Ipr vs Competion Law

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    THE INTERFACE BETWEEN COMPETITION LAW AND

    INTELLECTUAL PROPERTY RIGHTS

    Introduction

    The premise of intellectual property rights is that recognizing and rewarding the

    innovators and creators of intellectual work, augurs well for industrial and

    technical progress as it spurs invention and innovation. It also infuses efficiency

    and stimulates competition in new products, new markets and new technologieswhich is the life-breath of market driven economies; the consequential positive

    impact of which is felt by consumers as well.

    On the other hand, competition law and policy also has a vital role to play in

    market based economies, as it ushers an environment of free and fair play of

    market forces. It carves space for new entrants in the market by putting fetters on

    monopolistic anti-competitive behaviour of dominant enterprises and by

    checking collusive tendencies. It functions on the touchstone of consumer

    welfare and economic efficiency.

    Therefore, a common thread runs through Competition policy and Intellectual

    Property Law as they intersect at the point of fostering innovation, efficiency,

    consumer welfare and economic growth. Yet, an inevitable chasm exists in the

    sphere of monopoly rights which is the essence of IPRs. Concomitantly, the

    abusive exercise of these very monopoly rights is antilogous with the immutable

    tenets of competition policy. The monopoly rights as granted by IPRs could lead

    to substantial market power (though not necessarily) which may be used to

    annihilate competition in the market by exclusionary conduct (refusal to deal)

    by dominant enterprises. Likewise, anti-competitive behaviour could be in the

    form of collusive activities of a combination of IPR holders. IPRs also afford an

    opportunity to the right holders to manoeuvre the prices in a manner which

    enable them not only to recoup the R&D costs but also reap unprecedented

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    profits. These are but only a few examples of how IPR propelled market power

    could trample competition.

    An indisputable function of law is to strike an efficacious balance between the

    conflicting interests and to reconcile the evident anomalies in the socio-economic

    system. This is precisely what Competition Law and Policy in various

    jurisdictions strives for. The constant and inevitable tension between IPRs and

    competition policy is sought to be resolved in various major jurisdictions with

    the aid of flexibilities in law, guidelines and through judicial interpretations. This

    paper delves into the methods and the approach adopted by countries like USA,

    Canada, Australia, Japan and the European Union in order to understand how

    the legal procedures bridge the gap between the two divergent areas of law. An

    understanding of the nuances of law and its applicability in various countries

    shall facilitate an analysis of the lessons that can be derived for India as a

    vibrant and growing economic power.

    Therefore, this paper attempts to answer the following questions

    The meaning and rationale for Intellectual Property Rights

    The Balancing of IPRs and competition policy in major jurisdictions USA, EU, Canada, Japan and Australia

    The lessons for India Developing countries perspective

    Intellectual Property Rights Meaning and Raison detre

    IPRs are intangible property rights conferred for tangible fruits of innovative

    endeavour, creative expression and commercial goodwill. The term is acompendious one and embraces patents, copyright, trademarks, industrial

    designs, lay-out designs of integrated circuits as well as geographical indication.

    These provide a protective umbrella to human ingenuity and intellectual work

    against unwarranted encroachments by conferring exclusive rights to the

    authors, creators, innovators or the owners (such as employers).

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    If we juxtapose the benefits reaped out of IPRs, against the impending perils of

    exclusion and monopoly, we may find that the advantages of having an

    efficacious IPR regime outweigh the disadvantages.

    The rationale behind Intellectual Property Rights is that it fosters a vibrant socio-

    economic structure. To expatiate upon the reason detre of IPRs in greater detail

    one may emphasize that the contemporaneous knowledge driven economies

    thrive on innovation, enterprise and industrial technical progress and therefore

    is it considered expedient to bestow upon, the innovators, creators and

    entrepreneurs certain exclusive rights so as to further encourage them to

    invest, invent and innovate. These exclusive rights are in the form of intellectual

    property which not only rewards the innovators and creators of intellectual work

    for the efforts expended by them, but also allows them to recoup the costs of

    investments and research & development (R&D). The exclusivity of IPRs

    connotes that the owner has the right to make, use and sell the

    invention/creative work, to the exclusion of others. This provides sufficient

    leeway for recovering the costs and for making further investments in R&Dactivities, thereby paving way for increased dynamic efficiency. Furthermore,

    information which is the quintessence of future research and development flows

    into public domain, since the conferment of rights to innovators is conditioned

    by the prompt disclosure of invention. Dissemination of sufficient information

    about the invention enables others to carry out further research in the related

    field, even when the IPR (patent) subsists. An inevitable and positive outcome of

    constant research and development is that competition on merits is fostered

    and the consumers are placed at the vantage point of choosing from a variety of

    available goods and services in the market.

    Competition and fairness in the market is also the hallmark of trademarks. The

    economic rationale of trademarks is to dispel any confusion appertaining to the

    source of goods or services. Prudence demands that an entrepreneur who earns

    goodwill by maintaining consistent standard of quality, and wins the confidence

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    INTERPLAY BETWEEN ANTI-TRUST LAW AND IPRs THE

    POSITION IN USA

    The US constitutional mandate of promoting the progress of Science and

    Useful Arts1, forms the bedrock of copyright and patent laws. There has

    been a conscientious effort in the United States to stimulate artistic creativity

    and innovation, which is evident in the creative judicial exposition of

    Intellectual Property Laws. The courts have more often than not, manifested

    their penchant for broad and expansive interpretation in the realm of IPRs,

    resulting in patents being granted to live, human made micro-organism2

    ,computer software3and business method4as well.

    On the other hand there is an equal emphasis on anti-trust law which aims to

    create an environment of free and fair trade, whilst improving economic

    efficiency and consumer welfare.

    The Anti-trust law in United States is primarily rooted in the Sherman Act of

    1890 and the Clayton Act of 1914.

    Section 1 of the Sherman Act prohibits every contract, combinationor

    conspiracy, in restraint of trade or commerce.5 Under this provision some

    agreements in restraint of trade, such as price fixing cartels and market

    allocation agreements are treated as illegal per se. Most agreements, however,

    1Under Article I, section 8, clause 8 the Congress is granted power to promote the progress of science and

    useful arts, by securing for limited times, to authors and inventors, the exclusive right to their respective

    writings and discoveries.2Diamond v Chakravarty 447 U.S. 303 (1980)

    3Diamond v Diehr 450 U.S. 175 (1981)

    4State Street Bank & Trust Co. v Signature Financial Group, Inc. 149 F.3d 1368 (Fed. Cir. 1998)

    5Section 1, Sherman Act Every contract, combination in the form of trust or otherwise, or conspiracy, in

    restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.

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    appropriate balance between the two. Perhaps the most profound impact has

    been that of innovation economics, which exhorted the anti-trust

    authorities to take a flexible and comprehensive view of both intellectual

    property and anti-trust law. If one perforates through the annals of economic

    history in the United States, one may perceive that the dawn of twentieth

    century witnessed a perceptible shift from the torpid economics of price

    competition to the economics of innovation competition, primarily under

    the influence of Joseph Schumpeter who asserted that it is competition by

    innovation that truly improves social welfare.

    The competition that counts is competition from the new commodity, the

    new technology, the new sources of supply, the new type of

    organizationcompetition which commands a decisive cost or quality

    advantage and which strikes not at the margin of the profits and the outputs

    of the existing firms but at their foundations and at their very lives. He

    argued that to survive in capitalist competition, incumbents must withstand

    a perennial gale of competition in the form of the new consumer goods, the

    new methods of production or transportation, the new markets, the new

    forms of industrial organization.

    With the growing realization that competition which matters most is the

    competition on merits and that innovation is the key to sustained economic

    growth and consumer welfare, the anti-trust authorities began to highlight

    the congruence between competition policy and intellectual property rights,

    rather than the potential tensions between the two. This is explicit in the anti-

    trust guidelines jointly issued by the Department of Justice and Federal Trade

    Commission which portend that there is an inherent innovation nexus

    between IPRs and competition policy.

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    United States: 1995 Antitrust Guidelines for the Licensing and Acquisition

    of Intellectual Property10

    The essence of these guidelines was to accentuate the nexus between

    Intellectual Property Law and Competition policy. The fundamental precepts

    as articulated by the Department of Justice and Federal Trade Commission

    emphasized that -

    Intellectual property and other forms of property should be placed on anequal pedestal, without being oblivious of the inherent differences

    between IPRs and other property as far as the ease of misappropriation

    is concerned.11

    It should not be presumed that the existence of IPRs confer market powerupon the owner.12

    Competition policy and IP laws are intertwined with the commonobjective of promoting innovation and consumer welfare, and the licenses

    that blend the complementary factors of production produce pro-

    competitive results.13

    Not only were the areas of convergence between competition policy and IP

    laws highlighted, but also certain novel features introduced, such as

    innovation markets, horizontal and vertical relationships, steps to be followed

    in conducting rule of reason analysis and anti-trust safety-zone with

    respect to licensing transactions.

    The three distinct markets in which competition may be affected by a

    licensing agreement were identified as the markets for goods, thetechnology markets and the innovation markets. The assessment of

    10Available at http://www.usdoj.gov/atr/public/guidelines/0558.pdflast visited on July 2, 2008.

    11 2.1 The Agencies apply the same general antitrust principles to conduct involving intellectual property

    that they apply to conduct involving any other form of tangible or intangible property.12

    2.0 (b) The Agencies will not presume that a patent, copyright, or trade secret necessarily confersmarket power upon its owner. IP Guidelines, 199513

    Ibid at 2.0

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    innovation markets would have to revolve around the impact of licensing

    arrangements on the investment in R&D.

    The concept of an innovation market includes those firms which possess

    the specialized assets or characteristics which are thought to be necessary in

    order to successfully conduct research and development which might result

    in new or improved products or processes. Participants in an innovation

    market include not only firms which are currently participating in the

    relevant goods or technology markets, but other firms which while not active

    in such markets, nonetheless have the assets necessary to enter the market at

    some point in the future.14One factor that shall be taken into account is the

    number of firms with the capabilities required to conduct necessary research

    and development. If the number of firms with the required capability is small,

    it is likely that the innovation market concept will be evoked. On the other

    hand, if the number of firms with the required capability is very large, then

    the regulators will generally conclude that the innovation market is

    competitive, and that it is unlikely that any single firm or plausibleaggregation of firms could acquire a large enough share of those specific

    assets which are necessary for innovation to have an adverse impact on

    competition.15

    Further, the guidelines make it clear that the anti-trust analysis of any

    particular licensing arrangement will be based upon the kind of relationship

    the parties share.16 In most cases, purely vertical relationships may not

    dampen competition in the market, but there is no presumption to that

    effect.17Conversely, merely the existence of a horizontal relationship does not

    necessarily imply an adverse effect on competition.18 However, the most

    pernicious horizontal arrangements such as price fixing, market or customer

    14Allan Gutterman, pg 245,Innovation and Competition Policy, (Kluwer Law International, 1997)

    15Ibid

    16 3.3, IP Guidelines, 1995

    17Ibid

    18Ibid

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    allocation, or agreements to reduce output are deemed per se unlawful; while

    other horizontal restraints, shall be scrutinized under the rule of reason19. The

    rule of reason implies a fact based approach for the purpose of evaluating the

    reasonableness of the alleged anti-competitive conduct. It is in the form of

    weighing the pros and cons of the purpose and eventual consequence of the

    conduct and if the pro-competitive effects outweigh the anti-competitive

    harm, then the conduct is deemed reasonable.20 Therefore the guidelines

    eschew formalistic approaches to the treatment of licensing practices, and

    provide for a case-by-case examination of their actual effects in the context of

    licensing arrangements, in the light of relevant economic and legal factors.21

    Anti-trust scrutiny of licensing arrangements would mainly arise when they

    harm competition among entities that would have been actual or likely

    potential competitors in a relevant market in the absence of license.22Thus,

    the guidelines have been influenced by the Chicago School emphasis on

    preventing restraints between competitors, rather than by the Harvard School

    concern with safeguarding individual freedom of choice in verticalrelationships.23

    The guidelines also offer a valuable insight into the procedure to be followed

    for application of rule of reason. First, an inquiry is to be made whether the

    restraint has an anti-competitive effect.24 If so, consideration will then be

    given to whether or not the restraint produces offsetting pro-competitive

    effects, such as by facilitating the efficient development and exploitation of

    new technology.25 If such offsetting benefits are established, an assessment

    19See Standard Oil decision (1911)

    20On the other hand, per se unlawful conduct can be described as one which is patently anti-competitive

    and no plausible justification could mitigate the deleterious impact of such conduct. To exemplify, price

    fixing, reduction in output, dividing geographical markets are all per se unlawful.21

    UNCTAD report on Competition Policy and the exercise of Intellectual Property Rights,2002, available

    at www.unctad.org/en/docs//c2clp22r1.en.pdflast visited on July 7, 2008.22

    Ibid23

    Ibid24

    4.2, IP Guidelines, 199525

    Ibid 4.4

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    will be made as to whether the restraint is reasonably necessary in order to

    achieve the efficiencies. If it is and the efficiencies outweigh the anti-

    competitive effect, the licensing arrangement will typically not be

    challenged.26

    The anti-trust safety zones related to licensing transactions created a safe

    haven for intellectual property owners by allowing them to place certain

    restraints in licensing arrangements which would not invite the scrutiny by

    anti-trust authorities, unless some exceptional circumstances existed. To fall

    within the ambit of safety zone, the restraint should not be one which is

    derided under the per se rule. Apart from this, one of the three additional

    criteria should be met27:

    The licensor and its licensees should not collectively account for morethan 20 percent of each relevant market affected by the restraint, in case of

    goods market.

    At least four independently controlled substitute technologies must existin the technology market.

    In case of innovation market, there should be at least four additionalindependently controlled entities capable of conducting research and

    development that would be a close substitute for the licensing parties

    activities.

    In order to understand the interplay between IPRs and anti-trust law in the

    United States, it is essential to delve into the rubric of anti-trust cases involving

    intellectual property. To begin with, the cases involving duty to license and

    compulsory licensing form a considerable part of the interaction between IPRs

    and competition policy. Compulsory licenses are "involuntary contracts between a

    26Ibid 4.2

    27Ibid 4.3

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    willing buyer and an unwilling seller imposed or enforced by the state."28

    Compulsory

    licenses are basically the abrogation of an IP right - an extra-ordinary legal instrument

    whereby the State allows itself or third party (typically the competitor) to have access to,

    produce, use or sell the IP protected product or process without the consent of the IP

    owner. Such mandatory and involuntary licenses as compelled by law may be granted

    with respect to patents, copyrighted works or other exclusive rights. In case of patents the

    Compulsory license provides a safeguard against lack of use of a patented invention or

    misuse of the patent holders monopoly rightsin order to protect the public interest.29

    The same principle may be applied in case of copyrights and other exclusive rights.

    As a general matter, the US antitrust laws do not impose on individual firms,even monopolies, a duty to do business with anyone or otherwise to make other

    facilities available30. The position can be succinctly summarized with the aid of

    the following case:

    Hartford-Empire Co. v United States31

    The court asserted that a patent owner is not in a position of a quasi-trustee for

    the public or under any obligation to see that the public acquires the free right to

    use the invention. He has no obligation either to use it or grant its use to others.

    However, there have been some decisions over the years sometimes termed

    essential facility cases imposing duty to deal or decreeing compulsory

    licenses.In fact in US the principle of granting involuntary compulsory licenses

    is inextricably interwoven with the concept of essential facility which

    developed in relation to access to physical infrastructure. Essential facility is a

    facility or infrastructure which is necessary for reaching customers and/ or

    28Christopher A. Cotropia, Compulsory Licensing under TRIPS available at

    http://www.cotropia.com/bio/Chapter26--Cotropia--PatentLawHandbook.pdflast visited on May 30, 2008.29

    www.kommers.se/.../Rapport%20The%20WTO%20decision%20on%20compulsory%20licensing

    30Rudolf Peritz, pg 200, The Interface between Intellectual Property Rights and Competition Policy, edited

    by Steven Anderman (Cambridge University Press, 2007).31

    323 U.S. 386 (1945)

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    enabling competitors to carry on their business.32The essence of this concept is

    captured appositely in the Terminal Railroad Association case.

    United States v Terminal Railroad Association33

    A group of railroads which jointly owned the only railroad switching yard across

    the Mississippi River at the important city of St. Louis prevented competing

    railroad services from offering transportation to and through that destination.

    The Supreme Court required the railroads group to give access to non-members;

    and concomitantly held that such conduct constituted both an illegal restraint of

    trade and an attempt to monopolize.

    Likewise in Lorain Journal case34, the Supreme Court considered whether the

    defendant, the only local newspaper circulating news and advertisements in

    northern Ohio, violated the Sherman Act by refusing to accept advertising from

    businesses that placed advertisements with a small radio station. The Court

    approved an order requiring the newspaper to accept advertisements as it was

    considered an indispensable medium of advertising. Therefore, through the

    course of such decisions was born the essential facilities doctrine and theaccompanying remedy of compulsory access.35This doctrine is certainly not an

    independent cause of action but a strand of the monopolization claim. It has been

    articulated as a subset of the so-called refusal to deal cases which place

    limitations on a monopolists ability to exclude actual or potential rivals from

    competing with it. Hence, Where facilities cannot practicably be duplicated by

    would-be competitors, those in possession of them must allow them to be shared

    on fair terms. It is illegal restraint of trade to foreclose the scarce facility.36

    32H. McQueen, Charlotte Waelde, Graeme Laurie, pg 853, Contemporary Intellectual Property Law &

    Policy, (Oxford University Press, 2007).33

    224 U.S. 383 (1912).

    34342 U.S. 143, 146-49 (1951).

    35Rudolf Peritz, pg 200, The Interface between Intellectual Property Rights and Competition Policy

    (Cambridge University Press, 2007).36

    Hecht v. Pro-Football, Inc., 570 F.2d 982, 992 (D.C. Cir. 1977).

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    In the realm of IP monopoly, the federal circuit in Intergraph case37, trimmed the

    ambit of essential facilities doctrine by holding that only when the facility

    owner and the user compete in a downstream market that requires access to the

    facility, will the doctrine apply. In this case, the plaintiff Intergraph argued that

    Intel had an affirmative obligation to continue supplying it with chips,

    technology and interoperability information because Intel products were the de

    facto industry standard and thus essential facility to do business in the industry.

    Intel dominated the market with well over 80 percent share of microprocessor

    chip sales, thus Intergraph asserted that the refusal to deal was monopolizing

    conduct in violation of Sherman Act.38 However, the court held that Intel and

    Intergraph were not competitors and since they did not compete in downstream

    market, a compulsory license could not be granted.

    Another important case is that of Eastman Kodak Co. v. Image Tech. Inc.39. The

    Supreme Court emphasized that power gained through some natural or legal

    advantage such as patent, copyright or business acumen can give rise to liability

    if a seller exploits his dominant position in one market to expand his empireinto the next. In this case, the plaintiff won its monopolization claim that

    Kodaks practice of refusing to sell patented parts to independent service

    providers was an unreasonable restraint of trade that violated Sherman Act

    section 2. A perusal of the above decisions makes it amply clear that in US, apart

    from mere ownership of an IPR, some additional exclusionary conduct is

    essential for the grant of compulsory and involuntary license.

    It is important to note that in the recent and significant case of Verizon

    Communications Inc. v. Law Offices of Curtis V. Trinko, LLP40 the U.S.

    373 F. Supp. 2d 1255 (N.D.Ala. 1998), reversed, 195 F.3d 1346 (Fed. Cir. 1999)

    38Section 2 of Sherman Act makes any attempt to monopolize any part of interstate or foreign trade a

    criminal offence.39

    504 US 451, 482-3 (1992)40

    540 U.S. 398, (2004).

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    Supreme Court stated that requiring amonopolist to deal with a competitor can

    chill the very conduct the antitrust laws are designed to protect. The case

    involved a class action law suit alleging that Verizon by refusing to share its local

    exchange facilities with other providers as required under the

    Telecommunications Act of 1996, engaged in anticompetitive conduct i.e.

    refusal to deal, and leveraged monopoly power to its advantage. In an opinion,

    authored by Justice Scalia, the Supreme Court held that Verizons obligations

    under the 1996 Act did not mean that those obligations were enforceable under

    the Sherman Act. Rather, the issue was whether Verizons conduct violated a

    pre-existing duty under Section 2 of the Sherman Act to deal with rivals. The

    court emphasized that generally, the Sherman Act does not restrict a traders

    right to deal with whomever he pleases. The most important pre-requisite for a

    monopolization claim as the court asserted, was that the defendant should

    possess monopoly power in the relevant market and willfully acquire or

    maintain that power in a manner different from the normal development of

    monopoly power.41

    Thus, the court found no anti-trust violation on part ofVerizon and maintained that anti-trust laws cannot transcend beyond the normal

    statutory duties to deal. Though this case was not essentially entwined with

    IPRs, nonetheless it may have ramifications for cases involving essential facility

    and compulsory licensing.

    Intellectual property lawyers and, judging from the Trinko decision, the U.S.

    Supreme Court, both seem to want the competition authorities to not interfere in

    technologically complex legal areas involving intellectual property rights that

    they do not fully understand, because such interference undermines the

    incentive to innovate. While in some cases this may hold true, in other cases a

    detailed analysis of the facts may reveal that the true purpose of a refusal to

    license is both exclusionary and anticompetitive. The reality of the underlying

    41The normal development of monopoly power is the result of superior product, business skill or historical

    accident.

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    purpose of such refusals may lead to a reduction in productivity and innovation

    and an undermining of consumer welfare, both of which are contrary to the very

    purpose of antitrust laws.42

    In Re Independent Service Organizations Anti-trust litigation (the XEROX

    case)43, it was alleged that Xerox had monopolized the markets for service of

    Xerox high speed copiers and printers, and thereby violated Section 2 of the

    Sherman Act. The ISOs claimed that Xeroxs decision to set prices on its patented

    parts much higher for ISOs than for end-users was monopolizing conduct and

    was an attempt force ISOs to raise prices. The ISOs contended that Xeroxs policy

    of refusing to sell them its patented parts would prevent them from competing in

    the separate relevant market for service of Xerox machines and ultimately would

    lead to their elimination from the market. The Court stated that holders of

    intellectual property rights are not given the privilege to violate antitrust laws.

    However, generally a patent holder is not obliged under the antitrust laws to

    license or sell its intellectual property, and there is no violation of the Section 2

    for mere refusal to license unless: The patent was obtained through fraud on the Patent and Trademark

    Office.

    The refusal was objectively baseless and the intent was to interferedirectly with the business relations of a competitor,

    The refusal was part of an otherwise unlawful tying strategy.Besides cases on compulsory licensing of intellectual property and the essential

    facility doctrine, there are some significant decisions on industry standardizationof IP. The inherent merits of an industrial standard as a yardstick for product

    manufacturing, assimilates the benefits of low search costs and simplified

    compliance. In some instances, as in standardization of railroad track or football

    42Daniel Kanter,IP and Compulsory Licensing on both sides of the Atlantic, available at

    www.whitecase.com/.../article_kanter_ip%20and%20compulsory%20licensing.PDFlast visited on May

    15, 2008.

    43203 F.3d 1322 Fed Cir 2000

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    field dimensions, or of personal computer component interfaces or Internet

    message protocols, industry wide compliance has been crucial to growth and

    progress.44On the darker side, there are obvious disadvantages in the realm of

    competition, since it paves for cartelization, product homogeneity, entry barriers

    and exclusion of rivals. FTC v Dell Computer45highlights the abuse of standard

    setting initiatives by IP holders. In the present case Dell held patents for VL-bus,

    a computer component for transferring instructions between computers CPU

    and peripherals. Under the rules requiring disclosure, the standard setting

    organization compelled Dell to disclose its patents, but Dell certified that the

    proposed standard did not violate its IPRs. However, once the standard was

    adopted, Dell asserted infringement of its patent by the standard. The FTC

    alleged that the conduct amounted to an unfair method of competition under

    S.5 of the FTC Act. The commissions complaint specifically charged that

    industry acceptance of the new standard was delayed, and that uncertainty

    surrounding acceptance of the standard raised the cost of implementing new

    design. Other firms avoided using the new bus because they were concerned thatthe patent dispute would reduce would reduce its acceptance as a standard46.

    The enforcement action was settled, with Dell agreeing not to enforce its

    undisclosed patents.

    44Steven Anderman, pg 195

    45121 F.T.C. 616 (Federal Trade Commission 1996)

    46UNCTAD report on Competition Policy and the exercise of Intellectual Property Rights,2002, available

    at www.unctad.org/en/docs//c2clp22r1.en.pdflast visited on July 7, 2008.

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    Intellectual Property Rights & Competition Law in CANADA

    At the root of IP law "lies a concern to avoid overextending monopoly rights on

    the products themselves and impeding competition"47

    The above observation made by the Canadian Supreme Court is resonant of the

    general consensus over complementarily between competition law and

    intellectual property rights and the thrust is on accentuating the pro-competitive

    effects of IPRs. Looking through the prism of IP laws, it is evident that the fetters

    on the period of protection and the indispensable requirement of disclosure

    breed competition in innovation which is the paramount guiding principle of

    knowledge driven economies. Palpably, it is for this reason that the Canadian

    Competition Bureau portends that IP laws and competition laws work together

    to promote an efficient economy; that the Competition Act generally applies to

    conduct involving IP in the same way that it applies to conduct involving other

    forms of property; and that the exercise of an IP right is not necessarily anti-

    competitive.48

    Apart from the latest guidelines, the Canadian law also aims tobring about a harmony between IPRs and competition law by creating various

    exceptions. There are also some interesting Canadian cases which throw light on

    the interaction between these two supposedly divergent areas of law. Let us

    examine the Canadian position in greater detail.

    An overview of the Competition Act 198649

    The primary objective of competition law and policy is to foster competition,

    consumer welfare and efficiency. The Canadian Law also focuses on these

    immutable objectives and explicitly provides that: The purpose of this Act is to

    47Kirkbi AG v. Ritvik Holdings Inc., [2005] 3 S.C.R. 302

    48Competition Bureau,Intellectual Property Enforcement Guidelines (September 2000), available at

    http://strategis.ic.gc.ca/pics/ct/ipege.pdflast visited on July 3, 2008

    49R.S.C. 1985, C-34, available at http://laws.justice.gc.ca/en/C-34/.

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    maintain and encourage competition in Canada in order to promote the

    efficiency and adaptability of the Canadian economy, in order to expand

    opportunities for Canadian participation in world markets while at the same

    time recognizing the role of foreign competition in Canada, in order to ensure

    that small and medium-sized enterprises have an equitable opportunity to

    participate in the Canadian economy and in order to provide consumers with

    competitive prices and product choices.50

    The Act aims at uprooting any conduct or arrangement that would substantially

    or unduly prevent or lessen competition. Parties will be found to have

    substantially prevented or lessened competition where an arrangement or

    conduct will permit them to obtain and exercise unilaterally or interdependently

    with others, a materially greater degree of market power than in the absence of

    that arrangement or conduct.51However, these limitations do not apply in cases

    where the impact on competition is a result of superior competitive

    performance or is offset by greater gains in efficiency.52

    Among the major anti-competitive activities, conspiracy, refusal to deal, abuse ofdominance, price maintenance and exclusive dealing are the most pernicious and

    for our purpose of understanding the law in Canada it is important to have a

    brief overview of the relevant provisions.

    1. The Act makes conspiring to impede competition a criminal offence. It isunlawful for two or more persons to knowingly enter into an agreement

    that prevents or lessens competition unduly.53

    2. When the customers business interests are substantially jeopardized dueto their inability to secure adequate supplies of a product on usual terms

    50Section 1.1 of the Competition Act, 1986.

    51Richard F. D. Corley, Navin Joneja, Prakash Narayanan, The Competition/ Intellectual Property

    Interface Present Concerns and Future Challenges, available at

    http://www.competitionbureau.gc.ca/epic/site/cb-bc.nsf/en/02285e.htmllast visited on July 21, 2008.

    52Ibid

    53Section 45

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    of the trade, then the refusal to deal could be considered anti-competitive

    and the tribunal may order the supplier to supply the product on usual

    trade terms.54The adverse impact on competition by the refusal to deal is

    an indispensable consideration.

    3. It is a criminal offence for any person who is engaged in the business ofproducing or supplying a productor who has the exclusive rights and

    privileges conferred by a patent, trademark, copyright etc. to attempt to

    influence upward or to discourage the reduction of the price by any

    means or to refuse to supply a product to or otherwise discriminate

    against any other person because of low pricing policy of that person.55

    4. The abuse of dominance56as provided by the Act could be unilateral orcollusive in nature. The three relevant ingredients for constituting abuse

    of dominance are there should be dominance in the relevant market57,

    the dominant enterprise or undertakings must engage in anti-competitive

    acts58, and the practice has had, is having or is likely to have the effect of

    preventing or lessening competition substantially in a market. It ispertinent to mention that, the Act provides for exceptions in favour of

    superior competitive performance59 and an act in pursuance of mere

    exercise of IPR or enjoyment of any interest derived under IP

    statutes60.

    5. Exclusive dealing, tying and market restriction are manifested in the Act61as anti-competitive. These provisions can be applied in case of anti-

    competitive activities of IP holders as well; subject to certain exceptions

    54Section 75

    55Section 61

    56Section 79

    57Ibid, one or more persons substantially or completely control, throughout Canada or any area thereof, a

    class or species of business58

    Section 78 lists out certain anti-competitive acts but the list is only illustrative and not exhaustive.59

    Subsection 79(4)60

    Subsection 79(5)61

    Section 77

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    such as conditions can be imposed by the IPR (trademark) holder under

    franchise exemption. Moreover, when the products are technologically

    tied, then it is not considered as tied selling under the Act.62

    6. Pursuant to Section 32 of the Act, remedial orders may be issued declaringany agreement or license relating to the anti-competitive use void;

    restraining any person from carrying out any or all of the terms of the

    agreement or license; ordering compulsory licensing of the IP right (except

    in case of trademarks); expunging or amending a trademark; or directing

    that other things be done to prevent anti-competitive use of the IP right. 63

    However, according to the IP Guidelines, the Commissioner will consider

    recommending the use of Section 32 only if the following conditions are

    met64:

    The conduct at issue involves the mere exercise of an IPR; No appropriate remedy is available under another statute; The IPR holder is dominant in the relevant market and the IP is an

    essential input or resource for other firms seeking to compete in therelevant market;

    The exercise of the IPR (example refusal to deal) prevents otherfirms from effectively competing in the relevant market; and

    Invoking a special remedy would not reduce incentives to invest inR&D in the economy.

    The Canadian Competition Bureau enunciated a set of guidelines in 200065,

    reflecting upon the interplay between IPRs and competition policy. A general

    62Subsection 77(4)

    63John Bodrug, The interface between IP law and Competition Act, available at

    http://www.dwpv.com/images/The_Interface_Between_IP_Law_and_the_Competition_Act.pdflast visited

    on July 21, 2008.

    64Ibid

    65Intellectual Property Enforcement Guidelines (IPEG) 2000

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    consensus on the convergence of IPR and competition policy in fostering efficient

    economy is aptly reflected in the IPEG. There is recognition of the fact that IP is

    the engine of economic growth in the knowledge based economies since it

    stimulates the development in new technology, artistic expression and the

    dissemination of knowledge66. Further, the IPEGs are inherently congruent with

    the US approach on treatment of IPRs at par with other forms of property.

    However, an impressive advancement is made on bifurcation of the conduct of

    IPR holders

    Conduct involving mere exercise of IPRs and Conduct involving something more than the mere exercise of IPRs

    The mere exercise of IPR has been explicitly defined as the exercise of owners

    right to unilaterally exclude others from using the IP right or to decide whether

    to use or not use IP right itself67.

    In case of conduct involving mere exercise of IPRs, the Commissioner shall

    consider referring the matter to the Attorney General of Canada, who shall

    proceed under Section 32 of the Canadian Competition Act. This section dealswith some special remedies in cases where IPR is used to impede competition

    and is applicable only when some concurrent requirements are met. These

    requirements portend that - a remedy under Section 32 should not adversely

    alter the incentives to invest in research and development in the economy; the

    alleged competitive harm stems directly from the refusal and nothing else; and

    no appropriate remedy is available under the relevant intellectual property

    statute.68 In case of conduct involving more than the mere exercise of IPRs,

    the Bureau shall only intervene to challenge licensing agreements if they reduce

    66IPEG paragraph 1Adequate intellectual property plays an important role in stimulating new technology,

    artistic expression and the dissemination of knowledge all of which are vital to the knowledge based

    economy67

    IPEGs paragraph 4.2.168

    Richard F. D. Corley, Navin Joneja, Prakash Narayanan, The Competition/ Intellectual PropertyInterface Present Concerns and Future Challenges, available at

    http://www.competitionbureau.gc.ca/epic/site/cb-bc.nsf/en/02285e.htmllast visited on July 21, 2008.

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    competition substantially or unduly relative to that which would likely have

    existed in the absence of the license69. In such cases the Commissioner may

    proceed under one or more of the general provisions of the Act, such as abuse

    of dominance, refusal to deal, conspiracy, or price maintenance provisions.70

    For any inquiry to be complete, it is essentially important that the judicial

    precedents must be taken note of. Therefore, the significant cases appertaining to

    conspiracy, abuse of dominance, refusal to deal, price maintenance etc. have been

    referred below.

    One of the recent cases: Apotex Inc. v Eli Lilly and Co.71, explains the

    interrelation between IPR and Competition law. In this case Apotex contended

    that the assignment of patents to Eli Lilly by a Japanese company infringed

    Section 45 of the competition Act, since it was an agreement resulting in undue

    lessening of competition. The Federal Court of Appeal held that when the

    assignment increases the assignees market power in excess of that inherent in

    the patent rights assigned, then such an assignment would fall to tatters when

    tested at the touchstone of Section 4572

    . Section 50 of the Patents Act, whichprovides for assignment of a patent, does not override Section 45 of the

    Competition Act, since it only makes a provision for authorizing the assignment.

    Following the harmonious construction principle, the court emphasized that

    Section 50 of the Patents Act and Section 45 of the Competition Act are not

    antithetical and can operate simultaneously. However, the court held that the

    assignment of a patent may, as a matter of law, unduly73restrain competition.

    69IPEGs, paragraph 4.1

    70John Bodrug, The interface between IP law and Competition Act, available at

    http://www.dwpv.com/images/The_Interface_Between_IP_Law_and_the_Competition_Act.pdflast visited

    on July 21, 2008.71

    2005 FCA 36172

    According to Subsection 45(1), conspiracies that unduly restrain trade are unlawful.73

    InR v Nova Scotia Pharmaceutical Society(1992) 2 S.C.R. 606 the Supreme Court of Canada describedundueness as a serious or significant effect on competition depending upon two important factors:

    presence of market power in the relevant market and the conduct being deleterious to competition.

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    Further, there are various cases with regard to refusal to deal, which reflect the

    position that generally, the right granted by the Parliament to exclude others is

    fundamental to IPRs and cannot be considered to be anti-competitive74. The

    competition tribunal has taken recourse to the exception provided in Section

    79(5) in order to protect the legitimate interests of IPR holders. The underlying

    principle is that when there is nothing more than mere exercise of the right

    granted by IP statute, then the resultant effect on competition may not be

    considered to be harmful. The attempt is to strike a balance between the

    individual rights of IPR holder and competition in the market. An apt example

    is the case of Warner Music75, wherein the Commissioner claimed that Warner

    must supply licenses to BMG so as to enable it to manufacture, sell and distribute

    the sound recordings created from the master recordings owned by Warner. The

    tribunal held that under Section 75, the product which the supplier refuses to

    provide must be in ample supply or abundant. A copyright license is an

    exclusive legal right and since exclusivity is inextricably interwoven with such

    right, it cannot be in ample supply. Further, the court also stressed that copyrightlicense is not a product as mentioned in Section 75.

    Applying the same rationale of protecting legitimate rights of IPR holders, the

    competition tribunal in Tele-Direct case76, refuted the allegation that the

    dominant provider of telephone directory advertising services in Canada had

    abused its dominant position by refusing to license its Yellow Pages trademark

    to competing telephone directory advertising companies. An exception provided

    by Section 79(5) says that an act in pursuance of mere exercise of an IPR is not an

    anti-competitive act. It is only legitimate for an IP holder to be guided by the

    competitive considerations, and the selective refusal to license a trademark is

    not an anti-competitive act. It is the prerogative of the right holder to maintain

    74Canada (Director of Investigation & Research) v. Warner Music Canada ltd. (1997), 78 C.P.R. (3d) 321

    (Competition Tribunal)75

    Ibid76

    Canada (Director of Investigation & Research) v. Tele-direct (Publications) Inc. (1997), 73 C.P.R. (3d)

    (Comp. Trib.)

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    the distinctiveness of his/her product given the qualitative considerations and

    the reputation that trademark protects. Therefore, the tribunal held that the IPR

    holder has the exclusive right to determine whether or not, and to whom, to

    grant license.

    However, it has already been explained that when the conduct constitutes

    something more than mere exercise of IPR, then the deleterious impact on

    competition can be scrutinized by the authorities.

    Kirkbi AG v. Ritvik Holdings Inc.77is the case which gives an insight into the

    operation of IPRs and depicts how IP holders may try to perpetuate their

    monopoly behind the veil of these exclusive rights. Kirkbi was the manufacturer

    of LEGO products for which it held various patents in Canada and elsewhere.

    LEGO enjoyed a substantial market share which was the result of monopoly

    power conferred by IPR. Once the patents expired, the Kirkbi tried to preserve its

    market position by attempting to register the patterns on LEGO blocks as a

    trademark or design, with the intention of perpetuating its monopoly over the

    product and foreclosing competition in the market. However, the expiry ofpatents ushered competition and products which were virtually identical to

    LEGO flooded the market, the most aggressive competitor being Ritvik

    Holdings. Since Kirkbi could not get the pattern on LEGO blocks registered as

    trademark (because it was a utilitarian or functional feature of the product), it

    asserted unregistered trademark rights in the product, alleged violation in the

    form of passing off by Ritvik and sought permanent injunction to prevent

    marketing of Ritviks Mega blocks, coupled with damages. The Supreme Court

    of Canada reiterated what the lower courts had held. The court emphasized that

    once a patent expires, the product falls into public domain and it cannot be used

    to extend monopoly. The law of intellectual property discourages attempts to

    bring the monopoly position back in another guise. Moreover, the function of a

    trademark is to indicate the source of the product so as to enable the consumers

    772005 SCC 65

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    Primarily three types of activities are deemed to sap competition private

    monopolization, unreasonable restraint of trade, and unfair trade practices. Any

    business activity impeding the entry of others into the market can be deemed to

    be an act of private monopolization, the aim of which is to acquire greater

    market power. While private monopolization could be individual or collective in

    nature, unreasonable restraint of trade is essentially in the form of concerted

    action (cartelization) among entrepreneurs to fix, maintain or increase prices, or to

    limit production, technology, products, facilities, or customers or suppliers. Further, for

    an act to fall under the third category i.e. unfair trade practice, must obliterate

    competition in the market and such acts could be in the form of unjust

    discrimination against other entrepreneurs, dealing at unjust prices, unjustly

    inducing or coercing customers of a competitor to deal with oneself, dealing with

    another party on such terms as will restrict unjustly the business activities of the

    said party, dealing with another party by unjust use of ones bargaining position,

    or unjustly interfering with another entrepreneurs business activities.79 The

    Federal Trade Commission issued guidelines on unfair trade practices in theyear 1982 and designated sixteen categories of trade practices as unfair trade

    practice80.

    However, the Antimonopoly Act creates an exception in favour of intellectual

    property rights under Section 21 which reads thus

    the provisions of this act shall not apply to acts that qualify as the exercise of

    rights under the Copyright Act, the Patents Act, the Utility Model Act, the

    Designs Act, or the Trade Mark Act.

    79Section 2(9), Antimonopoly Act, 1947

    80The Fair Trade Commission issued guidelines designating sixteen categories of trade practices as unfair

    trade practice within the meaning of Antimonopoly Law. The categories include concerted refusal to deal,

    other refusal to deal, discriminatory pricing, discriminatory treatment on transaction terms, discriminatory

    treatment in a trade association, unjust low price sales, unjust high price purchasing, deceptive consumer

    inducement, customer inducement by unjust benefits, tie-in sales, dealing on exclusive terms, resale price

    restriction, dealing on restrictive terms, abuse of dominant bargaining position, interference withcompetitors transaction and interference with internal operation of a competing company, available at

    http://www.aippi.org/reports/Vortrag_kondo.pdflast visited on July 7, 2008.

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    business activities of other parties, then the same may be evaluated by the

    Commission, firstly under Section 23 (now Section 21) of the AMA an then

    on the basis of the eventual impact on competition. Even those acts which

    are not a part of the licensing agreements and are solely concerned with

    the exercise of rights under the IP statutes, such as decision to license or

    not to license a patent etc. shall be evaluated by the FTC in context of their

    impact on competition.

    2. Though section 23 (1) (now 21) places the acts in pursuance of exercise ofrights under the IP statutes, outside the purview of AMA, nonetheless

    under clause (2) if the said acts are considered to deviate from or run

    counter to the purposes of the IPR system, the said acts will no longer be

    deemed to fall under the exception and will be subject to AMA.

    3. The Commission shall take note of any restrictions placed on the sale oruse of patented products, after exhaustion the patents or after the

    patented product falls into public domain. Such matters shall be dealt

    with by the Commission in the same manner as the sale of products ingeneral under the AMA.

    4. The guidelines declare that following vertical restraints as unlawful: abuseof bargaining position by imposing an obligation to pay royalties after

    expiration of the patent right; licensing more than one patent as a package

    if unnecessary for the technology involved; requiring the licensee to assign

    rights over improvement inventions without compensation or granting

    licenses for improvement inventions without corresponding obligations of

    the licensor; prohibiting the licensee from challenging the patented

    technology, from manufacturing competing products or employing

    competing technology after the expiration of the licensing agreement;

    preventing the licensor from asserting his own IP rights against the

    licensor; restricting the licensee in sales activities of the patented products

    or any other restrictions having a measurable impact on the market.

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    Usually all clauses limiting the licensee will be judged against the

    prohibition of an abuse of a dominant bargaining position85: where the

    licensor is found to be in a dominant bargaining position, any restricting

    clause may be deemed unlawful unless there are justifying reasons. Also,

    retail price maintenance schemes are a violation per se.

    5. The FTC for the first time in these guidelines offered a systematicapproach on how to deal with private monopolization and undue

    restraints of trade in connection with IPRs. The acts of prohibited private

    monopolization are: forming patent pools and cross licensing agreements

    and refusing to grant licenses without justifiable reasons to new entrants

    or existing undertakings, or taking other measures that have the effect of

    impeding the market entry of other undertakings; acquiring patents and

    behaving as described above; and using licensing terms aimed at

    exclusion of outsiders.

    Cases In Nihon Record II86 - An attempt by the manufacturers of audio discs to

    prevent the shops from renting out these discs to customers was held by the FTC

    to be anti-competitive. Pertinently, the rights over the copyrighted discs were

    exhausted by the first sale of these discs and to limit the free distribution of such

    products, by enforcing a boycott against the shops renting the discs was held to

    be anti-competitive. However, in the present context, the approach followed by

    FTC would be inappropriate since the rights of rental and distribution have now

    been recognized as enforceable.87

    85Abuse of a bargaining position may occur when the licensee requires the license for the continuation of

    his business and is thus forced to give in to the licensors demands even when detrimental to the licensees

    business. Additional factors would be the market position of licensor and licensee, difference in size

    between licensor and licensee etc.86

    FTC, December 15,1983, 389 Kosei Torihiki 34, Nihon Record II87

    See Article 8, 9, 12, 13 of WIPO Performers and Phonograms Treaty, 1996.

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    Likewise in the case of Sony Computer Entertainment88 the company which

    supplied PlayStation products required the dealers to comply with a policy of no

    discount and no second-hand sales. The FTC held such conduct to be anti-

    competitive since it constrained the retail price of the new PlayStation software;

    ignoring the rights of rental and distribution which may have rested with the

    company. The opinion is interesting insofar as the FTC did not look at the rights

    formally allocated to the copyright owner, but to the objective behind the

    exercise of such rights.89The FTC, in its decision held that:

    Section 21 Antimonopoly Act is deemed to have been enacted for the purpose of

    confirming that even if acts are considered to be the exercise of rights under the

    Copyright Act, if those acts are considered to deviate from or run counter to the

    purposes of the IP protection system considering their effect on orderly

    competition, those acts will no longer be regarded as acts considered the exercise

    of rights, and the AMA shall apply to them therefore, even if as argued by the

    defendant, the PlayStation software is considered a cinematographic work which

    is given additional distribution rights, and if the act of prohibiting the sale ofsecond hand articles is within the scope of distribution rights, such act would

    still deviate from or run counter to the purpose of the IP protection system.

    Pachinko Machine Manufacturers case90 deals with patent pooling91 by ten

    manufacturers of pachinko machines, who collectively held the market share of

    90 percent. With the passage of time, these enterprises held all relevant patents in

    the technology and formed a trade association of manufacturers having nineteen

    members, constituting almost all the producers and developers of pachinko

    machines in Japan, and owing the responsibility of managing the licenses for

    88FTC, August 1,2001, 612 KoseiTorihiki64, Sony Computer Entertainment

    89Christopher Heath, pg 268,The Interface between Intellectual Property Rights and Competition Policy,

    edited by Steven D Anderman (Cambridge University Press 2007)

    90FTC, 20 June 1997, 4 Zeitschrift fur Japanisches Recht 148, Pachinko Slot Machine

    91Patent pool means a consortium of at least two companies agreeing to cross-license patents and other IP

    rights relating to a particular technology.

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    patent rights. The licensing policy obligated the members not to grant licenses to

    outsiders i.e. non-members of the association. When the majority of shares of one

    of the members were purchased by an outsider, the association refused the

    extension of the license. Further, the association also refused to grant license on

    behalf of an ex-member who had formed a joint venture with an outsider for

    joint production of pachinko machines. It was found that the policy adopted by

    the association severely crippled competition in manufacture of the machines

    and the activities of participants were regarded as private monopolization.

    Therefore, the Commission ordered the participants to abolish the patent policy

    of termination of license in case of takeover and the refusal to grant license.

    The most relevant example of bundling is the Microsoft case92 on bundling

    Word and Outlook with Excel. Microsoft was the leader in spreadsheets program

    Excel in 1994. However, in the field of word-processors and rescheduling

    management programs, Ichitaro of Just Systems and Organizer of Lotus were

    respectively more popular than the products of Microsoft (Word and Outlook).

    Thus, Microsoft started following the policy of bundling Word and Outlook withtheir Excel spreadsheet program. The PC manufacturers who pre-installed

    application programs in PCs wanted only Excel which they could not obtain

    without other bundled products. The FTC regarded the tying of licenses of Excel

    with Word and Outlook as an act of unfair trade practice. It held the licensing of

    a computer program to manufacturers of personal computers with an obligation

    to license also other programs of the same software maker with a significant

    market share constitutes an unfair trade practice and is unlawful.

    Some unreasonable obligations imposed by licensor in licensing agreements also

    whittle competition. For example - obliging the licensee to pay the licensing fee

    even after the expiration of IPR is absolutely unjust and anti-competitive.

    Similarly, imposing undue restrictions on the research and development

    92FTC, December 14, 1998 (1999) 30 IIC 478, Microsoft

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    activities of the licensee, with regard to licensed technology is equally pernicious

    and would invite the wrath of competition authorities. A significant case

    involving unreasonable licensing conditions is that of Asahi Electrics93in which

    the licensor disallowed for all times, the export of any products making use of

    licensed technology into Japan. Therefore, even after the expiration of the

    contract, the licensee - a Taiwanese company (Choshun Petrochemicals), could

    not export the licensed technology based products to Japan. This was perhaps an

    attempt to divide markets and thwart competition. Further, the Taiwanese

    company itself added a similar clause to a contract for the sale of technical know-

    how. The clause limited the export sales and was considered to be an undue

    limitation of licensees business and thus unenforceable.

    An interesting case depicting how IPR could be used as a tool to snub the entry

    of new competitors in the market is Hokkaido Shimbun94. Hokkaido Shimbun

    was the publisher of a newspaper distributed around the island of Hokkaido (the

    second largest island in Japan). Another publisher planned to launch a

    newspaper in the area of Hakodate. In order to prevent the new competitor frompublishing the new newspaper, Hokkaido Shimbun asked various news agencies

    not to provide news to the new competitor and also asked the local companies

    not to place advertisements on the new newspaper. Concomitantly, Hokkaido

    Shimbun filed a lot of trademark applications for newspapers covering almost all

    conceivable trademarks that could be used by the new competitor for example

    Hakodate Shimbun. The conduct of Hokkaido Shimbun was described by the

    Commission as constituting an act of private monopolization. It ordered the

    withdrawal of all trademark applications filed by Hokkaido Shimbun in so far as

    they were associated with the area of Hakodate.

    93FTC, 20 September 1995, 42 KTIS

    94FTC, February 28, 2000, available at http://www.aippi.org/reports/Vortrag_kondo.pdflast visited on July

    7, 2008.

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    The Interaction between IPRs and Competition Law in Australia

    Unhindered competition and inexorable innovation are the driving forces

    for economic growth; and this is equally true for the medium sized economies

    like Australia, as it is for the economically more advanced countries. However, to

    achieve the twin objectives of competition and innovation; the careful balancing

    of two potentially divergent areas of law is a sine qua non. In its quest for

    maintaining this delicate balance between IPRs and Competition law, the

    Australian government constituted the Intellectual Property and Competition

    Law Review Committee (IPCRC). Under its terms of reference the Committeehad to report on the various restrictions on competition that were contained in

    Australian Intellectual property legislation and to evaluate those restrictions

    from the perspective of costs and benefits to the community as a whole.95This

    cost-benefit approach to competition policy issues has been entrenched by the

    Competition Principles Agreement of 1995, an intergovernmental agreement

    between federal, state and territory governments96. This agreement was itself the

    product of a nationally co-ordinated approach to competition policy that hadbeen initiated by the Council of Australian Governments in 199197.

    The constitution of IPCRC bears testimony to the fact that there is a growing

    realization of the need to harmonize the pertinent tension between IPRs and

    Competition policy. The primary focus of this committee was on the exemptions

    to IPRs under S.51 (3) of the Trade Practices Act and the basis for granting

    compulsory licenses in Australia. An overhaul of these factors by the committee

    can be best understood by delving into those legal provisions under TPA, which

    are intertwined with IPRs and competition.

    95Peter Drahos, Imelda Maher,Innovation, Competition, standards and intellectual property: policy

    perspectives from economics and law, available at www.sciencedirect.comlast visited on July 25, 200896

    Ibid97

    Ibid

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    The Law

    For the efflorescence of a free and fair economic structure, the Australian Trade

    Practices Act of 1974 prohibits any unilateral or collusive conduct which

    obliterates competition in the market. Section 45 of the Act prohibits anti-

    competitive agreements. These agreements could be in the form of price fixing

    among competitors (S. 45 A) or collective boycott and collective licensing etc.,

    which are per se illegal and are deemed to lessen competition substantially.

    Likewise the exclusionary provisions98 are also prohibited under the per se rule

    ingrained in S. 45 (45 (2) (a) (i)).Section 46(1) prohibits a firm with substantial market power99 from taking

    advantage of that market power for the purpose of -

    (a)damaging one of its competitors;(b)preventing a person from entering a market; or(c)deterring someone from engaging in competitive conduct in a market.

    Section 47 strikes at anti-competitive vertical conduct while Section 48 deals with

    resale price maintenance which is also per se illegal.Section 50 of the TPA prohibits the acquisition of shares or assets from another

    entity where the effect is likely to be substantial lessening of competition. So the

    acquisition of any IP asset is exposed to the competition test, just like a merger

    through acquisition of shares. Authorization is available in case of an acquisition

    that is in the net public benefit regardless of its effect on competition100.

    It is important to note that Sections 88 and 90 of the Australian Trade Practice

    Act provide for administrative exemption of conduct, that although may lessen

    98For example - If competitors agree to restrict the persons to whom they will supply, perhaps only to

    supply the product to the collective licensing agent, their agreement is an exclusionary provision.99

    Market power has been explained as A firm possesses market power when it can behave persistently

    in a manner different from the behaviour that a competitive market would enforce on a firm facing

    otherwise similar cost and demand conditions or the ability of a firm to raise the prices above supply cost

    without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm

    would incur in producing the product Frances Hanks, pg 331, The Interface between IntellectualProperty Rights and Competition Policy, edited by Steven Anderman, (Cambridge University Press, 2007)100

    Ibid pg 334

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    competition, would be likely to result in a net public benefit. The Australian test

    for authorization is not constrained by requirements that consumers are allowed

    a fair share in the resulting benefit or that competition not be eliminated. In

    Australia the chief public benefit that might justify anti-competitive conduct is

    simply the achievement of efficiency which encompasses allocative, productive

    and dynamic dimensions.101

    Apart from the above provisions, the inherent tussle between IPRs and

    competition law is sought to be resolved with the aid of Section 51 which has

    been fraught with some limitations, to be discussed later.

    Under S.51 (1) (a), the exclusivity conferred by IPR, does not take precedence

    over competition law. If an IP owner engages in anti-competitive conduct such as

    refusal to license or creation of geographic territories for its licence, then he/she

    cannot take the plea of doing it under the statutory rights conferred by IP

    legislations. The conduct shall be subject to the overriding imperatives of

    fostering and sustaining competition in the market and the provisions of TPA

    will apply.Further, S. 51(3)102 exempts certain conduct (imposing of an IP licensing

    condition) from the application of several key prohibitions under Part IV of the

    101Ibid pg 319

    102Section 51(3) of TPA provides: A contravention of a provision of this Part other than section 46, 46A

    or 48 shall not be taken to have been committed by reason of:

    (a) the imposing of, or giving effect to, a condition of:(i) a licence granted by the proprietor, licensee or owner of a patent, of a registered design,

    of a copyright or of EL rights within the meaning of the Circuit Layouts Act 1989, or by

    a person who has applied for a patent or for the registration of a design; or(ii) an assignment of a patent, of a registered design, of a copyright or of such EL rights, or

    of the right to apply for a patent or for the registration of a design;

    to the extent that the condition relates to:

    (iii) the invention to which the patent or the application for a patent relates or articles madeby the use of that invention;

    (iv) goods in respect of which the design is, or is proposed to be, registered and to which it isapplied;

    (v) the work or other subject matter in which the copyright subsists; or(vi) the eligible layout in which the EL rights subsist;

    (b) the inclusion in a contract, arrangement or understanding, authorizing the use of a certificationtrademark of a provision in accordance with rules applicable under Part XI of the Trade Marks Act

    1955, or the giving effect to such a provision; or

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    TPA including S.45 (anti-competitive agreements), S.47 (anti-competitive

    exclusive dealing) and S.50 (anti-competitive acquisition of assets)103. However,

    the exemption under this provision does not apply to S.46 (misuse of market

    power) or S.48 (resale price maintenance).

    The wording of S.51 (3) does not spell out the particular relationship that must be

    present between the relevant underlying IP right and the condition imposed, but

    merely states that the condition must relate to the subject matter of the relevant

    IP right104. Justice Mason expounded the meaning of relates to test in the case of

    Transfield v. Arlo105, by stating that: S.51 (3) recognizes that a patentee is justly

    entitled to impose conditions on the granting of a license or assignment of a

    patent in order to protect the patentees legal monopolyS. 51(3) determines the

    scope of the restrictions the patentee may properly impose on the use of the

    patent. Conditions which seek to gain advantages collateral to the patent are not

    covered by S. 51(3).

    The collateral advantage test seems to be an attempt to strike a balance between

    the interests of IPR holders and competition law. When the conduct of the IPholder transcends beyond what is legitimately mandated by the IPR, so as to

    gain any commercial advantage beyond its scope, then the conduct shall not be

    protected by S.51(3). To exemplify, any conditions imposed to maintain the

    specific quality or standard of a licensed product is inextricably related to the IP

    protected product itself and therefore exempted under this provision. But a

    (c) the inclusion in a contract, arrangement or understanding between:(i) the registered proprietor of a trademark other than a certification trademark; and(ii) a person registered as a registered user of that trademark under Part IX of the Trade

    Marks Act 1955 or a person authorized by the contract to use the trademark subject to his

    or her becoming registered as such a registered user;

    of a provision to the extent that it relates to the kinds, qualities or standards of goods bearing the

    mark that may be produced or supplied, or the giving effect to the provision to that extent.

    103Gilbert Tobin,Intellectual Property Rights and Competition Law,available at

    http://www.findlaw.com.au/article/2236.htmlast visited on July 7, 2008

    104Ibid

    105(1980) 144 CLR 83

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    condition precluding the licensee from dealing in products that compete with the

    licensed product does not relate to the licensed IP. It rather appertains to the

    excluded product and therefore falls outside the scope of protection.106

    Similarly, a condition that requires a licensee to acquire other goods or services

    from the licensor would seem to be a classic instance of seeking to gain an

    advantage that is collateral to the licensed IP107. The bundling of other products

    seem to leverage the power of the licensed IP beyond the scope of the property

    right. According to the Australian guidelines, the conditions related to bundling

    or tying are outside the protection of S. 51(3) because they do not relate to the

    licensed product. But it is not clear as to what happens when tying is a device for

    greater efficiency. For example a tie of materials to be used as inputs in the

    manufacture of a patented product might be explained as a means of

    maintaining quality in the licensed product, so that the licensors reputation is

    not damaged by the licensee108. When tying is used to protect the value of the IP

    or to get in the revenue that measures its value, the tying condition would

    survive Masons collateral advantage test. So section 51 (3) would shield tying inthese circumstances from the full force of the competition provisions in the

    TPA.109

    Besides the relates to conundrum, there are other criticisms put forth against the

    exemptions embedded in S.51 (3).

    Firstly, the exception does not apply to the prohibitions of misuse of market

    power under S. 46 and resale price maintenance under S. 48. Secondly, it is also

    pertinent to mention that other intellectual property rights such as know-how,

    confidential information and plant breeders rights fall outside the purview of

    this provision. Thirdly, applying only to the conditions in assignments or

    licenses, S 51(3) does not exempt the assignments in themselves and refusals to

    106See Frances Hanks, pg 322, The Interface between Intellectual Property Rights and Competition Policy,

    edited by Steven Anderman, (Cambridge University Press, 2007)107

    Ibid pg 323108

    Ibid 324109

    Ibid

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    license or assign.110Moreover it is also not clear as to what happens in case the

    licensor stipulates the minimum price at which the products that embody the IP

    may be sold. If price stipulation is deemed to relate to the licensed product then

    the same shall be protected within the ambit of exemption. In such cases it would

    be difficult to draw the line between legitimate prices and prices which may

    secure a collateral advantage for the licensor.

    Given the inherent anomalies, it was considered expedient to overhaul the

    provision and the IPCRC constituted by the government examined these

    provisions in greater detail to come out with its recommendations.

    An Overview and Analysis of the Recommendations of IPCRC

    The Intellectual Property and Competition Review Committee (Ergas

    Committee) was constituted to evolve a strategy to forge coherence between IPRs

    and Competition Law. The impact of IP law on competition was to be analyzed

    through the prism of intellectual property legislations appertaining to patents,

    copyright, trademarks, designs and circuit layout, so as to determine whether theIP system is sufficiently accustomed to meet the needs of consumer welfare,

    efficiency and unhindered competition.

    The IPCRC reviewed provisions related to compulsory licensing and S.51 of the

    Trade Practices Act, besides making some other recommendations on the

    interaction between IPRs and competition law.

    Compulsory licensing111 has been considered a potent tool for rectifying

    market failure since it mitigates the rigours of abuse of dominant position by

    arbitrary refusal to deal or license. The Australian Patents Act makes a

    110Ibid 321

    111Compulsory licenses are basically the abrogation of an IP right - an extra-ordinary legal instrument

    whereby the State allows itself or third party (typically the competitor) to have access to, produce, use or

    sell the IP protected product or process without the consent of the IP owner. Such mandatory andinvoluntary licenses as compelled by law may be granted with respect to patents, copyrighted works or

    other exclusive rights.

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    provision for compulsory licensing under S.133 which is founded on the

    yardstick of public interest and failure to exploit the patent112. However, the

    IPCRC recommended that the criteria of public requirement should be replaced

    with the competition test in the market. Accordingly, compulsory licenses

    should only be granted if the following conditions are met113:

    Access to the patented invention is required for competition in therelevant market;

    There is public interest in enhanced competition in that market; Reasonable requirements for such access have not been met; The order will have the effect of allowing these reasonable requirements

    to be better met; and

    The order will not compromise the legitimate interests of the patentowner, including that owners right to share in the return society obtains

    from the owners invention, and to benefit from any successive invention,

    made within the patent term, that relies on the patent.

    The thrust of the above recommendation seems to be a concern for the legitimateinterest of the patent holder. There is an overwhelming tilt towards IPRs and the

    basis for the grant of a compulsory license is that it should be indispensable for

    enhancing competition in the market. Further, the enhancement of competition

    should be material and substantial114.

    Though the recommendations of IPCRC with regard to compulsory licensing are

    in consonance with TRIPS mandate, nonetheless, adoption of the IPCRCs

    approach would result in more stringent conditions for the grant of a

    112According to Section 133 of the Patents Act, the Federal Court may grant compulsory license if it is

    satisfied that: (a) the reasonable requirements of the public in respect to the invention have not been

    satisfied, and(b) the patentee has given no satisfactory reason for failing to exploit the patent113

    See Frances Hanks, pg 316, The Interface between Intellectual Property Rights and Competition Policy,

    edited by Steven Anderman, (Cambridge University Press, 2007)

    114Ibid

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    compulsory license in Australia than those currently in place in Canada, the

    United Kingdom and the United States115.

    Therefore the Government announced that the IPCRC based compulsory license

    provision shall not replace but complement the current provision. Moreover, the

    focus of the government has been on the rights of competitors. It was concerned

    that the IPCRC proposal may not cover situations where the non-working of an

    invention has some negative impact on the public interest, which is not

    dependant on the competition in the market116. Consequently, the competition

    test has been introduced as an additional test, while the public interest test

    firmly holds ground.

    One of the areas where the amendment may have an impact is where a large

    player takes advantage of its market power by refusing to license patent to one of

    its competitors, in order to keep that competitor out of a market. This conduct

    could amount to a misuse of market power. Therefore, the competitor may be

    able to apply for a compulsory licence under the new competition test, even

    though the patent holder is exploiting the patented invention and the reasonablerequirements of the public are being met.117

    As mentioned above the exemption contained in S. 51(3) is fraught with certain

    anomalies which these recommendations sought to rectify. In view of the

    committee, in order to maintain an appropriate balance between the needs of the

    IP system and the wider goals of competition policy, a careful re-framing of the

    section was required. The committee recommended the following changes

    Including amendments to S. 51 (3) to ensure that a contravention of PartIV of the TPA shall not be taken to have been committed by reason of the

    imposing of conditions in a license, or the inclusion of conditions in a

    contract, arrangement or understanding, or a refusal to license, that relate

    115See Richard Murphy, The long arm of competition law, available at

    http://www.minterellison.com/public/connect/Internet/Home/Legal+Insights/Newsletters/Previous+Newsle

    tters/A+-+D+The+long+arm+of+competition+lawlast visited on July 25, 2008116

    Ibid117

    Ibid

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    to the subject matter of that intellectual property statute, so long as those

    conditions do not result, or are not likely to result, in a substantial

    lessening of competition.

    The intended change to apply to the refusal to license or refusal tocontract by the IP owner as well.

    S. 51 (1) (a) (i) of the TPA to be amended to include all relevant IP statutes.Apart from the above mentioned changes in context of S. 51, the IPCRC also

    recommended that the ACCC provide guidelines on how it will enforce the

    provisions so as to provide sufficient guidance to IPR owners as to the types of

    behaviour likely to result in substantial lessening of competition.

    The committee believed that the approach it proposed will ensure the efficient

    development and use of IPRs and ensure that these rights are not exploited to

    extend market power beyond the scope of the right initially granted118.

    The policy rationale underlying the recommendations of IPCRC (Ergas

    Committee) was expressed in the following words:

    The committee recognizes that the IP legislation confers upon the intellectual propertyholder a series of exclusive privileges designed to promote innovation. Given that these

    rights are conferred by legislation, they should be able to be effectively exercised even

    when this involves (as it generally must) the exclusion of others. However, these rights

    should not be capable of being used to go beyond the market power those rights directly

    confer. That is, the right holder should not be allowed to extend the statutory right into a

    wider right of exclusion with the effect of substantially lessening competition119

    The Governments Response

    As mentioned above, with regard to the IPCRC recommendations on

    compulsory licensing, the government accepted the competition test as an

    additional test, while the public interest test firmly holds ground.

    118See note 17

    119Ibid

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    As regards the IPCRC recommendations on section 51, the government partly

    accepted the essential elements of the recommendations. The government now

    seeks to amend S. 51(3) so as to extend the exemption to cover IP rights under the

    Plant Breeders Rights Act 1994. However, the government does not intend to

    adopt the substantial lessening of competition test to all provisions of Part IV of

    the TPA. The fetters placed on the exercise of IPRs in the form of prohibition on

    misuse of market power (S.46) and resale price maintenance (S. 48) shall continue

    to operate. On the other hand IP licensing that would otherwise contravene the

    per se prohibitions under the TPA (price fixing, exclusionary provisions, third

    line forcing etc) will be subject to a substantial lessening of competition test.

    Further, the guidelines are to be issued by the ACCC120to help clarify when IP

    licensing conditions might be exempted under S. 51(3), when IP licenses and

    assignments might breach Part IV of the TPA, and when conduct that is likely to

    breach Part IV might be authorized.

    Judicial PrecedentsOne of the most fundamental tests applied in various cases involving

    competition issues is the taking advantage test. The premise of this test is that

    if an enterprise is dominant in the market or enjoys substantial market power,

    then its conduct shall be judged on the touchstone of the use of that market

    power. A firm uses its market power if it acts in a way which it could not afford,

    in a commercial sense, if it were operating in a competitive market.121Perhaps,

    the essence lies in using the dominance or rather abusing the dominance (defined

    in terms of market power) in the market, so as to tilt the scales of any commercial

    advantage in favour of the firm exercising and enjoying such power. I see it as

    essentially a three step test, involving the following questions:

    120Australian Competition and Consumer Commission

    121Ibid pg 331

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