the Commission started to develop, in the context of liberalized economic sectors, the concept of essential facilities to refer to situations where an infrastructure of necessary use in order to compete in downstream markets is controlled by one or several undertakings. 201 This term was later mentioned by the ECJ in Bronner.202 In contrast to the refusal to supply doctrine, the essential facilities doctrine originates from the U.S. in the judgement United States v Terminal Railroad.203 However, the courts soon proved their reticence towards the recognition of an obligation to deal: in United States v Colgate,204 the Supreme Court affirmed the right of a trader to freely decide with whom to contract as long as that did not conceal the “purpose to create or maintain a monopoly.”Though this doctrine has since then lost momentum in the U.S., one important case arguably revisited Terminal Railroad: Aspen Skiing v Aspen Highlands Skiing,205 where an operator of a ski area refused to cooperate with another operator after having done so for a time and despite such cooperation was more profitable. The Supreme Court affirmed that the general obligation not to cooperate with a rival was not unqualified, and that such a predatory action was liable under Section 2 of the Sherman Act. But discussion about the awakening of this doctrine has been silenced after Verizon Communications v Trinko, 206 where a law office brought an action against the owner of a telephone facility who had refused to share it with other operators. The Court saw no antitrust refusal— no predatory intention being found— and, more importantly, stated that it had “never recognized such a doctrine and [found] no need to recognize it here.”Generally, the doctrine can be at present said to be of rather
A.S. PATHAK, ‘Vertical Restraints in EEC Competition Law,’2 Legal Issues of Economic Integration (1988), 15-59, pp. 21-28: This author claims that the refusal to license was part of the producer’s forward vertical integration strategy, and that such integration would have resulted in lower prices once a more efficient scale of production would have been achieved. Cf. also Chapter II, Section E, subsection 1 above. A further critique to be raised against the judgment is that the question whether the undertaking being refused the supply of raw material could or not adapt its facilities in order to produce the material was considered irrelevant by the ECJ. This is clearly at odds with later judgments of the Court itself (see below). 201 See e.g. Commission Decision of 11th Jun 1992 (Case IV/34.174— B&I Line/Sealink Harbours and Sealink Stena),  5 Common Market Law Reports 255, para. 41. 202 Case C-7/97 Oscar Bronner v Mediaprint Zeitungs- und Zeitschriftenverlag, Mediaprint Zeitungsvertriebsgesellschaft and Mediaprint Anzeigengesellschaft,  ECR I-7791. 203 United States v Terminal Railroad Ass'n of St. Louis, 224 US 383 (1912). 204 United States v Colgate and Co., 250 US 300 (1919). 205 Aspen Skiing Co., n. 195 above, at 586. 206 Verizon Communications Inc. v Law Offices of Curtis Trinko LLP, 540 US 398 (2004).
no great interest in the U.S., where only some low courts seem to have shown some receptivity towards it.207 Because in the U.S. there is no general obligation to deal, the doctrine can be seen as a departure from the general principle; while in EC law it has not been clear for a while whether it is a specification of the refusal to supply doctrine 208 or a reformulation of the refusal to deal doctrine. Be as it may, a duty to deal becomes a duty to license when it comes to IPRs, which have not escaped legal scrutiny in Europe. 209 In this context, the landmark case is Magill,210 where three television (TV) broadcasters refused to license their copyrighted weekly listings to a magazine interested in publishing a weekly TV guide. Although the ECJ took pains to make clear that neither the mere ownership of IPRs amounted to dominance nor their mere exercise to an abuse, the facts that the refusal prevented the appearance of a new product for which there was a potential demand, that there lacked a sound justification and that all competition from the downstream market of TV guides was excluded seemed to the Court an arbitrary act amounting to an abuse.211 Magill, which signified the move towards an essential facilities doctrine, has been heavily criticized by scholars. 212 Two conditions laid down by the ECJ in order to establish an abuse were considerably vague. One was not explained— no hint was given as to what would have been an acceptable justification—
and another remained
ambiguous— whether the exclusion of all competition was to be considered in general— as in the U.S. low courts case-law— 214 or on the part of the undertaking being refused
SULLIVAN/HARRISON, n. 110 above, p. 292. Of this opinion, F. FINE, ‘NDS/IMS: A Logical Application of Essential Facilities Doctrine,’23 European Competition Law Review 9 (2002), 457-468, p. 457. 209 This became clear in the first case where IPRs were involved: Volvo v Veng, n. 191 above (para. 9). Here the Court of Justice decided that a refusal to supply spare parts protected by a design right could amount to an abuse of a dominant position in case that the refusal was “arbitrary,”the prices were fixed at an “unfair”level or the spare parts were not produced at all. 210 Joined Cases C-241/91 P and C-242/91 P RTE and ITP v Commission,  ECR I-743 (paras. 5457). 211 It is interesting here to note that Advocate General GULMANN recommended the Court rule in favour of the rights holders, not appreciating the newness of a product that in his view competed with the product offered by the rights owners, as “it would basically meet the same consumer needs.”See Opinion of Advocate General GULMANN of 1st Jun 1994 in Magill (n. 210 above) (paras. 93-97). 212 See inter alia P. CROWTHER, ‘Compulsory Licensing of Intellectual Property Rights,’20 European Law Review 5 (1996), 521-528, pp. 527-528. 213 This contrasts with the well-known ruling in Case 120/78 Rewe v Bundesmonopolverwaltung für Branntwein,  ECR 649 (para. 8), where at least a short list of examples of justifications of restrictions to free movement of goods (current Art. 28 EC) was provided. 214 Cf. MCI Communications Corp. v American Telephone and Telegraph, 708 F.2d 1081 (7th CIr. 1983), at 1132-1133. 208
licensing. 215 In any case, the most disconcerting issue was probably that a newness test216 was introduced. This test was considerably different from the one in IP law— in fact, much less stringent than it. The sequel to Magill was Bronner.217 Although the case did not directly involve the exercise of IPRs— it dealt with the refusal by a newspaper to deliver domicile its broadsheet and tabloid to a smaller rival press undertaking— , it gave the ECJ the opportunity to clarify on most of the questions which remained open in the field. But the preliminary ruling in Bronner did not clarify much; rather, more confusion joined the fray. 218 Firstly, the ECJ gave rather deficient indications on how to establish dominance to the referring court.219 Secondly, the Court went on to specify that three conditions had to be met in order to describe the refusal as an abuse: it had to be likely to eliminate competition in the downstream market by the press undertaking refused and lack justification, and the service had to be indispensable to the undertaking for carrying out its news editing and publishing activity. These conditions departed from the ones set down in Magill. Thus, the condition on the elimination of competition was more specific here— and different from the stance in the U.S.—
and the condition of
indispensability was clearly formulated separately from the former 221— the condition of newness was not enounced here. However, what is especially reprehensible is that both these conditions were both out of place and redundant. Hence, it was held that a delivery service was “indispensable” when setting up a second one on a comparable scale is not a viable economic project or, in other words, when there are neither “actual”nor “potential substitute[s] in existence.” There are two possibilities on what this can mean, each one relating to either market 215
Although in Magill, para. 56, the wording seems to suggest that all competition had to be eliminated, there is a reference to the passage of the judgment in Commercial Solvents (n. 198 above) where the second possibility is considered. 216 The term newness will be here used to refer to one of the requisites established in EC case-law in order to consider a refusal to license an abusive conduct, namely that the appearance of a new product is prevented. The aim is to avoid confusion with the term novelty, one of the characteristic requirements for the patentability of an invention. 217 See n. 202 above (paras. 41 and 46). 218 See C. STOTHER, ‘Refusal to Supply as Abuse of a Dominant Position: Essential Facilities in the Europen Union,’22 European Competition Law Review 7, 256-262, pp. 258-260. 219 The national court was instructed to consider whether the newspaper home-delivery scheme constituted a separate relevant market in accordance with the degree of interchangeability with other distribution schemes and, if so, to deduce the existence of dominance therefrom. It goes without saying that this a very unorthodox way to determine the existence of a dominant position; a more conventional analysis would follow the steps listed at the beginning of this section, hence studying the relevant market first and the existence of dominance as a subsequent but separate issue. 220 Cf. e.g. STOTHER, n. 218 above, p. 259. 221 Although the term indispensable was already used in Magill (n. 210 above), para. 53, it does not appear to be listed as a condition cut off from the elimination of competition requirement. This probably makes sense, as it avoids the stated tautology.
definition or dominance,222 but in any case not to abuse. In turn, if a delivery service is indispensable in the sense just described, then a refusal to supply is certainly likely to eliminate competition on the part of a competitor who is not able to set up a second home-delivery scheme. And to crown it all, the use of the concept of indispensability, which is rather one synonym for essentiality, added to the confusion.223 Things being so, it was probably good that the ECJ was given another chance to clarify on the subject. Such an opportunity came with a referral for preliminary ruling involving IPRs: IMS Health. 224 Here, a pharmaceutical data service and consulting company 225 was refused the licensing of a widespread system of organizing drug information by the copyright owner, a dominant player in the market. The Court to begin with replied to the referring court that the customization of the system and the existence of considerable switching costs for the customers 226 were relevant factors in order to determine whether the system was indispensable to competing with the dominant undertaking. It then went on to establish under what conditions the refusal to license would constitute an abuse, which basically coincided with those laid down in Magill. The ECJ however made some precisions here: it specifically included indispensability as an independent requirement and indicated more clearly that the requirement of newness of the product was one specific to cases involving refusals to supply based on the exercise of IPRs— although it also adjudged that in order for a product to be considered as new it is not necessary that it does not compete with the right owner’s product. Secondly, the requirement of excluding all competition in the downstream market was clearly formulated as a general one. The judgment in IMS Health is criticisable also. Important questions have remained open: The specification regarding the requirement of newness is unfortunate: if the requirement is to be understood as satisfying a specific consumer demand not 222
It could be equivalent to ask for supply substitutability (cf. n. 182 above) or, as another option, for the existence of potential competitors— the economic viability then referring to the existence of barriers to entry. According to the legal practice prevailing in the Community, in the first case we would be faced with a question of definition of the relevant market, while the second would be pertinent in the determination of dominance. In STOTHER (n. 218 above), p. 259, it is put forward that it is a matter of market definition, for being a question of availability of substitutes. However, the allusion to the possibility of creating a facility on a similar scale seems to refer rather to the height of entry barriers. 223 To be fair, this terminology is palpably inherited from Télémarketing (n. 199 above, para. 26), where the term is mentioned for the first time, and Magill (n. 210 above, para. 56), where it was repeated. The problem is however that in Bronner the Court also used the term essential (‘wesentlich’) in some passages (cf. e.g. para. 37). 224 Case C-418/01 IMS Health v NDC Health,  ECR I-5039 (paras. 30, 37-38 and 49). 225 A company of this type researches the pharmaceutical market (normally collecting drugs sales data) and sells the information to drug companies. 226 These costs derived from the fact that most of the customers had adapted their information systems and networks of sales representatives to it.
previously covered, it is hard to see how the product can still be in competition with that of the right owner. On the other hand, after IMS Health it now seems clear that the requirement of exclusion of competition is defined differently when IPRs are involved— all competition in the market must be excluded— , but few is known about the reasons behind this stance apart from— certainly— the Court’s preference for a more cautious approach to refusal to deal cases involving IPRs. The last episode of this saga is Microsoft. 227 This decision is one of the most commented in the Commission’s record.228 The EC executive found in this case that the world’s leading software producer had abused its dominant position by integrating its media player into its operating system and by refusing to disclose information necessary for interoperability to other software developers. As regards specifically this latter practice, 229 the Commission adjudged that Microsoft’s refusal230 to provide suppliers of application software— which Microsoft also developed— with the technical information needed to achieve intercompatibility with Microsoft’s operating system231 amounted to an abusive refusal to supply. Microsoft dominated the market for operating systems232 and was present also in the market for the relevant application software. Hence, preventing competing application software from being compatible with its operating system benefited Microsoft in this related market, for its software became more attractive to consumers as the only one compatible with the most common operating system. The Commission considered that interoperability information was here “indispensable” for no actual or potential substitutes were available, given that the option of reverse engineering, expressly permitted by the Software Directive, 233 was not a commercially viable one. 234 In addition, the refusal was adjudged to lack an objective justification.
Commission Decision of 24th Mar 2004, (abbreviated version) OJEC No L 32 (2007), 23-28, relating to a proceeding pursuant to Article 82 of the EC Treaty and Article 54 of the EEA Agreement against Microsoft Corporation (Case COMP/C-3/37.792— Microsoft) (paras. 430-435, 585, 685-686 and 782). 228 See, with different opinions, MESSINA, (n. 63 above), pp. 78-97, S. VEZZOSO, ‘The Incentives Balance Test in the EU Microsoft Case: a Pro-Innovation ‘Economics-Based’Approach?,’27 European Competition Law Review 7 (2006), 382-390, pp. 383-389, and R. PARDOLESI and A. RENDA, ‘The European Commission’s Case Against Microsoft: Kill Bill?,’27 World Competition 4 (2004), 513-566, pp. 540-553. 229 The former practice is a case of tying, and is analyzed in subsection 3 below. 230 Strictly speaking the refusal to provide information was not total, but rather there was a diminished level of disclosure of information in comparison with former commercial practice (Microsoft, para. 780). 231 An operating system is the platform on which software applications run, i.e. an application normally needs to be executed in an operating system. 232 It cornered over 90% of the market. 233 See n. 197 above. 234 There had been a precedent to this decision in the 80s, although the case was informally settled: it concerned a proceeding initiated against IMB for refusing to provide competitors with technical
Although the decision in Microsoft has been appealed and a judgment is now expected from the CFI— the case shows signs of arriving before the ECJ— , some conclusions as regards refusal to supply cases can already be drawn. Namely, the essential facilities or indispensability doctrine— European institutions apparently prefer this latter term— seems more polished at present: first, a test to define the indispensability of a resource takes place and, second, it is determined whether a valid justification for the refusal exists. This is, in essence, a return to Commercial Solvents, with the refinement that the indispensability of the resource being refused is studied more in detail, looking at actual and potential substitutes. It is also, in other words, a correction to Bronner: the indispensability test takes place once, and not at different stages and in varied forms. There remains however a big question, which is if the lack of justification is a sufficient ground to find an abuse of dominance— or, rather, super-dominance, because that is what indispensability essentially entails. As we have seen, the ECJ has feared reaching such a direct conclusion in cases involving refusals to license IPRs by requiring also newness. In Microsoft, the Commission apparently considered that no refusal to license IPRs was involved, from where it follows that interoperability information was not considered an IPR— although it is clearly a business secret.235 This inevitably shows the dangers of the approach on which the EC institutions have decided; the borderline between what an IPR is and what is not might not always be clear.
3. Tying We have already seen that the use of tie-in clauses in IPRs licensing agreements has historically been monitored closely by competition authorities. 236 However, tying practices can also arise as abuse of dominance offences, as Art. 82(d) EC Treaty provides and the ECJ has recognized in even broader terms.237 Also in the U.S., tie-ins are expressly outlawed by § 3 of the Clayton Act. In both jurisdictions it has however been acknowledged that tie-in arrangements may not always be anticompetitive, as is the case when the tie-in enhances the technical performance of a product or process.238 In recent years, however, important issues have been raised in relation to tie-in practices in the New Economy. The two most remarkable cases, one on each side of the Atlantic,
information about its computers, a practice that was considered to block their entry into the market. See COMMISSION OF THE EUROPEAN COMMUNITIES, Fourteenth Report on Competition Policy (1984), p. 79. 235 Cf. definition of know-how in the new TTBE: Reg. 772/2004, Art. 1(1)(i). 236 See Section B, subsection 2 above. 237 See Case C-333/94 P Tetra Pak International v Commission,  ECR I-5951 (para. 37). 238 These are considered necessary tie-ins in the new TTBE, e.g. Cf. Section B, subsection 2 above.
have involved the same IT company. 239 Hence, in United States v Microsoft,240 where the computer technology giant was accused of bundling its Internet browser software to its commercially widespread operating system, thereby leveraging its dominant position and excluding competitors from the related market. 241 Microsoft alleged that this bundling was technically necessary for a correct operation of the program. The lower court had condemned this practice as a per se infringement, but the upper instance reversed, indicating an analysis of the effects on competition should have taken place, the situation being too novel an issue to apply a per se rule. This case was eventually settled between the parties, but all in all it gave rise to a large amount of literature on the dangers of tying in the New Economy, where the risks of leveraging a company’s leadership in one market to gain share in another seem more pronounced.242 As regards Europe, a similar case involving— partly— tying has been already cited above. In Microsoft,243 the Commission charged the company with abusing its dominant position by inter alia bundling its media player with the platform software. The analysis of the effects on competition of this practice carried out by the European executive exhibited some differences in comparison with the U.S. court test. First, the Commission got involved in a justification analysis— in the U.S. the case was settled before a rule of reason analysis took place. Remarkably, the Commission did not weigh the pro-competitive effects of the practice— Microsoft essentially argued that the tying brought about benefits for consumers and programmers in terms of simplicity— against its anti-competitive effects. Rather, the analysis was based on the justification test developed by the ECJ:
the Commission considered that the tying was not an
indispensable means in order to attain the alleged benefits for consumers and software developers. Secondly, the remedy imposed in Europe was harsher than the outcome in 239
For discussion, see J. APON, ‘Cases against Microsoft: Similar Cases, Different Remedies,’28 European Competition Law Review 6 (2007), 327-336. 240 United States v Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001), at 84-95. 241 The case involved also a claim by the Department of Justice that Microsoft had compelled computer manufacturers to offer the web browser as part of the initial package, but this can be considered complementary to the main claim. 242 There has been a big deal of U.S. literature concerning the Microsoft case and the New Economy questions and threats posed by it, especially the presence of network effects: an entire review issue is dedicated to the case in 44 Antitrust Bulletin 3 (1999), 553-786 . Cf. also Chapter II, Section E, subsection 3 above. 243 See n. 227 above (paras. 838, 946, 956-957, 961-967 and 1011). 244 The justification test was constructed in the context of the free movement provisions, when a restrictive measure pursues yet an aim recognized as legitimate: in that case, the measure is justified insofar it does “not … go beyond what is necessary for that purpose”(Case C-19/92 Kraus v BadenWuerttemberg,  ECR I-1663, para. 32). The adoption if this test has been criticized by some authors (see APON, n. 239 above, p. 331, and references provided there), arguing that in fast-moving sectors of the New Economy it will always be possible to find a less restrictive mean to attain procompetitive effects. However, this test should not pose a problem if interpreted reasonably.
the U.S. after the settlement: apart form a heavy fine, the duty to offer consumers an unbundled version of its operating system was imposed— although Microsoft was also allowed to keep offering a bundled version. This was probably a consequence of the Commission’s fear that the presence of network effects would make a render lenient remedy ineffective. 245 Finally, the commission also considered the effects of the tie-in on innovation, adjudging that the foreclosure of competition affected the incentives of competitors to innovate.
4. Abuses of legal process Interesting examples— although few in number— of abuse of a dominant position are those related to the abuse of the IP legal system. In this regard, two types of abuse of process are distinguishable. In the first place, IP litigation commenced by a rights holder in order to unjustifiably harm its competitors has been condemned by the European Commission. Thus, in BBI/Boosey and Hawkes, 246 one of the grounds on which the Commission based its finding of an abuse of dominant position by a brass instruments manufacturer— apart from refusing to supply— was the initiation of legal actions for copyright infringement against newcomers to the market. This first issue belongs to the more general case-law on vexatious litigation: the initiation of ordinary legal proceedings against competitors without a real aim to ascertain legitimate rights and following a general plan to eliminate competition has been considered an abusive conduct by the European institutions.247 In other cases, the EC executive has applied competition rules to the misuse of the IPRs registration system by undertakings. The first of these cases was settled informally: it involved two lamp manufacturers, one of them registering a trade-mark with the intention of impeding the entry of the other in the market where the first was dominant, a conduct which was censured and amended.248 More recently, in AstraZeneca,249 the Commission regarded the inclusion of misleading information (representations) in the 245
In a similar line, APON, n. 239 above, pp. 332-333. Commission Decision 87/500/EEC of 29th Jul 1987, OJEC No L 286 (1987), 36-43, relating to a proceeding under Article 86 of the EEC Treaty (IV/32.279— BBI/Boosey & Hawkes: Interim measures), paras. 8 and 19. 247 See Case T-111/96 ITT Promedia v Commission,  ECR II-2937 (para. 55), although note that the CFI did not rule on the adequacy of these two criteria, laid down by the Commission. 248 This case is generally known as Osram/Airam. It is documented in COMMISSION OF THE EUROPEAN COMMUNITIES, Eleventh Report on Competition Policy (1981), p. 66. 249 Commission Decision 2006/857/EC of 15th Jun 2005, OJEC No L 332 (2006), 24-25, relating to a proceeding under Article 82 of the EC Treaty and Article 54 of the EEA Agreement (COMP/A.37.507/F3— AstraZeneca). 246
filing an application for the temporal extension of a patent in order to exclude competitors as an abuse of the patent system.250 Although the findings included also the misuse of pharmaceutical regulatory procedures, it was the first formal decision on an abuse of patent case under EC competition law. Conversely, the consideration of abuse of IP legal system cases in the context of U.S. antitrust law goes back several decades. As regards the fraudulent use of the IP system, the leading case is Walker Process v Food Machinery,251 where a patent obtained by fraudulent representation of facts to the patent office was held liable to damages for monopolization. A propos vexatious or sham litigation, the judgment delivered in Nobelpharma v Implant Innovations252 made clear that pursuing legal enforcement of a patent without any objective ground with the sole aim of harming other market players was an anti-competitive practice. Incidentally, this second case of abuse of the IP legal system bears many aspects in common with a highly topical subject in the U.S. over the past years, namely that of patent trolls. 253 Patent trolls have caused unease among ICT companies, which see them as financial threats to their businesses. However, patent trolls interested in patent enforcement actions cannot be said to be sham litigators, as their claims are not normally objectively unfounded. The interest of these cases— for our purposes— lies in the fact that the abusive conduct does not take place in the domain of business activities, but in a different sphere. 254 The playground in these scenarios is rather a legal one, not the traditional business framework. This is important, because it brings about the question of whether the existence of dominance is to be established on the conventional product market or rather in less traditional dimensions, as the market for innovation. In practice such a question will not be a problem, as a strong IPR position normally directly corresponds to a strong position in the relevant market; such is the case in the pharmaceutical industry. 255 But in circumstances where a company with no conventional market power but with an IP
For an analysis of the decision and its comparison to existent U.S. case-law, see J.P. GUNTHER and C. BREUVART, ‘Misuse of Patent and Drug Regulatory Approval Systems in the Pharmaceutical Industry: An Analysis of US and EU Converging Approaches,’26 European Competition Law Review 12 (2005), 669-684. 251 Walker Process Equip., Inc. v Food Mach. & Chem. Corp., 382 U.S. 172 (1965). 252 Nobelpharma AB v Implant Innovations, Inc., 141 F.3d 1059, 1068-71 (Fed. Cir. 1998). 253 The topic of patent trolls is examines in more detail in Chapter IV, Section A, subsection 2 below. 254 It is remarkable that the Commission itself has recognized the novelty of this type of situations. Cf. AstraZeneca, para. 2, in relation to the determination of the fines. 255 See C. MACKERNAN, ‘Red Flags in the Trousseau: A survey of the Competition Treatment of IP Assets,’26 European Intellectual Property Review 10 (2004), 461-466, p. 462. This was the case in AstraZeneca, n. 249 above.
portfolio protecting an R&D position at the forefront of an emerging market, 256 the traditional market definition analysis gets into trouble.
D. Merger control cases 1. The European expansion of competences Although the original competition rules contained in the EC Treaty made no express allusion to merger control, the Commission soon took the view that Art. 82 EC Treaty could apply to concentrations. 257 The judgment in ECJ Continental Can258 confirmed this: the prohibition of Art. 82 was not to be only interpreted as a ban of practices directly distorting competition, but also to measures whose indirect effect— by means of altering the market structure— could be equivalent. In view of this evolution of the aquis, the ground was set for the adoption of a concrete piece of EC legislation providing the Commission with specific powers to control concentrations: Regulation 4064/89.259 In line with the case-law preceding the regulation, the concept of market dominance was central to this instrument, which outlawed concentrations creating or strengthening a dominant position likely to lead to a significant restriction of competition.260 Regulation 4064/89 was eventually repealed by the new EC Merger Regulation, 261 which introduced important material changes into the area of EC merger control law. The focus of the new regulation swung from the notion of market dominance to the one of significantly impeding effective competition— the creation or strengthening of a dominant position then only being a particular case of the general rule, 262 in what has
One decision where considerations of protecting a emerging instead of an existing conventional market were made was the Commission Decision 2001/718/EC of 11th Oct 2000, OJEC No L 268 (2001), 28-48, declaring a concentration to be compatible with the common market and the EEA Agreement (COMP/M.1845— AOL/Time Warner), paras. 25-26. 257 This possibility was already envisaged in 1966: see R. STRIVENS, ‘The ‘Philip Morris’Case: Share Acquisitions and Complainants’Rights,’10 European Intellectual Property Review 6 (1988), 163-171, p. 165. 258 See n. 181 above, paras. 25-27. 259 Council Regulation 4064/89/EEC of 21st Dec 1989, OJEC No L 395 (1989), 1–12, on the control of concentrations between undertakings. 260 Cf. Regulation 4064/89/EEC, Art. 2. 261 Council Regulation 139/2004/EC of 20th Jan 2004, OJEC No L 24 (2004), 1–22, on the control of concentrations between undertakings. 262 Cf. Regulation 139/2004/EC, Art. 2.
been called the SIEC-test. This has been also described as a more structural approach of EC institutions towards competition. 263
2. Merger control and IPRs Although, in the domain of EC merger control, cases where the strategic role of IPRs has been under careful review are not many, the protagonism of IPRs is on the rise. 264 It has become commonplace to prevent an undertaking with a strong IPRs position to strengthen that position by means of acquiring other IPRs holders. One path-breaking decision in this context, prior to the entry into force of the first merger regulation, was Tetra Pak I, 265 in which the strategic implications of IPRs following a concentration were considered in detail. The Commission, later upheld by the CFI, adjudged that the acquisition of a licence to a key patent by means of a merger by a dominant player in the market for sterilized milk packages foreclosed the market to competitors and amounted therefore to an abuse. For our purposes, it is of particular interest to remark that the Commission’s decision266 also took into account the strong IPR position enjoyed by the dominant undertaking, so that the indirect acquisition of a licence to a patent to one of the few challenging sterilising methods left little room for competitors to manufacture aseptic cartons without infringing IP laws. However, neither the decision nor the judgement went further than stating that the acquisition had the effect of “preventing, or at the very least considerably delaying” access to market by competitors, without further considerations as to whether market foreclosure had the effect of shutting out innovation in the long run. Furthermore, the strong IPRs position was considered here in addition to the position of dominance in the relevant market: no independent market was defined in order to assess economic power. The first decisions after the adoption of the old merger control regulation reflected some continuation of this ‘short-sighted’ approach, focusing on the possibility to use combined IPRs portfolios foreclose entry by competitors in the short-term. 267 However, 263
See A. WEITBRECHT, ‘EU Merger Control in 2004— An Overview,’26 European Competition Law Review 2 (2005), 67-74, pp. 67-68. 264 See C. MACKERNAN, n. 255 above, p. 466. 265 Case T-51/89 Tetra Pak Rausing v Commission,  ECR II-309, para. 23. 266 Commission Decision 88/501/EEC of 26th Jul 1988, OJEC No L 272 (1988), 27-46, relating to a proceeding under Articles 85 and 86 of the EEC Treaty (IV/31.043— Tetra Pak I (BTG licence)), paras. 44 ff. 267 See e.g. Commission Decision of 9th Aug 1999, OJEC No C 254 (1999), 5, declaring a concentration to be compatible with the common market according to Council Regulation 4064/89 (IV/M.1378— Hoechst/Rhône-Poulenc), paras. 68-69 and 122, where the concerns related to the control of a key technology were that it prevented third parties from entering the market in the short term. Similar considerations were made in Commission Decision 2004/237/EC of 17th Oct 2001, OJEC No L 82
the long-term strategic implications of IPR positions have been pondered in more recent decisions. One interesting example of this latter trend can be found in Boeing/McDonnell Douglas, 268 where the combination of two large know-how and patent portfolios was considered to have a restrictive effect on “future technology.”Yet, it is true as well that no concrete assessments have been made as to the seriousness of hampering long-term innovation in comparison with short-term market protection. And another interesting decision has been Shell/Montecatini,269 where the Commission for the first time showed signs of readiness to consider an innovation market different than the usual product market.270 On the other side of the Atlantic, the primary piece of legislation is Sections 7 and 7A of the Clayton Act, the latter introduced by the Hart-Scott-Rodino (HSR) Act,271 and the HSR rules. 272 Cases dealing with IPRs more principally are higher in number in the U.S.273 This explains a somewhat deeper familiarity with the different repercussions— short and long term ones— of combining the IPRs portfolios of merged companies. For instance, FTC actions are normally more specific as to whether a merger can create obstacles to future R&D and innovation. 274 Also in the legal actions of the Department of Justice an understanding of the dynamics of innovation and IPRs filing can be perceived; e.g. in United States v Gemstar TV-Guide International and TV Guide,275 the Antitrust Division not only considered that the defendants were the sole providers of technology and technological services in the relevant markets, but also that, among the barriers to entry the market, there was the difficulty of inventing around existent IPRs. An interesting U.S. case is also Flow International,276 where an independent “market
(2004), 20-72, declaring a concentration to be incompatible with the common market and the functioning of the EEA Agreement (COMP/M.2187— CVC/Lenzing), paras. 232-236 and 246-250. 268 Commission Decision 97/816/EC of 30th Jul 1997, OJEC No L 336 (1997), 16-47, declaring a concentration compatible with the common market and the functioning of the EEA Agreement (IV/M.877— Boeing/McDonnell Douglas), paras. 102-103 and 122. 269 Commission Decision 94/811/EC of 8th Jun 1994, OJEC No L 332 (1994), 48–70, declaring the compatibility of a concentration with the common market (IV/M. 269— Shell/Montecatini), paras. 112113. 270 Innovation markets were later on alluded to in the TTBE guidelines (n. 139 above), para. 25 (cf. Section B, subsection 2 above). 271 Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (cf. 15 U.S.C. § 18a). 272 Rules, Regulations, Statements and Interpretations under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 16 C.F.R. §§ 801-803. 273 See MACKERNAN (n. 255 above), p. 462. 274 E.g. in American Home Products/American Cyanamid, FTC Docket No C-3557, it required the acquirer to license one of the target company’s research lines, lest the specific R&D market could become a dupoly. 275 United States v Gemstar-TV Guide Int’l, Inc. and TV Guide, Inc., not reported in F.Supp.2d, 2003 WL 21799949 (D.D.C.), 2003. 276 United States v. Flow International Corp. and Ingersoll-Rand Co., Civ. No. 94-71320 (E.D. Mich. filed Apr 14th, 1994).
for innovation” was defined, in which a position of dominance could be established. Similarly, in Roche Holding./Corange, 277 the FTC indicated that the merger of two pharmaceutical companies would eliminate competition in a number of markets, specifically including the market for R&D of thrombologic agents. In merger control decisions, information required for the interoperability of computer programs has received a legal treatment equivalent to that given to IPRs.278 For instance, in AlliedSignal/Honeywell 279 the Commission adjudged that most of this ‘essential’ information was proprietary and needed to be licensed or provided to competitors seeking to manufacture interoperable software. Both in the E.C. and the U.S., trade-marks280 and copyrights281 have also been subject to scrutiny under merger control rules. The implications of holding these types of IP are however different: trade-marks and copyrights can certainly be key strategic assets, capable of conferring a position of dominance in a product market, but not— except in hardly imaginable situations— barriers to innovation, especially in the long run.
D. Evaluation Competition law, as part of the legal system, evolves more slowly than economic theoretical thinking. This is simply because the law needs to make safe moves; it cannot afford the level of experimentation typical of economic theories. But the crossroad of competition law and IP, especially in the EC, is anyhow peculiar as regards the adoption of economic theories. Indeed, the different branches of the subject (cartel, dominant position abuse and merger control law) have evolved at a different rhythm, on occasion even independently from each other. Much of the explanation here is that the three branches have been developed under fairly different systems: while the cartel law applicable to IP (essentially licenses of IPRs) has been developed by legislation, the law of abuses of market power is purely case-law. Merger control law
Roche Ho. Ltd./Corange Ltd., FTC File No 9710103. C. MACKERNAN, n. 255 above, pp. 462 and 465. 279 Commission Decision 2001/417/EC of 1st Dec 1999, OJEC No L 152 (2001), 1-23, declaring a concentration compatible with the common market and the functioning of the EEA Agreement (COMP/M1601— AlliedSignal/Honeywell), paras. 100-103 and 128. 280 See Commission Decision 2004/322/EC of 2nd Sep 2003, OJEC No L 109 (2004), 1-63, declaring a concentration to be compatible with the common market and the functioning of the EEA Agreement (COMP/M.3083— G.E./Instrumentarium) and United States v General Electric Co. and Instrumentarium OYJ, not reported in F.Supp.2d, 2004 WL 602773 (D.D.C.), 2004. 281 AOL/Time Warner, n. 256 above. 278
would be in-between: it was first based on case-law, but has recently evolved to a more codified type. In view of this situation, it is not so surprisingly that different economic theories have been adopted by different institutions at different moments of time. To start with, the application of competition law to IP licences was for a long time almost exclusively based on market integration considerations: not even static efficiency considerations played an important role— dynamic efficiency was however soon taken into account at an early stage, at least in the sense that some degree of commercial exclusivity was allowed. Later on, allocative efficiency considerations entered the stage in the shape of formalistic rules, as it was the case in the U.S. Escaping from this formalistic approach took long time; in the U.S. it was overcome a bit earlier than in the EC. Nowadays, the current legislative approach to IPRs licensing is considerably modern, with concepts of markets intended to correctly address most of the features of the New Economy. No tools have been designed, however, to deal with the IPR strategy phenomenon. For its part, the case-law on abuse of dominance has gone a long way from a rather rudimentary start. Although, in this area, market integration concerns were not so important, in cases like Commercial Solvents only static efficiency implications were taken into account, sacrificing productive efficiency. Moreover, the EC ban of unfair prices can be— though not much applied in practice— even contrary to static— not to speak about dynamic— efficiency. In this regard the U.S. approach differs, courts having proved there more receptive to economic thinking. Back in the EC, a significant set of case-law has dealt with situations of refusal to license IPRs. The approach here, if truth be told, has not relied much in economic theories: the ECJ’s special care in cases of refusal to license vis-à-vis ordinary cases of refusal to deal definitely show a concern for dynamic efficiency; however, the requirement of a product to be new in order to apply an essential facility doctrine— and this not meaning economically complementary nor novel in the IP law sense— falls short of being eccentric. Moreover, market definition in these cases where intercompatibility is the key has not been adequate. The Commission’s decision in Microsoft however contrasts with this line: it can be considered a modern decision, in the sense that it takes into account many of the features characterizing the New Economy, particularly the importance of acting promptly and effectively in the presence of network effects and non-compatible standards. This the Commission proved to do as regards the tying practice involved, at least in comparison with the similar case on the other side of the Atlantic. But the
famous decision in Microsoft is not free from important flaws. Probably in order to escape the complex ECJ’s condition of newness, the Commission opted for not regarding interoperability information as IP, when it is certainly a business secret— as paradoxically the Commission itself has decided in cases of merger control. It remains now to be seen what the European courts will make out of this saga. Secondly, the decision does not seem to have correctly addressed the strategic use that Microsoft made of its IP: probably the problem was not whether the company could have achieved the alleged efficiencies with a less restrictive practice or not, but whether it had strategically acted in a not very ‘clean’manner— first promoting intercompatibility to place its product as a market standard, later closing the hand once the market was locked-in. Merger control law is in the youngest of the EC competition law branches, but has rapidly caught up with the U.S. technical level, which is probably the highest in all the three branches— the SSNIP-test was for example designed in this area. Particularly, one remarks a rapid evolution in the economic reasoning applied by the Commission and a significant move towards the approach in the U.S., which relies in market structure but at the same time admits productive efficiency defences. As regards the specific relation to IPRs, both jurisdictions have proved a progressive interest for the features characterizing the New Economy, and similar tools to that developed in the context of the new IPRs licensing block exemption and guidelines has been used here. All in all, comparing the conclusions in the previous chapter with the analysis presented here, one does not remark significant divergences: antitrust agencies and— to a lesser extent— courts have done much of the economics homework. There is however one significant exemption: no coherent approach seems to have been adopted towards the rise of an IPR strategy. The cases on vexatious litigation and patent system that authorities on both sides of the Atlantic have studied prove however that they are ready to intervene if competition is distorted. What remains for us to see is whether that time has already come. Up to this point we have been talking about how competition law has been trying to catch up with economic theories. But this evaluation would be incomplete if reduced only to that. Competition law has certainly the goal to promote consumer welfare, and in that regard, economic efficiency plays a crucial role. However, the goals of competition law are not reduced to the promotion of economic efficiency. In contrast to the modern economic approach, antitrust pays decisive attention to income distribution 81
and to the fairness of the competitive process. This remains a fundamental difference. Similarly to the question of distribution of wealth, economists have not paid much attention to questions of fairness. In general, economic analysis does not include fairness as a variable to contribute to maximize welfare, basically because it cannot be incorporated into the economic discussion without problems. This exclusion is normally made because of the more ideological nature of this concept, so that discussion can focus on more technical variables, more easily includable in mathematical models— by rights, the favourable reception of economic theory lies also in this ‘modesty.’But, in our world, fairness is a universal value. Law, as a social product— unlike economics, which is an academic product— has certainly brought fairness into the discussion; in fact, fairness has historically been, and most likely remains, its central point. What is more, considerations about the fairness of certain transactions and practices can be said to be at the origin of modern competition law. It was precisely the courts’condemnation of certain commercial practices as unfair— as e.g. the doctrines of necessity in commonlaw and lesion in civil-law— that later evolved into two types of legal protection of parties with a reduced amount of bargaining power.282 Competition law has obviously changed over the years, in particular it has been recognized that many of the injustices it was designed to combat in fact refer to either economic efficiency or distribution. However, one can still remark certain logic in the competition legal practice which escapes from a mere analysis of the economic effects (either allocative or distributional) of a certain transaction or practice. In other words, there seems to remain a redoubt for fairness understood in a broader way than a mere question of proper balance of bargaining power— inefficient for being a situational monopoly— as economists tend to portray the concept.283 And, so long as such an important variable is not systematically considered in the problem of welfare maximization, the risks of relying exclusively on economic theory are manifest.
On the one hand, unfair competition law and consumer protection were born as a generalization of cases where the weaker position of consumers, particularly when confronted to contracts of adhesion, was realized. On the other hand, another commercial law realization linked abuse of rights with market manipulation and was in general suspicious of economic power; this gave rise to what is nowadays competition law or antitrust. 283 Cf. COOTER /ULEN, n. 1 above, pp. 223-224 and 287.
Chapter IV: Re-focusing the debate
A. A problem of fairness within the IPR field 1. Dynamic competition within the IPR field The surge of a genuine IPR strategy entails a conscious strategic positioning within one dimension which we call the IPR field, the virtual terrain where all patentable— or otherwise protectable— technologies and ideas are represented. 284 Hence, from the moment that actions within this field become conscious and controlled ones, one can talk about a true competition within the IPR field. And this is the case nowadays. Examples of conscious tactics in the IPR field include the following: 285 ‘invent around’ path designing, blocking modalities— key patent searching, wall-building, fencing and blanketing or flooding— , intimidation measures— surrounding or (more offensively) harassing— and combinations designed both to block and intimidate— by building different patent networks or nodes. As it can be seen, some of these modalities regard entry modes (inventing around) and some regard exclusionary practices (blocking) but one can also identify predatory tactics (intimidation). And these modalities refer only to individually planned or independent practices, but one could also talk about collusory behaviour or concerted practices within the IPR field: these would e.g. include crosslicensing and patent pooling. As we have pictured throughout the thesis, the phenomenon of competition within the IPR field is not actually classed by economists or competition lawyers as an independent sort; rather, their analysis focuses on specific manifestations of this type of competition: patent races are examined in a different context than patent litigation, for example. However, they have characteristics in common, the most obvious of which is the playing ground. Hence, identifying and topographizing this playing ground seems an immediate priority if one is to consider this type of competition from this perspective.
2. The IPR field and its competition implications When one starts to charter the IPR field, it is realized that there is a problem of fairness in it. Not only of economic efficiency, but of fairness. The patent accumulation phenomenon has led up to a point where it is more patent quantity than quality what matters in business activity. This implies a number of allocative and dynamic 284
The IPR field gives hence shelter to all kinds of IPRs, even created by registration or by mere claim— as is the case of copyright. The higher degree of protection (what economists refer to as breadth) afforded by patents and consequentially its greater potential effects on competition is however the reason while the analyses here presented concentrates on the creation of patent positions. 285 Cf. GRANSTRAND, n. 22 above, pp. 219-222.
inefficiencies, as we have seen.286 But it also affects to the fairness of the competitive process, in the sense that some economic agents are better off than others in the current state of affairs. The IPR field is a ‘jungle’: there are more patents nowadays than ever before, most of them overlapping each other in what has been described as a thicket.287 What this means is that the number of potential IPRs infringements is high. As we know, this entails problem of compliance verification costs: every time a company is to develop a purportedly new product,288 it should ideally work out what patents could be infringed and which ones should be licensed in order to play on safe ground. But such is the number of issued patents nowadays that it is not easy to make any sense of it. For small firms, which do not have legal departments at their disposal, this is an enormous, virtually impossible task. Hence, in practice small firms do not verify IPRs compliance, but simply rely on the innovative level of the new product. By doing so, they certainly run a risk of infringement, but this they try to lessen by not interfering too much with the businesses of large firms. For their part, large firms have more resources to verify IPRs compliance; however, and despite IPM publications usually recommend doing so,289 this is not always the case. Often large firms rely on the IPRs portfolio they own and use it to counter-attack small companies alleging an infringement of their IPRs, either countersuing them or challenging the validity of the infringed patent. In other cases, potential infringements by small firms and the threat to go to court are used by large firms to get access to their technology.290 Finally, at times the advantage in the IPR field is not used to gain access to smaller rivals’technologies, but to leverage that advantage in the commercial area (e.g. by including grant-backs or tie-ins in the licence terms). To be fair, large companies are not exactly the ‘bad guy’in this movie. The IPR field evidently favours large firms over small ones, and large firms simply— legally— exploit that circumstance. In fact, one could even say that they do not exploit it to the full: 286
It implies a waste of resources in patenting activities and a disincentive to innovation: see Chapter II, Sections E, subsection 5, and F. 287 See Chapter II, Sections E, subsection 5. 288 Note that even less far-reaching practices than R&D could be caught here: e.g. when a shopkeeper decides to reproduce music in the premise, she will have to find out about all potential copyright infringements in most countries where this is considered a type of public performance covered by copyright. See RAHNASTO, n. 64 above, pp. 97-99, for details. 289 See e.g. DAVIES/HARRISON, n. 8 above, pp. 36-39. 290 An interesting example of how large companies can gain access to small firms’innovations can be found in DAVIES/HARRISON, n. 8 above, p. 35, where a large firm executive explains that it does not take long before a start-up company with an interesting new technology ends up infringing their IPRs portfolio and cross-licensing negotiations start.
arguably, there is at least a trade custom in the ICT sector about respecting the others’ competitive space.291 Furthermore, for some time now, large firms are not the only ones to benefit from the state of affairs. At least in the U.S., the patent thicket has been a good breeding ground for patent trolls. The latter is a pejorative term coined to describe non-manufacturing entities (NMEs) holding patent portfolios and pursuing legal actions in order to make profits from the award of patent infringement damages. Needless to say, the rents that NMEs seek are mostly found in large companies’ pockets. And because they do not carry out any R&D or manufacturing activity, any counter-attack is cut. NMEs are generally frowned upon in the industry. 292 Even the Supreme Court has recently shown signs of hostility towards them. 293 And much of the ongoing patent law reform in the U.S. is aimed at curtailing NMEs business.294 Undoubtedly, patent trolls can add to the problem of legal uncertainty and eventual innovation discouragement. However, they are precisely the result of the patent thicket: if there are many patents infringing upon each other and large companies with deep pockets behind them, it is certainly a good terrain for litigation. On the other hand, one shall acknowledge that some of the functions NMEs carry out are economically beneficial. For instance, they bring more liquidity to the market for patents.295 And, last but not least, some of the entities that would meet the definition of patent troll are in fact patent enforcement firms, which provide litigation services to start-up and other small companies and individual inventors. In this case, it is submitted that their presence should be welcome, for they contribute to making the legal system more available to small entities.
See e.g. n. 289 above. “On the road of innovation, sits an ugly patent troll … Faster than a Rocket docket, sticks his hand into your pocket … Corporations be united! He who slays the patent troll, by the Queen he will be knighted, and exalted by us all.”A. POLTORAK’S Patent Troll Ballad, read in a speech at the Intellectual Property Owners Conference in Washington, D.C. (Mar 2005), as quoted by T.P. MCMAHON et al., ‘Who is a Troll? Not a Simple Answer,’7 Sedona Conference Journal (2006), 159-168, p. 159. 293 In eBay Inc. and others v MercExchange LLC, 547 U. S. ___ (2006), 126 S.Ct. 1837, at 1838-1839, a NME held a patent that was found to be infringed by a jury. The NME subsequently sought injunctive relief, but the district court denied it. The Court of Appeals reversed. Finally, the Supreme Court ruled that the general rule of availability of injunctive relief upon a finding of patent infringement could be held inapplicable, according to the equitable discretion of the district courts. 294 Cf. Section C, subsection 1 below. 295 See A.F. MCDONOUGH, ‘The Myth of the Patent Troll: An Alternative View of the Function of Patent Dealers in an Idea Economy,’56 Emory Law Journal 1 (2006), 189-228, pp. 213-214. 292
All in all, the IPR field remains however a realm dominated by large firms. 296 Small firms normally opt for more informal protection, such as business secrets, in order to protect their R&D efforts. This should not matter if business secrets protection would be equivalent in practical terms. But as we have born out in the previous chapter, the legal treatment of both figures is fairly different. Although significant steps towards equal footing have been made,297 substantial differences remain. For instance, the degree of uncertainty as regards the term of protection is definitely higher in the case of business secrets. Given this uncertainty, when it comes to selling a technology to larger companies, it is not infrequent for small firms to sell the company as a whole, instead of using assignment or licensing schemes, in order to prevent secret leakage during the negotiation phase. Surprisingly enough, small firms often apply for patents with aims very different from securing an exclusive use of the innovation, such as advertising.298 A typical argument put forward in this context is that this type of sympathy to small firms falls again in the trap of the much criticized ‘small versus big guy’approach especially distinctive of EC competition law. 299 It can be argued that if the patent system helps more those who are precisely carrying out more R&D and innovating more,300 then it is precisely achieving its goal. This argument is, nevertheless, unsatisfactory. On a strictly economic basis, it is far from clear that large firms are better positioned to carry out R&D than their small counterparts. They might be better endowed as regards equipment, they might better profit from economies of scale, and they might even have an advantage in combining human capital resources, setting up multidisciplinary research teams. But they are also less flexible than small firms, and flexibility seems a crucial issue when it comes to
In the U.S., less than 40% of patents were granted to small entities in 1991, according to U.S. Government, The State of Small Business: A Report of the President, U.S. Government Printing Office (1997), p. 140; this number is in addition likely to have decreased with the acceleration in patent accumulation. In Europe, according to C. MCCREEVY, EUROPEAN COMMISSION, Closing remarks at public hearing on future patent policy— Public Discussion on Future Patent Policy in Europe, SPEECH/06/453 of 12th Jul 2006, “large firms hold almost three-quarters of all the patents.”The patent offices are aware of this problem: ‘Getting a patent is expensive. Once you’ve got it, you need to enforce it. We have been made aware of the difficulties that SMEs may face in defending patents,’(L. SMITHHIGGINS, head of awareness, information and media at the U.K. Intellectual Property Office. Quote from I. MARSON, ‘Patent injustice for small software companies,’ZDNet UK (29th Jun 2005)). 297 Cf. Chapter III, Section B, subsection 1. 298 Patents might be in this way a signal to the market that a start-up company has a good invention portfolio and is not just ‘selling smoke.’ 299 A typical case mentioned in this context is Commercial Solvents (n. 198above). 300 In this line, SCHUMPETER himself: “What we have got to accept is that [the large-scale establishment] has come to be the most powerful engine of [economic] progress”(SCHUMPETER, n. above, p. 106).
creativity. Empirical research is in fact ambiguous,301 and there might be an important bias derived from small firms being caught in a ‘trap’: they might innovate less precisely because they are less protected. But even if it could be proved that large companies innovate more, this could not justify favouring them in the IPR field. That is to say, as long as the IPR field is a more hostile ground for small firms than for large ones, potential opportunities to do business are hampered for the former. This affects innovation. To this it could be replied that business secret protection incentivizes their innovative efforts sufficiently, but, as long as business secrets and patent protection is not equivalent, decisions on the legal protection of inventions are distorted, and hence welfare is diminished.302 Finally, from an ethical perspective, the consequences of this imbalance go beyond affecting an efficient allocation of resources; they affect one of the values most highly regarded by modern societies and legal systems, namely the principle of equality in its modern variant of equal opportunity for welfare.
3. Looking for solutions The immediate question that follows the presentation of a problem of inequality of opportunities within the IPR field is inevitably what to do to level the playground. Because this issue primarily affects IP law, in principle one line of study directly turns up: reforming the patent system. However, some alternatives to this exist; for example, proposals can be drawn from the sphere of corporate social responsibility. Moreover, the fact that this imbalance also influences the fairness of the competitive process opens the door to antitrust intervention. As we shall see, there might even be another reason for considering antitrust enforcement: the fact that an IPR strategy is born.
B. IP system reform The most immediate thought when one is asked to give a solution to problems concerning IPRs is of reforming the IP system itself, and it is certainly something legislators, agencies and scholars are aware of. Several streams are however identifiable 301
For example, HARHOFF and LICHT (1996), as cited in D.B. AUDRETSCH, ‘Sustaining Innovation and Growth: Public Policy Support for Entrepreneurship,’11 Industry and Innovation 3 (2004), 167-191, p. 176, find that the likelihood of a firm not innovating decreases with firm size. However, Z.J. ACS and D.B. AUDRETSCH, n. 76 above, p. 681, compute from a 1982 sample of data concerning innovations in the U.S. that large firms account for about 60% of the innovations, without remarkable differences as regards the quality of the innovation. 302 This reasoning is normally used in public economics in order to evaluate fiscal neutrality: if e.g. a tax on capital gains is lower than on ordinary income, decisions as to the type of work or investment made by economic agents will be distorted, and efficiency affected.
within this main option. Among them, the most predictable line of thought is probably the one considering that the problem derives from the lack of resources of patent offices, and that a budget increase should solve it. The case-study of the U.S. Patent and Trademark Office is typically presented as an example thereof: the patent office receives around 350,000 applications a year, which are to be studied by 3,000 examiners. 303 Examiners have then only some hours to decide on an application. The argument then goes that if the PTO’s staff would be increased, examination could be more thorough and less overlapping patents would be granted. This reasoning is correct, and the problem of under-funding is undoubtedly a real one, but in a world of limited resources, the answer is certainly more complex that that. But it does not seem realistic to assume that the problem is just quantitative: there is definitely an increase in the number of patent applications, but also a qualitative change in the way companies use their IP. Ideally, qualitative reforms should accompany quantitative ones. But consensus amongst law-makers, officers and scholars gets not further than here. From this point forth, different directions are indicated.
1. The ongoing U.S. patent reform In the U.S., a patent reform has been under ongoing discussion304 for a time since the publication of research studies pointing at specific changes to enhance the system. 305 The reform certainly demonstrates that U.S. law-makers have become aware of the need of improving the quality of granted patents, 306 although there are also other main motivations behind, as the wish to line up the system with other jurisdictions— particularly as regards the move from a first-to-invent to a first-to-file-system— and the aspiration to stop the patent troll phenomenon. 307 For the purposes of our study, two reform poles deserve special attention: reforming measures aimed at improving the quality of patents and measures intended devised to put a stop to the patent litigation
See MCMAHON et al. (n. 292 above), p. 160. Patent Reform Act of 2007 (H.R. 1908, S. 1145). Before its adoption by Congress and Senate, previous bills had been discussed in 2005 and 2006. 305 One of the most influential among these reports is the one by the FEDERAL TRADE COMMISSION, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy (2003), even though there had already been proposals for reform in the 90s, as the one suggested by the Mosbacher Advosory Commission on Patent Law Reform in 1992. 306 “High patent quality is essential to continued innovation,”Congressman H. BERMAN reportedly said when introducing the 2007 bill. See B. MOYER, ‘Creating Patent Expertise in the District Courts,’54 Federal Lawyer (2007), 10. 307 See W.C. ROOKLIDGE, ‘Reform of the patent laws: the US experience in forging legislation from disparate interests,’2006 Intellectual Property Quarterly 1, 1-15, pp. 2-5. 304
business. The first group includes facilitating patent officers’access to prior art, 308 establishing a post-grant opposition procedure at the patent office— including a reduction of the estoppel effect in courts— ,309 the relaxation of the burden of proof for the challenge of patent validity310 and measures thought to achieve a higher degree of technical expertise in trial courts hearing patent infringement cases. These are devices thought to purge the patent system of ‘bad’patents for the benefit of true innovation. There is however a second group of mechanisms introduced in order to make it more difficult for NMEs involved in patent infringement claims to profit from the system. These measures comprise a limitation of damages awardable in court for patent infringement— embracing e.g. capping damages to the economic value of the improvement as compared to prior art or restricting treble damages instances. 311 The overall affect such a reform may have is however uncertain, as the two reform poles point to different directions: facilitating opposition procedures may well foster the prevalence of better patents, but limiting infringement damages may have the opposite effect of deterring access to justice and make infringement more profitable, notably for companies with deep pockets. This may be the result of pursuing rather antagonistic policies: making patent usefulness more dependent on quality than on size but at the same time witch-hunting patent trolls. As discussed above, patent trolls are a consequence of the problem, not its origin. In any case, several of the measures designed to encourage fundamental innovation deserve closer attention. To start with, support post-grant opposition and judicial patent challenge may have the effect of narrowing the patent claims. This might be beneficial for levelling the playing field, but not a definitive solution. Specifically, it would not discourage intimidating practices by large firms, for the reason that for the latter it would be just a question of owing a sufficient number of patents to intimidate a smaller competitor. Narrowing patent claims would mean that more patents would be needed for this purpose, so the number of ‘harassing’firms might diminish, but not disappear. Another proposal worth considering is the one related to increasing the technical background of trial courts in patent infringement cases. In fact, a similar suggestion has been put forward, back in Europe, in a recent white paper by the Commission, following
For example, by allowing third parties making submission of prior art (H.R. 1908, § 9, and S. 1145, §
H.R. 1908, § 6, and S. 1145, § 6. H.R. 1908, ‘§ 328, and S. 1145, ‘§ 328. 311 H.R. 1908, § 5, and S. 1145, § 5. 310
a number of reports on how to enhance the patent system.312 The emphasis in this case is on expert arbitration or alternative dispute resolution mechanisms, both as a way of reducing the cost of enforcement and improving the technical level of assessment of infringement and validity issues. Whether this type of measures would work however critically depends on the approach technical arbitrators would adopt, which— given their professional background— is not likely to take many competition law implications into consideration. 313
2. Reverse discrimination and litigation insurance schemes There are more daring proposals. It has been pointed out by some scholars that there is a legal trap,314 that those actors playing the most significant role in innovation enjoy that position precisely because the legal system is on their side. There are then very powerful comparisons possible with other situations of social exclusion, for example the impairment of minorities by a social system. Based on such comparisons— although the situation for small companies is definitely less dramatic— some scholars have started to contemplate the idea of introducing affirmative action or positive discrimination mechanisms in favour of small enterprises into the patent system.315 Concrete proposals in this connection include discounts on fees charged to small businesses316 and even a period of limited post-grant incontestability. 317 This would allow small firms to forestall intimidation by larger rivals for a time, during which they could be better placed to earn profits and hence have an incentive to innovate. This thought is not farcical, but neither is it without risk, for it would mean shutting the door to legal revision of patent 312
Communication from the Commission to the European Parliament and the Council COM/2007/165 final of 29th Mar 2007, Enhancing the patent system in Europe (pp. 13-14), and inter alia W. KINGSTON, Enforcing Small Firms’Patent Rights, Report for the European Commission (2000), pp. 43-46. 313 This will be elaborated in Sections E, subsection 2, and F below. 314 The term trap is used in social sciences, such as economics or sociology, to describe a no-exit social situation. Hence, the term poverty trap is used to describe the situation in which the lack of economic progress is due to the inexistence of minimum economic preconditions and the term innovation trap is used to refer to the case in which businesses obsessed with innovation invest in it more than required, consequently attributing the to the lack of sufficient investment and nourishing the vicious circle. Legal trap is intended to mean in this case the hypothetical situation in which inventors other than corporations encounter less incentives to innovate than the latter, to become thereby one more in the list of noninnovating agents. 315 Affirmative action is the policy of legally favouring those minorities which de facto are disadvantaged. It finds its roots in material justice considerations leading to the welfare state, and measures of this type are normally directed to improve the social standing of certain groups, characteristically ethnical minorities, women and handicapped. However, it is true that in the patent systems some positive discrimination already exists (for instance, the Swedish Patent and Registration Office (Svenska Patentoch registreringsverket) charges a discounted fee to patent applications hailing from developing countries). 316 W. KINGSTON, ‘Making Patents Useful to Small Firms,’2004 Intellectual Property Quarterly 4, 369378, pp. 372-373. 317 Ibid., pp. 376-377 and W. KINGSTON, ‘Improving Patents for Smaller Firms,’2007 Intellectual Property Quarterly 1, 1-18, pp. 7-11.
examiners’decisions in general, and to antitrust intervention in particular. Be it as it may, granting privileged treatment to small businesses is nonetheless a remarkable idea. In fact, in the U.S. some on-the-field manifestations of the idea already exist: filing, issuance and maintenance fees are half the ordinary ones for applicants and patentees qualifying as “small entities”. 318 It is indeed interesting to see that reverse discrimination might have arrived to a domain quite different from where it was born in.319 Nevertheless, and despite one shall acknowledge the potential that reverse discrimination may have in the sphere of IP law, one may raise the question of whether overt reverse discrimination measures are the most appropriate solution in this context. Indeed, trying to solve a problem of imbalance by adding more weight to the lightest of the scales certainly contributes to restoring the balance, but at the expense of making the whole system top-heavier, and likely to malfunction. Hence, by focusing excessively on the situation of the weaker party in a system, one runs the risk of disregarding the system’s main goal— and precisely that what makes it an ally of dynamic competition: the promotion of innovation. True, worries have here been expressed about the existence of an imbalance of the system, but understood as the lack of equal opportunities; this does not imply encouraging patent applications by small firms at all costs. Fee-discrimination is a rather harmless example, 320 but it can illustrate the inconveniences of moving into this direction. The benefits in terms of social welfare an innovation yield are in principle the same regardless of the inventor; what counts is the invention as such. However, fixing a different fee for the patenting of identical inventions depending on the economic size of the applicant de facto implies requiring a smaller expected contribution from small entities than from big business— the former then need a lower flow of income from their invention in order to make it profitable. It could be said here that this simply restores the lost balance: it requires less profitable inventions on behalf on small entities because in general the system makes the former less profitable for the latter, precisely because of their size. In economic terms, this
U.S. Code of Federal Regulations, Title 37— Patents, trademarks and Copyrights, §§ 1.16-1.20 and 1.492. 319 Cf. n. 315 above. 320 In fact even some large corporations have shown their sympathy towards reduced fees for small businesses: see press release by MICROSOFT CORP., Q&A: Microsoft Calls for Reforms to the U.S. Patent System (Mar 2005), where Microsoft’s General Counsel B. SMITH argues for a “zero-filing-fee system” for applicants having small-entity status.
could be characterized as a problem of higher risk aversion: 321 small undertaking, lacking an adequate business size, discount the future benefits that inventions yield at a higher rate. That these two effects are contrary is correct; that they cancel each other is however unlikely: we simply ignore the amount of incentives small firms would need, from such a broad perspective, in order to restore the balance. All the same, reverse discrimination could still be an option in the absence of better workable solutions: are there in fact better feasible options? As the interviewee in the need of time would say, ’that’s a very good question indeed.’One initiative worth of consideration is the one championed by the Danish Patent and Trademark Office (Danske Patent- og Varemærkestyrelsen), which gave rise to a research study commissioned by the EC executive, and involves introducing an insurance scheme.322 To a great extent, this proposal correctly addresses the problem of risk aversion. Namely, if a small sized patentee is insured against litigation from larger-sized enterprises, she should not fear their harassment tactics. In addition, small firms’ resources would be pooled in this fashion in order to surmount the obstacle of lacking an adequate size: the risk is like this ‘diluted’in a larger volume. Despite of its potential virtues, this option is not exempt of problems. If an insurance scheme is established for the coverage of litigation solely, a general risk of innovation failure— i.e. the risk of an innovation not being successful, without litigation being involved— would still remain uncovered. Perhaps the insurance could then be extended to general cases of failure with appropriate safeguards, but this seems highly unlikely, at least in the near future.323 Another obstacle is adverse selection— the tendency to attract to the scheme precisely the most litigious patentees— though this barrier could be avoided by making insurance compulsory for small businesses.324 A further impediment could be that patentees would not be encouraged to act in good faith, taking excessive risks and giving rise to excessive litigation— this is known as moral hazard.325 There is
Risk aversion relates to the degree of risk an economic agent is willing to undertake in decisionmaking. A person is more risk averse than other if she prefers a fixed payment or loss to a risky project while the latter would embark on it, assuming the risk. 322 A. TURNER et al., CJA CONSULTANTS, Study on the possible introduction of an insurance against costs for litigation in patent cases, Report for the European Commission (2006). 323 In fact it is not even sure whether the scheme could be set up simply covering the risk of litigation: see Enhancing the patent system in Europe (n. 312 above), pp. 14-15. 324 CJA CONSULTANTS (n. 322 above), p. 49. 325 There are also here some corrective mechanism to incentivize insured persons to behave in a more favourable manner, such as charging a premium risk based on past conduct— which are used e.g. in motor vehicle insurance— , but in this case there would be the additional burden of potential collusion between the insured— note that in the case of motor vehicle insurance, the gains of undesired conduct are somewhat offset by the risks of injury; in the present case this is less obvious.
also an important legal hurdle, the European Patent Convention prohibition on additional compulsory formalities in patent applications. 326
3. ‘Public procurement’- based proposal In this context, one final alternative is here submitted. It speaks up for drawing inspiration from public procurement policies. The purpose of public procurement is to select the most suitable project among a number of competing tenders in order to make the most of contributors’ money.
This is a similar purpose— though more
restrictive— to the one a patent system is supposed to pursue: getting the most out of patent grants. In this case, innovations can be seen as projects, while the potential seizure of market power by patentees can be seen as the price society has to pay for those projects. This comparison could offer a solution to the problem discussed here. Specifically, public procurement has developed over the years a set of tools in order to address the social benefit versus cost maximization question. These tools are more tested than the ones set up in the patent system. In this regard, a simple mechanism used in public procurement is the use of rankings of tenders. Projects are evaluated and ranked, so that if the first one proves a failure, the next best evaluated is selected.328 One can learn something from this uncomplicated procedure: ranking pays off more than simple ‘yes/no’grading. The latter is what takes place in patent examination procedures: an invention is compared against the state of the art and a decision taken on whether the invention is patentable or not.329 This seems fairly risky. A ‘yes/no’decision implies that different qualities will be lumped together, and the result likely to be that some patents or, more probably, patent thickets block or delay the patentability or commercial exploitation of fundamental innovations— apart from certainly opening the door to ‘mushrooming’practices. In theory, introducing a grading scale system solves the problem: applications are evaluated according to their expected future contribution to social welfare, and better evaluated fundamental innovations upheld against the rest of the patent thicket. In practice however this does not hold, simply because we cannot foresee the future. Any future contribution to social welfare by an innovation could hardly— if at all— be 326
European Patent Convention, Art. 137(1). See KINGSTON (n. 317 above), p. 14. See e.g. the Preamble to the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Public Procurement of Goods, Construction and Services with Guide to Enactment of UNCITRAL 27th session (3rd may - 17th jun 1994). 328 Cf. UNCITRAL Model Law (n. 327 above), Art. 35(4) and (7). 329 This is of course not the only requirement, patentability of the subject-matter and utility being needed in most if not all patent systems, but it is the most relevant for the present discussion. 327
guesstimated. In fact, were it possible to make an accurate estimation, it would then be better to pay the inventor with public funds and spare any potential monopolies. With such an imprecise estimation, prioritizing better ranked patents in case of potential infringement would be senseless. All the above holds, but it shall not lead us to rule out the thought prematurely. Precise estimation of welfare contribution by an invention might be impossible, but a comparison with existent state of the art is not. In point of fact, that is what patent examiners currently do. So the— adapted— proposal here would just imply one more step: ‘giving a mark’to the application. This mark should by no means be deemed an irrefutable proof of incontestability by worse-ranked patents, but it could be a hint in the event of infringement litigation or patent validity challenges. To put it simple: it is better than nothing. One could have the objection that such an evaluation process would require more time and resources than the examination currently taking place. This is important, because— as we already know— resources available to patent offices are limited, so the proposal runs the risk of being impracticable. That is why this type of evaluation should probably take place occasionally, though not randomly: account should in this regard be taken of the number of previous applications made by the same or related applicants. Hence, only one in a specific number of applications made by the same or related persons would be evaluated and graded. A further objection then reads that this would de facto involve positive discrimination, because small firms file fewer applications than large ones, hence their inventions would have a greater chance of being evaluated. The reply to this is, first, that the fact that an application is graded would not automatically imply its incontestability. Should the ‘hint’ given by the mark in any case imply certain discrimination in favour of small businesses, at least this type of discrimination would be of a smaller rank— certainly not overt one— ; hence, it would be closer to the ‘first best’ solution. A second reply is more fundamental, but also more arguable: this practice would be more in line with the theory that returns to variety are increasing in scale.330
C. Calls for Corporate Social Responsibility
See YOUNG (1998) in Chapter II, Section C, subsection 1.
Corporate social responsibility (CSR) is the term used to designate a company’s approach towards aspects affecting its community and environment. 331 The term was first coined in the 1970s, although its roots can be traced back to the debate following the emergence of modern large corporations, when the economic power of those entities reached such an extent that they were in a paramount position to influence their environment, particularly their workers’ communities. 332 The idea that corporations should aim at something more than making profits for their shareholders— and take into account other stakeholders— started to be discussed. The concept of CSR has however evolved to encompass other aspects of the corporations’environment and to become a formal area of discussion as regards its business and legal desirability. Thus, the roles of CSR as a source of competitive advantage, as a relevant financial variable and as an extension of the fiduciary duties of corporate directors have all been studied by strategic management, corporate finance and corporate governance literature. However, the results thereof have been and remain ambiguous, cultural components markedly influencing the debate. Hence, in some countries the reception has been more positive than in others.333 Particularly, it is not clear whether CSR should make part of the goals pursued by a company together with the maximization of the shareholders value. There is general agreement however that CSR should basically remain a voluntary phenomenon. 334 In this connection, companies in different business sectors have ended up approving voluntary codes of conduct, lists of dos and don’ts in corporate management actions affecting the social or environmental spheres. The discussion about CSR certainly finds an infertile ground in IPM scholarship. In this area, business management literature has focused on strategies of a rather opposite nature, characterized by their marked individualism. 335 Nevertheless, recent times have witnessed the formulation of large corporations’proposals calling for a more ethical
See COMMISSION OF THE EUROPEAN COMMUNITIES, Corporate Social Responsibility: A business contribution to sustainable development (2002), pp. 7-12. 332 See WORLD BUSINESS COUNCIL FOR SUSTAINABLE DEVELOPMENT , Meeting Changing Expectations, WBCSD Publications (1999), pp. 5-6. 333 For instance, in continental Europe, where the concept of CSR has merged with that of corporate governance, the general line of discussion is more inclined than in the U.S. towards recognition of the social role of the corporation: see J.C. SALACUSE, ‘Corporate Governance, Culture and Convergence: Corporations American Style or with a European Touch?,’14 European Business Law Review 5 (2003), 471-496, pp. 475-476. 334 Cf. e.g. EUROPEAN COMMISSION (n. 331 above, pp. 18-21. 335 Cf. Section A, subsection 2 above.
behaviour in IPR practices.336 A number of campaigns have been launched in this regard, intended to increase the quality of patent applications and grants and trim down the patent thicket. Hence, both a closer— and more sincere— collaboration with patent offices in order to establish prior art and a more transparent and content-based filing and enforcement strategy have been advocated. The hope is that, by boosting integrity and transparency in IPR practices, the environment will be a healthier one for all— major and minor— players. Although calls for a more ethical conduct in the IPR field are to be welcome, especially if coming from those actors who are favoured by the actual state of affairs, this option does not transcend a complementary approach. Actions of this type can certainly contribute to improving the commercial and legal relations between the actors in the IPR field, it does not seem realistic to assume that the solution will come from selfregulation: being both judge and jury is not normally a solution when there are important conflictive interests at stake.337 The fact that the initiative has been proposed by a large corporation is however worth to mull over: this might be a sign that the patent thicket phenomenon is getting far too unmanageable, even for large companies. Maybe the ethical imbalances have become too blatant. Or maybe patent trolls have convincingly shown their teeth.
D. Antitrust intervention 1. Intervention based on the patent system malfunction Historically, the relation between the IP system and antitrust has been presided by the principle that IPRs owners should not exceed the proper field of protection afforded by the IP system. 338 In other words, most legal practitioners and scholars have traditionally considered antitrust intervention only necessary if IP protection proved excessive. Theoretically— mistakes aside— it is only in cases where the protection offered by the IP system to a rights owner has uncalled-for effects on competition that antitrust intervention is deemed reasonable. 336
A pioneering declaration in this regard was made by IBM’s vice-president D. KAPPOS, ‘Point Of View: We Must Stop The Race To The Bottom,’IP Law & Business (Apr 2007). 337 This is recognized by large companies themselves: “It’s a little like holding the door open for someone, helping an athletic competitor in distress, or being extra courteous while driving”(KAPPOS, n. 336 above): it is a commendable initiative, but not the definite remedy. 338 Cf. Chapter III, Section B, subsections 1 and 4.
This principle is nothing new. It is also the attitude competition law has adopted in relation to other legal spheres. We have seen an example of competition law enforcement in vexatious litigation cases.
At this juncture, when it can be
demonstrated that one undertaking, lacking legal grounds, brings legal proceedings against another undertaking and with the purpose of disrupting its normal commercial operation, competition law has intervened. We should bear in mind that this intervention would not be necessary at all if the justice system worked flawlessly: if all unfounded legal actions were sufficiently punished so that bold claimants were deterred from abusing the legal process, there would be no room for antitrust enforcement. Following this traditional reasoning, there would probably be room for competition law enforcement in the context of practices taking place in the IPR field. That is, as long as the patent thicket facilitates practices such as harassing and blocking competitors by companies with larger portfolios, as long as IP protection is not proportionate to innovative effort, antitrust interference is probably justified. There have been in fact indications that such an intervention can take place: within the EC, AstraZeneca340 is a sign that competition authorities are ready to react against abuses of the IP system. As one author has put it, “AstraZeneca does not only concern the abusive exercise of intellectual property but also the abusive obtaining, protection and extension of intellectual property rights themselves.”341 And in the U.S., cases regarding the fraudulent use of the IP system go back several decades. 342 Other examples involve compulsory licensing cases. For instance, Magill343 the interference of EC competition law with national copyright legislation eventually derived from the perceived problem that the creative effort was minimal, comparable to the creative effort of preparing a shopping catalogue.344
2. Intervention based on a dynamic approach? IP lawyers are suspicious when hey hear about competition law ‘poking its nose’into their domain and, to be fair, they have some good reasons for that. Competition and IP law soon proved troubled room-mates, the latter adopting a rather aggressive stance at a 339
See Chapter III, Section C, subsection 4 above. See n. 249 above. 341 GUNTHER/BREUVART, n. 250 above, p. 680. 342 See Chapter III, Section C, subsection 4 above. 343 See n. 210 above. 344 “The listings do not consist more than the setting out on paper of certain information which must in any event be produced for the purposes of the television broadcasting service”(A.G. GULMANN in Magill, para. 123). In spite of that, the A.G. concluded that this fact could not lead to the interference of EC competition law with national IP law: as long as complying with Art. 30 EC Treaty, it should be for the EC or national legislature to decide on this subject (paras. 124-127). 340
certain point. In a number of occasions, antitrust concerns about the anticompetitive effects of IPRs have proved inflated, if not directly wrong. In time, both sets of law have nonetheless learned how to live together— or at least we like to think so. Both have tended to acknowledge a common goal: increasing society’s welfare. Welfare may be improved by promoting the existence of situations leading to that result, either in the present or in the future. While IP focuses on the second possibility, competition law has evolved so as to pay attention to both of them. Historically, conflict between the two legal domains has come from circumstances where competition legal practice considered that encouraging the second possibility was not worth discouraging the first. To this has contributed the fact that, while the study of situations leading to a welfare-enhancing in the present— static competition— has made significant progress in modern times, the analysis of the more complex issue of what present situations lead to improving welfare in the future— dynamic competition and innovation— has still a long way to walk. But, as said, the competition law analysis has learned to move towards a more dynamic perspective. However, in doing so— in moving from a static to a dynamic approach— competition legal practice has also ‘crossed the Rubicon.’It has entered a new phase in which it will not only consider the static effects of the exercise of IPRs, but also its dynamic consequences, its effect on future performance and, particularly, innovation. An example thereof is the new way of considering licensing restrictions, based on the overall effects on competition. The approach is now more comprehensive, but also much more complex: it will have to face exactly the same difficulties IP law has: determine the set of current situations that are actually leading to a welfare-enhancing outcome in the future.345 Therefore, it seems to the author that there is another reason why one should reflect on antitrust intervention in this situation; namely, that the IP system may not merely be an instrument for frivolous patentees or litigants to disturb a competitor’s business activity. This is what distinguishes the present problem form the problem of vexatious litigation as such— i.e. not necessarily involving IPRs: the former poses a challenge to competition which goes beyond a static scenario. Indeed, as we have put forward, the IP system defines a new dimension of competition, which we called the IPR field. Within this field, companies take strategic positions across time. They form a portfolio of 345
The two set of laws do not have the same exactly objectives— for instance, competition law is also concerned with wealth distribution while IP law is normally not— , but the optimization problem is the same: determine what is good today for tomorrow’s well-being.
patents to related technologies, they look for patenting opportunities— or gaps— or they simply file patents in order to block competitors. So long as this can be defined as competition, it makes sense that competition authorities (also) monitor the process. This second reason definitely relates to the phenomenon of dynamic competition between companies, only that not in the general technological sense— not in the meaning of competing for markets through the development of technologies— , but in a more legal sense, as competition for strategic ‘legal’positions. It is however undeniable that both sorts of dynamic competition are closely related, what is more, most of the debate on the antitrust approach to competition in innovation can be also imported to the area of competition for IPRs. A propos, some legal practitioners have shown their distaste for antitrust intervention in these cases, arguing that IP law enforcement is in a better position to examine this type of competition. Said a high-ranking WIPO official: “[I]ntellectual property law can— the word ‘can’is important— be applied to regulate, or police, or guide an emerging ‘innovation market,’already at an early stage. That market is probably beyond reach for competition law.”346 However, this stance assumes that both the design and application of IP laws fully takes into account all strategic actions to which they give rise. This is, at best, far from clear. To start with, even the exact optimal scope of IP protection is nowadays impossible for a legislator to determine; as we have seen,347 it is not still clear for economists on a theoretical level. Secondly, IP law practitioners are not very likely to see the applicants’and patentees’economic decisions and interactions from a ‘game’theoretic perspective, for there is a true game taking place on the IPR field.
E. Selection of the preferred approach We concluded the last section by observing that there is a true ‘game’among the players on this field that needs to be monitored. The question that then arises is: are there also clear rules on how to play and a referee to enforce them? The answer is that the rules are not clear, but there is in fact more than one referee. Both antitrust and patent offices are involved, each of them applying their rules, which are not forcedly the same. For instance, patent offices are empowered under several national IP systems to endorse compulsory licences. However, they have not proceeded to do so 346
A. HEITZ, ‘Intellectual Property and Competition,’in EUROPEAN ENTERPRISE INSTITUTE (EEI), Competition - Economic Approach to Article 82, EEI Policy Papers (2006), 40-46, p. 44. 347 Cf. Chapter II, Section D.
in the same cases as antitrust agencies have: in general, when restrictions to competition are invoked, patent offices are less inclined to grant compulsory licences than antitrust authorities. This indicates that, if competition authorities were at the same time patent officers— and did not have their budgetary problems— , they would not probably patent the same inventions as patent offices currently do. This is because both authorities look at different aspects of what is ‘going on’on the IPR field. Patent officers primarily look at the state of the art: officers typically ‘draw a line’to separate what is presently known or invented from what is not. If an application for a patent can be placed at the right side of the border-line, the invention is patentable.
In contrast, competition law
practitioners would seem keener to look at the evolution of patent filings— e.g., whether a particular company suddenly deviates from its filing record, or whether its patents suspiciously encircle those of a competitor. The problem is that each of these approaches are probably biased when considered individually: the ‘state of the art’approach arguably does not take into consideration some strategic movements within the IPR field, and competition law practitioners would probably lack the knowledge and expertise to discern actions within the IPR field which correspond to genuine innovations from those which may cover up anticompetitive moves. This leads us to conclude that the best approach lies in combining efforts: competition authorities and patent offices should now more than ever cooperate. This would permit analyzing the phenomenon of competition in the IPR field from a broader, richer perspective. Certainly, that this is exactly the perspective to adopt in order to correctly monitor these actions is far from being true; one could for instance say that other institutions or experts in the domain of competition or innovation should be brought into such a collaborative scheme. This would be correct on paper, absent institutional costs. In practice, the system proposed here is the most direct and costeffective solution occurring to the author. To put it simple: it is better— it is submitted— than what we currently have. The idea of cooperation between antirust and patent institutions has for sure not been left out by law-makers and their advisors. An on-the-spot example thereof is contemporaneous to the Magill case: 349 the procedure for compulsory licensing established by the U.K. Copyright, Designs and Patents Act 1988 (CDPA).350 In the 348
This is obviously a simplification. Cf. n. 329 above. This example was firstly commented by A.G. Gulmann in Magill (n. 210 above), para. 11 of his Opinion. 350 Copyright, Designs and Patents Act 1988 [c. 48], sections 144 and 149. Section 149 was amended by the Broadcasting Act 1990 [c. 42], section 175.
U.K., the legislature realized that protection afforded by copyright to television listings was excessive in relation to the creative effort involved, and proceeded to enact legislation whereby right holders could be compelled to license third parties under certain prescribed conditions— apart from establishing a general duty to provide advance information about programmes. 351 But what is interesting for our purposes is that the CDPA envisaged the participation of the current U.K. Competition Commission in the compulsory licensing procedure, the terms of the licence being decided by the Copyright Tribunal352 in case of disagreement. This co-intervention of competition and IP authorities is an early example of official recognition of the need to join efforts at this specific legal crossroads. More generally, the FTC has lately advocated an increased degree of communication between antitrust agencies and patent institutions. 353 The FTC has presented a number of measures to be adopted in this connection. One is intensifying the use of amicus curiae briefs354 in patent cases likely to have effects on competition— as patent misuse cases— and, another, strengthening the working relationship with the patent office director in order to re-examine potentially ‘bad’patents. These proposals however do not exceed a mere informal level of collaboration. Instead, it is submitted that a more formal type of collaboration is preferable, which could consist in the establishment of joint committees of competition and IP law representatives. Such a more stable cooperation is more likely to produce a more coherent and comprehensive treatment of IPR field competition issues and, being the resultant approach also more easily institutionalizable, it could provide official guidance to other authorities dealing with cases in this area, typically regular courts. This option would also present the advantage of easily incorporating another institutional measure already proposed in the context of IP reform,355 namely the use of a selective grading scale system for initial guidance. In this regard, it is worth noting that the FTC has also envisaged the possibility of establishing a more formalized type of communication between antitrust and patent, involving e.g. the set up of liaison panels or an ad hoc antitrust section within the patent office. This is a bolder step, but a step that— it is submitted— should be taken.
Broadcasting Act 1990, section 176. The Copyright Tribunal is created by the Copyright, Designs and Patents Act 1988, sections 145-152, with the general task of settling disagreements on the copyright royalties to be paid in licences offered by collective licensing bodies. 353 FEDERAL TRADE COMMISSION, n. 305 above, Chapter 6, Section III, subsection B. 354 An amicus curiae (“friend of the court”) brief is a document sent by third parties interested in the outcome of a specific case to the court hearing it. 355 See Section B, subsection 3 above. 352
Chapter V: Conclusions
Already in 1890, ALFRED MARSHALL warned on the imbalance of the patent system to the detriment of small business,356 pretty much what has been discussed throughout this thesis. However, MARSHALL’S warnings were not based on the same premises that have been here presented: he said the patent system was poorly used in several businesses, with the result that important inventions were not disclosed by large firms and small firms had no option to profit from the technological improvement. These days, the situation is rather the opposite. The patent system is used; what is more, it is over-used. It is not only used by large firms, but it works out rather well for them. The patent revival has led to a situation of large numbers of patents potentially infringing upon each other; in this Wild West, having more patents as business weapons matters. And this, whether they want it or not, works for the benefit of large companies. Comparing the business situation of small versus large companies is however something very common, as MARSHALL’S example illustrates. It is a typical way to find flaws in the business legal system: to go to court you need a lawyer, a lawyer costs you money, and large companies have more money; hence, the legal system is imbalanced. The situation here pictured differs however from this— rather over-simplistic— example: going to court might be expensive, but at least the probabilities of winning against a wealthier rival are higher than the chances a single patent holder has not to infringe on any other patents. But the naïve example is not that bad, because it shows that, eventually, the two situations are not that different; they ‘just’differ in the intensity of the imbalance. However, the logic is the same: in both cases the problem is that some actors are favoured over others; putting it simple, that there is not a level playing field. What we try to convey in this thesis is that the rise of an IPR strategy implies something more than patent accumulation, and consequently a— fairly— uneven field. Of course this is the most pressing problem, and it has been therefore addressed in the first place. But the existence of a genuine IPR strategy entails also that a real competitive process is taking place within the dimension we called the IPR field. This process is dynamic, very different from the classical competition in price, quantity or quality, and more similar to the process of competition in innovation, but not the same. It may be a competitive process in a virtual terrain, but it has real consequences in the performance of the
MARSHALL, n. 20 above, Vol. IV, Ch. XI, fn. 133.
industry. The author therefore understands that it is a process to be monitored, sensibly by those agencies that have more experience on the field. One shall of course be aware of the difficulties that the adoption of a new approach as the one presented entails. In the near future it seems hardly realizable, at least in most jurisdictions: little research has been carried out about the behaviour of firms within the IPR field, and we currently lack important information. It seems however already clear that many of the tools currently used in competition law analysis would not work on the IPR field.357 New tools would have then to be developed. Finally, to agencies in most jurisdictions, where competition law enforcement still struggles to curtail the most basic anticompetitive practicesâ€” price-fixing cartels especiallyâ€” , what is said here is probably Greek. But it is important to point the way. Further research in this area is obviously needed and, needless to say, will be very welcome by this author.
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Published on Feb 20, 2013
LL.M. Thesis by Oliviero Magagnini (Sep 2007). Deals with a new phase in the ongoing discussion on the right balance between IP and competit...