Competition Policy And Intellectual Property Rights - Oecd

DAFFE/CLP(98)18requisite to the competition agency taking some action against a competitive restraint, including onelinked to IPR.Both competition agencies and patent offices lack the knowledge required to determine optimalpatent breadth, but of the two, the patent offices seem to be in a better position to make trade-offs betweenincentives for primary as opposed to secondary innovation. At the same time, competition agencies enjoya comparative advantage in discovering and appreciating the anticompetitive effects that overly broadpatents might entail. Competition agencies should ensure that patent office decisions about patent breadthare well informed concerning their possible anticompetitive effects. Competition agencies should not only accept the legitimacy and potentially pro-competitive nature ofIPR despite possible inherent short run restrictions on competition, they should also recognise theunique features of IPR which call for a customised approach to cases involving IPR.The most obvious reason for customised enforcement in cases featuring IPR is that manycountries’ competition laws provide exemptions or exceptions designed to ensure that such laws do notnegate the exclusive rights explicitly granted by patent, know-how and copyright laws. Even without suchlegal constraints, competition agencies should be cautious about constraining the use of IPR because ofthe pro-competitive potential inherent in innovation. As in merger review, this is an area wherecompetition agencies are forced to make difficult trade-offs involving uncertain future effects.There are certain unique features of IPR which must be borne in mind by competition agencies.Prominent among them are:1. though costing a great deal to produce, an IPR can be applied at very low marginal cost, i.e.a price above marginal cost is not indicative of market power;2. IPR can be easily misappropriated through unauthorised copying or use so owners will seekto protect themselves in ways that could tangentially restrict competition; and3. IPR often must be used in combination with other IPR, and the agreements required toexpedite this should be analysed under the more liberal competition policy standard typicallyapplied to vertical as opposed to horizontal agreements. The roundtable displayed general, though not unqualified, support for the following three policyprinciples:1. it should not be presumed that an intellectual property right creates or increases marketpower;2. competition policy should acknowledge and respect the basic rights granted under patentlaw;3. a licensing restriction should not be prohibited under competition law if it leads to asituation which is less anticompetitive than would occur if there were no license at all (i.e.competition agencies should not implicitly assume that if the restriction were proscribed, thelicense would still be granted). Where a licensing restriction fails this test, it shouldnevertheless be permitted under competition law if it is associated with sufficient actual orpotential efficiency effects.8

DAFFE/CLP(98)18No one disagreed with the first principle and a considerable number of Members indicatedapproval. There was less obvious support for the third principle. Even before the roundtable turned toexamine specific cases, it was apparent that the second principle was the one most in need of elaborationand possible qualification.Most competition agencies attempt to draw a line between the existence of IPR (i.e. defining orinherent rights), and the use of IPR particularly through entering licensing agreements with other firms.The latter are sometimes referred to as extending or augmenting the benefits that legislators intended togrant by way of patent or copyright protection, i.e. the protection required to foster innovation. This canbest be understood by looking at the areas where competition agencies seem most ready to take actionagainst employing IPR in an anticompetitive fashion:1. using IPR to create or co-ordinate a cartel;2. leveraging IPR to create an advantage outside of the market where the innovation took place;3. prohibiting post-termination use of a licensed technology or requiring royalty payments fora term exceeding the life of a patent; and4. prohibiting a licensee from challenging the validity of a patent. Though there can be cases where abuse of dominance laws should be applied to IPR and companiesforced to license their technology or reduce their royalty charges, such actions bear a high potentialcost in terms of reducing incentives to innovate and should be used sparingly.In jurisdictions where high pricing could amount to an abuse of dominance, both product pricingby a patentee and his chosen level of royalties could presumably be adjusted downward if the patentee hasa dominant position. The problem, however, would lie in identifying what constitutes an abusively highprice. Marginal cost would not supply a suitable benchmark in cases applying to IPR, especially if acompetition agency recognises the need to assure an adequate return to investments in innovation. Notsurprisingly, competition agencies seem reluctant to require compulsory licensing or lower royalties fromIPR holders judged to have dominant positions.The more common way in which abuse of dominance cases could lead to action restricting IPRis where a patentee’s refusal to license, or its excessively high royalties, inordinately restrict thedevelopment of competition. These are candidates for application of the essential facilities doctrine toIPR. Once again, it is difficult to see how competition agencies can take action in such cases withoutdirectly attacking the exclusivity lying at the very heart of IPR.Perhaps the most defensible example of interference by a competition agency occurs when afirm seeks to monopolise technology by obtaining patents not just on processes and products it intends touse and sell, but on a wide variety of competing processes and products that it intends to leave idle. Thisostensibly took place in the early years of the photocopying industry when the leading producer acquired a“killer patent portfolio” that was difficult to innovate around. The case was settled by the pioneering firmessentially acceding to compulsory licensing.9

DAFFE/CLP(98)18Through discussion of the Boeing/McDonnell Douglas and Ciba-Geigy/Sandoz mergers, theroundtable illustrated that compulsory licenses could also feature prominently in merger approvals. Thisappears to be less controversial, however, because a right to combine IPR is not inherent in IPR. The “innovation market” analysis employed in the Ciba-Geigy/Sandoz merger case has the potentialto significantly expand the degree to which competition policy interacts with IPR, but is not yet widelypractised by competition agencies.The Ciba-Geigy/Sandoz merger raised the issue of whether action should be taken againstthreats to competition even before a specific technology or process/product is clearly in view. Thismerger combined two of only a few entities capable of commercially developing a broad range of genetherapy products and threatened to significantly reduce competition to innovate in that area. The mergedentity would have less incentives to proceed quickly to make gene therapy innovations than was the casefor the parties before the merger. In addition, the merger reduced incentives for other companies to entera field where they would in future have only one source of necessary IPR instead of two, and only onepotential buyer for resulting technology. Accordingly, the competition authority abstained from blockingthe merger only after the parties agreed to certain compulsory licensing conditions.Discussion at the roundtable clarified that potential competition analysis, as applied for examplein conglomerate mergers, may be an imperfect substitute for innovation market analysis. The mainadvantage of the innovation market concept lies in its focus on an easier to understand actual rather than1hypothetical constraint on competition. Licensor imposed restrictions on the pricing decisions of licensees in relation to licensed technologydo not usually lead to greater anticompetitive effects than would occur if there were no licensing atall. Countries might therefore wish to review their opposition to such restrictions.Though competition agencies generally appear to support the principles of respecting IPR andallowing licence restrictions which are less anticompetitive than a no licence benchmark, they seem touniversally make an exception as regards restraints on licensee pricing. Inherent in a patent is the right toset the price of patented goods. It is difficult to see how consumers would gain from prohibitingrestrictions on licensee pricing if this simply causes patent holders to refuse to license. Such a refusalcould easily mean foregoing efficiencies of combining IPR with complementary resources owned bypotential licensees.Whether licensees are regarded as potential competitors or as standing in a vertical arrangementto an IPR holder, the roundtable illustrated a strong consensus that competition law should be used toprohibit pricing restrictions applied through IPR licences. Such restrictions would likely be viewed asbeing analogous to horizontal price fixing or resale price maintenance and be treated as per se illegal. Patent pooling and cross-licensing is an area where competition law can and should be applied torestrict anticompetitive use of IPR among firms which are actual or potential competitors.Patent pooling is normally pro-competitive if it is strictly confined to sharing complementarypatents. Competition agencies must be vigilant, however, against companies seeking to combinesubstitute technologies and thereby reduce horizontal competition. There is a particular danger that thiscould happen in the context of settling patent litigation.10

DAFFE/CLP(98)18Even where pooled technology clearly combines complementary rather than substitutetechnology, there is good reason for vigilance on the part of competition agencies as regards treatmentaccorded to non-members and as concerns how technology improvements will be treated. Patent poolscould amount to collective boycotts which significantly reduce the competitive power of existing or futurecompetitors. Consumers also stand to lose if the patent pools require such generous sharing of anytechnological improvements that the incentive to make improvements is significantly reduced. This isespecially regrettable where improvements could unleash the kind of “creative destruction” thatSchumpeter thought was so important to long term economic growth.A rule of reason approach seems eminently suitable to reviewing the effects of patent pooling. Tying and full-line forcing based on IPR is another difficult area calling for sensitive, rule of reasonapplication of competition laws.Roundtable discussion noted several cases where member countries had taken action to stoppatent holders from linking the sale of patented products to the purchase of goods whose patent protectionhad lapsed. This was treated as a means of leveraging or extending what legislators had intended to grantas an incentive to innovate. Normal competition law, applied under a rule of reason standard, seemsentirely adequate for distinguishing between “pro” and anticompetitive tying in cases where the requisitemarket power is conferred through IPR. Grantbacks are a particularly good example of how licensors seek to protect themselves against thepossibility that licensing will foster the emergence and growth of future competitors, but a hard lineapproach to grantbacks could do more harm than good if it leads to inefficient refusals to license.There is a danger that competition agencies, concerned about encouraging greater horizontalcompetition, could be too quick to take action against grantbacks. Once again there is wisdom inconsidering what might happen if patent holders react to a hard line against grantbacks by simply refusingto grant licenses. As with other refusals to license, there could be a few such cases where competitionauthorities might justifiably apply an essential facilities doctrine and press for a compulsory license. Ingeneral, however, this would pose too great a risk in terms of reducing incentives to innovate. A betterapproach appears to have been adopted by those competition agencies which permit grantbacks as long asthese stop short of giving the original licensor an assignment or exclusive license. Thus bounded,grantbacks can still insure the original licensor against being displaced from the market while leavinglicensees a significant incentive to innovate. Patents and copyrights can be used as the foundation for international price discrimination havingsignificant effects on consumers in certain countries. The global welfare effects of such practices canbe positive, however, and where they are not, the origin of the problem may lie elsewhere than in theuse of IPR.With reference to patents, the roundtable considered how IPR based price discrimination hasbeen undermined by the application of the exhaustion principle. The parallel imports protected by thisprinciple can benefit consumers in the short run but might lead to reduced future innovation. This isespecially problematic if the exhaustion principle is extended to cover parallel imports from countrieshaving low or zero patent protection for certain goods, e.g. pharmaceuticals. The solution to this problemappears to lie outside the scope of competition law.11

DAFFE/CLP(98)18In the area of copyright (e.g. books and music), it was argued that the ability of licensedcopyright holders to block parallel imports leads to higher prices in some markets. Others argued,however, that restrictions on parallel imports, as with any other import barrier, should not automaticallylead to price differences. Such differences should materialise only when there are also significantdifferences in competitive conditions or in underlying demand.NOTE1.It is worth noting that in the jurisdiction which has apparently given birth to the innovation market concept,its use is considerably circumscribed through the application of two important thresholds. First, it is onlyemployed where the effects of the investigated conduct or merger cannot be fully assessed by looking at thetechnology licensing and product markets. Second, this approach is confined to cases where the capabilityto engage in the relevant research and development (R & D) can be associated with specialised assets orcharacteristics of particular firms, i.e. core R & D competencies. In addition there is a type of ‘safeharbour’ which applies if there are a sufficient number of firms having the same capability and incentives toundertake certain R & D.12

DAFFE/CLP(98)18SYNTHÈSESi l’on examine les débats de la table ronde, le document de référence et les documents établispar les membres des groupes spéciaux et les délégués, les principaux points qui se dégagent sont lessuivants : Bien qu’ils aient en commun d’importants objectifs, les droits de propriété intellectuelle (DPI) et lespolitiques de la concurrence ne sont pas purement complémentaires et il peut être difficile de gérerl’interface entre les deux.Au plus haut niveau de l’analyse, les DPI et les politiques de la concurrence sontcomplémentaires parce qu’ils visent les uns et les autres à favoriser le progrès technique dans l’intérêtfinal des consommateurs. Les entreprises innoveront davantage si elles sont protégées, ne serait-ce qu’enpartie, contre les “profiteurs”. Elles innoveront sans doute davantage aussi si elles sont exposées à unevive concurrence. Le problème est que l’utilisation des DPI, même tout à fait légale, peut restreindre laconcurrence, du moins dans le cours terme, ce qui oblige à choisir entre les avantages d’uneintensification de la concurrence et ceux d’une innovation plus poussée. Cet arbitrage n’est sans doute pasdu ressort de l’Office de la propriété intellectuelle, et il est, par essence, difficile pour les organismeschargés de la concurrence. Ce problème pourrait être aggravé dans le cas où les organismes chargés de laconcurrence auraient une vision strictement à court terme de la concurrence. Ces derniers adoptenttoutefois, de plus en plus, une approche dynamique, en particulier dans les industries de haute technologieoù les DPI peuvent jouer un rôle très important dans le processus concurrentiel.Les risques d’incompatibilité entre les DPI et la politique de la concurrence seront réduits si lesorganismes chargés de la concurrence sont empêchés, par la loi ou par l’administration, de chercher àajuster la protection des DPI, c’est-à-dire s’ils

Judicial Enforcement of Competition Law OCDE/GD(97)200 (Roundtable in October 1996, published in 1997) . Such a trade-off probably lies outside patent office mandates, and is inherently difficult for competition agencies to make. This problem could be aggravated by competition agencies taking a strictly short run view of competition. Such .