Ipr vs Competion Law
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Transcript of 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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