Competition Law and Patents: A Follow-on Innovation Perspective in the Biopharmaceutical Industry (New Horizons in Competition Law and Economics)

Competition Law and Patents

NEW HORIZONS IN COMPETITION LAW AND ECONOMICS Series Editors: Steven D. Anderman, Department of Law, University of Essex, UK and Rudolph J.R. Peritz, New York Law School, USA This series has been created to provide research based analysis and discussion of the appropriate role for economic thinking in the formulation of competition law and policy. The books in the series will move beyond studies of the traditional role of economics – that of helping to define markets and assess market power – to explore the extent to which economic thinking can play a role in the formulation of legal norms, such as abuse of a dominant position, restriction of competition and substantial impediments to or lessening of competition. This in many ways is the new horizon of competition law policy. US antitrust policy, influenced in its formative years by the Chicago School, has already experienced an expansion of the role of economic thinking in its competition rules. Now the EU is committed to a greater role for economic thinking in its Block Exemption Regulations and Modernisation package as well as possibly in its reform of Article 82. Yet these developments still raise the issue of the extent to which economics should be adopted in defining the public interest in competition policy and what role economists should play in legal arguments. The series will provide a forum for research perspectives that are critical of an unduly-expanded role for economics as well as those that support its greater use. Titles in the series include: Antitrust, Patents and Copyright EU and US Perspectives Edited by François Lévêque and Howard Shelanski Innovation Markets and Competition Analysis EU Competition Law and US Antitrust Law Marcus Glader Competition Law and Patents A Follow-on Innovation Perspective in the Biopharmaceutical Industry Irina Haracoglou

Competition Law and Patents A Follow-on Innovation Perspective in the Biopharmaceutical Industry

Irina Haracoglou Attorney at Law, Independent Researcher/Consultant

NEW HORIZONS IN COMPETITION LAW AND ECONOMICS

Edward Elgar Cheltenham, UK • Northampton, MA, USA

© Irina Haracoglou 2008 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited Glensanda House Montpellier parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data Haracoglou, Irina, 1981– Competition law and patents : a follow-on innovation perspective in the biopharmaceutical industry / by Irina Haracoglou. p. cm. — (New horizons in competition law and economics series) Includes bibliographical references and index. 1. Patent laws and legislation. 2. Pharmaceutical biotechnology—Patents. 3. Pharmaceutical biotechnology—Law and legislation. 4. Competition, Unfair. I. Title. K1575.H37 2008 346.04'86—dc22 2007038609 ISBN 978 1 84720 599 5 Typeset by Manton Typesetters, Louth, Lincolnshire, UK Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

To Mum for her love & patience To Dad for his persistence & perfectionism To Dimitris (my stepfather) for his kindness & generosity

Contents List of abbreviations Preface Acknowledgements Table of cases

xii xiv xv xvi

Part I: The problem – Access as a necessary element of follow-on innovation? 1. Biopharmaceutical R&D: the increased importance of cumulative innovation and related concerns 1.1 Introduction 1.2 The case of research tools 1.2.1 Defining research tools 1.2.2 The patent experience in biotechnology: biomedical research tools 1.2.3 The effect of patent trends on the patent balance for research tools 1.3 Conclusion

3 3 7 7 9 12 16

Part II: The Patent Balance and Working Solutions in the Patent System 2. The patent system as a system of balancing 2.1 The Patent Balance 2.2 The particular importance of the patent balance in the biopharmaceutical industry 2.2.1 The patent system and the biopharmaceutical industry 2.2.1.1 Biopharmaceutical innovation and patenting 2.2.1.2 Has the importance of patents been overstated? 2.3 Conclusion

21 21

3. The patent system and some potential safety nets 3.1 Introduction to the patent safety nets

36 36



vii

25 25 28 31 34

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Contents

3.2 The patent safety nets 3.2.1 Experimental use exemption 3.2.1.1 The experimental use exemption: a viable and effective working solution? 3.2.1.2 The US experience: a helpful paradigm? 3.2.1.3 Conclusion on the EUE 3.2.2 The reverse doctrine of equivalents and blocking patents 3.2.3 Patent pools 3.2.4 Compulsory licensing in the patent provisions 3.2.4.1 Introduction to compulsory licensing (a) Definition and history (b) Support and opposition for CL (c) Grounds for granting a compulsory licence 3.2.4.2 Analysis of the role of CL (a) The role of CL in balancing commensurability (i) CL as a mechanism to induce broad licensing (ii) CL for non-use (iii) CL for significant technological advances (iv) CL to address health emergencies (v) CL as a remedy for anti competitive conduct (b) Conclusions on CL

37 39

4. The right to health as an interpretive principle of patent law 4.1 Introduction 4.2 The right to health as a human right and its status in European law 4.2.1 Introduction to the right to health 4.2.2 Sources of the right to health 4.2.3 Implications of the right to health 4.2.3.1 Elements of the right to health 4.2.3.2 Obligation to respect, protect and fulfil 4.2.4 International Efforts to Strengthen the Right to Health 4.3 The right to health and patent law: The fundamental nature of health concerns and the move towards a right to health as an interpretive principle in patent law

70 70

39 44 46 48 51 54 54 54 54 57 58 58 58 59 59 61 63 63

71 71 74 76 77 79 80 82



Contents

4.3.1 The link between the right to health and patent law 4.3.1.1 The effect of patent law on the right to health 4.3.1.2 The effect of the right to health on patent law 4.3.2 The right to property and IP: IP as a human right 4.3.2.1 Striking the balance: limitations in the public interest 4.3.3 Patenting and the right to health 4.3.3.1 Direct effect 4.3.3.2 The indirect effect of the right to health 4.3.4 The right to health as an interpretive principle in patent law 4.3.4.1 Effect on specific patent provisions 4.3.4.2 Case-law on public health 4.3.4.3 European cases on IP and fundamental rights analysis 4.4 Conclusions

ix

82 82 83 84 86 87 87 88 90 91 93 94 96

PART III: Antitrust as a Complement to the Patent System 5. Unilateral conduct, intellectual property rights and Competition Law: a systems’ interaction 5.1 Introduction 5.2 The practice of the courts 5.2.1 The existence/exercise distinction 5.3 IPRs and competition: A systems’ interaction 5.3.1 IPRs – public goods, exclusivity and information goods 5.3.1.1 Public goods and market failure 5.3.1.2 Patronage, procurement and property 5.3.2 Implications for competition 5.3.2.1 IP like other property rights for the purposes of competition 5.3.2.2 Competition embedded in the IP system 5.3.2.3 The transition from separate to unified fields 5.3.2.4 How antitrust control affects incentives to innovate 5.3.3 Recent recognition of antitrust control 5.4 Conclusions

101 101 103 103 107 107 107 109 112 112 114 114 116 119 121



Contents

6. The Duty to Deal under Art. 82 EC 6.1 Introduction 6.1.1 What is a refusal to deal and what is the rationale behind its prohibition? 6.1.2 Concerns relating to a refusal to deal: Potential harm to competition 6.2 The state of the law 6.2.1 Cutting off existing customers: The dependence cases 6.2.2 ‘Reservation of an ancillary activity’ and leverage economics 6.2.3 The indispensability requirement and the essential facilities doctrine (EFD) 6.2.3.1 Indispensability 6.2.3.2 Two-market requirement 6.2.3.3 Objective justification 6.2.4 New product innovation 6.3 Conclusions Appendix  The refusal to deal cases under Art. 82

122 122 122 123 126 128 130 133 135 138 139 141 143 145

PART IV: A MORE INNOVATION SENSITIVE APPROACH TO THE INTERFACE OF COMPETITION LAW AND PATENTS? 7. The duty to deal as applied to address technology access problems in the biopharmaceutical industry 7.1 Conclusions on the patent system in the case of research tools 7.1.1 The particularity of research tools: pre-commercial stage patents 7.1.2 A gap in the patent system? 7.1.3 The more the better? Optimal market structure for innovation 7.2 Two possible avenues for increased access to essential research tools 7.2.1 Patent law 7.2.2 A role for Art. 82? 7.2.2.1 Indispensability 7.2.2.2 Preventing the emergence of a new product for which there is potential consumer demand 7.2.2.3 Elimination of competition on a downstream or neighbouring market/two-market requirement

177 177 177 179 179 181 181 185 186 187 187



Contents

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7.2.2.4 The absence of an objective justification 7.2.3.1 The impact of Art. 82 duty to deal with case law on the patent system 7.2.3.2 An innovation sensitive approach: innovation markets in Art. 82? 7.2.3.3 Conclusions on compulsory licensing as a safety net 7.2.4 Conclusion: A human rights approach to competition law?

188

Bibliography   Legislation and Guidelines   Reports and Studies   Authors Index

200 200 204 210 239

189 191 195 196

Abbreviations ACIP AIPLA Am. Bus. L. J. Am. J. L. and Med. Antitr. L. J. Berk. Tech. L. J. Buff. Hum. Rts. L. Rev. CAFC CFI Chi. Kent L. Rev. Chi. Trib. CL CML Rev Col. L. Rev. Community Community Courts CPC CPTech DOJ EC Treaty ECJ ECLR ECR EEA EFD EGE EIPR ELR EMEA EPC EPO ESCRC EU EUE FDA

Advisory Council on Intellectual Property American Intellectual Property Law Association American Business Law Journal American Journal of Law and Medicine Antitrust Law Journal Berkeley Technology Law Journal Buffalo Human Rights Law Review Court of Appeals for the Federal Circuit Court of First Instance Chicago Kent Law Review Chicago Tribunal Compulsory licensing Common Market Law Review Columbia Law Review European Community CFI and ECJ Community Patent Convention Consumer Project on Technology Department of Justice Treaty Establishing the European Community European Court of Justice European Competition Law Review European Court Reports European Economic Area Essential Facilities Doctrine European Group of Ethics European Intellectual Property Review European Law Review European Medicines Evaluation Agency European Patent Convention European Patent Office Economics, Social and Cultural Rights Committee European Union Experimental use exemption Food and Drug Administration xii



Abbreviations

xiii

Ford. Corp. L. Inst. Ford. Int. L. J. FTC GATS IACHR IIC

Fordham Corporate Law Institute Fordham International Law Journal Federal Trade Commission General Agreement on Trade in Services Inter-American Court on Human Rights International Review of Industrial Property and Copyright Law IMA Innovation Markets Approach IP Intellectual property IPR Intellectual property right J.L. and Econ. Journal of Law and Economics JPE Journal of Political Economy JPTOS Journal of the Patent and Trademark Office Society LQR Law Quarterly Review Mich. L. Rev. Michigan Law Review NYU Law Review New York University Law Review OECD Organisation for Economic Co-operation and Development OFT Office of Fair Trading OJ Official Journal OJ Objective justification OUP Oxford University Press R&D Research and Development RJE Rand Journal of Economics SME Small and medium-sized enterprise SPC Supplementary Protection Certificate SSM Specific Subject Matter Stan. L. Rev. Stanford Law Review TTBER Technology Transfer Block Exemption Regulation TRIPS Agreement on Trade-Related Aspects of Intellectual Property Rights U. Chi. L. Rev. University Of Chicago Law Review U. Ill. L. Rev University Of Illinois Law Review USA United States of America USPTO Patent and Trademark Office, USA Va. J. Trans. L. Vanderbuilt Journal of Transnational Law Va. L. Rev. Vanderbuilt Law Review VI Vertical Integration WIPO World Intellectual Property Organization WTO World Trade Organization Note: Other abbreviations that have been used are either defined in the text or can be found in the bibliography.

Preface In June 2005 the European Commission announced that it had fined AstraZeneca €60 million for misusing the patent system to delay entry of competitors thereby abusing its dominant position in contravention of Art. 82 EC. In October 2005 a complaint by six phone manufacturers was reported against Qualcomm, a chip manufacturer that owns patents over technology used in 3G handsets, alleging that Qualcomm refused to license essential patents on fair terms, and charged excessive royalties for its essential patents thereby acting anti-competitively. In December 2005 the Commission published a Discussion Paper on the Application of Art. 82 to Exclusionary Abuses. In February 2007 the Commission opened an investigation into Boehringer’s best selling drug last year, Spiriva, in relation to possible misuses of the patent system to exclude competition from the market. These initiatives have as their backdrop two central questions, inter alia: first, the relationship between competition law and intellectual property rights; and secondly, the duty of dominant undertakings to deal/license/supply other undertakings. Against this background and in view of the increased significance these questions are likely to assume in the future, this book deals broadly with the relationship between competition law and intellectual property rights, and more specifically, with the interface between patent law and competition abuses – by virtue of refusal to deal – in the biopharmaceutical industry. It focuses on a paramount element for competition: ‘access’. It addresses the following question: how do we strike the balance between initial and follow-on innovation so as to ensure that access to ‘essential’ research tools (or other fundamental elements for follow-on innovation) is not impeded?    Commission press release IP/05/737. AstraZeneca abused its dominance by making misrepresentations to national patent offices with a view to obtaining supplementary protection certificates, as well as by misusing rules and procedures of medicines agencies to block entry of generic products or parallel traders.    N. Gohring, Qualcomm accused of anticompetitive conduct in EU, 28 October 2005, available at www.infoworld.com.    December 2005, available at http://ec.europa.eu/competition/antitrust/others/article_82_review.html.    Case COMP/B2/39246.



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Acknowledgements This book started from a series of coincidences, evolved into a test of persistence and patience, and culminated in a series of good fortunes the most significant of which was to see one’s long-awaited aspiration realised. It has certainly not been a smooth ride throughout as there have been many moments of frustration, questioning and disbelief, together with many moments of challenge, excitement and great fulfilment. The various stages of the manuscript travelled with me across countries, and have certainly filled me with many experiences that I have grown with and for which I am most grateful. I owe my most profound and sincere gratitude to my supervisor, Prof. Ullrich, who has provided me with great support, understanding and words of wisdom. I am also deeply grateful to the following people who have helped me with their support and useful comments: Prof. Shelanski, Prof. Joerges, Prof. Lemley, Prof. Blackburn, Prof. Barton, Prof. Lévêque, Luk Peepercorn, Sandro Paollichi, Dimitrios Giotakos, Dr Alan Riley, Dr Barry Rodger, Emanuela Lecchi, Andreas Avgousti, Katherine Llorca and many more. My warmest thanks are due to the European University Institute for the support and funding they granted me over the years as well as my funding body, the Department of Education and Skills. I would also like to thank the University of California, Berkeley and European Commission, DG COMP who, during my stay there, were instrumental in helping my research. I am also grateful to the members of CLASF for listening to drafts of my papers and providing me with comments, Charles Russell LLP as well as to the TRA (Bahrain). I am, of course, most grateful to my publisher, Edward Elgar and the people therein who gave me their support, particularly Luke Adams, Jo Betteridge and Kate Pearce. Most of all, I would like to thank my friends and family without whose support this experience would not have been so remarkable: Mum and Alexia thanks for listening during my many hours of frustration; Yianni and Eleni thanks for providing me with immeasurable entertainment; Manoli thanks for supporting me in the finish!



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Cases European Courts’ Decisions Case 402/85 Basset v SACEM [1987] ECR 1747 196 Case 77/77 Benzine en Petroleum Handelsmaatschappik BV and others v Commission [1978] ECR 1513 129, 146 Case 311/84 Centre Belge d’Etudes du Marché-Télémarketing SA (CBEM) v Companie Luxembourgeoise de Télédiffusion [1985] ECR 3261 127, 130, 151–2, 171, 173 Case T-201/04 Competition Microsoft v Commission, Order of the President of the CFI, 22 December 2004 (Proceedings for interim relief – Art. 82 EC) 144, 169, 173, 179, 187, 188, 190 Case 78/70 Deutsche Grammophon [1974] ECR 1147 104 Case 56 and 58/64 Etablissements Consten SA and Grundig-Verkaufs-GmbH v Commission [1966] ECR 299 104 Case T-374/94 European Night Services [1998] ECR II-3141 165 Case C 418/01, IMS, not yet reported, judgment of 29 April 2004 123, 126, 127, 136–7, 139, 141, 142, 143, 144, 165–9, 172, 173, 186, 187, 188, 198 Case 6/73 Istituto Chemioterapico Italiano and Commercial Solvents v Commission [1974] ECR 223 126, 127, 128, 130, 145–7, 171, 173 Case C-200/96, Metronome Music v Music Camp, Judgment of the Court of 28 April 1998, ECR I-01953 95 Case 322/81 Michelin v Commission [1983] ECR 3461 148 Case C-377/98 Netherlands v Council, [2001] ECR I-07079 94–5 Case C-7/97 Oscar Bronner v Mediaprint [1998] ECR I-7791 103, 123, 127, 133, 136, 141, 143, 162–5, 172, 173 Cases C-241/91 P and C-242/91 P, Radio Telefis Eireann (RTE) and Independent Television Publications (ITP) v Commission (‘Magill’), [1995] ECR I-743 103, 105–6, 121, 123, 126, 127, 128, 130, 133, 141, 159–61, 172, 173, 190 Case C-53/03 Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v Glaxosmithkline AEVE, Opinion of the A-G Jacobs, reference 28 October 2004, not yet reported 124, 128, 140, 143, 170, 173 Case 88/501 Tetra Pak I (BTG license) [1988] OJ L272/27 190, 191

xvi



Cases

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Case C-333/94 Tetra Pak v Commission [1996] ECR I-5951 148–9 Case T-504/93 Tierce Ladbroke v Commission [1997] ECR II 923 126, 127, 128, 141–2, 161–2, 172, 173 Case 27/76 United Brands Co. and United Brands Continental BV v Commission [1978] ECR 207 124–5, 127, 128, 130, 147–9, 157, 171, 173 Case 238/87 Volvo v Veng (UK) Ltd [1988] ECR 6211 105, 123, 128, 153–4, 171, 173

Community Commission Decisions Case COMP/B2/39246 Boehringer [2007], not yet reported 63, 197 Commission Decision M.877 Boeing-McDonnell-Douglas, OJ 1997 C.59/877 192 Commission Decision Boosey & Hawkes, OJ 1987 L. 286/36 146, 157 Commission Decision British Midland/Aer Lingus, OJ 1992 L. 96/34 127, 130, 156–7, 172 Commission Decision Ciba-GeigySandoz, OJ 1996 C.102/737 197 Commission Decision Crown Cork, OJ 1995 L. 75/39 192 Commission Decision Decca Navigator System, OJ 1989 L. 43/27 126, 127, 155–6, 172, 173 Commission Decision DSD and others, OJ 2001 L. 319/1 104, 106 Commission Decision M.984 DuPont-ICI, OJ 1997 L. 2985 192 Commission Decision M.555 Glaxo-Wellcome and others, OJ 1995 L. 2985 192 Commission Decision IGR Stereo Television EC, in Comm XI Competition Policy Report, 1982, p. 63 150, 173 Commission Decision Info-Lab/Ricoh, in 1999 Competition Policy News­ letter 165 Commission Decision Konsortium, OJ 1990 L. 228/31 192 Commission Decision London European-Sabena, OJ 1988 L. 317/47 126, 127, 154, 171, 173 Commission Decision in Case COMP/C-3/37.792 Microsoft [2004], not yet reported 121, 137, 140, 142, 143, 169, 173 Commission Decision M.468 MSG-Media Services, OJ 1994 L. 364/01 192 Commission Decision Sea Containers v Stena Sealink, OJ 1994 L. 15/08 126, 127, 135, 143–4, 158, 172, 173 Commission Decisions Shell-Montedison, OJ 1994 L. 332/49 192 Commission Press release IP/05/737, AstraZeneca 173, 188

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Cases

International Case-law Alejandro Moreno Alvarez v Estado Colombiano, SU.819/99, Corte Constitucional de Colombia 1999, available at http://bob.minjusticia.gov.vo/ jurisprudencia/CorteConstitucional/1999/Tutela/su819-99.htm 81 Alvarez v Caja Costarricense de Seguro Social, Exp. 5778-V-97, No. 5934-97, Sala Constitucional de la Corte Suprema de Justicia de Costa Rica 70, 81 Ceballos v Instituto de Seguros Sociales, T-484 Corte Constitucional de Colombia 1992, available at http://bib.minjusticia.gov.co/jurisprudencia/Corte 80–81 Constitucional/1992/Tutela/T-48492.htm Glenda Lopez v Instituto Venezolano de Seguros Sociales, 487-060401 Supreme Court of Venezuela, Constitutional Chamber 1997, available at www.tsj.gov. ve/decisiones/scon/Abril/487-060401-001343.htm 81 Minister of Health v Treatment Action Campaign, CCT 8/02 Constitutional Court of South Africa, July 2002, available at www.tac.org.za/Documents 80 In The Matter Between Mpho Makhathnini, Nelislwe Mthethwa, Musa Msomi, Elijah Paul Musoke, Tom Myers, AIDS Healthcare Foundation Limited, and GlaxoSmithKline (Pty) Ltd, Glaxo Group Limited, Case Number 34/CR/ Apr04 98, 178, 197 Odir Miranda v El Salvador Case 12.249, Report No. 29/01, Inter-Am. CHR, Annual Report 2000, OEA/Ser./L/V/II.111, Doc. 20 Rev. 2001 available at www.cidh.oas.org/annualrep/2000eng/ChapterIII/Admissible/ ElSalvador12.249.htm 88 Pharmaceutical Wholesalers and Glaxo Wellcome, case 68/IR/Jun00, 18 June 2003 available at www.comptrib.co.za/decidedcases/pdf/68IRJUN00kinesis. pdf 98, 178 Protection Writ. Judgment of Fabio Moron Diaz, Magistrado Ponente, T-328/98 Corte Constitucional de Colombia 1998, available at http://bib.minjusticia. gov.vo/jurisprudencia/CorteConstitucional/1998/Tutela/T-328-98.htm 81 Social and Economic Rights Action Center v Nigeria, Communication 155/96 (African Commission on Human and People’s Rights, Oct. 2001), available at www.achpr.org/DECISIONS_30th_Session-_Oct.2001_eng.pdf 80 Street Children Case (Morales v Guatemala), Joint Concurring Opinion of Judges A.A. Cancado Trinidade and A. Abreu-Burelli, Inter-Am. Ct H.R. (Ser. C) No. 63, available at www.corteidh.or.cr/seriecing/VotocancadoabreuSerie_c_63_ing.doc 80



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US case-law Akro Agate Co. v Master Marble Co. No. 119, District Court, N.D. West Virginia, 18 F. Supp. 305; 1937 U.S. Dist. LEXIS 2087, 16 January, 1937 45 American Home Products/American Cyanamid, American Home Prods Corp., FTC Docket No. C-3557 (1995) 191 Amgen Inc. v Chugai Pharmaceutical Co. 927 F. 2d 1200 (Fed. Cir. 2000) 48 Aspen Highlands Skiing Corp. v Aspen Skiing Co., 738 F.2d 1509 (10th Cir. 1984) aff’d on other grounds, 472 US 585 (1985) 133 Baxter/Immuno, Baxter Int’l, Inc., 123 FTC 904 (1997) 191 BellSouth Advertising and Publishing Corp. v Donnelly Information Publishing, Inc., 933 F.2d 952 (11th Cir. 1991), vacated, 977 F.2d 1435 (11th Cir. 1992), and reversed en banc on other grounds, 999 F.2d 1436 (11th Cir. 1993), cert. denied, 114 S. Ct. 943 (1994) 133 Ciba-Geigy/Sandoz, Ciba-Geigy Ltd, 123 FTC 842 (1997) 191 Consolidated Gas Co. of Florida v City Gas Co. of Florida, 880 F.2d 297 (11th Cir. 1989) 133 Embrex Inc. v Service Engineering Corp 99-1064, US CAFC, 216 F.3d 1343; 2000 US App. LEXIS 15036; 55 USPQ2D (BNA) 1161, 28 June, 2000 44 Fishman v Wirtz, 807 F.2d 520 (7th Cir. 1986) 133 Glaxo/Burroughs Wellcome, Glaxo Inc., 119 FTC 815 (1995) 191 Graver Tank case 339 US 605 (1950) 48 Hecht v Pro-Football No. 2815-66, US Dist. Ct. for Distr. Of Columbia, 312 F. Supp. 472; 1970 US Dist. LEXIS 12049; 1970 Trade Cas. (CCH) P73,170, 16 April,1970 135–6 Hecht v Pro-Football, Inc., 570 F.2d 982 (D.C. Cir. 1977), cert. denied, 436 US 956 (1978) 133 Hoechst/Rhone-Poulenc, Hoechst AG, FTC Docket No. C-3929 (2000) 191 Howard Hughes case 366 F. 2d 303 (2nd Cir. 1966) 92 Madey v Duke 01-1567 US CA for Fed. Circ. 307 F.3d 1351 44 MCI Communications Group and MCI Telecommunications Corp. v American Telephone and Telegraph 708 F.2d 1-81 (7th Cir. 1983) 133, 134 Pfizer/Warner-Lambert, Pfizer Inc., FTC Docket No. C-3957 (2000) 191 Roche/Genentech, Roche Holding Ltd, 113 FTC 1086 (1990) 191 Roche Products v Bolar Pharmaceutical Company 733 F.2d 858 (CA Fed.), cert. denied, 469 US 856 (1984) 45 Sawin v Guild 21 F.Cas 554 (C.C.D. 1813) (No. 12,391) 44 Scripps Clinic and Research Found. v Genentech, 666 F. Supp. 1379 (N.D. Cal. 1987); 927 F.2d 1565 (Fed. Cir. 1991) 11, 48 Sensormatic/Knogo, Sensormatic Elec. Corp., FTC Docket No. C-3572 (1995) 191 Texas Inst. v ITC, 6 USPQ 2d 1886 (Fed. Cir. 1988) 34

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Cases

Time Inc. v Bernard Geis Associates NYLR, 21 January 1994, p. 5 (CD Cal. 11 June 1993) 92 Upjohn/Pharmacia, The Upjohn Co. 121 FTC 44 (1996) 191 US v General Motors Corp., No. 93-530 (D. Del. Filed 23 March 1998) 191 US v Griffith 334 US 100 (1948) 133 US v Lockheed Martin and Northrop Grumman (DDC filed 23 March 1998) 191 US v Terminal Railroad Association of St. Louis, 224 US 383 (1912) 133 48 Westinghouse v Boyden Power Brake Co. 170 US 537 (1898) Whittemore v Cutter 29 F. Cas 1120 (C.C.D. 1813) 44, 45 Wilson Sporting Goods v David Geoffrey and Associations, 904 F.2d 677 (Fed. Cir. 1991) 48

EU national case-law Ethofumesate Case, (1991) 22 IIC 541, 546 (Germany) 40 Frearson v Loe (1878) Ch.D. 48 (UK) 40, 43 ‘Hollow plastic profiles II’ BGJ GRUR 1982, 301 (Germany) 16 Inhale Therapeutic Systems Inc v Quadrant Healthcare Plc [2002] RPC 21 (UK) 43 ‘Klinische Versuche’ Federal Supreme Court (BGH), 11 July 1995, GRUR 1996, 109; 1997 IIC 103 (Germany) 42 LG Berlin (Photographs of Ulrike Meinhof) [1978] GRUR 108 (Germany) 92 Lili Marleen BGH, 7 March 1985 [1987] GRUR 34 (Germany) 92 Medicopharma N.V. et al. v ICI plc, 14 Rechtspraak van de week 79–89 (1993), (the Netherlands) 40 Monsanto v Stauffer [1985] RPC 515 CA (UK) 43 Sandisk Corporation v Koninklijke Phillips Electronics NV and Others [2007] EWHC 332 Ch. (UK) 188 Scientology decision [2003] Mediaforum 337, note Visser; (2003) 6 AMI 217, note Hugenholtz; (2003) 6 IER 352, note Grosheide. Appeal to the Supreme Court pending (the Netherlands) 92 Smith Kline and French Laboratories Ltd v Evans Medical Ltd [1989] FSR 513 (UK) 43 Telegraaf case; Decision of director-general Dutch Competition Authority 10 September 1998, 1/501.o119 (Telegraaf v NOS/HMG); Trade and Industry Appeals Tribunal 15 July 2004, www.rechtspraak.nl, LJN-nummer: AQ1727 (Netherlands) 140, 142 Zwangslizenz, Federal Supreme Court (BGH), 5 December 1995, GRUR [1996] 190; 24 IIC 397 (1993) (Germany) 42–3, 61

Part I

The problem – access as a necessary element of follow-on innovation?

1. Biopharmaceutical R&D: the increased importance of cumulative innovation and related concerns We often talk about how important patents are to promote innovation, because without patents, people don’t appropriate the returns to their innovation activity, and I certainly very strongly subscribe to that … On the other hand, some people jump from that to the conclusion that the broader the patent rights are, the better it is for innovation, and that isn’t always correct, because we have an innovation system in which one innovation builds on another. If you get monopoly rights down at the bottom you may stifle competition that uses those patents later on, and so … the breadth and utilization of patent rights can be used not only to stifle competition, but also [can] have adverse effects in the long run in innovation. We have to strike a balance.

1.1 Introduction Recent changes in the nature of research in the biopharmaceutical industry have given rise to new concerns regarding innovation. In the US, in particular, the industry has become fragmented into a two-tier system, in which small biotech firms carry out all of the innovative research, which the large pharmaceutical companies then further develop, produce, prepare and market. Much of the research carried out by small biotech firms involves upstream innovative research that is fundamental to the development of downstream research on products and processes. Hence, research has increasingly become dependent on access to other fundamental upstream research.

    J.E. Stiglitz before the FTC Hearings on Global and Innovation-Based Competition, 12 October 1995; also quoted in D.A. Valentine, Abuse of Dominance in Relation to Intellectual Property: US Perspectives and the Intel Cases, at the Israel International Antitrust Law Conference, 15 November, 1999 at http://www.ftc.gov/speeches/other/ dvisraelin.htm.     J. Walsh and J. Cohen, Research Tool Patenting and Licensing and Biomedical Innovation, in Cohen and SMerill (eds), Patents in the Knowledge-Based Society, Washington DC, National Academies Press (2003), p. 285; A. Gambardella et al. Global Competitiveness in Pharmaceutical Industry (2002).     Ibid. See OECD, The Pharmaceutical Industry, Paris (2001).







Access as a necessary element of follow-on innovation?

Unlike most industries where innovation involves improving upon a first product, in the biopharmaceutical industry, most cumulative innovation occurs in the pre-commercial stage, before the initial marketable product is produced. Once a marketable product has been developed, it is usually only subject to competition by me-too drugs or generics, and not subject to significant improvements in the end-product market. It is important, for this reason, to ensure that cumulative innovation in the pre-commercial stage is not impeded. This is significant as it may otherwise lead to a limitation in the paths to biomedical research. The recent increase in patenting in the biotechnological field has raised several concerns regarding the potential implications for healthcare. For example, the grant of a patent over the BRCA1 gene raised concerns that the patent would hamper innovation and the identification of new tests and diagnostic methods, impairing equitable access to testing and the public health approach. Related to this, was the concern that patents are sometimes granted in cases too broadly to even cover unanticipated utilities, which may hamper further research. Hence, the CCR5 Receptor gene used in research for HIV/AIDS drugs spurred concerns regarding the reasonableness of rewarding estimations of util-

    R.K. Rai, Fostering Cumulative Innovation in the Biopharmaceutical Industry: The Role of Patents and Antitrust, 16 Berkeley Tech Law Journal 813 (2001).     Ibid. The author notes that an exception to this is where the patented drug is not a traditional small molecule chemical, but rather, a biologic (e.g. protein or macromolecule) and the improver has come up with a method to produce the biologic that is drastically different.     Ibid. p. 813. Competition is perceived to be a driving force and to allow multiple independent research paths that are important for creative development.     Biotechnology Industry Organization: Editors’ & Reporters’ Guide to Biotechnology (Feb. 2000), available at www.bio.org/aboutbio/guide2000/facts.html shows, for example, that in the USA biotechnology patenting escalated from 2,000 patents issued in 1985 to more than 9,000 patents issued in 1998. See also Report of the National Institutes of Health NIH, Working Group on Research Tools, presented to the Advisory Committee to the Director, 4 June 1998, referring to an ‘increasing use of the patent system to obtain proprietary rights in research tools’.     The BRCA1 gene indicates susceptibility to breast cancer. Its discovery was reported by Myriad Genetics and Utah University in 1994, and ever since the gene and its mutations have been part of numerous patent applications. See Nuffield Council on Bioethics, The Ethics of Patenting DNA, 2001– Case Studies, pp. 39–40.     This led to a Resolution from the European Parliament in October 2001 opposing the patenting of the BRCA1 gene. Resolutions B5-0633, 0641, 0651 and 0663/2001– on the patenting of BRCA1 and BRCA2 (‘breast cancer’) genes OJ 2002 C 87/265. R. Dalpé, L. Bouchard, A-J. Houle, L. Bédard, Watching the race to find the breast cancer genes, 28(2) Science, Technology, and Human Values 187–216 (2002); Nuffield (2001) op. cit. pp. 39–40.



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ity, and the effect that such patents may have on research if they are not licensed extensively.10 While in the 1980s upstream innovative research was mainly governmentsponsored research, with the rise in privatisation this came into the hands of private firms who were able to exclude others from their findings. As more stages, actors and inter-connectiveness complemented the drug development process, patenting made commercial sense where before there was nothing to patent.11 These two trends immediately raised fears that patents would deter innovation. In an article published in Science magazine, Heller and Eisenberg postulated a theory that too many patents on upstream innovation could lead to two eventualities.12 First, the granting of too many fragmented patents may lead to a situation identified as the ‘tragedy of the anti-commons’, whereby too many people have the right to exclude and no one has an effective right to use; this means that one can impede others from using his technology but is also impeded from using the technology himself by the rights of exclusion of others. The creation of too many fragmented and overlapping patent rights could lead to high transaction costs, which, coupled with the heterogeneous interests of owners and the cognitive biases of researchers,13 could make bargaining unlikely in most cases, leading to the creation of fewer products and to less innovation. The second eventuality postulated is that the granting of patents for fundamental upstream research could lead to a situation whereby patent owners stack licenses on top of future discoveries of downstream users, and/or impede the creation of downstream-dependent inventions.14 Heller and Eisenberg did not present scientific data to support their theory. The degree to which research is fragmented and dependent on too many other patents depends on many other factors including the breadth of the grant of the patent, the nature of the research and the extent to which it is cumulative or

10

  Ibid. p. 41.   While inventions were made, patents were not taken out. 12   M.A. Heller and R. Eisenberg, Can Patents Deter Innovation? Anti-commons in Biomedical Research, 280 Science 698, 1 May 1998. 13   This refers to a situation whereby every patent holder over-estimates his position and the value of his patents, therefore, it is difficult to reach an agreement on licences. 14   R. Eisenberg Bargaining Over the Transfer of Proprietary Research Tools, in R. Dreyfuss et al., Expanding the Boundaries of Intellectual Property, Oxford, Oxford University Press (2001). op. cit. See also R. Eisenberg, Technology Transfer and the Genome Project: Problems with Patenting of Research Tools, 5 RISK 163 (1994), p. 168, which states that: ‘the stacking of intellectual property obligations as successive tools are used in the course of an extended research project has the potential to impede or even preclude the development of new and better diagnostic and therapeutic products’. 11



Access as a necessary element of follow-on innovation?

discrete, and the bargaining power of the players. However, no evidence was given in support of these factors. Thereafter, Walsh and Cohen15 attempted to test these hypotheses against more scientific data. They found that while there is an increase in the patents on inputs to the discovery of the drug, the discovery was not substantially impeded except in the case of patented genetic diagnostics. With regard to the ‘anti-commons’, more specifically, they found that while there may be some delays in negotiating access and that negotiations could be costly, there was no evidence of bargaining breakdowns or of a real threat of royalty stacking or a failure to undertake projects on this basis. However, the approximately 33 per cent increase in the transaction costs for filing, enforcing and contracting for patents may make a difference between entering or not entering such negotiations, depending on the size of the firm. They also found that working solutions such as licensing, inventing around the patents, challenging patents and relying on the goodwill and information sharing between companies, nonetheless, constitute important tools for advancing research.16 Walsh and Cohen were less conclusive, however, on the issue of restricted access to upstream discoveries and its effects on innovation. They found that access to foundational discoveries can be restricted, and that patents over targets may limit access in certain cases.17 Depending on the breadth of the interpretation and the capacity of a firm to market in a timely fashion, the lack of access might lead to less innovation. In particular, in the case of targets, this might be problematic depending on the breadth and degree of restriction compared to the incentive necessary to invest in the first place. The effect of control upon such discoveries will depend, first, on how essential it is for subsequent innovation, and secondly, on the degree of rivalness in use of the first and subsequent products as this will, in turn, determine the motives for refusing access or not.18 Although such concerns have arisen, there is not much scientific evidence to support one finding over another.19 Does the existence of many patents hinder

15

  J. Walsh and J. Cohen (2003) op. cit.   Ibid. See also J. Holzapfel et al. (2002) op. cit.; E.G. Campbell et al. (2002) op. cit.; C. Lawson, (2002) op. cit. 17   Ibid. 18   Ibid. 19   D. Nicol and J. Nielsen, Patents and Medical Biotechnology: An Empirical Analysis of Issues Facing Australian Industry, Centre for Law and Generics Occasional Paper No. 6 (2003). It is stated that it is quite difficult to obtain quantitative data on the number of projects abandoned. ‘It may be that this will occur because of patent thickets and perceived future negotiating difficulties (i.e. anti-commons issues). However, we do acknowledge that projects will be abandoned or redirected for a whole host of reasons, and these may often be more to do with the intrinsic value and likelihood of success of the technology than the level of encumbrance.’ 16



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the development of products related to health care? Do upstream patents deter further innovation and is exclusion really a problem? This concern has been heightened in the case of research tools.20

1.2 The case of research tools 1.2.1 Defining Research Tools The term ‘research tools’ has many meanings depending on the perspective. Researchers who use them in the laboratory may view them as tools, whereas firms who primarily manufacture and sell these resources may consider them ‘end products’.21 In their broadest sense, research tools embrace ‘the full range of resources that scientists use in the laboratory’22 including ‘cell lines, monoclonal antibodies, reagents, animal models, growth factors, combinatorial chemistry libraries, drugs and drug targets, clones and cloning tools, methods, laboratory equipment and machines, databases and computer software’.23 Hence, they can be sequences used in research with no immediate therapeutic or diagnostic value. In this sense, they are a means to develop a commercial product such as a medicine or a vaccine, but not an end product sold directly to consumers. Research tools are licensed for particular sequences or applied to discover drugs or other research, and in this way, may realise a commercial value. They are a typical example of upstream innovation required to develop downstream innovation. For example, the EST approach involving the rapid sequencing of the coding parts of genes was used as a means to locate entire genes. A high percentage of the basic research tools of biotechnology are subject to proprietary restraints (such as patents) or material transfer agreements. 24 Patent

20   Though focus is on the case of research tools, it may be that they are only an illustration of a more general concern also present in other cases. See Chapter 7 for discussion of Pharmacy Benefits Management (PBM) networks. 21   NIH Report on Research Tools (1998) op. cit. and J.M. Mueller, No Dilettante Affair: Rethinking the Experimental Use Exception to Patent Infringement for Biomedical Research Tools, 76 Wash. L. Rev. 1 (2001), p. 10. 22   NIH Report on Research Tools (1998) op. cit. p. 3. 23   Ibid. See also G. Cullem, Panning for Biotechnology Gold: Reach-Through Royalty Damage Awards for Infringing Uses of Patented Molecular Sleeves, 29 IDEA 533 (1999). 24   J.M. Mueller (2001) op. cit. p. 11. A material transfer agreement (MTA) is a negotiated contract between the owner of a material and a party that seeks to use it for research.



Access as a necessary element of follow-on innovation?

protection is deemed necessary for such tools to recover the high cost of their development.25 The biotechnological research environment is complicated by the fact that researchers need access to several research tools to conduct their research.26 Some of the most important research tools include:27

l

The Cohen-Boyer Patents covering the basic method and plasmids for gene cloning.28 l Polymerase chain reaction technology (PCR), a basic method of amplifying DNA sequences and its key reagent, the enzyme Taq DNA polymerase.29 The PCR selectively multiplies a region of DNA so that it can be experimented on and analysed. l The Harvard ‘oncomouse’ useful in cancer research.30 l Expressed sequence tags (ESTs) identified in decoding the human genome. These are a fragment of complementary DNA (cDNA) and are useful in finding the full-length gene.31

25   S.A. Chambers, Comments on the Patentability of Certain Inventions Associated with the Identification of Partical CDNA Sequences, 23 AIPLA Q.J. 53 (1995); M.A. Flores, Taking the Profits out of Biomedical Research Tools, 17 Nature Biotechnology 819 (1999). 26   See S. Junnarkar, ‘GeneChip’ Encodes DNA on Silicon, N.Y. Times, 15 March 1997, describing DNA chips that offer a myriad of potential applications for studying genes and diagnosing genetic mutations. On these chips more than 40,000 sequences may be attached, and if each of these is covered by a patent, licensing will prove to be exceedingly difficult. 27   J.M. Mueller (2001) op. cit. pp. 12–14. 28   This research tool has been extensively licensed. See R.K. Seide and J.M. McLeod, Response to Policy Commentary, SCIENCE at www.sciencemag.org/feature/data/980465/ seide.shl. 29   This was initially owned by the Cetus Corporation. 30   The patent was assigned by Leder-Stewart to Harvard University who exclusively licensed it to E.I. du Pont de Nemours. See J.M. Mueller (2001) op. cit. p. 13. 31   Ibid. pp. 13–14. See also R.S. Eisenberg and R.P. Merges, Opinion Letter as to the Patentability of Certain Inventions Associated with the Identification of Partical cDNA Sequences, 23 AIPLA Q.J. 1 (1995). There has been some debate on whether ESTs are truly research tools. See R. Blackburn, Chief Patent Counsel, Chiron Corporation, remarks at the National Academies Board of Science, Technology and Economic Policy’s Conference on Intellectual Property Rights: How Far Should They Be Extended? Washington DC, 3 February (2000).



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1.2.2 The Patent Experience in Biotechnology: Biomedical Research Tools The thermostable enzyme Thermus aquaticus YTI DNA polymerase (Taq) is a basic and widely used biotechnology tool.32 In 1995, Hoffman-La-Roche accused more than 40 US universities and research institutes and more than 200 scientists of infringing its patents.33 The alleged wrongdoing involved the purchase of Taq for use in the PCR process34 from a company which, according to Roche, was not licensed to sell Taq for such use.35 Roche’s attempts to restrict the use of Taq and PCR provoked great alarm, which were described as ‘violating practices and principles basic to the advancement of knowledge for the public welfare’.36 The possibility that this large number of actors would be found guilty of infringement triggered a whole debate on the patenting of research tools and the implications for technological and medical progress.37 Coupled with the increase in patenting in recent years,38 the use of these biomedical tools to advance R&D for new drugs and therapies, diagnostic methods and other therapeutic products and the heightened difficulties in their access and dissemination have continued to trouble the research community. In essence, the dispute involves the broad rights stemming from patents on such tools, but is also complicated by other factors and determinants such as the definition of infringement, transaction costs, proliferation complications and licensing practices.39 According to the Nuffield Report:

32

  J.M. Mueller (2001) op. cit. p. 2.   M.C. Aguilera, Local Institutes Named in Lawsuit, San Diego Daily Transcript, 25 May (1995); M. Barinaga, Scientists Named in PCR Suit, 268 Science 1273 (1995). 34   PCR refers to the polymerase chain reaction, the revolutionary DNA amplification process using Taq. Taq allows the PCR process to be automated. The latter consists of multiplying a specific region of DNA, producing quantities of DNA sufficient for experimentation and analysis. See J.M. Mueller (2001) op. cit. p. 3. See also K. Drlica, Understanding DNA and Gene Cloning: A Guide for the Curious, New York: Wiley edn, 3rd edn (1997), pp. 153–7, (4th edn 2003); P. Rabinow, Making PCR: A story of Biotechnology, Chicago, University of Chicago Press (1996), pp. 128–32. 35   J.M. Mueller (2001) op. cit. 36   Hoffman-La-Roche Challenges Freedom of Researcher; List of ‘Infringers’ Includes Hundreds of Researchers and Dozens of Government-Supported Laboratories, Bus. Wire, 24 May (1995). 37   J.M. Mueller (2001) op. cit.; B. Rubenstein, La Roche and Promega in Tug of War Over Enzyme; DNA-Testing Tool Patent at Issue, Corp. Legal Times, Jan. 1996, at 15. 38   Nuffield Report (2001) op. cit. 39   In addition, the narrow interpretation of some of the working solutions such as the experimental use exemption, aggravates the situation. See Chapter 3. 33

10

Access as a necessary element of follow-on innovation? There are various ways in which patents on DNA sequences which have a primary use as research tools may inhibit innovation and development: the cost of research may increase, as the grant of increasing numbers of patents will mean that ever more licenses are required before research can be conducted; research may, as a matter of practice, be made more difficult if researchers are required first to negotiate the use of patented genes and sequences; a patent owner may withhold a license to gain maximum financial benefits, or license it exclusively to one or a limited number of licensees; companies that wish to acquire the rights to several DNA sequences may decide not to develop a therapeutic protein or diagnostic test because of the number of royalty payments that would be required (this is sometimes referred to as royalty-stacking).40

Hence, there is a concern regarding the breadth of the patent on such tools. The Nuffield Institute of Biotechnology concluded that the law is generous in granting patents to DNA sequences, as they are broad in scope (covering all of the uses of DNA obtained and sometimes protein DNA produces) and/or are granted when the criteria for inventiveness and utility are weakly applied. ‘This is because the patent system provides that in the case of patents directed to novel and inventive DNA and other chemical entities, inventors are entitled to property rights not only over the uses of their invention that they anticipated or predicted, but also over new uses that are developed. The case studies also reveal that some patent offices have been willing to adopt low thresholds for inventiveness and utility.’41 In the case of diagnostic tests, the problem has been highlighted as the fact that ‘excessively broad patents containing a claim to all conceivable diagnostic tests create a monopoly such that there is little incentive to develop improved tests’.42 A study has shown that almost half of the research laboratories surveyed ceased to pursue research on genetic testing because of the patents on DNA sequences.43 Another study is also quoted, which proved that 30 per cent of the laboratories discontinued or did not develop genetic testing for haemochromatosis because of exclusive licensing of patents that asserted rights over the most common mutation in gene involved.44 40

  Nuffield Report (2001) op. cit.   Ibid. p. 47. 42   Ibid. para. 5.14. 43   See M.K. Cho, Ethical and Legal Issues in the 21st Century, in Preparing for the Millennium: Laboratory Medicine in the 21st century, Washington DC, AACC Press, 2nd edn, 1998, pp. 47–63. 44   See J.F. Metz, et al., Diagnostic testing fails the test, 415 Nature 577–9, (2002). Metz produces some evidence that individual researchers may have terminated individual research projects as a consequence of property disputes. On the other hand, L. Bendekgey and D. Hamlet-Cox, Gene Patents and Innovation, 77 Academic Medicine 1373 (2002), argue that the evidence does not indicate any aggregate reduction in biological research as a consequence of gene patenting. 41



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11

Other patents, it is felt, are granted without being warranted. Genetic information was initially found to be patentable as it was thought that by isolating it or producing it through a technological process, the required threshold of not existing in nature had been satisfied. This, however, is now being questioned as there may no longer be a need for cloning in order to identify a DNA sequence and that identification may be achieved by computer databases.45 In addition, patents confer broad rights to the owner as he can prevent others from using the patented invention without distinction as to the nature or the purpose of the use. Products developed through the use of the invention may be found infringing even though they do not involve the sale of the patented invention.46 The interpretation of the breadth of the patent as regards infringing activity can be determinative, and can shift the balance one way or the other.47 Hence, the broad interpretation of infringing activity by the courts may aggravate the perceived broad nature (relative to disclosure) of such patent rights. The lax application of the patentability requirements may lead to unjustified

45   See Nuffield Report (2001) op. cit. para. 6.4. ‘We have considered the question of whether DNA sequences should be eligible for patenting. Even though we think that the judgment that isolated DNA sequences are eligible for patenting is based on a questionable extrapolation to the case of genetic information from the case of the isolation of chemical compounds, we accept that a limited number of the early patents granted on the basis need not now be called into question, in view of the inventiveness required to isolate the DNA sequences. Since the early days of the pioneering experiments using positional cloning techniques, patents have been filed on many DNA sequences which were mass produced by a mixture of computational and cloning techniques. Even if it can be convincingly argued that these sequences were eligible for patenting, the patents should be examined in the light of the criteria for inventiveness and utility. We note that as techniques have advanced, and in particular as the use of computers to identify genes has become more widespread, the eligibility of DNA sequences for patenting should have diminished.’ 46   J.M. Mueller (2001) op. cit. p. 5. ‘Use liability arises under the patent laws even though the researcher has not physically incorporated the patented tool into the new product that is ultimately marketed.’ The ‘selling’ prohibition has not been violated because the research tool is not incorporated in the commercial product. 47   In the USA, in Scripps Clinic and Research Foundation v Genentech, 666 F. Supp. 1379 (N.D. Cal. 1987) the Federal Circuit found a patent infringement by virtue of the production of the same protein by recombinant means, refusing to construe product claims to include inherent process limitations. It found that product by process claims are not limited to products prepared by the process set forth in the claims. ‘The decision reflects two antagonistic results, creating possible process-related exceptions to infringement of a product claim that on its face, makes no reference to any process parameters, while reading process limitations out of a claim that expressly recites them.’ Y. Ko, An Economic Analysis of Biotechnology Patent Protection, 102 Yale Law Journal 777 (1992).

12

Access as a necessary element of follow-on innovation?

grants or extensions in scope which heighten the risk of restricted research tool access when coupled with a wide interpretation of infringement.48 Accordingly, Art. 9 and Recital 25 of the Biotechnology Directive recognise that in determining the scope of protection of corresponding claims, there may be an overlap in an essential part of the invention.49 1.2.3 The Effect of Patent Trends on the Patent Balance for Research Tools The effect of the issues raised above on the research community and more generally on innovation, however, is unclear. While the existing case studies have not shown a recognisable problem with access to upstream research tools,50 some commentators believe that this is becoming a growing concern.51

48   In a joint article of the President of the US National Academy of Sciences and the President of the Royal Society of London, both EU and US researchers admonish that ‘those who patent DNA sequences without real knowledge of their utility are stacking claims not only to what little they know at present but also to everything that might later be discovered about genes and protein associated with the sequence. They are in effect laying claim to a function that is not yet known or a use that does not yet exist. This may be in current shareholders’ interests, but it does not always serve society well.’ D. Gitter, International Conflicts over Patenting Human DNA Sequences in the US and the EU: An Argument for Compulsory Licensing and the Fair Use Exemption, 76 NYUL Rev. 1623 (2001), p. 1642. 49   Recital 25 provides: ‘Whereas, for the purposes of interpreting rights conferred by a patent, when sequences overlap only in parts which are not essential to the invention, each sequence will be considered as an independent sequence in patent law terms.’ Biotech Directive (1998) op. cit. See also Vossiues and Partner, The Patenting and Enforcement of Inventions Relating to Research Tools: Chances and Problems, at www.vossiusandpartner.com/eng/publication/pub-patenting_and_enforcement.html. ‘As regards ESTs and SNPs, they might be considered essential as a whole. However, for partial DNA sequences it may become relevant to distinguish between coding and non-coding sequences.’ 50   See, for example, the case of recombinant DNA, in which the patented research tool was non-exclusively licensed with low fees, the case of PCR and TAQ Polymerase, in which licensing arrangements were controversial, and the case of protein and DNA sequencing instruments, in which strong patent protection promoted broad access, in R. Eisenberg, Patenting Research Tools and the Law, in IPRs and Research Tools in Molecular Biology, Summary of Workshop Held at the National Academies of Sciences, 15–16 February 1996. 51   See I.N. Feit, Biotechnology Research and the Experimental Use Exception to Patent Infringement, 71 J. Pat. & Trademark Off. Soc’y 819 (1989) p. 821, predicting that ‘as commercial products of biotechnology become available, the infringement of patents covering the basic research methods that led to the product will become an increasingly difficult problem’. See also L. Nelsen, The Rise of Intellectual Property Protection in the American University, 279 Science 1460 (1998). Nelsen describes the



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13

Opinion differs in the pharmaceutical industry as to the effect of this on the discovery of new medicines. Some companies take the view that the additional costs incurred through the need to take out large numbers of licenses on DNA sequences for use in research are not significant. Others consider that the costs incurred are already having a significant impact on profit markets. These differences of view most likely reflect the extent to which individual companies own patents that assert rights over DNA sequences. Access to research tools based on DNA sequences may indeed prove to be difficult and expensive unless the patents that protect them are licensed easily and widely.52

In the least grave of cases, evidence has shown that such patents may lead to more costly negotiations, which might make the difference for small firms between being on and off the market.53 The increasingly high transaction costs are becoming a real problem and might pose a barrier to researchers and hence act as an effective lack of access. ‘The stacking of intellectual property obligations as successive tools are used in the course of an extended research project has the potential to impede or even preclude the development of new and better diagnostic and therapeutic products’.54 This situation also results in increases in secrecy and delays in research.55 Altogether this leads to a heightened concern among scientists regarding the high prices and burdensome licensing conditions associated with research tools.56 Numerous upstream patents must be practised to make a new down-

‘restricted availability or delays in exchange of “research tools” (such as vectors or transgenic mice in biological research’ as one of the problems that universities face, pp. 1460–61. 52   Nuffield Report (2001) op. cit. pp. 59–60. See also R. Eisenberg (2001) op. cit. p. 223 who claims that one of the difficulties in the biopharmaceutical industry in concluding transactions is the heterogeneity among the institutions. The universities, pharmaceutical firms and biotechnology firms each have different expectations. For example, in biotechnology, the emergence of commercial biotechnology firms in market niches can be seen. These firms lie somewhere in between fundamental academic research and end product development. They are also most likely to depend on the commercialisation and the financial value of the research tools as they lack end products for sale to non-research consumers. Even within a single institution the interests may be different between the scientists, lawyers and business people involved in the negotiations. 53   See Should Congress Liberate Gene Data? Chi. Trib., 16 September, 1999, ‘Holders of genetic patents have been charging steep licensing fees for use of their information and sending “cease and desist” notices to competing companies, academic medical centres and clinical laboratories that use it without permission’. 54   NIH Report on Research Tools (1998) op. cit. p. 22. 55   OECD, Genetic Inventions, IPRs and Licensing Practices: Evidence and Policies, Paris (2002). 56   J.M. Mueller (2001) op. cit. p. 8. See also E. Marshall, A Deluge of Patents Creates Legal Hassles for Research, 288 Science 255 (2000), pp. 255–7.

14

Access as a necessary element of follow-on innovation?

stream product, thus leading to a problem of ‘royalty stacking’.57 Patents on research tools can ‘create obstacles to subsequent research and development and add to a thicket of rights that firms must negotiate their way past before they can get their products on the market’.58 In the case of clinical use, protection appears to have impeded access to information and therefore concern has been raised over the high costs and limited access to genetic testing. In 1999, a survey showed that almost all patents were licensed exclusively. This could mean, in practice, that they are offered at prohibitive costs, thus impeding the provision of genetic testing services.59 Genetic testing for a predisposition to diseases and early diagnosis is an issue of great importance and restrictions on its availability may raise ethical concerns. Hence, it has often been said that patents have a negative impact on access, the costs and quality of testing and on information sharing between researchers.60 It is difficult to assess the frequency of access issues and their effect on R&D and so whether the problem is occasional or systematic is unclear. An empirical study of German inventions and the patent system concluded that there is a proliferation of DNA patents and unduly broad patents causing a situation in which patents are dependent on earlier inventions, which may cause a reluctance to enter certain fields in which genes have already been patented and that royalty stacking and higher transaction costs are present, leading to an explosion of legal disputes and potential delays in innovation.61 Hence, the existence of patents may lead to a redirection of research in other fields if it is perceived that dependency might be avoided. It should be clarified, however, that research tool patents are not viewed in all cases as an obstacle to research. In some cases, research tools have been treated as staple goods that can be easily purchased, even without disclosure of

57   R. Eisenberg (2001) op. cit. Reach-through licensing terms attempt to govern rights to potential future inventions made by the user of the research tool. In this way, the tool owners try to leverage their proprietary rights in early innovations in order to have a share in the profits of future innovations. However, if there are too many pre-commitments to future products, this may cause difficulties and complicate the situation by virtue of the licence of several research tools. 58   R.S. Eisenberg (1994) op. cit. p. 168. 59   Ibid. 60   Nuffield Report (2001) op. cit. p. 69; However, in genetic tests, it was also found that exclusive licensing might be necessary to the additional investment needed to develop and test the potential economic viability of the product. 61   J. Strauss, Genetic Inventions and Patent Law, at OECD Workshop on Genetic Inventions, IPRs and Licensing Practices: Evidence and Policies, Paris, 2002. See also Should Congress Liberate Gene Data? (1999) op. cit. which states that ‘rather than risk a lawsuit or pay fees they consider exorbitant, some researchers have stopped exploring diseases whose genetic profiles already have been licensed’.



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15

intended use. ‘Some proprietary research tools have been widely distributed under license agreements that permit subsequent research to go forward while preserving a return for the patent owner’.62 In such cases, for example in the case of the Cohen-Boyer patent on recombinant DNA technology,63 there has been no problem with regard to access. In addition, practical considerations may be used to allay the concerns raised by research tool patenting. First, pre-issuance use of the patent between the time of publication and the time of the granting might be possible, although damages might be available for this purpose.64 Policing is also quite difficult, therefore it has been suggested that, in view of the difficulty in negotiating something speculative, some firms could use the patented research tools without a licence, assuming that they can settle the matter once, and if, they discover something meaningful.65 In addition, while it constitutes an infringement to import a product made by a patented process in the USA as long as the product made abroad has not been materially changed, it is unclear whether a process claim which covers the screening of a drug would be infringed by the importation of the data resulting from the screening process.66 As the detection of the use of a research tool may not occur until a commercialised product has been developed, it may even be possible to escape any liability whatsoever due to the statute of limitations.67

62

  R. Eisenberg (2001) op. cit. p. 229.   This was owned jointly by Stanford University and the University of California and constituted a fundamental technology which was useful for research into a range of problems. The terms of its licence permitted its wide dissemination and use. See Intellectual Property Rights and the Dissemination of Research Tools in Molecular Biology, Summary of a Workshop held at the National Academies of Sciences, 15–16 February, 1996 (1997), pp. 40–42. 64   J.A. Goldstein, Patenting the Tools of Drug Discovery, Drug Discovery World, Summer 2001, p. 9. See also Art. 67 EPC which states that ‘from the date of publication of a European patent application, the applicant can claim compensation reasonable in the circumstances from any person who has used the invention in the said State in circumstances where that person would be liable under national law for infringement of a national patent’. 65   R. Eisenberg (2001) op. cit. p. 233. Though this may be becoming increasingly difficult in view of the recent US decision that allows for the initiation of litigation based on a previous request for information from the potential defendant. J.A. Goldstein (2001) op. cit. p. 9. 66   J.A. Goldstein (2001) op. cit. p. 9. In addition, in the US and now in the EU there is immunity for infringement when it is done in pursuit of regulatory approval for the drug. ‘Yet it is not clear whether a patented receptor of software used in the pursuit of regulatory approval for a drug would be immune under the clinical research exemption. The issue in such a case would be that the material for which approval is sought (the drug) is not the patented invention for which the immunity is sought (the target or the software).’ 67   In Germany section 141 PatG provides that claims for infringement lapse after three years from the time when the claimant obtains knowledge of the infringement and 63

16

Access as a necessary element of follow-on innovation?

1.3 Conclusion In conclusion, in view of the increasingly cumulative nature of innovation, a concern has been raised regarding the proliferation of patents, which may impede access to essential technology and, as a result, hinder innovation. More specifically, the case of research tools was examined as it captures the essence of the concern in relation to follow-on/downstream innovation in the biopharmaceutical industry and striking the patent balance. Research tools have been at the centre of these discussions, although the problems in this area might simply represent an instance of what might be a more general problem. Practical evidence confirms that patents have been extended both in subject matter and in scope, and this may often be seen as unjustified by the research community. As patents, by definition, involve a degree of exclusivity, their very grant is bound to affect access to the patented technology. Where their grant is unjustified or overbroad, lack of access is bound to be seen as unwarranted. While it is felt that this may in turn lead to the hindering of innovation, there has been no evidence to date produced which unambiguously establishes a clear negative effect on innovation. The main concern relates to the increased transaction costs68 and the difficulty in reaching licensing agreements.69 More specifically, regarding the issue of exclusion, current practice shows broad licensing patterns in most cases. Nevertheless, there is still some concern in the industry that access to essential

of the identity of the infringer. Bearing in mind that damages are only high enough to merit instituting legal proceedings after a new pharmaceutical compound is successfully put on the market, this is unlikely as it normally takes more than three years to get approval for a pharmaceutical compound. (It might, however, be possible to claim damages in license analogy for unjustified enrichment, whose limitation period is 30 years, although the Federal Supreme Court held that, in this case, damages can only amount to a reasonable royalty. BGH GRUR 1982, 301 ‘Hollow plastic profiles II’). See also the UK statute of limitations barring infringement actions after six years and the equitable doctrine of ‘laches’ which might estop the patent proprietor from bringing an action in the first place. 68   This may stem from the proliferation of patents, the need to negotiate with a wide range of people or from other factors associated with the need to negotiate access to upstream patents such as exclusion or high prices. 69   See R. Eisenberg (2001) op. cit. pp. 232–47. Eisenberg attributes this to the following four factors: (1) the fact that transaction costs are a greater obstacle in low-value exchanges and might be inhibited; (2) the heterogeneity among institutions leading to complications in reaching agreeable terms of exchange; (3) the differences amongst agents in institutions such as between scientists and lawyers and business people; and (4) the fact that the evaluation of research tools involves an estimation of their contribution to potential future discoveries which is a highly speculative and subjective process.



Biopharmaceutical R&D

17

upstream technology may be refused and it is felt that this may impact negatively on innovation.70 Whether this should be seen as a systematic failure in the patent system, or simply as individual instances of restricted access, is not clear. The industry also attributes the lack of evidence of a discernible impact on innovation to the existence of working solutions, however, it is not clear what these solutions involve or how the situation would differ in their absence.71 In addition, as one of the working solutions is infringement, it could be questioned whether it is sensible to have a system that relies on encouraging infringement. Despite the ambiguous nature of the evidence on the purported lack of access and its impact on innovation, industry participants still feel that this is a problem that needs to be addressed. ‘Burgeoning research and development will require ever-greater numbers of proprietary tools, giving rise to transaction costs associated with acquiring the right to use each such tool. In some cases, the patentee may refuse to license the research tool altogether. The sum total of the transaction costs involved with acquisition of all necessary research tools may be so severe as to impede, postpone, or stop the development of important new products’.72 The Nuffield Committee has admonished: There is insufficient evidence to judge the extent to which the granting of patents that assert rights over DNA sequences based on a primary use as research tools is producing the potentially deleterious effects set out above. However, we take the view that the exercise of a monopoly over what are now essentially discoveries of genetic information accessible by routine methods is, in principle, highly undesirable. We consider that the development of a culture among those who carry out scientific research, whereby claims are made to naturally-occurring material which can be isolated by routine procedures and to which a weakly demonstrated or hypothetical utility may be ascribed to secure some possible future value, if endorsed by the patent offices, amounts to a misapplication of the patent system. We consider, therefore, that in general, the granting of patents which assert rights over DNA sequences as research tools should be discouraged.

This report also recommended that wide licences should be encouraged. In view of the above discussion, the next chapter considers the significance that ‘striking the balance correctly’ assumes in the biopharmaceutical industry,

70   See NIH Report on Research Tools (1998) op. cit. which lists refusal to license as one of the key concerns in the area of research tools. The definition of obstacles includes: ‘refusals to license, onerous royalty obligations, restrictions on the dissemination of materials and information restrictions on the ability to collaborate with commercial firms, and advance commitments regarding intellectual property rights in future discoveries’, p. 4. 71   J. Walsh and J. Cohen (2003) op. cit. p. 290. 72   J.M. Mueller (2001) op. cit. pp. 6–7.

18

Access as a necessary element of follow-on innovation?

and the mechanisms available within the patent system to encourage wide licences and to reduce the problem of transaction costs in the area of research tools.

Part II

The patent balance and working solutions in the patent system

2. The patent system as a system of balancing 2.1 The Patent Balance The patent system is an integrated means of addressing public policy concerns. It is concerned with encouraging the R&D of new intellectual products that would otherwise remain undeveloped or under-developed due to the ease of appropriability of knowledge and the difficulty in excluding others. While its main objective is to encourage innovation, it also has competing interests to address.

Box 2.1: Main rationales of patent system 1. Invention motivation. The patent system provides incentives for investment in innovation by granting a limited monopoly that allows the inventor the opportunity to make a profit on the invention. This is the most common rationale for the patent system and its justification is usually based on the market failure rationale. In the absence of the government grant of property rights, it is argued that the competitive market would not give a sufficient incentive to induce the optimal amount of innovation. This is because knowledge could be described as a durable, indivisible, and non-rival commodity. While the costs of production are high, the costs of imitation and reproduction are low and there is ease of appropriability. Hence, it is argued

    ABA, The Economics of Innovation: A Survey, ABA, July 2002 available at http:// www.ftc.gov/opp/intellect/0207salabasrvy.pdf; F. Machlup, An Economic Review of the Patent System, Study No. 15 of the Subcomm. on Patents, Trademarks and Copyrights of the Senate Comm. on the Judiciary, 85th Cong., 2nd Sess. (1958); E.W. Kitch, The Nature and Function of the Patent System, 20 Journal of Law and Economics 265 (1977).     P.A. David, Intellectual Property Institutions and Panda’s Thumb: Patents, Copyrights and Trade Secrets in Economic Theory and History, in M. Wallerstein, M. Mogee



21

22

The patent balance

that in the absence of patents people would fail to or would under-invest as they would lose on their investment. This rationale is based on the assumption that the inventor cannot reap the full benefits by relying solely on secrecy measures to prevent imitation. It generally views inventions as one-off events and not as a cumulative process. Hence, the costs are related to static ones of reduced access and the possible exercise of market power. There may, however, also be dynamic costs associated with the deterrence of other innovation, and waste due to ‘patent races’. The latter is associated with duplicative investment by entering races or by over-investment. It also raises the possibility that investment could be made at a faster rate than the social optimum. 2. Invention dissemination. The patent system encourages dissemination by requiring the disclosure and publication of the invention and details on how it works. This may in turn lead to a wider use of the inventions, particularly where the inventor cannot exploit the potential of the invention himself and where secrecy would allow the inventor to reap some of the returns effectively. This is often the case for process innovations. Patent publications may also improve the free flow of information. Disclosure, in turn, may be beneficial to rivals. A study of the spillover value of patents in the biotechnology sector showed that core technology patents valued between $13 and $21 million may have knowledge spillovers generating economic values of $3 to $6 million per rival firm, although some highprofile patents are viewed as harmful to rivals and most patents do not generate significant market effects. 3. Invention commercialisation. The commercialisation of an invention often requires a large investment. Patents allow for the development of inventions that may have little value in the initial stages and need further development in order to be commercially valuable. In some cases, a head-start might assist in

and R. Schoen (eds), Global Dimensions of IPRs in Science and Technology, National Research Council, Washington, National Academy Press (1993).     ABA (2002) op. cit.     Process innovations refer to changes in the production process to reduce the costs related to producing a product, while product innovations refer to changes in the product itself to improve quality.     D. Austin, Patents, Spillovers and Competition in Biotechnology, Discussion Paper 00-53, November 2000, at http://www.rff.org.



The patent system as a system of balancing

23

regard to this objective, although the role of head-start is not particularly important in the pharmaceutical industry. 4. Orderly cumulative development of innovation. Broad patents may facilitate follow-on inventions by controlling the licensing terms and avoiding duplicative efforts. However, they may also hinder it if the transaction costs are high or if there is an overarching threat of infringement. One of the central goals of the patent system is ensuring that follow-on research building on previous inventions is not impeded by the granting of an overly restrictive legal monopoly. The function of the patented invention as an output has to be balanced against its function as an input for further development. This is the vertical dilemma which the patent provisions seek to address. The patent system, however, also seeks to address issues associated with the dissemination of the patented invention, as it would be counter-productive if one could simply monopolise a particular invention and then not utilise it, for example. In this way, ensuring that an invention is adequately disseminated is the horizontal dilemma that the patent system addresses.10 In the non-cumulative model, patents involve a trade-off between incentives and static efficiency loss associated with market power.11 In order to encourage innovation in the long term, exclusive property rights are granted allowing producers to restrict output and raise prices in the short term leading to static losses. In the cumulative framework, however, patents are concerned not only with providing the best incentives for the primary invention, but also to ensure incen-

    H. Grabowski, Patents and New Product Development in the Pharmaceutical and Biotechnology Industries, in Science and Cents, April (2002), Federal Reserve Bank of Dallas.     S. Scotchmer, Cumulative Innovation in Theory and Practice, Goldman School of Public Policy Working Paper 240, University of California (Berkeley), February (1999), p. 1.     H. Ullrich, Legal Protection of Innovative Technologies: Property or Policy? in O. Grandstrand, The Swedish Intellectual Property Symposium (2001), p. 5; Y. Benkler, Free as the Air to Common Use: A Political Economy of the Public Domain, in R. Dreyfuss et al. (ed.), Expanding the Boundaries of Intellectual Property, Oxford, Oxford University Press (2001).     The issue of whether and when such a motive might be present is not addressed here. 10   H. Ullrich (2001) op. cit. p. 5; P. A. David (1993) op. cit. pp. 19, 32. 11   E.W. Kitch (1977) op. cit.

24

The patent balance

tives for follow-on inventions.12 Adjusting patent length and breadth might give effect to some of these considerations. The problem is, however, that it is not clear how much incentives are necessary.13 The dilemma in the area of sequential innovation reflects the clash between monopoly and competition theorists, the former arguing that monopolies eliminate duplicative efforts and ensure that invention takes place,14 and the latter arguing that innovation incentives are often smaller in monopolistic conditions and that competition may yield different results in the race.15 The optimal length of patents is sensitive to price elasticity of demand in the product market, and the responsiveness of the costs of the production process to the amount of R&D resources devoted to its invention.16 In cases where the demand is more elastic, the patent length should be shorter. This is because if prices are higher, the quantity will be lower and there will be more deadweight losses. On the other hand, a wider breadth would provide strong incentives for the breakthrough inventions and weaken incentives for the follow-on inventors. Scotchmer and Green have shown that a broad scope puts followers at a disadvantage in negotiating the terms of licences for complementary elements that they seek to patent, and results in additional costs in attempting to ‘invent around’ the blocking first generation patent.17 Innovation is often cumulative so that the patent could interfere with further discovery; inhibition of progress as opposed to discouraging inventions.18 Weak and narrow patents encourage firms to cross-license and disseminate, however, this may discourage fundamental inventions.19

12

  S. Scotchmer (1999) op. cit.   F.M. Scherer, Nordhaus’ Theory of Optimal Patent Life: A Geometric Reinterpretation, 62(3) American Economic Review 422 (1972); R. Gilbert and C. Shapiro, Optimal Patent Protection and Breadth, 21 Rand J. of Econ’cs 106 (1990); P. Klemperer, How Broad Should the Scope of Patent Protection Be? 21 Rand J. of Econ’cs 113 (1990); P.A. David (1993) op. cit.; F. Machlup (1958) op. cit. 14   See, for example, E.W. Kitch (1977) op. cit.; J. Schumpeter, Capitalism, Socialism and Democracy, New York, NY Harper (1942) . 15   R. Merges and R. Nelson, On the Complex Economics of Patent Scope, 90 Colum L Rev 839 (1990); G.C. Loury, Market Structure and Innovation, 93 Quarterly J. of Econ’cs 345 (1979); M. Lemley, The Economics of Improvements in Intellectual Property Law, 75 Texas L. Rev. 993 (1997). 16   P.A. David (1993) op. cit. 17   J. Green and S. Scotchmer, On the Division of Profit between Sequential Innovators, 26 Rand J. of Econ’cs 20–33 (1995); S. Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 1 J. of Econ. Pers’s 29 (1991). 18   Ibid. J. Ordover, A Patent System for Both Diffusion and Exclusion, 5 J. of Econ. Pers’s 212–29 (1991). 19   Ibid. 13



The patent system as a system of balancing

25

There is no clear dividing line and it is difficult to determine how much incentives are necessary in view of the various and often competing policy objectives. The balancing process necessarily involves certain trade-offs. For example, where initial innovation ought to be encouraged the patent breadth will tend to be wider, whereas to account for follow-on innovation, the exclusivity will have to be restricted. Table 2.1 The existing EU patent systems and sources determining their applicability and implementation Patent systems in the EU:

Patentability

Infringement and validity

National patent

To be determined by Member States, but de facto harmonisation in view of TRIPS, EPC and CPC

To be determined by Member States, but de facto harmonisation in view of TRIPS and CPC

European patent

EPC

To be determined by Member States, but de facto harmonisation in view of TRIPS and CPC

Community patent

EPC

Community Patent Regulation



2.2 The particular importance of the patent balance in the biopharmaceutical industry 2.2.1 The Patent System and the Biopharmaceutical Industry The patent balance assumes a particular significance in the biopharmaceutical industry. First, it is an industry that affects public policy as it improves health and the standard of living. These goods are not ordinary ones, and therefore optimising innovation and striking the balance between short-term and longterm innovation and ensuring access becomes fundamental. Secondly, the patent system is perceived as being vital to the industry. In contrast with many others, this industry relies heavily on the patent system to appropriate returns and much of the innovation is based on the patent system

26

The patent balance

as an incentive mechanism. It hence becomes important to preserve this incentive. On the other hand, consumers expect to gain access to new and effective drugs at an affordable cost, not only in the short term but also in the long term.

Box 2.2: The nature of biopharmaceutical innovation Innovation is the main source of competitiveness in the biopharmaceutical industry.20 However, the dynamics of innovation are far from clear.21 Research is a costly and risky business. There are increasingly stringent requirements for approval, and research has become orientated towards complex drug discovery, leading to a sharp increase in the resources needed to develop new drugs.22 A 20   The nature of competition in the industry is such that a premium is based on research and innovation in a dynamic sense. E. Halm and A. Gelijns, An Introduction to the Changing Economics of Technology Innovation in Medicine, in A.C. Gelijns and E.A. Halm (eds), The Changing Economics of Medical Technology, Institute of Medicine, Medical Innovation at the Crossroads Vol. II, Washington, National Academies Press (1991). The biopharmaceutical is a highly research-based industry. The primary operations of the industry are linked to: innovation, which is a risky and costly business; production, which requires specialised methods; marketing, which aims at persuading the choice of one product over another and is aimed at physicians who usually make the decisions relating to which drug to prescribe; and distribution, which is usually done through specialised wholesalers who in turn sell to retail pharmacists. EUROPE, Pharmaceutical Products, Single Market Review (1996). 21   ABA (2002) op. cit. Much economic research has concentrated on whether competition and potential competition can increase innovative activity. Whether concentration or competition is more conducive to innovation is not clear. F.M. Scherer, Firm Size, Market Structure, Opportunity and the Output of Patented Inventions, 55 American Economic Review 1097–125 (1965); F.M. Scherer, D. Harhoff, J. Kukies, Uncertainty and the Size of Distribution of Rewards from Innovation, 10 J. of Evol’y Econ’cs 175-200 (2000). 22   A. Gambardella, L. Orsengo, F. Pammoli, Global Competitiveness in Pharmaceutical Industry. A European Perspective, for DG Enterprise of European Commission, 2002. In the EU the pharmaceutical industry is a highly regulated industry with provisions controlling reward and safety, the quantity and quality of expenditures and, in some cases, price controls. However, while there is a Community system for granting marketing authorisation, the market for medicines is still quite fragmented by national controls especially over price. There are two means by which companies may receive authorisation to market a drug in the EU: the first is through an application to the European Medicines Evaluation Agency (EMEA) which cooperates with the competent national authority to scientifically assess the product and then sends its advisory opinion to the



The patent system as a system of balancing

27

study undertaken in 1985 concluded that the average annual expenditure on R&D represented 8–10 per cent of sales, although it was even higher for some firms.23 Basic research is an on-going process,24 but once a new substance is discovered, its development follows three stages: the synthesis of active materials and determinations of their biological effects; extensive biological testing on animals and then on humans to establish its pharmacological activity and to detect adverse effects; and finally, product development.25 This process is lengthy, costly and uncertain. The growth rate of discovery and pre-clinical development costs have increased substantially due to the need for a detailed understanding of the mechanisms involved, including highly specialised medical, biological and biochemical skills, and the clinical costs which have grown at a rapid rate.26 The rise in costs and length of drug development is partly due to the more extensive clinical research required prior to marketing and the nature of the disease areas of research. Attention is focused on treating chronic clinical conditions requiring greater overall resources prior to commercial

European Commission, which prepares a draft decision that becomes law if it is not opposed. This procedure is mandatory for biotechnological products and optional for high-tech medicines. The second route is based on mutual recognition, where a licence to enter the market is given after an investigation into the efficacy and quality of the process. Quality and quantity control is achieved by direct or indirect means on the prescribing/consumption practices, and price regulation is a national affair in the EU. See also Directives 92/26, 92/28, 92/27, 92/23 on the rational use of medicines, OJ 1992 L113/13, which have harmonised the classification of medicines for prescription and non-prescription products, the advertising of medicines, the information to be provided to patients and pharmaceutical wholesaling. See also Directive 98/44/EC on the Legal Protection of Biotechnology Inventions, OJ 1998 L213/13 that provides a common set of principles regarding the grant of patents, but only four Member States have adopted the necessary legislation so far. 23   OECD, The Pharmaceutical Industry, Paris (1985). 24   The industry is made up of different types of firms. There are small companies that specialise in sales of non-R&D intensive drugs which are mainly involved in the manufacturing and commercial activities. There are also the New Biotechnology Firms (NBFs) that specialise in biotechnology and who are mostly concerned with the discovery and development of new drug compounds and the development of research tools which pharmaceutical companies may subsequently develop and commercialise. A. Gambardella et al. (2002) op. cit. 25   Ibid. 26   H. Grabowski, Patents and New Product Development in the Pharmaceutical and Biotechnology Industries, in Science and Cents (April, 2002) (Federal Reserve Bank of Dallas).

28

The patent balance

sale.27 However, the physiological effects of compounds can now be predicted with greater ease. It takes approximately 10 to 15 years to develop a new drug, and most of these do not survive the development process. In the USA, it has been found that only 20 out of every 5000 compounds screened, enter the pre-clinical testing stage, and only one out of every five drugs entering the clinical trials has been approved by the FDA as fulfilling the safety and efficacy requirements. Clinical trial requirements have increased, and hence the costs have risen, while the average returns from marketing a new drug have decreased.28 It has been estimated that, on average, the development of a new drug costs $802 million.29 In addition, most of the marketed drugs fail to cover their R&D costs, and so the development of blockbuster drugs every two to three years is necessary for a company to be able to survive the R&D process.30 It has, however, been found that there is a positive correlation between R&D intensity and the probability of discovering a new drug,31 although the causal relationship is not clear, in other words whether R&D expenditure leads to patents that provide lucrative earnings or vice versa.32 2.2.1.1 Biopharmaceutical innovation and patenting In view of the complexity and the cost of the innovation process, patents are perceived to be of primary significance. Several researchers have commented that 27   H. Grabowski, The Changing Economics of Pharmaceutical R&D, in A.C. Gelijns and E.A. Halm, (Eds), The Changing Economics of Medical Technology, Institute of Medicine, Medical Innovation at the Crossroads Vol. II, Washington, National Academies Press (1991). 28   G. Glover, Competition in the Pharmaceutical Marketplace before the FTC, Proceedings on Competition and IPRS: A. Diverse perspectives on patents. B. Business perspectives on patents. Biotechnology and pharmaceuticals, 19 March 2002; A Congressional Report 1998 showed that there was a 12% decline since 1984. 29   Ibid. See also H. Grabowski (1991) op. cit., for the best estimate of the average cost of drug development as being $231 million in 1991. He estimated the R&D costs per approved drug amounted to $400 million. 30   G. Glover (2002) op. cit. Out of every 10 drugs on the market, only three cover their average development costs and this was prior to the facilitation of generic drug competition. 31   E. Jensen, Research Expenditures and the Discovery of New Drugs, 36 Journal of Industrial Economics 83 (1987). 32   M. Baily, R&D Costs and Returns: the US Pharmaceutical Industry, 80 Journal of Political Economy 70 (1972).



The patent system as a system of balancing

29

the industry would not exist but for the patent system.33 Innovators would be reluctant to invest as they would be unable to make a reasonable return, and in this way there would not be any products to be copied for the generic brands.34 The market would only afford two types of benefits to innovators: de facto exclusivity from being the first mover, and a sizeable segment of consumers which prefers branded products over generic ones. In the less serious cases, it is thought that without patent protection, R&D would fall by almost 60 per cent.35 This is also consistent with Mansfield, who reports that 65 per cent of innovations generated from 1981 to 1983 would not have been marketed and 60 per cent would not have been developed if there had not been patent protection.36 By comparing the four factors for appropriating the benefits from product inventions, one study has concluded that patents are the most effective mechanism. On a scale of one to seven, seven connoting very effective, patents had a marking of 6.53 compared to learning by doing 4.24, lead time 5.47 and sales and services 5.59. In other industries, these variations were very different, for example in the computer industry patents were effective in a scale of 3.43 compared to lead time that was 6.33.37 The importance of the patent system is attributed to four main factors: the high costs of R&D; the low costs of imitation; the fact that claims may be defined precisely for new chemical molecules, making it easier to prove infringement; and the long life-span of pharmaceutical inventions rendering lead time less important.38 Only one out of every eight patents has a significant economic value, therefore, apart from a few cases, the market does not seem to treat patents as winner-take-all prizes.39 In addition, evidence shows that newer drugs reduce 33   See DOJ/FTC Proceedings on the pharmaceutical industry: Business perspectives on the use and the role of patents in the biotech industry, 26 February 2002. 34   G. Glover (2002) op. cit. 35   Snyder in FTC/DOJ Proceedings on Competition and IPRs: A. Diverse perspectives on patents. B. Business perspectives on patents. Biotechnology and pharmaceuticals, 19 March 2002. See also OECD Report, Competition and Regulation Issues in the Pharmaceutical Industry, Paris (2001); where it is estimated that 65% of drugs would not have been introduced without patent protection. 36   S.A. Singham, Competition Policy and the Stimulation of Innovation: TRIPS and the Interface Between Competition and Patent Protection in the Pharmaceutical Industry, 26 Brooklyn J Int’l L 363 (2000). 37   H. Grabowski (2002) op. cit. 38   F.M. Scherer, D. Harhoff, J. Kukies, Policy Implications of a World Skew-Distributed Returns on Innovation, 29 Research Policy 559 (2000); F.M. Scherer et al. Uncertainty and Size Distribution of Returns from Technological Innovation 10 J. Evol’n Econ’cs 17 (2000); WTO, WTO Agreements and Public Health, A Joint Study by WHO and the WTO Secretariat (2002); pp. 92–3. 39   Ibid.

30

The patent balance

non-drug expenditures 7.2 times as much as they increase drug expenditure.40 Dynamic efficiency evidence further supports the effectiveness and preservation of the patent system; ‘While providing greater access to the current stock of prescription drugs would yield large benefits to consumers in absolute terms, realizing those benefits has yet greater costs in terms of lost consumer surplus from reduction in flow of new prescription drugs. The ratio of harm to benefit is three to one.’41 Moreover, patents do not render entry impossible or even unlikely. Within four years of their introduction, a study has shown that 60 per cent of patented successful innovations had been imitated.42 However, the patent system generally increases the costs of imitations by about 30 per cent in the industry.43 In addition, in view of the tight regulatory requirements, a substantial amount of patent time is lost during clinical development and regulatory approval periods. Effective patent life in the pharmaceutical industry was usually around seven years. In order to address this problem, the Supplementary Protection Certificate44 was created, which allows for an additional protection of five years on top of the 20 years from the filing period, with a cap of 15 years protection in total, rendering the average effective patent life 10 to 12 years in which companies must recover their expenses. The patent system, however, does not address all of the public policy concerns in the industry. While patents may be important for investing in R&D, pharmaceutical companies mainly focus on the diseases likely to yield high returns for the shareholders, therefore diseases suffered by the poor or afflicting a small number of people are neglected.45 Only 10 per cent of global R&D is directed

40   F. Lichtenberg, Benefits and Costs of Newer Drugs: An Update, 2002 at http:// www.nber.org/papers/w8996. 41   E.A. Snyder (2002) op. cit. 42   E. Mansfield, Unauthorized Use of IP: Effects on Investment, Technology Transfer and Innovation, in Global Dimensions of IPRs in Science and Technology, National Research Council, edited by M. Wallerstein, M. Mogee, R. Schoen, Washington, National Academy Press (1993). 43   Ibid. 44   Regulation 1768/92 EEC, concerning the creation of a Supplementary Protection Certificate for medicinal products, OJ 1992 L182. 45   It is for this reason that different mechanisms to stimulate innovation in diseases afflicting a small proportion of the population have been created, such as the Orphans Drugs Act. Regulation 141/2000/EC, on Orphan Medicinal Product OJ 2000 L 18/1. See D.M. Richardson, The Orphan Drug Tax Credit: An Inadequate Response to An IllDefined Problem, 6 The American Journal of Tax Policy 135 (1987). See also, P.J. Kenney, The Orphan Drug Act – Is it a Barrier to Innovation? Does it Create Unintended Windfalls? 43 Food Drug Cosmetic Law Journal 667–79 (1988). See also in the USA the Orphan Drug Act that provides incentives to undertake orphan drug indications including tax credits, clinical research grants programme, accelerated review by the FDA,



The patent system as a system of balancing

31

towards illnesses that account for 90 per cent of the worldwide diseases. ‘The problem is rooted in poverty, not in industrial incentive structures’.46 In addition, WHO estimates that one-third of the world’s population currently lacks access to essential drugs and over 50 per cent of people in poor countries in Africa and Asia do not even have access to the most basic drugs.47 2.2.1.2 Has the importance of patents been overstated? While patenting is vital for the biopharmaceutical industry, its importance should not be overstated.48 Many pharmaceutical patents are awarded to secondary and often trivial inventions rather than authentic ones, which attempt to use patents strategically to extend their monopoly by restricting competition, creating large areas of exclusion around their inventions, thus preventing other companies from exploiting their own patents and enhancing their bargaining power in cross-licensing deals.49 For example, while the industry claims that it is a risky industry relying on the few blockbuster drugs developed, the Public Citizen study has concluded

and guaranteed market exclusivity for seven years from the date of FDA approval. The effects have been impressive as more than 200 drugs and biologicals for rare diseases were developed between 1983 and 1999. 46   Oxfam, Patent Injustice: How the World Trade Rules Threaten the Health of Poor People; at www.oxfam.org.uk p. 7. In such cases supplementary mechanisms need to be embedded in the system, in the form of push mechanisms involving financial contributions towards R&D, and pull mechanisms aimed at ensuring the existence of an attractive level of demand in the event that successful drugs or vaccines are generated. 47   WTO (2002) op. cit. p. 16. Access to essential drugs depends on four critical elements: rational selection and use, sustainable financing, reliable supply systems and affordable prices. Access to drugs requires availability and affordability, and is conditioned on many factors including price controls, medical insurance, import duties and tariffs, local taxes, limited competition mark-ups for wholesaling, distribution and dispensing. Cullet, Patents Bill, TRIPS and the Right to Health, XXXVI/43 Economic and Political Weekly, 27 Oct. 2001. 48   The industry will want to lobby for the highest level of protection as it directly affects its stock prices. For example ‘when the US court granted pharmaceutical conglomerate Eli Lilly an extension on its patent for Prozac that was two years shorter than it had requested, its share fell by almost one third, wiping out $38bn of its market capitalization’. For this reason, pharmaceutical companies spend a huge amount on lobbying. ‘PhRMA’s political influence comes at a price. Between 1997 and 1999, PhRMA’s members spent US$236m lobbying Congress and the executive branch of the government. Another US$14m was provided to political parties in 1999 alone. Approximately two-thirds of corporate investment in political lobbying in the USA is directed towards the Republican Party, raising doubts about corporate influence over the new Administration.’ Oxfam, on patents op. cit. p. 7. 49   G. Dutfield, IPRs and the Life Science Industries, A 20th Century History, Aldershot, Ashgate (2003).

32

The patent balance

that pharmaceutical R&D is not particularly risky, as most new drugs are ‘metoo’ drugs, (in other words close substitutes for successful drugs), and that the initial R&D costs of many important drugs comes from public funds.50 It has been shown that pharmaceutical companies have recently been found guilty of paying generic producers to delay selling their versions of the drugs.51 In addition, the link between an increase in profits and an increase in R&D in the industry is also not clear-cut, although a recent study has shown that as profits increase, firms will compete to exploit them by increasing R&D investments.52 The lack of a direct correlation between research expenditure and patent-based income renders it difficult to determine if the patent system is fair. The price of drugs does not always correlate with the costs of R&D and production as marketing costs, profit margins, subsidies, tariffs and tax are added to those. Pharmaceutical firms spend more on advertising and promotion than on R&D and this cannot be justified by the need for patent exclusivity. ‘There is no apparent justification for allowing patent-based pricing to generate income for advertisements.’53 This is particularly evident in the case of essential drugs that are not dependent on advertising.54 It is also argued that companies exploit incremental innovations and patent improvements or minor changes in order to extend the effective term of protection for the original invention.55 Therefore, it is claimed that the patent system often rewards not only inventions which constitute ‘a moral triumph’, but also those of predictable outcome.56 The patent system has also been accused of creating a situation in which patents are used to stifle small firms that may be a prime source of innovation in areas of new technology.57 The evidence is ambiguous, however, as other studies have suggested that patent protection may be the key to commercial

50

  WTO (2002) op. cit. pp. 92–3.   FTC, FTC Antitrust Actions in Pharmaceutical Services and Products, October 2003. See also the Commission announcement that it had fined AstraZeneca €60 million for abusing its dominance by misusing the patent system. Commission Press Release IP/05/737. 52   F.M. Scherer, New Perspectives on Economic Growth and Technological Innovation, Washington, DC, Brookings Institution Press (1999). 53   See F.M. Abbott (2001) op. cit. 54   In such cases, other means may be warranted to allow for the recovery of research costs such as tax credits, subsidies and prizes. 55   C. Correa, Internalization of the Patent System and New Technology in WIPO Conference on the International Patent System, Geneva, 25–27 March (2002). 56   Ibid. 57   J. Barton, Adapting IP System to New Technology, in Global Dimensions of IPRs in Science and Technology, National Research Council, edited by M. Wallerstein, M. Mogee, R. Schoen, Washington, National Academy Press (1993). 51



The patent system as a system of balancing

33

success for medium-sized firms with the research capacity to produce innovative new products but lacking the capital to fully exploit and commercialise their inventions.58 Finally, it should be remembered that major breakthroughs are usually made in universities, and companies are more likely to encourage research with obvious commercial applications in the interest of increasing profits. Pharmaceutical companies have often been reproached for investing in lifestyle drugs treating trivial conditions that need to be treated on a continuous basis (as opposed to cured), such as baldness, rather than in lifesaving drugs. A comparative analysis of the experience of several countries raises further doubts as to the role of patents in ensuring a commitment to expensive R&D. For Britain and France, the product patent regime was largely ineffective, while in Switzerland, despite the absence of chemical industry patents, the industry has evolved rapidly. Italy is also representative of the fact that the introduction of product patent protection does not necessarily lead to increased innovative R&D among domestic firms,59 though another study has shown that multinational corporations limited their involvement in the Indian drug market after the adoption of the weak patent system in 1970.60 None the less, stronger patent protection does not necessarily result in more innovation and less patent protection does not necessarily mean less innovation. Therefore, caution should be exercised in introducing overly-restrictive patent protection when there are other discernible negative effects. The above considerations should not lead us to conclude that the patent system should be abolished, nor to undermine the importance of the patent system in the biopharmaceutical industry. Rather, they seek to clarify the underlying objectives of the industry in their quest for an absolute and unqualified patent protection. Exclusivity involves a full scale of degree ranging from absolute exclusivity to the complete lack of it.61 The level of patent protection is, therefore, a matter of degree and involves the careful balancing of competing objectives. 58   See the case of Pliva which patented azythromycin worldwide, and then reached a licensing agreement with Pfizer Inc. in which both companies and the public could benefit from the commercialisation of the antibiotic. See WIPO, Azythromocin: A world best-selling antibiotic – Pliva, at www.wipo.int. 59   F.M Scherer and S. Weisburst, Economic Effects of Strengthening Pharmaceutical Patent Protection in Italy, 26 IIC 1009 (1995), p. 1023. G. Dutfield (2003) op. cit. p. 241. 60   R. Garg et al., Four Opportunities in India’s Pharmaceutical Market, 4 MCKINSEY Q. 132 (1996); S. A. Singham (2000) op. cit. 61   This depends, amongst other things, on how one determines an infringement, how extensively compulsory licensing is used and how moral considerations affect the patent grant or its invalidation.

34

The patent balance

2.3 Conclusion Despite the significance of patent protection for the biopharmaceutical industry and the centrality of the right to exclude in this respect, one should view with caution requests for unlimited patent protection, as a balance is envisaged within the system itself. Patent protection has various objectives to address and exclusivity therefore is a matter of degree. The continuous progress of innovation and production of improvements is a central part of the patent balance, particularly in the biopharmaceutical industry. To this end, it aims to encourage not only pioneer inventions,62 involving a distinct step in the progress of the art, but also technological improvements resulting from independent discoveries or intentional efforts to design around and therefore avoid infringing the patent.63 The patent system aims to achieve a balance between competing interests and the incremental nature of innovation. As a result, patent rights may interact and overlap in different ways, with different consequences in each case. In cases of technological improvements, patents may block each other. In cases where different inventors patent different components of a larger invention independently, patents are complementary and thus ineffective without a licence to each of the patented products. In other cases, patents may be substitutes or inventions around other patents and so may compete. Yet the categorisation amongst such different types of patents and relations is not perfect and so, for example, complementary patents may also compete.64 The patents system attempts to distinguish and cater for such competing and often conflicting interests through limitations, exemptions from scope or other provisions. For example, in the case of improvements, the patent system treats them differently according to their significance and value in relation to the pioneer invention.65

62   A pioneer invention is defined as a ‘distinct step in the progress of art, distinguished from a mere improvement or perfection of what had gone before’. Texas Inst. v ITC, 6 USPQ 2d 1886 (Fed. Cir. 1988). 63   M. J. Conigliaro, A.C. Greenberg and M.A. Lemley, Foreseeability in Patent Law, 16 Berkeley Tech L.J. 1045 (2001). 64   S.C. Carlson, Patent Pools and the Antitrust Dilemma, 6 Yale J. on Reg. 369 (1999). 65   M.A. Lemley (1997) op. cit. This is also consistent with the inventive step determination in case of pharmaceuticals. The greater the structural distance and the better the technical effect of the invention as compared with the state of the art, the greater the likelihood that inventive step will be found. See B. Domeij, Pharmaceutical Patents in Europe, Deventer, Kluwer Law International (2000). At the bottom of the scale are minor improvers for which the law offers no protection and who may appropriate their findings only by trade secrets or first mover advantages.



The patent system as a system of balancing

35

It is therefore in no way inconsistent with the patent system to state that there are limitations and ‘safety nets’ within the system itself that may address competing interests, including follow-on innovation considerations.

The law, however, does not make allowance for an infringement of the pioneer invention. Higher up the scale are significant improvers that exceed the minimum social value threshold for patentability and are thus able to get an improvement patent. While they may not use the pioneer invention without the permission of the patent holder, they may prevent the patent holder (and any other unlicensed party), from using their improvement. This often leads to the case of blocking patents which, according to the transactional view of IPRs, is conducive to levelling the playing field and to minimising the chances of a bargaining breakdown. In the EU, there is also a provision for compulsory licensing in cases where the improvement patent involves an ‘important technological advance of considerable economic interest’ Art. 53 EPC 1973 (Convention for the grant of European Patents, which came into force in 1977, also known as the Munich Convention). At the top of the scale there are radical improvements that depart from prior patents and are afforded independent protection. In such cases, they may be found to depart from prior patents even though they fall within the literal language of the claim. This is done in the USA through the reverse doctrine of equivalence. As will be seen, where efficient licensing will not occur, the law allows the improver to use the pioneer idea without that being infringement, avoiding the hold up problem. This is done, as will be shown, by interpreting the improvement as being sufficiently radical to escape the scope of the pioneer patent.

3. The patent system and some potential safety nets 3.1 Introduction to the patent safety nets Recent developments in biopharmaceutical R&D have raised concerns regarding the basic assumption of most patent systems that society benefits more from innovation than it is harmed by the grant of a legal monopoly. This chapter examines the safeguards in the system to ensure that follow-on innovation is not unduly impeded in the case of research tools. Before examining the means available within the patent system to ensure access to such research tools, it should be clarified that the analysis is limited to the patented tools used to develop biopharmaceutical products that do not physically incorporate the tool. In addition, the analysis is limited to the situations in which access to the patented tool is problematic. As it was shown, access has not proven to be problematic in most cases. None the less, access to research tools remains problematic in some cases. This may be due to the hesitation on the part of researchers to disclose the nature of their research in the course of obtaining a licence, to a refusal on the part of the tool holder to license it, or to placement of significant limitations on the licences, or to demanding a price amounting to an effective refusal to license. The analysis will centre largely on the mechanisms available in patent law to deal with a refusal to license. The mechanisms examined only involve potential remedies once a patent has been granted. Therefore, for example, considerations leading up to the grant of the patent such as whether certain types of inventions should be patentable or not are outside the scope of the present examination.

     The distinction has been highlighted by J.M. Mueller (2001) op. cit. p. 14 as it does not trigger infringement liability for selling or offering to sell the patented products, but rather only for use.      See Chapter 2.      J.M. Mueller (2001) op. cit.      Article 53 EPC provides for certain exceptions from patentability for ordre public, under which research tools could arguably fall. The Guidelines for Examination in the EPO provide that a fair test to determine what should be excluded from patentability on this ground is if it is something which the public at large would consider so abhorrent



36



The patent system and some potential safety nets

37

The patent working solutions will be examined with reference to the research tool experience, though their application may be equally applicable (or nonapplicable) in other cases involving similar issues. It should be stressed, however, that the particularity of the case of research tools lies in the fact that it is concerned with access to some technology for research purposes at a precommercial stage (as distinct from product supply).

3.2 The patent safety nets The following safety nets/limitations to patents are examined:

l

experimental use exemption; reverse doctrine of equivalents and blocking patents; l patent pools; l compulsory licensing. l

as to render a patent inconceivable. It is contemplated that this provision will be used only in rare and extreme cases where an invention is likely to ‘induce riot or public disorder, or lead to criminal or generally offensive behavior’. None the less the possibility of such an exclusion from patenting is not considered as it is assumed that patents in this context are more desirable than not. It also bears noting, however, that in the EU there is a group of advisers on the ethical implications of biotechnology serving the interests of European society and respecting the fundamental rights of every European citizen. The Group submits reports amongst others on the compatibility of policies including patent policies with fundamental rights such as the dignity of the human person. The Group gives its advisory opinion on ethical aspects of patenting inventions involving, for example, elements of human origin, cloning techniques, health care in the information society and gene therapy. So, for example, in the EU we have a Biotech Directive (1998) op. cit. excluding the patenting of inventions which would be contrary to public order of morality, and a Directive 98/79/EC, on InVitro Diagnostic Medical Devices, OJ 1998 L331/1 referring to the protection of the integrity of human persons. See the Report of the European Group on Ethics in Science and New Technologies on the Charter on Fundamental Rights Related to Technological Innovation, as requested by President Prodi, on 3 February 2000. The Group also decided that the recourse to compulsory licensing should be encouraged when the access to diagnostic and treatments is blocked by a misuse of patent rights and stressed that it is the responsibility of the states to establish a legal procedure for compulsory licensing where that is justified by fair access to health care. In addition to the European Group, there are also National Ethics Committees such as the Hellenic National Bioethics Commission and the Nuffield Council on Bioethics considering issues of ethics and patenting and that could potentially consider the issue of patenting when a life-saving drug is in issue, or as otherwise required by the right to health.

38

The patent balance

Table 3.1 Community patent provisions for the grant and extent of patent protection Source

Rule

Requirements

Exceptions/ Exclusions/ Limitations

Article

European Patent Convention (EPC)

Patentability

Inventions: – concrete – technical character

Exclusions: – artistic works – scientific theories and mathematical methods – presentation of information – business methods Exceptions to patentability: – against ‘ordre public’ – plant or animal varieties Exception: – methods of medical treatment or methods of diagnosis

Art. 52

Limits of exclusive rights: – acts done privately and for non-commercial purposes – acts done for experimental purposes – preparation of medicine in pharmacy according to medical prescription – exhaustion – prior use Compulsory licensing: – non-use for 3 yrs from grant and 4 yrs from application – to use second otherwise infringing patent where important technical advance of considerable economic significance – cases of extreme urgency

Art. 7, 8, 9, 10, 11, 12

Industrial application Novelty Inventive step Community Patent Regulation (CPR)



Infringement

– direct use – indirect use

Art. 53

Art. 57

Art. 54 Art. 56

Art. 21



The patent system and some potential safety nets

39

3.2.1 Experimental Use Exemption 3.2.1.1 The experimental use exemption: a viable and effective working solution? The experimental use doctrine is a very narrow exception that excuses the infringement of a patent. To the extent that the experimental use exemption is present in Europe, it is governed by national law. Article 54(1) of the European Patent Convention (EPC) provides that the rights conferred by a European patent shall be the same as those conferred by a national patent for each of the designated states. Article 64(3) of the EPC provides that any infringement of a European patent shall be dealt with under national law. Patent legislation in EPC countries contains limitations of the rights of patentees. Article 69 EPC specifies that the scope of the patent right is determined by the claim, but the infringement exceptions can be found in the Community Patent Convention (CPC) Arts 25–28. Article 27(b) provides that the ‘Community Patent shall not extend to acts done for experimental purposes relating to the subject matter of the patented invention’. The national patent systems have generally accepted this exemption from patent infringement. The general opinion is that the experimental use of a patented invention in order to check the accuracy of the patent specification, or to carry out experiments with no commercial impact or profit motive, does not amount to patent infringement.10 An important rationale behind the experimental use exemption

     The experimental use exemption at its current state is viewed as only useful in exceptional cases. See M. Kern, Recent Federal Supreme Court Decision on Experimental Use and Compulsory Licensing, 3(2) CASRIP Newsletter 2, Summer (1996).      See IPR Helpdesk, at http://www.ipr-helpdesk.org/ on Patenting and the Research Exemption.      A similar provisions was also found in Art. 9 of the Draft Council Regulation on the Community Patent COMM (2000) 412 final (that has now been modified by Doc 7119/04 PI 18, Revised Proposal for Council Regulation on the Community Patent, 8 March 2004, COM(2004) 7119).      All EU states except for Austria have introduced such a general exception.      See W.R. Cornish, Experimental Use of Patented Inventions in European Community States, 29(7) IIC 736 (1998). See French Patent Law Including Modifications of 1978, Art. 29 providing that ‘acts accomplished for personal or domestic purposes or for the purpose of testing the object of the patented invention shall not be considered as affecting the patentee’s rights’. German Patent Act of 16 December 1980, § 11.2 ‘effects of the patent shall not extend to … acts done for experimental purposes relating to the subject matter of the patented invention’. UK Patent Act 1977 § 60(5) exempting acts ‘done privately and for purposes which are not commercial’ as well as those acts ‘done for experimental purposes relating to the subject matter of the invention’.   10   D. Gilat, Experimental Use and Patents, 16 IIC 1 (1995).

40

The patent balance

(EUE) is to prevent technical and scientific progress from becoming paralysed.11 The EUE relates to two types of experiments: market-oriented and researchoriented.12 Market-oriented experiments include generic drug manufacturers who seek to make the drugs during the patent life in order to obtain marketing authorisation and sell the generic products as soon as the patent lapses. The position regarding these types of experiments has been more or less settled following the introduction of the Drug Price Competition and Patent Term Restoration Act 198413 in the USA, and the recent adoption of the Bolar exception in the EU.14 In the context of research tools, however, the issue is different. Typical litigants do not involve a research and a generic drugs company, but rather it involves two research companies which have invested a large amount of financial resources and time in R&D. In such cases, the issue before the courts involves the question of ‘which policy would better serve the promotion of progress: an ex ante incentive to invest, disclose and innovate or the ex post legitimation of research and development efforts which have contributed to advancing technology one step forward’.15 This distinction has been recognised in several European cases. For example, the German Supreme Court in the Ethofumesate case stated that ‘experimental activities are considered permissible to the extent that they serve the purpose of technically perfecting and further developing the patented subject matter.’16

  11   See ibid. and British case Frearson v Loe (1878) Ch.D. 48, 66, where Jessel MR said that if a man merely makes a bona fide experiment with the aim of ‘improving upon the invention the subject matter of the patent, or with the view of seeing whether an improvement can be made or not, that is not an invasion of the exclusive rights granted by the patent. Patents were never granted to prevent persons of ingenuity exercising their talents in a fair way’.   12   Ibid.   13   Drug Price Competition and Patent Term Restoration Act 1984, Public Law 98-417.   14   See 11 March 2004 when the Council of Ministers adopted a new European Pharmaceutical regulatory package including a provision allowing pre-patent expiry development work and registration and generic approval. Directive 2004/27/EC of the European Parliament and of the Council amending Directive 2001/83/EC, on the Community code relating to medicinal products for human use O.J 2004 L 36/34.   15   D. Gilat (1995) op. cit. p. 9.   16   Ethofumesate Case 22 IIC 541 (1991), p. 546. The Supreme Court distinguished experiments aimed at developing the subject matter of the patent and experiments aimed at gaining an advantage in the market once the patent expires. A similar distinction can be found in the British Case Frearson v Loe (1878) 9 Ch.D. 48, and in the Dutch case Medicopharma N.V. et al. v ICI plc, 14 Rechtspraak van de week 79–89 (1993).



The patent system and some potential safety nets

41

The application of the EUE remains a highly contentious matter with different authors arguing for different applications.17 It seems that one of the guiding principles in its application involves checking whether consensual licensing would take place so that the exemption covers the other cases.18 The EUE is linked, to a large extent, to the problem of high transaction costs which hinder the carrying out of experiments. From a policy perspective, it is desirable that competitors should be able to experiment and improve on an invention, especially in fields such as the biopharmaceutical industry where therapeutic advances are of great significance. It is unlikely that a licence would be negotiated as the parties usually have different views on the value, validity and scope of protection of the patent and the experiment, and therefore the transaction costs for such negotiations are likely to be significant. In addition, if a product patent is framed in a way that includes all therapeutic indications and the exemption cannot be invoked, it is impossible for someone to search for new indications as the patent holder would view him as a possible future producer and would be reluctant to negotiate a licence. This situation would impede competition and innovation within the scope of the patents already granted. ‘If research can result in a product with added value, the experimental use exception should probably be applicable, as it is not likely that this research would happen without it. The transaction costs would prevent the negotiation of a license.’19 In such cases, experiments using the invention as an object and not as a tool are exempt. Therefore, if a competitor seeks to use the invention, as there is a danger that the inventor’s profits will decrease when the experimenter commercially exploits his results, it is unlikely that a licensing arrangement will be made. If the experimenter seeks to invent around the patent, denying the exemption might result in the ‘paralysation’ of progress, whereas invoking it would undermine incen-

  17   See R.D. Hantman, Experimental Use as an Exception to Patent Infringement, 67 JPTOS 617 (1985) basing the distinction on monetary profit or lack of it and distinguishing experimenting on and for experimental purposes. See also N.A. Israelsen, Making, Using and Selling Without Infringement: An Examination of 35 U.S.C.Sec.271(e) and the Experimental Use Exception to Patent Infringement, 16 AIPLA Q.J. 457 (1988–89); R.S. Eisenberg, Patents and the Progress of Science: Exclusive Rights and Experimental Use, 56 Univ. Chi. Law Rev. 1017 (1989); L.T. Welch, The Experimental Use Exception to Patent Infringement in the USA, 19 Patent & Licensing 17 (1989); D.E. Tuffery, Experimental Use as a Defense to Infringement in New Zealand, Patent World, Oct. (1992), p. 22.   18   D. Gilat (1995) op. cit. pp. 19 and 29 ‘According to the thesis suggested in this study, where there is no barrier to a consensual license or an assignment transaction between the patentee and the user of the invention an exemption from patent infringement is not required.’   19   B. Domeij (2000) op. cit.

42

The patent balance

tives to invent. The conclusion was that the patent policy of encouraging ‘inventing around’ should prevail over the incentives policy.20 Hence, a distinction was drawn between experimenting on and experimenting with the patented invention. The former refers to use in order to study its underlying technology and to invent around the patent which is considered exempted, while the latter refers to use in order to study something else that is not covered by the exemption. Hence, for example, a research tool that is used for conducting work will require permission from the patent holder, whereas people that study the research tools themselves will be considered exempted.21 As regards the interpretation of the provision in the different European countries, it appears that Germany is the most liberal in its interpretation. German courts generally find that the use of the patented invention to obtain further information about the product falls within the exception.22 During the mid-1990s, the German Supreme Court in two cases known as Clinical Trials I and II,23 ruled that experiments or trials on a patented substance such as pharmaceutical products were permitted, both in order to test the claimed properties and for new indications, as long as they were directed on the substance itself. The Constitutional Court of Germany affirmed these decisions in the interest of the development of the state of the art and the public interest.24   20   See D. Gilat (1995) op. cit. p. 53 referring to a distinction as to mere improvement and delineation of substitute and alternative.   21   One may question whether this is a sensible approach as it is exactly in the case of improvements and competing products that the patent exclusivity may be advantageous. None the less, it is thought that this amounts to research in the technology field and that the inventions are used for a different purpose than that for which they were originally created. Hence, this only represents a small loss of revenue to the patentee as his main market resides in their non-experimental uses. The fact that such research may lead to improvements or new competing products that are patentable does not change the analysis. On the other hand, it is felt that experimentation with a patented invention does not advance the field of technology or contribute to innovation as they leave the invention unchanged, hence this is not exempted. See P. Ducor, Research Tool Patents and the Experimental Use Exemption – A no-win situation? 17 Nature Biotechnology 1027 (1999).   22   C. Laherty and Y. Shibata, Harmonization of Patent Term Extension and Experimental Use Laws Related to Drug Development and Testing, Comparative Patent law Seminar, Spring 2001 at http://www.law.washington.edu/casrip/Harmonization/PDF/ExperimentalUse.pdf.   23   Klinische Versuche I (BGH, 11 July 1995); Klinische Versuche (BGH, 17 April 1997); 1997 IIC 103   24   See Cases Federal Supreme Court (BGH) 11 July 1995, GRUG 1996, 109 ‘Klinische Verusche’ and 5 December 1995 GRUG 1996, 190 ‘Zwanglizenz’ concerning the protein, interferon. The Düsseldorf Court of Appeals held that experiments undertaken that neither establish the characteristics of the substance nor the feasibility of its produc-



The patent system and some potential safety nets

43

On the other hand, the exception has been construed more narrowly in the UK.25 For example, in the case Smith Kline & French Laboratories Ltd v Evans Medical Ltd [1989] FSR 513, experimental purposes relating to the subject matter of the invention was interpreted to mean ‘in the sense of having a real and direct connection with that subject matter’.26

tion fall outside the scope of s.11(2) as otherwise it would be inconsistent with the principle of product patents extending to all possible uses of its subject matter. The Court stressed that what was important was not the activity itself but the purpose of the activity, but that ‘experiment’ was limited to those directed to the ‘subject matter of the patented invention’.   25   See Frearson v Loe [1878] 9 Ch.D. 48, where the Court held that experimentation with a patented product with no intention to sell or use but just to improve upon the invention or to see whether an improvement can be made does not amount to infringement. See also Monsanto v Stauffer [1985] RPC 515 CA, where the Court stated ‘trials carried out in order to discover something unknown or to test an hypothesis or even in order to find out something which is known to work in specific conditions would work in different conditions or even perhaps to see if the experimenter could manufacture commercially in accordance with the patent. These can fairly be regarded as experiments, but trials carried out in order to demonstrate to a third party [such as a regulatory body] that a product works, or in order to amass information to satisfy a third party, whether a customer or body that the product works as its maker claims are not to be regarded as acts done for “experimental purposes”’. Of course the recent European Directive referred to above has to some extent changed and harmonised the position as regards regulatory bodies. See also Smith Kline & French Laboratories Ltd v Evans Medical Ltd [1989] FSR 513, observing ‘what is or not an experiment must depend on the facts of each case but can include experiments designed with a commercial end view’. In Inhale Therapeutic Systems Inc v Quadrant Healthcare Plc [2002] RPC 21, the Patents County Court observed ‘it is said that there is a defence of experimental use. This fails on the facts. None of the exploitation of the products or technology complained of was conducted by Quadrant for its own experimental purposes. In all cases Quadrant was trying to exploit and sell its technology to third parties. This is not experimental use’. To the extent this viewpoint is endorsed it seems that the UK is moving away from the liberal stance of Germany towards the more narrow view of the exemption of the USA.   26   See M. Fysh, Supplementary Certificate Legal Issues in Exploiting Drug Patents in Europe, LES-Italy Conference, Milan, 2002, ‘I believe that the exception may therefore have a very narrow effect under UK/Irish law. The qualification may cover such acts as verifications of various kinds (such as seeing whether a compound can be made as proposed or will work in a particular climate), assessment of validity, and in-house experiment for the purpose of improvement and modification etc. But the exception would not in my view exclude the use of a patented process in experiments specifically to test some other product or process with the view to the direct use of the results thereof for a commercial purpose.’

44

The patent balance

3.2.1.2 The US experience: a helpful paradigm? The experimental use doctrine originated in the USA as a narrow judge-made exemption to patent infringement for anyone who makes, uses or sells a patented invention purely to satisfy scientific curiosity, or philosophical reasons. It was initially expounded by J. Story in a dictum in Whittemore v Cutter27 in 1813, in which he stated that ‘it could never have been the intention of the legislature to punish a man who constructed a patented machine merely for philosophical experiments, or for the purpose of ascertaining the sufficiency of the machine to produce its described effects’. In Sawin v Guild,28 J. Story further elaborated on the exceptions to infringement. In order to constitute an infringement, it must involve ‘the making with intent to use for profit, not for the mere purpose of philosophical experiment, or to ascertain the verity and exactness of the specification’. The defence reflects an understanding that the interests of the patent holder are not harmed, and this is dependent to a large extent on whether the alleged infringer derives profit from the patented article. However, in most cases, the defence has failed, and whilst the recent US decision of Madey v Duke29 affirms the existence of the doctrine, it defined its applicability in a very narrow sense. 30 The scope of the exemption remains unclear both in terms of applicability and policy. The breadth of the exemption relies on how one defines ‘curiosity, amusement and philosophical experiment’. Arguably, the latter is prone to different interpretations that would have different implications on the applicability of the exemption. Could ‘philosophical’ include the acts of designing around an invention as this arguably leads to the creation of new knowledge? The exemption shifts the importance to the intention behind the use of the patent, and directs an evaluation into whether the use is commercial or not. ‘The making must be with an intent to infringe the patent rights, and deprive the owner of the lawful rewards of his discovery’.31 Damages will only be available where there is some commercial use involved, yet damages cannot be used alone as the benchmark of its application as there might also be non-infringing uses that result in a loss of revenue to the patent holder, which he would not be justified in claiming. In addition, while infringement consists of use, inter alia,

  27

  Whittemore v Cutter 29 F.Cas 1120 (C.C.D. 1813).   Sawin v Guild 21 F.Cas 554 (C.C.D. 1813) (No. 12,391).   29   Madey v Duke 01-1567 US CA for Fed. Circ. 307 F.3d 1351.   30   Ibid. See also Embrex Inc. v Service Engineering Corp 99-1064, USCA for Fed. Cir., 216 F.3d 1343; 2000 U.S. App. LEXIS 15036; 55 U.S.P.Q.2D (BNA) 1161, June 28, 2000, Decided; where the Federal Commission commented that the experimental use exemption is construed very narrowly.   31   Sawin v Guild, 21 F.Cas 554 (C.C.D. 1813) (No. 12,391) and J. Story dicta.   28



The patent system and some potential safety nets

45

irrespective of the purpose of the use, under patent law, the exemption imports a subjective evaluation into the motives underlying the use. The extent to which this is sound is contentious. Can intent and purpose make something exempt from infringement when it is irrelevant to establishing an infringement in the first place? In the case of corporations, there is an unspoken assumption that these activities are motivated by a commercial intent. Hence, a distinction was initially made in the case of universities, where it was thought that there was no commercial intent. This assumption, however, has been called into question in recent times with the increasing commercialisation of activities on the part of universities, especially in the USA.32 However, when does a use become commercial? Even while researching or upon the development of a commercial product? Under the current status of the exemption it seems that even use for the purpose of testing will be infringing if it also has a proximate commercial purpose. Hence, the practical utility of such an exemption can be questioned. It is thought that an infringement action is unlikely to occur in the first place in cases where an invention is used for commercially insignificant purposes, and while the exemption may exist in theory, it is hard to sustain it in practice. It seems to be applicable only in cases of use to assess the commercial viability and applicability of the results where that does not lead to commercial gain for the user and a loss of interest for the patentee.33 With regard to the specific case of pharmaceuticals, in the USA, in the case of Roche Products v Bolar Pharmaceutical Company,34 the CAFC in 1984 rejected the argument that a generic drug manufacturer should be able to use a patented drug to conduct clinical trials during the term of the patent, with a view to commercialisation immediately after the expiration of the patent. It was held that the defence is truly narrow and cannot permit experiments conducted with a view to commercial exploitation. The US Congress has, however, reconsidered the effects of this ruling as it was felt it, in fact, extended the term of effective patent protection to include

  32

  R. Eisenberg (2001) op. cit.   In US common law the defence has seldom succeeded. In Whittemore v Cutter 29 F.Cas. 1120 (C.C.D. 1813) the use of a product to assess its applicability to a commercial process was exempted. Similarly, in Akro Agate Co. v Master Marble Co. No. 119, District Court, N.D. West Virginia, 18 F. Supp. 305; 1937 US Dist. LEXIS 2087, 16 January 1937; the use of a machine merely to assess its usefulness that was then abandoned voluntarily was also found exempted. But these represent very specific and limited instances of philosophic inquiry.   34   Roche Products v Bolar Pharmaceutical Company 733 F.2d 858 (CA Fed.), cert. denied, 469 US 856 (1984).   33

46

The patent balance

the period required for generic companies to obtain marketing authorisation once the patent had expired, in other words, for another one to two years. It also noted that there was no economic effect on the patent holders by virtue of such conduct. In view of the significant impact it might have on public health, it amended the statute to permit the use of inventions for the purpose of developing and submitting information under laws regulating the manufacture, use or sale of drugs. The Drug Price Competition and Patent Terms Restoration Act 1984 § 202, later codified as 35 USC § 271(e)(1)(2001),35 permits clinical trials for the purpose of providing data to official regulatory authorities for market clearance of a medicine developed by a non-licensed third party covered by a patent that is due to expire. It protects drug manufacturers whose use of products is necessary to satisfy the pre-market testing requirements of the FDA: ‘the patented drugs should be used solely for purposes reasonably related to testing requirements under federal law’.36 Furthermore, ‘reasonably related’ is an objective test of acts deemed to constitute an infringement except for § 271. Therefore, although Bolar was overruled, the judgment still presents a valuable insight into the notion of infringement, as the patent cannot be permitted under the ‘guise of scientific inquiry when the inquiry has definite, cognizable and not insubstantial commercial purposes’.37 While the US experience has proved useful in encouraging Europe to also endorse a Bolar-type exemption, the dilemmas facing research tools and the problem with the applicability of the experimental use exemption is the same and might even be more heightened in view of their more limited interpretation of the doctrine. 3.2.1.3 Conclusion on the EUE ‘The purpose of the experimental use doctrine is not to subsidize new research at the expense of the patentee, but rather to allow such research when market forces prevent it.’38 In the case of research tools used by other researchers for the purpose for which they were created, it was traditionally believed that no barrier to licensing exists as they are the ordinary consumers, and therefore the exception should not be invoked.39 The distinction between experimenting on

  35

  Public Law 98-417.   G.N. Pate, Analysis of the Experimental Use Exception, 3(2) North Carolina Journal of Law and Technology 253 (2002).   37   For an analysis of the Bolar exemption see J. Love, Bolar Exemption, 1998 at http://lists.essential.org/1998/pharm-policy/msg00004.html.   38   D. Gilat (1995) op. cit. p. 41.   39   Ibid. p. 44. See also R.S. Eisenberg, Proprietary Rights and the Norms of Science in Biotechnology Research, 97 Yale L. J. 177 (1987) p. 225.   36



The patent system and some potential safety nets

47

and experimenting with would not provide access in cases of downstream research, as it would be inapplicable. ‘The problem is that researchers are ordinary consumers of patented research tools, and that if these consumers were exempt from infringement liability, the patent holder would have nowhere else to turn to collect patent royalties.’40 In light of the increasing difficulties in reaching an agreement or securing a licence, however, this assumption may be called into question. The Working Group on research tools has concluded that an EUE should not be available to those ‘working with’ a patented invention as such workers are truly ‘ordinary consumers’ of the tool.41 This is only reasonable, however, if the research tools to these people can be freely acquired in the ‘marketplace at a reasonable cost via anonymous purchasing without the need for licensing transactions. The growing incidence of high transaction costs associated with accessing multiple patented research tools contravenes the ordinary consumer assumption, however. When research tool transaction costs are severe enough to impede or stop the development of new biomedical products, line-drawing between “experimenting on” and “experimenting with” may no longer be justified’.42 In addition, there may be further complications with maintaining this distinction, as the Australian Department of Health and Ageing has stated: It should also be noted that there are also practical problems in some fields of technology in making this distinction … including biotechnology, with its tendency towards broad patents … research using knowledge of the structure of a gene, directed towards identifying treatment for disease associated with abnormal forms of the gene may be regarded as research with the gene. Research intended to identify variation within the gene may be regarded as research on the invention. However, clinical diagnostic testing, which can be regarded as technology subject to commercial application, could in principle be thought of as research on the invention. This is in the sense that it is research directed towards identifying the exact structure or property of the ‘invention’ in the specific individual being tested. The distinction between research genetic testing and clinical diagnosis is also clouded by the fact that, although the objectives may differ, the processes generally remain identical. This problem seems inherent in the patenting of ‘inventions’ which are also a form of discovery.43

  40

  R. Eisenberg (1996) op. cit.   J.M. Mueller (2001) op. cit. p. 40.   42   Ibid. p. 40.   43   ACIP, Patents and Experimental Use, Options Paper, Advisory Council on Intellectual Property, December 2004.   41

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The patent balance

3.2.2 The Reverse Doctrine of Equivalents and Blocking Patents The reverse doctrine of equivalents is an equitable doctrine devised by the courts in the USA to excuse infringement even though it may be within the scope of the patent claim, by taking the importance of the improvement in question into consideration. Although falling within the literal words of the claim, it refers to a situation in which the improvement performs the same or similar function in a substantially different way, and in this way, the reverse doctrine of equivalents is used to bring it outside the scope of patent protection.44 While the US Supreme Court has made reference to this doctrine on several occasions,45 the Federal Circuit has viewed it with some scepticism although it has been validated in theory.46 None the less, the doctrine has rarely been invoked and even more rarely applied, therefore, its practical effectiveness remains a contested issue. In the EU no provision is made as to the reverse doctrine of equivalents, although a proposal for a similar measure has been made. Domeij has proposed that the reverse doctrine of equivalents should be used in Europe so as to facilitate the entry of new products into the market that are of high value to consumers in cases that would otherwise encroach on the scope of the patent granted.47 However, it appears that the indirect use of the principle may be made upon interpreting the scope of the patent. It has been argued that the doctrine is a judicial response to the likelihood of breakdown in bargaining between the pioneer and the improvers.48 This breakdown is likely to occur, first, due to the difficulty in setting the value on the relative contributions and, secondly, the uncertainty over the future development of the technology, as well as its profitability.49 Strategic bargaining may aggravate the situations and lead to a failure in reaching an agreement, despite the existence of a cooperative surplus.

  44   L.A. Handley, Refining the Graver Tank Analysis with Hypothetical Claims: A Biotechnology Exemplar, 5 Harvard J. Law & Tech 31 (1991).   45   See Westinghouse v Boyden Power Brake Co. 170 US 537 (1898), and Graver Tank case 339 US 605 (1950).   46   Wilson Sporting Goods v David Geoffrey & Associations, 904 F.2d 677 (Fed. Cir. 1991). See also Amgen Inc. v Chugai Pharmaceutical Co. 927 F.2d 1200 (Fed. Cir. 2000), and Scripps Clinic and Research Foundation v Genetech Inc. 927 F.2d 1565 (Fed. Cir. 1991), where the Federal Circuit limited the scope of the inventor’s claims of purified natural products and applied the reverse doctrine of equivalents.   47   B. Domeij (2000) op. cit.   48   R. Merges, IPRs and Bargaining Breakdown: The Case of Blocking Patents, 62 Tenn. L. Rev. 75, (1994).   49   Ibid.



The patent system and some potential safety nets

49

In such cases, the reverse doctrine of equivalents promotes the voluntary licensing between parties by creating a threat to the pioneer patentee, encouraging them to reach a socially productive agreement without recourse to statutory compulsory licensing. In the USA, it allows the radical improver to use the pioneer inventor’s idea in certain cases in which the latter would otherwise have held the radical improver hostage.50 In such cases, it is not necessary to have recourse to compulsory licensing as the improvement falls outside the scope of protection. The radical improver is exempt from liability regardless of whether it lies within the literal scope of the claim, so as to encourage its creation and ensure it reaches the market.51 According to this, the improvement is treated as a function of its value and significance in relation to the original invention. A minor improvement is not eligible for a patent and in order to reach an agreement with the patent holder, it must overcome Arrow’s paradox of information.52 The latter refers to the situation in which the improver is unable to protect the information once it has been disclosed, yet needs to disclose it in some way in order to reach an agreement with the patentee. The improver cannot stop the pioneer from using the improvement and it is unlikely that an agreement will be reached. The minor improver is also likely to infringe, whether literally or by virtue of the doctrine of equivalents. In the case of a significant improvement, however, a property right is given to the improver in the form of a patent, although his unauthorised use of the original patent would still be infringing. This creates a mutually blocking situation which levels the bargaining power of parties and creates an incentive for both parties to reach an agreement and to push technology forward.53 The rationale of the blocking patents doctrine in US patent law reflects the statutory provision in EU law and in TRIPS regarding dependent patents. Under European patent law, it is possible to get a compulsory licence in cases of a secondary dependent patent that involves an important technological advance of considerable economic interest.54 Hence, while there is no provision for compulsory licensing (CL) of dependent patents in US law, as it exists in the EU, the blocking patents doctrine attempts to have the same effect by maximising the situations in which licensing can occur. 55

  50

  M.A. Lemley (1997) op. cit.   Ibid.   52   Ibid.   53   R. Merges (1994) op. cit. The author elaborates on a transactional view of IPRs.   54   See further down at 3.2.4.2(a).   55   R. Merges (1994) op. cit. Delineating the scope of the patent according to the value of the improvement relative to the pioneer patent also overcomes the incentive ac  51

50

The patent balance

The transactional view of patents permeates doctrines such as the doctrine of equivalents and the reverse doctrine of equivalents. Consideration is paid to when parties are likely to reach an agreement and how to maximise the cases of important agreements for follow-on innovation, so as to ensure that commercially value-added innovation reaches the market. Despite the lack of certainty, in many respects, on the law relating to improvements and the delineation of the relationship between the initial and subsequent patents, the extent to which the current provisions or doctrines would cater for the problem of research tools is not clear. This is because, first, the reverse doctrine of equivalents only applies to radically different inventions, and secondly, and most significantly, research tools do not usually fall within the category of improvements. As explained, access to research tools is mostly needed to research downstream pharmaceutical products. In such cases, the reverse doctrine of equivalents would not remedy the problem relating to access. The doctrine could only have a small role to play in cases dealing with improvements on the research tools as such, and even here it would be limited as it would only cover radical improvements (involving inventing around) and would also fail to justify ‘of itself’ experimentations on the invention until such time as the improvement has been developed.56 The doctrine would be of little use in cases in which access is needed to the research tool for downstream research. It therefore becomes necessary to examine what other provisions may be used to give effect to such concerns.

cess paradox of compelling access in cases where the incentive for the pioneer work is most significant. This is because the improvement’s value is measured relative to the original patent. Practical evidence, however, is equivocal on the role of commercially added value as the most significant factor in determining the scope of patent protection. It is feared that this will lead to uncertainty from a technical point of view as the scope of protection will effectively depend on the value of the improvement. See the author’s proposal that the portion of the scope of protection devised by the courts be mainly thought of as an ex post facto adjustment taking into account the value of the attacked embodiment, and that the doctrine of equivalents be seen as an economic test not a technical one. He argues that patent claims define the invention but do not conclusively define the scope of protection since it is impossible at the time of the grant to foresee all possibly infringing products that add something of importance and therefore should be encouraged by the courts.   56   In fact, as regards access to the patented technology it provides no means of ensuring that and only seems to operate ex post to excuse infringement by taking the improvement out of the pioneer’s scope. To that end see the experimental use exemption analysed next.



The patent system and some potential safety nets

51

3.2.3 Patent Pools The creation of patent pools provides another working solution to the problem of blocking patents and stacking licences. Patent pools are predominantly used in situations where patent thickets57 arise, so that the commercialisation of new technologies is not impeded by an overlapping set of patent rights. They refer to the ‘aggregation of IPRs which are subject to cross licensing, whether they are transferred directly by the patentee to the licensee or through some medium such as a joint venture set up specifically to administer the patent pool’.58 Patent pools have been described as ‘private liability rule’ organisations that function in a similar way to compulsory licences except that they have been devised by an organisation.59 Typically, a single entity licenses the patents of two or more companies to third parties as a package, and this offers the convenience of a ‘one-stop shop’. In cases of standardisation any patents necessary to comply with the standard become really essential and, in such cases, patent pools may be particularly effective. Hence patent pools mostly arise in cases of standards, in cases where essentiality is not readily defined or in cases where there are blocking patents from different companies that are not part of a standard.60 Where a patent is essential to the practice of the relevant technology field then the blocking situation is present. Patent pools are typically created in industries in which parties have a longstanding relationship and form a homogenous group, where there are repeat-play transactions and they hold mutually blocking patents.61 While the object is to ensure that access to essential inputs is not impeded, it refers predominantly to a situation of complementary and multiple patent rights that are interdependent and potentially inter-blocking in the absence of coordination. Hence, they are more a solution to the balkanisation of rights that may lead to higher prices than a single package price, high licence fees and may also

  57   For an explanation of the term ‘patent thicket’, see C. Shapiro, Navigating the Patent Thicket: Cross Licenses, Patent Pools and Standard-Setting, UCLA Department of Economics in its series Levine’s Working Paper Archive no. 122247000000000539, 2004.   58   J. Clark, J. Piccolo, B. Stanton, K. Tyson, Patent Pools: A Solution to the Problem of Access in Biotechnology Patents? US PTO, 5 December (2000) at http://www.uspto. gov/web/offices/pac/dapp/opla/patentpool.pdf.   59   See R.P. Merges, Institutions for Intellectual Property Transactions: The Case of Patent Pools, in R. Dreyfuss et al., Expanding the Boundaries of Intellectual Property, Oxford, Oxford University Press (2001).   60   J. Kubalski, Comments on Patent Pools and Standards, for the FTC Hearings on IP and Antitrust, January 2002.   61   ACIP (2004) op. cit.

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The patent balance

dynamically be a drag on innovation, than access to a single essential input technology.62 Patent pools are particularly effective in cases of complementary as opposed to substitute patents, minimising transaction costs in negotiating individual licences and reducing the possibilities of a hold-up problem.63 Patent pools are perceived as particularly beneficial in the biotechnology industry as they may assist in integrating technology, reduce the often high transaction costs, prevent blocking positions, avoid costly litigation and promote the dissemination of technology. The biotech landscape, it is often felt, is such that the ‘vast amount of genetic information and its significance as a fundamental research tool even absent functional knowledge can give rise to an almost overwhelming number of patents, the true value of which may be unascertainable without the cooperative efforts of other companies’.64 Hence one-stop shopping may be particularly effective in this industry to save time, money and resources that can be directed instead to further innovation.65 It also leads to the distribution of risk benefit as the members share the risks associated with R&D and each member may receive a set of income based on the percentage of the royalty earned from the pool. It can also be advantageous as it provides a mechanism for the free sharing of technical information relating to the patented technology and provides an incentive for avoiding overlapping efforts, leading to a more effective and efficient allocation of limited resources. However, these perceived benefits have not gone unchallenged. First, it is questionable whether the genetic inventions market is amenable to patent pools. While there is a significant degree of interdependence and high transaction costs, some have argued that unlike the electronic industry, the definition of standards and need to ensure interoperability is not essential in the pharmaceutical industry, especially in the development of therapeutics.66 It is also often found that the number of patents to which access is effectively required is usually manageable. Patent pools have also been criticised as potentially ineffective in view of the likely disagreement over the value of the patents. In addition, as the industry is made up of diverse, heterogeneous players and parties who are often involved in one-off transactions, the usefulness of pools may be limited.67 Criticism is

  62

  C. Shapiro (2004) op. cit.   Ibid. See also R.P. Merges (2001) op. cit. describing the need for ‘strict complimentarity’ of patent pools, i.e. that none of the parties be able to have any return in the absence of an agreement to pool.   64   L. Sung, Greater predictability may result in patent pools, 8 February 2002 in CPTech on Collective Management of IPRS: Patent Pools at www.cptech.org.   65   J. Clark et al. (2000) op. cit.   66   OECD (2002) op. cit.   67   ACIP (2004) op. cit. p. 59.   63



The patent system and some potential safety nets

53

also made regarding the fact that they may inflate the costs of competitively priced goods (although this could be remedied if truly blocking patents are identified), shield invalid patents and encourage collusion and price fixing.68 The latter, however, would seem to be amenable to control if an independent expert were charged with evaluating the patents, and if a field of application could be defined and the essential patents identified. In this case, the patent pools may be deemed worthy of consideration. Empirical evidence has shown that some patent pools have been created in the biotech industry such as the SNP Consortium and the Genebank pool.69 These have been viewed as particularly effective pools. On the other hand, empirical evidence from Germany has shown that patent pools were not deemed to be effective in increasing access to genetic inventions due to the difficulty in assessing contributions.70 Furthermore, in some cases, pools have been found to be inefficient. For example, the patent pool between VISX and Summit Technology, of the only two FDA-approved manufacturers of lasers used in photo refractive keratoctomy, was condemned as it was perceived to act as a tool for fixing prices and eliminating horizontal competition between the companies, in view of the ability of both companies to enter the market independently.71 The careful examination of the true complementarity and dependency therefore seems to be paramount.72 In conclusion, while patent pools may prove particularly advantageous in certain cases, it would seem that they have been directed more towards the problem of the proliferation of patent rights and the creation of patent thickets, than to the problem of access to a single essential upstream technology as in the case of research tools.73 In order for patent pools to function, a symmetrical structure is required in which everyone owns patents. This is not usually the case for upstream biotechnological research and downstream pharmaceutical developments. Patent pools are also usually dependent on the voluntary decision to pool the patents, which is not likely to arise in the absence of interdependence in cases of access to essential inputs.

  68

  J. Clark et al. (2000) op. cit.   This is analysed in CPTech on Collective Management of IPRS: Patent Pools at www.cptech.org.   70   J. Strauss (2002) op. cit.   71   CPTech on Collective Management of IPRS: Patent Pools at www.cptech.org.   72   See though R.P. Merges (2001) op. cit. who argues that the most important factors are open membership to the pool and non-exclusive licensing.   73   See the submissions on p. 59 ACIP (2004) op. cit. ‘It should be remembered that patent pools are promoted as a solution to patent thickets, or anti-commons issues, so they do not assist where blocking patents are used in an exclusionary manner.’   69

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The patent balance

3.2.4 Compulsory Licensing in the Patent Provisions 3.2.4.1 Introduction to compulsory licensing (a)  Definition and History A compulsory licence enables a government to license a third party to use the patented invention without the patent holder’s consent. The competent authority will grant the licence to a designated body or person that usually compensates the patent holder by providing him with reasonable remuneration. Contrary to other balancing mechanisms in the patent system, compulsory licences do not arise automatically but instead only after a decision has been made by the competent body. Historically, compulsory licensing (CL) arose to ameliorate the risk of forfeiting the patent, which was used to encourage the development of national industry by requiring a domestic patentee to work his invention, directly or indirectly in the relevant country.74 Patentees are generally required to work their invention in nearly every country in which a patent has been obtained.75 Forfeiture of the patent, however, as a sanction for failing to work it, had social costs, especially in instances where investment and/or know-how was not sufficient to encourage competitors to produce the invention themselves. CL developed against this background, marking a shift of the sanction from forfeiture to CL.76 (b)  Support and Opposition for CL CL has been met with support but also with opposition. There are several factors that point to the desirability of CL when certain conditions are met.77 CL might be considered desirable, first, where the demand for the product has not been met. According to economic theory, a monopolist will intentionally under-supply goods (to sell at higher prices) in order to maximise profit. In such circumstances, CL may facilitate entry into the market leading to enhanced consumer

  74   J. Reichman, C. Hasenzahl, Non-Voluntary Licensing of Patenting Inventions: Historical Perspective, Legal Framework under TRIPS, and an Overview of the Practice in Canada and the USA, UNCTAD (2002), p. 5.   75   See survey of patent laws in Table 3.2.   76   See Art. 5 of the Paris Convention for the Protection of Industrial Property of 20 March 1883 as revised at Brussels on 14 December 1900, at Washington on 2 June 1911, at the Hague on 6 November 1925, at London on 2 June 1934, at Lisbon on 31 October 1958, and at Stockholm on 14 July 1967, and as amended on 2 October, 1979.   77   See also ACIP (2004) op. cit. p. 58 confirming the perception of the compulsory licensing as desirable as a tool in certain cases.



The patent system and some potential safety nets

55

choice and lower prices. There is a risk, however, of eliminating the monopoly position of the intellectual property (IP) holder, although this may be justified to ‘assure a more complete utilization and commercialization of innovative products’.78 Compulsory licences may also be desirable in certain cases as they may facilitate further innovations, especially the case of improvements or patents building upon previous ones. Proponents of this view also argue that IP rights can reinforce market power in the areas of network industries. CL may also be desirable for products which are vital to the public, such as those relating to public health, welfare and national defence.79 CL is also supported under patent law by virtue of deadweight loss concerns. According to the deadweight loss argument, wasteful levels of research activity can be invested in the race to be the first to innovate and reap the first-mover profits. The reason is that social utility is a function of the overall likelihood of innovation which is a function of the absolute level of research activity.80 Therefore, in line with this argument, there may be some benefits in weakening IP protection through CL as it results in a reduction in wasteful activity. Indeed, in certain cases, considerations of explicit costs and opportunity costs could militate against the provision of a particular product or service at a higher rather than a lower level. The socially optimal level of a particular good is the level at which the marginal benefit of providing another unit is equal to the marginal cost of providing an additional unit. Pointing to the fact that CL will lead to a less-than marginal level of R&D is not dispositive as the social cost of providing those additional units of research may outweigh their social utility.81   78   C.M. Fauver, Compulsory Patent Licensing in the US: An Idea Whose Time Has Come, 8 J Intl. L Bus. 666 (1988).   79   Ibid.   80   T.C. Bailey, Innovation and Access: The Role of Compulsory Licensing in the Development and Distribution of the HIV Drug, U. Ill. J. L. Tech. & Pol’y 193, 2001. The author refers to the work of P. Tandon. The author explains that competing firms will engage in absolute levels of research that exceed the point at which such activity contributes positively to social utility, as it may contribute to the firm’s individual utility by increasing the likelihood that it will invent first and reap the profits. In a dynamic model, relaxation of patent protection may lead a firm to refrain from competition, and although that may reduce research activity at an absolute level, the level may be socially optimal avoiding wasteful activity. A firm will have an incentive to invest in a particular industry as long as the profits earned in that industry are more than the average profit rate of industry as a whole, assuming there are no barriers to entry. Hence, in such industries, weakening patent protection may not actually decrease innovation, or at least may reduce it to an optimal level. P. Tandon, Optimal Patents with Compulsory Licensing 90(3) J. of Polit’l Econ’y 470–86 (1982).   81   Ibid.

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The patent balance

The social costs include the potential consumers who would be able to afford a product or service in a competitive market but who cannot afford it at monopoly prices. ‘This is the deadweight loss associated with monopoly pricing’.82 CL has also been severely criticised, however, as it is feared that it reduces incentives for the original innovation.83 This rests on the assumption that a reduction in incentives would dramatically reduce the level of investment. It is also argued that a compulsory licence would discourage the IP owner to engage in further research as he would have normally used the profits from the IPRs for this purpose. Empirical evidence is ambiguous on this matter. For example, an analysis of patenting activity from 1954 to 1956 has shown that patent owners subject to CL significantly reduced their patenting activity.84 By contrast, a 1975 study did not find any evidence that CL adversely affected corporate R&D expenditure.85 It would seem, therefore, that the effect of CL is also dependent on other factors, such as first-mover advantages and royalty rates.86   82   Ibid. Hence, the concept of deadweight loss considers the consumers who are not able to afford the monopoly product, and the wasteful levels of research activity in the race to reap the first-mover profits. It should be noted, however, that this is part of a general problem and used as an argument on behalf of those advocating a liability system. See, for example, C.T. Taylor and Z.A. Silberston, The Economic Impact of the Patent System, Cambridge, Cambridge University Press (1973), pp. 198–9.   83  V. Korah, Compulsory Licenses and Incentives to Invest in Innovation and Compulsory Licenses, OECD (1998).   84   F.M. Scherer, The Economic Effects of Compulsory Patent Licensing, New York, New York University Monograph Series in Finance and Economics (1977), pp. 43–50. See also C.T. Taylor and Z.A. Silberston (1973) op. cit. pp. 198–9 which shows that British pharmaceutical executives believed that some forms of licensing could harm innovation.   85   H. Hovenkamp, J. Mark, M. Lemley, Intellectual Property and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property law, New York: Aspen Law & Business, c. 2002, 2003 Supplement. See also F.M. Scherer (1977) op. cit. pp. 43–50. He concludes that the licensing had no long-term negative impact on licensors’ innovation, even for industries like pharmaceuticals. Indeed, companies subjected to compulsory licensing actually spent more, on average, on R&D than similar firms in their industry that had not been subjected to compulsory licensing. A study of Canada’s compulsory licensing programmes found similar results, i.e. that there was no negative impact on pharmaceutical innovation. D.G. McFetridge, Intellectual Property, Technology Diffusion, and Growth in the Canadian Economy, in Competition Policy and Intellectual Property Rights in the Knowledge Based Economy, R.D. Anderson and N.T. Gallini (eds) (1998), p. 65.   86   See, for example, C.V. Chien, Cheap Drugs at What Price to Innovation: Does the Compulsory Licensing of Pharmaceuticals Hurt Innovation? 18 Berkeley Technology Law Journal 853 (2003), pp. 21–2 who analyses the effects of compulsory licensing and states that it is likely to depend not only on the price that will be set but also two other



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(c)  Grounds for Granting a Compulsory Licence A survey of European and international IP law reveals that there are three primary grounds for CL: where a dependent patent is blocked; where a patent is not being worked; or where the public interest so dictates whether because it relates to food or medicine, to an antitrust remedy, to national defence or to the sovereign.87 Accordingly, the TRIPS Agreement provides for three main cases in which CL may arise. These include:

l

the non-use of a patent for three years from its grant or four years from its application; l when necessary to use a second otherwise infringing patent that constitutes an important technical advance of considerable economic significance; and l in cases of extreme urgency, crisis, or to remedy anti-competitive behaviour.88

While the provisions relating to CL are sufficiently broad to cater for different interpretations, the Agreement on Trade-Related Aspects of Property Rights (TRIPS Agreement) lays down some procedural safeguards that should be followed in exercising the discretion to grant a CL. They stipulate that governments should consider the cases on their individual merits, that prior to the authorisation of third party use there should be an effort to negotiate a voluntary licence on reasonable commercial terms, and that the government provides adequate remuneration taking into account the economic value of significant factors, namely, ‘market significance’ and ‘predictability’. Market significance refers to the extent to which a licensee actually threatens the patentee’s market, while predictability refers to the extent to which a licensor anticipates a compulsory licence. ‘Unpredictable licenses that cover only existing technologies are more limited in scope than those that are predictable and cover future inventions. Although unanticipated loss of exclusivity that accompanies an unpredictable compulsory license may influence a company’s decisions about investing in follow-on innovation, development and commercialization, the licensing event may come at a point that is too late for the company to change course. This is not the case with an order that requires licensing of future patents. The licensor may choose to redirect R&D investment, put off inventive activity until the license has expired, or choose trade secret over patent protection.’ See also Chapter 5 at 5.3.2.4 on harm to incentives.   87   The survey shows that some states merely refer to a broad notion of public interest that could potentially include these more specific considerations, whereas others refer more particularly to these three grounds. See survey of patent laws in Table 3.2. See also G. Julian-Arnold, International Compulsory Licensing: The Rationales and the Reality, 1993 IDEA 349.   88   TRIPS Agreement (1994) op. cit.

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the authorisation.89 Article 32(f) of TRIPS also requires that use should be authorised predominantly for the supply of the domestic market.90 3.2.4.2 Analysis of the role of CL (a)  The Role of CL in Balancing Commensurability As was shown above, it would seem that neither the EUE nor the patent pools solutions are adequate in addressing the potential blocking of access to upstream innovation. In such a technological environment, it would seem that the CL provisions could serve many functions. On the one hand, it might work as a factor to induce voluntary licensing, and on the other hand, it could be used as a safety net to address substantive concerns.91 The usefulness of the CL provisions in the context of research tools depends on both the substantive and the practical aspect. Substantively most countries contemplate licences where the public interest so dictates. This diverts the question to the interpretation of ‘public interest’. Other countries refer more specifically to the specific cases of non-use, dependent patents and emergency or anti-competitive situations.92 (i)  CL as a mechanism to induce broad licensing  CL may be used as a means to encourage and induce broad licensing techniques. Evidence has shown that   89   It should also be noted that some of these requirements may be waived in cases of national emergency.   90   Related to this provision is the issue of the extent to which a country that has no manufacturing capacity of its own could use CL to compel manufacturers in another country to export to it. This issue is particularly relevant to developing countries, as the South Africa and Brazilian experiences have shown. However, this issue is not addressed in the present paper. In such cases, however, CL works to reduce the adverse effects that patents may have on prices and availability. For developing countries, the issue which needs to be resolved centres on how to overcome limitations on prospective importing states as to the sources of the products, and of exporting states in their capacity to establish economies of scale. See F. Abbott, Compulsory Licensing for Pubic Health Needs: The TRIPS Agenda and the WTO after the Doha Declaration on Public Health, Quaker UN Office, February 2002, p. 16. See also the recent developments with the Proposal for a Regulation of the European Parliament and of the Council on Compulsory Licensing of patents relating to the manufacture of pharmaceutical products for export to countries with public health problems, COM/2004/0737 COD 2004/0258. See also the Netherlands Policy rules on issuing compulsory licenses pursuant to the WTO decision WT/L/540 on the implementation of paragraph 6 of the Doha Declaration on the TRIPS Agreement and public health, under s.57(1) of the Kingdom Act on Patents of 1995 available at www.cptech.org/ip/health/cl/netherlands-export-rules.html.   91   With regard to the latter, see H. Hovenkamp, J. Mark, M. Lemley (2003) op. cit. para. 6-53, who state that: ‘compulsory licensing should be used as ‘a last resort’.   92   See survey of patent laws in Table 3.2.



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even the threat of CL is effective in exerting power on firms to reach a consensual agreement on licensing. Hence in cases where the upstream patentee would have otherwise refused to deal with a downstream competitor, the possibility of a compulsory licence might be effective in obtaining a voluntary licence. The Brazilian experience is illuminating in this respect.93 The government of Brazil threatened to produce pegylated interferon locally, which is a medicine used to cure Hepatitis C, unless the branded producers reduced their price. This led to an agreement between the government and the patent-holder, Roche, who offered to sell the drug in Brazil at an additional 40 per cent discount in order for Brazil to refrain from issuing a compulsory licence. The practical value of CL, therefore, is not only its use, but also ‘that the threat of it usually induces the grant of contractual licences on reasonable terms, and thus the objective of actually working the invention is accomplished’.94 (ii)  CL for non-use  It is in the interest of every state to promote the working of the patents as this assures the supply of new and better goods.95 Non-use provisions are therefore implemented in order to promote local working of the inventions and to forward the public interest in having access to novel and desired subject matter.96 It is argued that this type of CL would not serve as a possible safety net in the context of research tools as they address different issues. The research tool problem is grounded on lack of access rather than a lack of any kind of working of the patented invention. (iii)  CL for significant technological advances  It is also possible to have recourse to a provision allowing for the granting of a licence in cases in which a product or process would otherwise be infringing a first patent, and which represents an important technological improvement of considerable economic significance.97

  93

  J. Reichman and C. Hasenzahl (2002) op. cit. p. 97.   Ibid. See also Roche’s bid for a compulsory licence in May 2001 of Chiron’s blood screening patents in Germany, which led to a licensing agreement between the parties. See www.cptech.org/ip/health/cl/cl-eu.html.   95   Bhatnager, GATT Intellectual Property Protection Proposals in Context with Developing Countries and the Paris Convention, 40 Patent World 33 (1992).   96   G. Julian-Arnold (1993) op. cit. p. 349. See also S.P Ladas, Patents, Trademarks and Related Rights: National and International Protection, Cambridge: Harvard University Press (1975), §§ 245–9, pp. 423–36.   97   This provision existed in Art. 21 of the 2000 version of the Proposal for a Council Regulation, however, it was not included in the 2004 version. EC Commission Proposal for a Council Regulation on Community Patent, 1 August 2000, COM (2000) 412 final   94

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This is broadly referred to as the dependent patent, as it cannot be worked without infringing the earlier issued patent.98 If a licence agreement has not been reached, the dependent patent cannot be used. The ramifications of this depend on the value of the second patent in relation to the first patent. Hence, the hold-up problem could be significant where the improvement is of much larger value than the original patent. In some countries, the delay in introducing the improvement is perceived as being contrary to the public interest in having the unencumbered working of all patented inventions.99 To this end, CL provisions seek to remedy this situation. For example, Art. 36 of the Swiss Patent Law provides that: ‘If a patented invention cannot be used without violating the prior patent, the owner of the more recent patent shall have the right to the grant of a licence to the extent required for such use of his invention, provided that that invention serves a purpose entirely different from that of the prior patent, or that it involves a considerable technical advance’. The rationale is to provide incentives for the promotion of technical and economic development. Industry-specific similar provisions have also been created such as the European Directive on Biotechnological Inventions that allows breeders to request a CL if it has not been possible to acquire or exploit a plant variety without infringing a prior patent.100 It also allows for CL where the patent holder cannot use a protected variety without infringing third party rights.101 While these provisions may be desirable, it is questionable whether they are sufficient as they have been narrowly interpreted and so only applied in exceptional cases.102 For example, the provision on substantial improvements was

Doc. 7119/04 PI 18, Revised Proposal for Council Regulation on the Community Patent, 8 March 2004. See also UK section 48 Patents Act 1977; France Art. L 613.15 Industrial Property Code 1992; Netherlands, section 57 Patent Act 1995. For example, in the UK s.48(3)(d)(ii) provides that three years after the date of patent grant a compulsory licence may be granted where the working of another patented invention is being prevented or hindered by the refusal to grant licences on reasonable terms. This is subject to the condition that the compulsory licensee is prepared to cross-license its own dependent patent on reasonable terms. (section 48(7) PA 1977). None the less, this case of compulsory licensing has not been the subject of litigation in the UK. See M. Kern (1996) op. cit.   98   See G. Julian-Arnold (1993) op. cit p. 349.   99   Ibid. See survey in Table 3.2. 100   Biotech Directive (1998) op. cit. See also UK SI 2002/247 on Patents and Plant Variety Rights (Compulsory Licensing) Regulations 2002 that envisage compulsory licensing in cases constituting ‘significant technical progress of considerable economic interest in relation to the invention protected by the patent’. 101   Ibid. 102   M. Kern (1996) op. cit.



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applied by the German Federal Patent Court on 7 June 1991, in favour of the granting of a CL.103 In this case, Bioferon owned a patent for a pharmaceutical product, polyferon, for the treatment of chronic polyarthritis and it also held dependent patents on specific uses of human immune interferon. The Court found that there was a public interest in the medical use of polyferon which was dependent on the dominant substance patent, however, in December 1995, the Federal Supreme Court ruled that a CL would not be granted if the public interest could be satisfied with an alternative mechanism of equivalent effect. On the facts, it found that the substantially improved therapeutic properties had not been established.104 It is noteworthy that a study published in 1990 has shown that the last dependent compulsory licence in Japan had been granted more than 20 years before, and that the Federal Court in Switzerland had not dealt with such a case since the law had come into force in 1956.105 In cases involving a significant technological advance impeded by another patent and raising public health concerns, one could potentially envisage the use of CL under this provision to remedy the blocking effect, however, the usefulness of this approach has not been tested thus far.106 It should also be noted that it is unclear whether this provision can only be used for improvements or if it can also be used for dependent downstream technology. The wording of the Community Patent Regulation only provides for a second infringing patent, therefore it, prima facie, covers both cases. However, it seems that this provision would be inadequate to deal with cases raising similar issues such as research tools, as use is required prior to any potential patent. Hence, it would seem that this provision could not be used in cases of blocked access to an upstream innovation for downstream research, as opposed to patents that have already been granted.107 (iv)  CL to address health emergencies  Most countries have provisions in their patent laws relating to the grant of CL in situations involving a national 103   ‘Zwangslizenz’ Federal Supreme Court (BGH), 5 December 1995, GRUR 1996, 190; 24 IIC 397 (1993). See also Grounds for Granting Compulsory Licensing, at www. southecentre.org. 104   See Grounds for Granting Compulsory Licensing, at www.southecentre.org, p. 4. For a critique of the strict interpretation of the notion of ‘public interest’ by the Court, see M. Kern (1996) op. cit. 105   W.G. Walter, Compulsory Licenses and Dependent Patents, 21 IIC 532 (1990). 106   See IPR Helpdesk, Some Basic Issues Surrounding Improvements Made to Patented Invention and to Dependent Patents, at http://www.ipr-helpdesk.org/. 107   As it was shown earlier, downstream research to potentially obtain a second patent would not be exempted under the experimental use exemption, as it would constitute commercial use and experimenting with as opposed to on the invention.

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emergency108 which may include health emergencies.109 Some countries, such as the USA, have even enacted more sector-specific legislation to cater for the particular interests affected by pharmaceutical patenting. In this way, the Public Health Emergencies Act110 gives the US Secretary of Health and Human Services broad discretion to issue CL to address public health emergencies.111 It also provides that, in the determination of reasonable remuneration, account should be taken of the following factors: the risks and costs associated with the invention; the efficacy and innovative nature and the importance of the invention or of products using the invention to public health; the degree to which the invention has benefited from publicly funded research; the need for adequate incentives for the creation and commercialisation of new inventions; the public interest in health care services; the public health benefits of wider access to inventions; the benefits of making inventions available to working families and retired persons; and the need to correct anti-competitive practices or other public interest considerations. The USA has also enacted the Affordable Prescription Drugs Act,112 that seeks to use competition to bring

108   See section 24(1) of the German Patent Act which states that ‘If the applicant or patentee refuses to permit the exploitation of the invention by another person offering to pay reasonable compensation and to furnish security therefore, that person shall be given authority to exploit the invention if permission is indispensable in the public interest.’ See also Art. L.613-16 of the French Code on Intellectual Property which provides for compulsory licensing of patents ‘if required in the interest of public health’. According to WHO’s publication, Globalization and Access to Drugs, Implications of the WTO/TRIPS Agreement, WHO, November 1997, this law authorised this procedure when patented drugs ‘are only made available to the public in insufficient quantity or at abnormally high prices’. See also according to G. Julian-Arnold (1993) op. cit. p. 349 who states that in Greece ‘for imperative reasons of public health, if the invention has been insufficiently exploited to satisfy local needs a license may be granted’. On health emergencies, see Proposal for Regulation of the European Parliament and Council on Compulsory Licensing of patents relating to the manufacture of pharmaceutical products for export to countries with public health problems, COM (2004) 737. 109   See Doha Declaration, WT/MIN(01)/DEC/1 November 2001 5(c) providing ‘Each member has the right to determine what constitutes a national emergency or other circumstances of extreme urgency it being understood that public health crises … can represent a national emergency, or other circumstances of extreme urgency.’ 110   Public Health Emergencies Act HR 3235, 6 November 2001. 111   The anthrax scare in 2001 led the DHHS Secretary Thomson to seek a large stockpile of ciprofloxacin (Cipro) that would be sufficient to treat 10 million people. However, as the quantity was greater than Bayer was able to produce in a timely manner, Thomson was asked to issue compulsory licences to generic manufacturers on 16 October. For more information see www.cptech.org/ip/health/cl/recent-example.html. 112   Affordable Prescription Drugs Act HR 1708, 27 April 2001.



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down the cost of the prescription drugs. If the patent privilege is misused at the expense of consumers, generic competition is seen as having an important role in ensuring broader access and reasonable prices. HR 2927 also provides for the CL of certain patented medical inventions.113 The Competition Commission in South Africa found that GlaxoSmithKline and Boehringer Ingelheim had contravened the Competition Act of 1998 and abused their dominant positions in the anti-retroviral markets by virtue of excessive pricing in respect of ritonavir, lamivudine, ritonavir+lamivudine and nevirapine.114 Therefore, this may provide another avenue to give effect to the predominance of health concerns. (v)  CL as a remedy for anti-competitive conduct  The final ground for granting a compulsory licence is to remedy practices found to be anti-competitive.115 In this context, it is possible to contemplate a situation in which a compulsory licence could be imposed if a dominant firm refuses to grant access to its upstream innovation, thereby impeding innovation on downstream research or follow-on innovation. This might represent a threshold that is lower than the dependency provisions within the patent system as it does not necessitate the existence of a significant technological advance of considerable economic interest. In this respect, it may be broader and more effective than the dependency provision. On the other hand, it should be remembered that liability for a unilateral refusal to deal is only imposed in anti-trust law on dominant undertakings and not on a general level. The implications of this type of CL are not dependent on the internal patent provisions but rather on the external anti-trust determination. (b)  Conclusions on CL CL is envisaged to take many different forms in order to cater for the potential problems relating to research tools. The outcome largely depends on the interpretation and the recourse made of the provisions relating to public interest/health emergency, dependent patents and anti-competitive practices. In view of the uncertainty of pharmaceutical patent protection regarding its effect on prices, profitability and innovation, it is difficult to evaluate the desir-

113

  Affordable Prescription Drugs Act, HR 2927, 23 September 1999.   For an extensive discussion see www.cptech.org/ip/health/cl/recent-examples. html. 115   While this has not been found to be a ground justifying CL in most European national patent laws, it is within the scope of lawful CL under TRIPS, and could find its way into national law if it is deemed desirable through the interpretation of ‘public interest’ which is present in most national systems. See survey of CL provisions in Table 3.2. 114

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ability of compulsory licences. A study which analysed the effects of CL on the R&D expenditure of firms and sought to establish whether the incentives to invest were hampered by such licences, found that in relation to the 70 companies surveyed, a negative effect on R&D could not be established, and that there was even a discernible rise in comparison to similar companies that were not subject to such licences.116 As was shown, however, much depends on the interpretation and application of the patent provisions as an overly narrow interpretation could render them useless.117 Julian Arnold has found that compulsory licences have rarely been applied in cases where dependent patents were blocked.118 This is due to the practical problems associated with the fact that an improvement on the invention must be made prior to an application, a patent must have been granted, the improvement patent must survive the possible length of the opposition proceedings, and an attempt to voluntarily reach an agreement must have been made. The dependency provisions might prove to be even less helpful in the context of research tools as they apply to secondary patents and not research as such. CL may also prove to be problematic due to the costs associated with patent litigation. ‘The costs of the litigation in the AZT patent case were estimated at $100,000 per day, and it is common in the US for parties to spend more than $1million to litigate a patent dispute.’119 In cases where access is needed to simply carry out research with the research tool which is at a stage where it is unclear whether it will be successful, these practical obstacles might be decisive and might render CL inefficient. Empirical evidence from other European countries confirms that although some form of compulsory licence scheme exists, it is rarely exercised in practice.120 For example, statistical data for the German Federal Patents Court, which

116   See F.M Scherer, The Patent System and Innovation in Pharmaceuticals, Cambridge, Harvard University Press (1998), pp. 107–8; Grounds for Granting Compulsory Licensing, www.southcentre.org, p. 6. It is also known that pharmaceutical companies spend more on advertising and promotion than on R&D which is hard to justify in the case of life-saving drugs such as antiretrovirals, that are essential and do not require advertising. See F. Abbott (2001) op. cit. p. 41. 117   See, for example, in Australia where only one application has been made to the Federal Court for a CL on the grounds that ‘the reasonable requirements of the public with respect to the patented invention have not been satisfied’. This claim was rejected. See ACIP (2004) op. cit. 118   G. Julian-Arnold (1993) op. cit. 119   J. Love, Implementing TRIPS safeguards with particular attention to administrative models for compulsory licensing of patents, WHO meeting in Harare, Zimbabwe, 21 August 2001. 120   See M. Kern (1996) op. cit. p. 2.



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was founded in 1961, shows that until the end of 1991 there had been only 12 cases in which parties had instituted proceedings for compulsory licences.121 In practice, compulsory licensing is not greatly used. Between 1991 and 1993, the Patent Office did not receive any applications for compulsory licenses, although between 1988 and 1990 it received eight. As Jeremy Phillips has pointed out however, these figures do not necessarily tell the whole story. The licensing provisions also act as a form of deterrent against abuse – or to look at it another way, of encouragement to grant licenses voluntarily. Actual applications under s. 48 may therefore be regarded as instances where the compulsory license provisions have failed, while on many other occasions they may have been successful in encouraging voluntary agreements.122

Despite this, some governments might even be unwilling to impose a compulsory licence in cases of national emergency due to the uncertainty over the potential compensation. It has been suggested that the reluctance of the Bush administration to act in a way that would ‘override’ the patent, could be attributed to the concern over what the Treasury might thereafter charge for lost revenues. ‘As a consequence of concerns about uncontrolled or unpredictable costs, public health officials will act conservatively and expose the public to higher risks.’123 In conclusion, while CL might be associated with different contexts, the most relevant patent law situation relates to dependent patents. The interpretation and practical use of this provision has thus far been quite limited, therefore in its current form it is doubtful whether it would be helpful in the context of research tools. Apart from internal licensing, there are only two other instances that might be helpful in the research tool context, which include cases of ‘extreme urgency’ including public health and CL as a remedy to anti-competitive conduct. However, as these involve licences outside the patent system, they need to be analysed externally, in line with their own system. The application and interpretation of both of these cases as an effective means to address follow-on innovation concerns are discussed in the following section. In this regard, it will be endeavoured to ascertain the implications of the right to health on the duty to deal and how this may potentially cater for situations of blocked access to essential research inputs.

121

  Ibid.   R. Battcock, IPRs, software copyright and competition law: restricting the rights of intellectual property owners in the wider public interest, available at www.cptech. org/ip/health/cl/cl-eu.html. 123   CPTech comments on H.R. 3235, the ‘Public Health Emergency Medicines Act’, 7 November 2001, http://lists.essential.org, p. 1. 122

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Table 3.2 European national provisions for compulsory licensing and on the experimental use exemption Country

Applicable statute

Compulsory licensing provisions

Patent infringement limitationsexperimental use exemption

Austria

Austrian Patent Law (Patentgesetz 1970) as last amended by the Law No. 234 of 23 May 1984

§ 36. CL for – non working – dependent patents where of ‘considerable commercial or industrial significance’ – public interest

Denmark

The Consolidate Patents Act Patents Act No. 479 1967 as last amended by Act No. 733, 27 Nov. 1989

CL for – non working (s.45) – dependent patents if reasonable in view of its importance (s.46) – if required by important public interests (s.47)

Art. 3(3) excuses noncommercial use and use for experimental purposes relating to the subject matter of the invention

Finland

Finnish Patents Act Patent Law (Patenttilaki) No. 550 1967 as last amended by Act No. 243, 21 Mar. 1997

CL for – non working (s.45) – dependent patents if ‘reasonable’ (s.23) – where ‘considerable public interest’ (s.47)

Section 3: exclusive right does not apply to ‘use of experiments relating to the inventions as such’

France

Intellectual Property Code French Patent Act Law No. 92-597 (as last amended by Law No. 96-1106 1996)

CL for non-working and for dependent patents Art. L 613-16 in the interests of public health, patents granted for medicines … See also Use of Inventions for Service of State Section 78 (for the maintenance of supplies essential to life, for promoting productivity…)

L. 613-6 ‘acts performed on an experimental basis and which relate to the object of the patented invention’



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Table 3.2 continued Country

Applicable statute

Compulsory licensing provisions

Patent infringement limitationsexperimental use exemption

Germany

German Patent Act Patent Law of 16 Dec. 1980 as last amended by Law of 25 Oct. 1994

Section 24(1) where the public interest so commands

Section 11 No.2 ‘acts done for experimental purposes which are related to the subject matter of the patented invention’ No.1 excuses private uses for noncommercial purposes

Greece

Technology Transfer, Inventions and Technological Innovation Law 1733/1987 as last amended by Law No. 17/39 1987 and Presidential Decrees No. 54/1992

§§ 13, 14 CL for – non-working – dependent patents if ‘significant progress in comparison with invention of prior patent’, – imperative reasons of public health or national defence (Art. 14)

Art. 10 (2) a. nonprofessional or research purposes

Italy

Law on Patents for Inventions; Royal Decree No. 1127 1939 as last amended by Legislative Decree No. 198 1996

§54 CL for non working, dependent patents ‘important technological improvement’

Art. 1(3) exclusive rights do not extend to non-commercial use/ experimental use/ private use

Netherlands

Dutch Patent Act 1910 as last amended by the Act of the Kingdom of 29 May, 1987

– Section 34(1) compulsory license based on ‘public interest’ – Section 34(2) and (3) for non-use – Section 34(4) to enable use of younger patent

Section 30(3) ‘acts exclusively done for experimental purposes relating to the subject matter of the invention, including the product obtained directly as a result of applying the patented process’

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Table 3.2 continued Country

Applicable statute

Compulsory licensing provisions

Patent infringement limitationsexperimental use exemption

Norway

Patents Act No. 9 1967 as amended by Act No. 104, 20 Dec. 1996

§§43 50 CL for – non-working – dependent patent ‘important – technological advance of considerable economic significance’, – ‘important public interests’

Art. 3 excuses experiments outside professional activities or experiments relating to the subject-matter of the invention

Portugal

Industrial Property Code Decree Law No. 16/95 1995

CL for – non-working (art. 103) – dependency when considerable technological advance (art. 107) – public interest incl. public health or national defence (Art. 102)

Art. 98 on experimental purposes

Spain

Spanish Law on Patents No. 11 (20 March 1986) as last amended by Law 50, 1998

§86 CL for – non-working – dependent patents so long as the invention has ‘distinctive industrial objectives or represents considerable technical progress’ – ‘reasons of public interest’ where paramount for public health or national defence Also special provisions for cases of medicines and public health.

Art. 52 patent rights not extend to ‘acts carried out for experimental purposes which relate to the subject matter of the patented invention.’ Also exemption as to private and noncommercial use.



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Table 3.2 concluded Country

Applicable statute

Compulsory licensing provisions

Patent infringement limitationsexperimental use exemption

Sweden

Swedish Patents Act No. 837 1967 as last amended by Act No. 1406 of 1998 (Patentlag)

CL when – non working (s.45) – dependent patents where reasonable (s.46) – required by public interests of extreme importance (s.47)

Section 3: excludes use from exclusive right that is not commercial, use for experiments which relate to the invention …

Switzerland

Federal Law on Patents for Inventions 1954 (as last amended on 24 March 1995) Swiss Patent Act

CL for – Art. 40(1) ‘public interest’ – Non-working Art. 37 – dependent patents Art. 36 when important technological advance of significant importance

Implicit support for EUE via Art. 26(1) No. 3 – disclosure not sufficiently clear and complete is a nullity and Art. 36 acknowledging dependent inventions or patents.

UK

UK Patents Act 1977 as last amended by the Copyright, Designs and patents Act 1988

Section 48(3) – Non working – dependent patent ‘if the working of an invention which makes a substantial contribution to the art is hindered’ – demand not met … Section 51 CL in consequence of report of Monopolies and Mergers Commission where would be in public interest Sections 55–57 on Crown Use for public interest

Section 60(5) ‘acts done privately and for purposes that are not commercial’ ‘for experimental purposes relating to the subject matter of the invention’

European Communities

Directive 98/44/EC on legal protection of biotechnological inventions

Art. 12 ‘significant technical progress of considerable economic interest’

See recent endorsement of Bolar exemption See EPC Art. 27(b) for EUE

4. The right to health as an interpretive principle of patent law In a state of law, the right to life, and in consequence the right to health, receives particular attention. Any economic criterion that pretends to annul the exercise of such rights must cede in importance … because without the right to life all of the other rights are useless … Of what use are all other rights and guarantees, the institutions and programs, the advantages and benefits of our system of liberties, if even one person cannot count on having the rights to health and life guaranteed? (Alvarez v Caja Costarricense de Seguro Social, Exp. 5778-V-97, No. 5934-97, Sala Constitucional de la Corte Suprema de Justicia de Costa Rica)

4.1 Introduction One of the particularities of the biopharmaceutical industry is that human rights and specifically the right to health may have implications on policy making. This is due to the nature of the goods produced as any unintended impact on the balance may lead to an increased social cost. The implications that the right to health might have on the patent balance cannot therefore be overlooked. The objective of this chapter is to enquire into the extent to which patent law could be affected by the existence of the right to health, whether directly or indirectly. As shown in the previous chapter, patent law does not contain specific provisions for cases where the right to health might be in issue, however, it does envisage the possibility of granting a compulsory licence in the interest of public health. It also allows for exceptions and exclusions to be created in the interest of ordre public, which may include health concerns in certain cases.

    See Chapter 3 and Art. 8 of the TRIPS Agreement, Principles. The reference to ‘public health’ does not directly incorporate the right to health, although one might assume that the latter is included in it.     In the EU, the European Group on Ethics in Science and Technology is an independent pluralist multidisciplinary body, which was set up in 1992 by the Commission to advise on the ethical aspects of new technologies envisaged in Community policies or proposed legislation.



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In order to examine the potential implications of the right to health on the patent system and, more specifically, on the duty to deal in the pharmaceutical industry, the following elements will be assessed: 1. Does a right to health exist and what obligations does it create? 2. Does a right to intellectual property law exist and can it be described as a human right? 3. How does the right to health impact on patent law? How does the right to health affect patent statutes, either through interpretation or as a means of invalidation?

4.2 The right to health as a human right and its status in European law 4.2.1 Introduction to the Right to Health The right to health as a human right has its roots in the public health movement of the nineteenth century when the first health legislation was adopted. Due to the development of commerce and transportation, the creation of a mechanism was sought to prevent transmittable diseases at the international level, as it was believed that diseases would hinder international trade. Gradually, the foundations for the recognition of health as a human right were laid both at national and international level. It was quickly understood that in order to improve health, issues such as poverty and sanitary conditions would have to be tackled. The starting point for the protection of health can be found in the WHO Constitution, which states that the enjoyment of the highest attainable standard of health is one of the fundamental rights of every human being without discrimination as to race, religion, political belief, economic or social condition. The promotion and protection of health is fundamental to the individual’s wellbeing and dignity and, therefore, health services became an important social good. States have responsibilities in relation to public health, which crystallise

    C.A. Toebes, The Right to Health as A Human Right In International Law, Oxford, Intersentia- Hart 1999, pp. 15–17; P. Farmer, Pathologies of Power. Health, human rights and the new war on the poor, Berkeley, University of California Press (2003); N. Birdsall and E. James, Health, government and the poor: The case for the private sector, in J.N. Gribble and S.H. Preston (eds), The Epidemiological Transition Policy and Planning Implications for Developing Countries, Washington DC, National Academy Press (1993), pp. 229–51.     Article 1 of the WHO Constitution, 1945 available at http://www.who.int/rarebooks/official_records/constitution.pdf.

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in the obligation to create some basic conditions to protect and enhance public health; however, this does not extend to an obligation to guarantee the well-being of every individual. In view of its paramount importance in society, health has been recognised as a human right in several international, regional or national human rights treaties. There is much controversy surrounding the existence of this right, even in the use of the term.  

  At the international level, it is set out in myriad international treaties including the ICESCR GA Res. 2200, UN GAOR, Supp. No. 16, UN Doc. A/6316 (1966), 999 UNTS 171 (entered into force 23 March 1976) (see further down), Art. 24 of the Children’s Convention (Convention on the Rights of the Child, No. 20 1989 GA Res. 44/25, UN GAOR 44th Sess., Supp. No. 49, at 167, UN Doc. A/44/49 1989) stating ‘State parties recognize the right of the child to the enjoyment of the highest attainable standard of health …’, the International Convention on the Elimination of All Forms of Racial Discrimination of 1965, UN GAOR Res. 2106 A(XX), and the Convention on the Elimination of All Forms of Discrimination against Women of 1979, GA Res. 34/180 UN GAOR 34th Sess., Supp/No. 44 at 193, UN Doc A/34/36 91980 (entered into force 3 September 1981) at Art. 12. At the regional level, there are also several instruments setting out the right to health care and the obligation to undertake public health measures, such as Art 16 of the Banjul Charter (African [Banjul] Charter on Human and People’s Rights, adopted 27 June 1981, OAU Doc. CAB/LEG/67/3 rev. 5, 21 I.L.M. 58 (1982) entered into force 1986) securing the right to the ‘best attainable state of physical and mental health’, and the European Social Charter, ETS 35 – Social Charter, 18.X.1961, 18 October 1961 (available at www. conventions.coe.int/Treaty/en/treaties/hetml/035.htm) Art. 11(3) referring to the obligation to take appropriate measures to ‘prevent as far as possible epidemic, endemic and other diseases’ and Art. 13(1) to ‘ensure that any person who is without adequate resources and who is unable to secure such resources … be granted adequate assistance, and in case of sickness, the care necessitated by his condition.’ At the domestic level, the right to health has been enshrined in more than 60 national constitutions. See The Right of Everyone to the Highest Attainable Standard of Physical and Mental Health, Report of the Special Rapporteur, Paul Hunt, submitted in accordance with Commission Resolution 2002/31, UN ESCOR, 59th Sess., Agenda Item 23, ¶ 20, UN Doc. E/CN.4/2003/58 (2003).     While the term, right to health, is most often used in international law, reference is made in some cases to the right to health care, or to health protection. Some even allege that there is no such right at all as it makes no sense to confer a right unless someone else has the ability to meet that need. ‘So any ‘right’ to medical care imposes on someone the obligation to provide care to those who cannot provide it for themselves.’ See D. Kelley, Is there a right to health care, The Objectivist Centre (1993), http://www.objectivistcenter.org/articles/delley_right-to-health-care.asp. Others have described the right to health as misleading by arguing that it should be converted to the right to health protection including the right to health care and a right to healthy conditions. H.L. Fuenzalida-Puelma/S.S. Connor, The Right to Health in the Americas, Pan-American Health Organization, Scientific Publication No. 509, Washington, D.C., 1989. V.A. Leary, The Right to Health in International Human Rights Law, 1(1) Health and Human Rights: An International Journal 1, (1994).



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The right to health is used in the international human rights context, first, to refer to the more lengthy detailed provisions relating to health in the WHO Constitution and in legally binding human rights treaties, and secondly, to emphasise the social and ethical aspects of health care and status. The concept of a right to health implies that fundamental human rights principles such as dignity, non-discrimination, participation and justice are relevant to issues of health care and health status. ‘Three aspects of the right to health have been enshrined in the international instruments on human rights: the declaration on the right to health as a basic human right; the prescription of standards aimed at meeting the health needs of specific groups of persons; and the prescription of ways and means for implementing the right to health.’ Conceptualising health issues as a right emphasises their exceptional importance as social or public goals and not merely as medical, technical or economic problems.10 It focuses on the dignity of persons as recognised in the Preamble to the Universal Declaration of Human Rights (UDHR),11 which provides for

The right to health, however, is probably the most desirable term as it recognises a right not only to health care, but also to underlying preconditions for health such as occupational health and environmental health. C.A. Toebes (1999) op. cit. p. 17. See also R.K. Lie, Health, human rights and mobilization of resources for health, 4 BMC International Health and Human Rights 4 (2004).     See The Committee on Economic Social and Cultural Rights which monitors compliance with the International Covenant on Economic, Social and Cultural Rights, G.A. Res. 2200 (XXI), UN GAOR, Supp. (No. 16) 49, UN Doc. A(6316) 1966. This Committee held a ‘Day of General Discussion on the Right to Health’ on 6 Dec. 1993 (the right to the enjoyment of the highest attainable standard of physical and mental health) UN Information Service, Press Release HR/3604, 6 December 1993; R.J. Cook, Human Rights in Relation to Women’s Health, The Promotion and Protection of Women’s Health through International Human Rights Law, WHO/DGH/93.l; Fuenzalida-Puelma and Connor (1989) op. cit.    V.A. Leary (1994) op. cit. p. 2.     T.C. Van Boven, The Right to Health, pp. 54–72, in R-J. Dupuy (ed.), The Right to Health as a Human Right, Workshop, The Hague Academy of International Law and the United Nations University, Sijthoff & Noordhoff, Alphen aan den Rijn, The Netherlands (1979), pp. 54–55. 10  V.A. Leary (1994) op. cit. p. 8. A. Chetley, A Healthy Business? World Health and the Pharmaceutical Industry, London, Zed Books (1990), p. 206; R-J Dupuy (1979) The Right to Health and Human Rights, Alphen aan den Rijn, The Netherlands: Sijthoff & Noordhoff, 1979. 11   ‘Recognition of the inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world.’ UDHR, GA Res. 217 A(III), UN Doc. A/810 (1948) Preamble. In the health context, this stresses that the dignity of each person must be central in all aspects of health, including health care, experiments etc. The focus is on the good of the individual not the collective good.

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equality or non-discrimination,12 the participation of individuals and groups in issues affecting them,13 implies an entitlement14 and interdependence with other rights, and that limitations should be subject to strict scrutiny.15 However, as a socio-economic right, the precise content of the right to health is unclear. Contrary to civil and political rights which are frequently invoked in national judicial proceedings and which are enshrined in many international complaint mechanisms, economic, social and cultural rights are often regarded non-justiciable at the national level, and viewed as ineffective due to the lack of effective complaint systems at the international level. This is often due to the reluctance of states to accept the high costs associated with ensuring entitlements to health or housing or food and education.16 4.2.2 Sources of the Right to Health Within EC law, the most relevant provisions on the right to health can be found in the Charter on Fundamental Rights.17 The European Charter on Fundamental Rights18 was drawn up in order to ‘strengthen the protection of fundamental rights in the light of changes in society, social progress and scientific and technological developments by making those rights more visible in a Charter’.19 Article 35 of the Charter provides for the right of access to preventive health care and the right to benefit from medical treatment under the conditions established by national law and practice. It is not considered as a right to individual

12   See Art. 2 of the Universal Declaration on Human Rights GA Res. 217 A(III), UN Doc. A/810 (1948) recognising the fundamental nature of non-discrimination in the human rights context: ‘Everyone is entitled to all the rights and freedoms set forth in this Declaration, without distinction of any kind such as race, colour, sex, language, religion, political or other opinion, national or social origin.’ 13   The Declaration of Alma-Ata on Primary Health Care states: ‘The people have the right and duty to participate individually and collectively in the planning and implementation of their health care.’ Declaration of Alma-Ata, adopted at the International Conference on Primary Health Care, 12th September 1978, World Health Organization, Geneva. 14   This means that governments have a duty to provide for individuals, not just to society in general. 15   According to the International Covenant on Civil and Political Right, UNGA Resolution 2200A [XX1], 16 December 1966, limitations are permitted on the rights to liberty of movement, freedom of religion, freedom of expression and the right to freedom of association, in the interest of protecting public health (e.g. Art. 18(3)). 16   B.C.A. Toebes (1999) op. cit. 17   Other national, regional or international relevant provisions were mentioned above. op. cit. 18   Charter of Fundamental Rights of the European Union OJ 2000 C 364/01. 19   Ibid. Preamble.



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health, but rather, a right to conditions that may lead to it. The extent and level of protection is left to the discretion of individual states, although it stipulates that a ‘high level of human health protection’ should be ensured.20 The right to health has been recognised on several occasions at the international level, the most important of which include: first, the Universal Declaration of Human Rights,21 which affirms in Art. 25(1) that: ‘Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.’ In addition, the International Covenant on Economic, Social and Cultural Rights contains the following provisions:22 Art. 11(1) states that ‘The States Parties to the present Covenant recognise the right of everyone to an adequate

20   The rights recognised in the Charter are addressed to the institutions and bodies of the EU and to the Member States in the implementation of Union law, and therefore, they are not building on individual pharmaceutical companies (Art. 51). Limitations on such rights may be provided for by law if they respect the essence of these rights and freedoms and are proportional, necessary and meet the objectives of the general interest recognised by the Union or are necessary to protect the rights and freedoms of others (Art. 52). Hence, it would seem that the Charter seeks to balance potentially competing interests in particular through the proportionality and necessity principle. Important safeguards and provisions regarding the right to health can also be found in the European Charter of Patients’ Rights. The latter is directed to active citizenship organisations working on patients’ rights at the national level, yet it also addresses health care professionals, managers, governments, legislatures and administrative bodies. The dissemination and application of the contents of the Charter is carried out on many levels, particularly at European, national and local levels. The supremacy of the rights of patients over financial constraints is underlined, and an attempt is made to harmonise respect for the patients’ rights throughout the Union. It complements the Charter of Fundamental Rights in affirming the inalienable and universal nature of these individual rights. It explains that the protection of the right to health as provided for in Art. 35 is both an individual and a social good. The Charter proposes 14 patients’ rights which would be concrete, applicable and appropriate to the transitory nature of the health services. The latter includes: the right to preventive measures, access, information, consent, free choice, privacy and confidentiality, respect of patients’ time, observance of quality standards, safety, innovation, avoidance of unnecessary suffering and pain and personalised treatment, and the right to complain and to receive compensation. The Charter effectively stresses the need to ensure that ‘the criteria of economic sustainability do not prevail over the right to health care’. Article 12 Active Citizenship Network. European Charter of Patients’ Rights, 2002, available at http://www.activecitizenship.net/health/european_charter.pdf. 21   GA Res. 217 A(III), UN Doc. A/810 (1948). 22   GA Res. 2200, UN GAOR, Supp. No. 16, UN Doc. A/6316 (1966), 999 UNTS 171 (entered into force 23 March, 1976).

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standard of living for himself and his family, including adequate food, clothing and housing and to the continuous improvement of living conditions.’ According to Art. 12(1): ‘The State Parties to the present Covenant recognise the right of everyone to the enjoyment of the highest attainable standard of physical and mental health.’ Article 12(2) states: The steps to be taken by the States Parties to the present Covenant to achieve the full realisation of this right shall include those necessary for: (a) The provision for the reduction of stillbirth-rate and of infant mortality and for the healthy development of the child; (b) The improvement of all aspects of environmental and industrial hygiene; (c) The prevention, treatment and control of epidemic, occupational and other diseases; (d) The creation of conditions which would assure to all medical service and medical attention in the event of sickness.

The latter is the most comprehensive provision on the right to health in international human rights law.23 General Comment 14 of 2000 analyses the implications of Art. 12 and its recognition of the right to the highest attainable standard of health.24 4.2.3 Implications of the Right to Health The right to health is dependent on and related to respect for human dignity and the realisation of other human rights including the rights to food, life, non-discrimination, equality and privacy. Within the preamble to the Constitution of WHO, health is defined as ‘a state of complete physical, mental and social wellbeing and not merely the absence of disease or infirmity’.25 However, as the General Comment highlights, the right to health does not refer exclusively to the right to health care but also embraces a range of socio-economic factors that promote conditions for a healthy life, and extend to other aspects such as food, nutrition, housing and a healthy environment.26

23   Other international provisions affirming the right to health can be found in: Art. 5(e)(iv) of the International Convention on the Elimination of All Forms of Racial Discrimination, 1965; Arts 11.1(f) and 12 of the Convention on the Elimination of All forms of Discrimination against Women, 1979; and Art. 24 of the Convention of the Rights of the Child, 1989 op. cit. 24   E/C.12/2000/4, The Right to the Highest Attainable Standard of Health, CESCR General Comment 14, 11 August 2000. 25   WHO Constitution (1945) op. cit. 26   See General Comment No. 14 (2000) op. cit. See also R-J Dupuy (1979) op. cit.; International Institute for Human Rights Studies. Le médecin face aux droits de l’ homme.



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Health care is therefore simply a part of the right to health, which encompasses broader factors as shown above. Access to medication is a critical component of the right to health, both for epidemic and endemic diseases.27 The right to health does not, however, guarantee the right to be healthy, as health is a very subjective matter: Health is a state of being, not something that can be given, and only in indirect ways something that can be taken away or undermined by other human beings. It no more makes sense to claim a right to health than a right to wisdom or courage. These excellences of soul and of body require natural gift, attention, effort, and discipline on the part of each person who desires them. To make my health someone else’s duty is not only unfair; it is to impose a duty impossible to fulfil.28

4.2.3.1 Elements of the right to health The right to health consists primarily of the right to health care and the preconditions for health. It also involves two levels of obligations: those which can be realised progressively and those which can be realised irrespective of the financial resources of a state; the scope and core content of the right to health respectively.29

Padova: CEDAM, 1990. p. 1485; J. Montgomery, Rights to Health and Health Care, in A. Coote (ed.), The Welfare of Citizens, Developing New Social Rights, London, Institute for Public Policy Research/Rivers Oram Press (1992). 27   See Art. 12(2)(c) and (d) ICESCR. See A.E. Yamin, Not Just A Tragedy: Access to Medications as a Right under International Law, 21 Boston University International Law Journal 178 (2003). 28   L.R. Kass, Regarding the End of Medicine and the Pursuit of Health, 40 The Public Interest 11 (1975). The right to health does not signify a right to be healthy, but instead it contains freedoms such as the right to control one’s health and body, and entitlements such as the right to a system of health protection that provides an equal opportunity for people to enjoy the highest attainable standard of life. The latter refers not only to the individual’s biological and socio-economic conditions, but also to the state’s available resources and so is bound to vary. The state may not ensure good health services, therefore ‘the right to health must be understood as a right to the enjoyment of a variety of facilities, goods, services and conditions necessary for the realisation of the highest attainable standard of health.’ Hence, the right to health includes not only appropriate health care but also the determinants of health, and the right of individual participation in health-related decision-making at all levels including national, community and international levels. 29   While there are several elements which impact on health, they should not be included in the scope of the right if they are not referred to in the treaties or protected through other human rights, as in the case of torture and protection against compulsory medical treatment or experimentation. M. Whitehead, The Concepts and Principles of Equity and Health. WHO Regional Office for Europe: Copenhagen, 1990. World Health Organization. Indicators to Measure the Realization of the Right to Health, Background Paper for Seminar on Appropriate Indicators to Measure Achievements in the Progressive

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The core content of the right to health is comprised of the following aspects: maternal and child health care; immunisation against major infectious diseases; appropriate treatment of common diseases and injuries; the provision of essential drugs; and an adequate supply of safe water and basic sanitation and freedom from serious environmental health threats.30 The General Comment clarifies that the right to health depends on four elements that may be applied at the discretion of the State in line with the availability of resources. These include: 1. Availability: public health, health-care facilities, goods and services should be made available in a sufficient quantity at the national level. 2. Accessibility: health facilities, goods and services should be accessible to all without discrimination. This involves non-discrimination, physical accessibility (within safe physical reach), economic accessibility (affordability), and information accessibility (the right to seek, receive and impart information and ideas concerning health issues though also preserving confidentiality of personal health data). Accessibility requires that the vulnerable and marginalised groups are not prejudiced in any way. 3. Acceptability: this refers to the fact that facilities, goods and services must respect medical ethics and should be sensitive to cultural needs. 4. Quality: facilities, goods and services must be of the appropriate standards and quality. While the right to the highest attainable standard of health is a progressively realisable right due to resource limitations, some obligations are immediate, such as those relating to non-discrimination and the provision of deliberate, concrete and targeted steps.

Realization of Economic, Cultural and Social Rights. Geneva, 25–29 January 1993, HR/Geneva/1993/Sem/BP. 30   In addition, it is believed that the services should be ‘geographically, culturally and functionally within easy reach of the whole community’. It has also been suggested that additional health services should be available, subject to equal access, give extra protection to vulnerable groups and that the quality of those services should be taken into account. Toebes (1999) op. cit., pp 287–8. See also A.E. Yamin (2003) op. cit.; P. Carl, et al., AIDS and Human Rights in the European Communities, Utrecht, Netherlands Institute of Human Rights (1991); L. Gostin and J. Mann, Towards the Development of a Human Rights Impact Assessment for the Formulation and Evaluation of Health Policies, 1(6) Health and Human Rights: An International Journal 58 (1994).



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4.2.3.2 Obligation to respect, protect and fulfil As with all human rights, states have a three-fold obligation; namely, the obligations to respect, protect and fulfil.31 The obligation to respect requires that the State should not interfere directly or indirectly with the enjoyment of the right to health, and to refrain from denying or limiting equal access for all persons. The obligation to protect requires the state to take measures to prevent third parties from interfering in the attainment of the right to health,32 while the obligation to fulfil requires the adoption of appropriate legislative, administrative, budgetary, judicial, promotional and other measures for the full realisation of the right to health.33 The right to health could be violated in the following ways: the suspension of legislation or the adoption of laws or policies that interfere with the enjoyment of any of the components of the right to health; the failure of the state to take its legal obligations regarding the right to health into account when entering into bilateral or multilateral agreements with other states, international organisations and other entities such as multinational corporations; the failure to regulate the activities of individuals, groups or corporations so as to prevent them from violating the right to health of others and the failure to take measures to reduce the inequitable distribution of health facilities, food and basic services.34

31   A.E. Yamin (2003) op. cit.; WHO, Indicators to Measure the Realization of the Right to Health, (1993) op. cit.; J. Montgomery (1992) op. cit.; R-J. Dupuy (1979) op. cit. 32   Failure to take action to restrict the harmful conduct of pharmaceutical companies might potentially be such a breach of obligations. 33   Despite the above core and scope obligations, however, it cannot be concluded that the right to health is justiciable as such at the international level. The term ‘recognise’ in contrast with to ‘ensure’ or ‘guarantee’, reflects its non-binding character. None the less, some elements of the Article are justiciable such as the obligation of non-discrimination and the obligation to realise the core content. The core content of the right to health consists of both negative (freedom from serious health infringements) and positive (access to basic health services) obligations. When translated into the core obligations, the obligation to respect the right to health means that states have to respect the equal access to basic health services, and refrain from acts that seriously encroach upon people’s health. The obligation to protect consists of the obligation to take legislative and other measures to assure that people have equal access to basic health services if provided by third parties, and to take legislative and/or other measures to protect people from serious health infringements by third parties. Finally, the obligation to fulfil requires states to adopt a national health policy and devote a sufficient amount of their budget to health, and to provide the basic health services or create conditions under which individuals have adequate and sufficient access to health services. 34   See also E/CN.4/Sub.2/2002/9, Economic, Social and Cultural Rights, Liberalization of trade in services and human rights, Report of the High Commissioner, 25 June 2002.

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4.2.4 International Efforts to Strengthen the Right to Health There have been some steps taken to strengthen the obligations imposed by the right to health or its related provisions at the international level.35 The Nigerian government was recently found to have violated the right to life, to health and to housing, amongst other things, due to pollution and environmental degradation.36 The obligation of states is not simply a negative duty to refrain from interfering arbitrarily with people’s rights, but also the positive obligation to ‘take all measures necessary’ to ensure that basic rights are not violated, either by public or private entities.37 In the specific case of access to pharmaceutical products, it seems that domestic courts are increasingly willing to find that the denial of access to certain medication may constitute a violation of the constitutional right to life.38 The

35   Attempts have been made at the international level to make the right to health more concrete. In 2002, the main UN policy-making body on human rights, the Commission on Human Rights, adopted a resolution on the right to health to appoint a special rapporteur (an independent expert) to report annually to the Commission on the extent to which governments are fulfilling the right to health. Press release WHO/61 24 July 2002, New WHO publication explores important links between health and human rights an area drawing increased attention. A new mechanism to create a means for individuals to petition their governments at the international level for failure to respect, protect, or fulfil human rights obligations is also being examined. See also, for example, the right to life, ‘There has been a tendency to move towards a broader and more comprehensive concept of the right to life which characterizes the right to life not only as the legal foundation for all other rights, but also as an integral part of all the rights that are essential to guarantee the access of every human being to all the goods … required for the development of his/her material, moral, and spiritual existence.’ IACHR, Status of Human Rights in Several Countries: Nicaragua, Annual report of the Inter-American Commission on Human Rights 1993, OEA/Ser.L/V/II.85, Doc. 9 Rev. (1994) at 465, available at www.cidh.org/annualrep/93span/cap.IVe.htm (quoting The Right of Everyone to Own Property Alone as well as in Association with Others, UN Commission on Human Rights, 49th Sess., Provisional Agenda Item 7, at 25, UN Doc. E/CN.4/1993/15). 36   Social and Economic Rights Action Center v Nigeria, Communication 155/96 (African Commission on Human and People’s Rights, Oct. 2001), available at www. achpr.org/DECISIONS_30th_Session-_Oct.2001_eng.pdf. 37   See Street Children Case (Morales v Guatemala), Joint Concurring Opinion of Judges A.A. Cancado Trinidade and A. Abreu-Burelli, Inter-Am. Ct H.R. (Ser. C) No. 63, ¶¶ 2–4, available at www.corteidh.or.cr/seriecing/VotocancadoabreuSerie_c_63_ing. doc. 38   Costa Rica, India, Venezuela, Colombia, Argentina and South Africa are among the many countries in which national courts have recognised an obligation on states to provide medication in HIV/AIDS cases and for other diseases. See Minister of Health v Treatment Action Campaign, CCT 8/02 Constitutional Court of South Africa, July 2002, at www.tac.org.za/Documents; Ceballos v Instituto de Seguros Sociales, T-484 Corte



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Constitutional Court of Colombia set out a four-pronged test in order to determine the situations in which the right to health services might be justiciable. The health issues must implicate ‘fundamental’ rights such as life, work or education. There must be a ‘grave and imminent threat to human life or health’ presented by the failure of the state to provide services. The claimant must be in extreme financial and physical need of the services and there must be a possibility of providing the service.39 In this way, the right to health has been increasingly found to be justiciable,40 and this may have implications for patented products which impact upon access to essential drugs. In addition, with regard to private entities, the ESCR Committee clarified that the obligation of states to protect includes, inter alia, ‘ensuring that privatization of the health sector does not constitute a threat to the availability, accessibility, acceptability and quality of health services; controlling the marketing of medical equipment and medicines by third parties; and States ensuring that third parties do not limit people’s access to health-related information and services’.41

Constitucional de Colombia 1992, available at http://bib.minjusticia.gov.co/jurisprudencia/CorteConstitucional/1992/Tutela/T-48492.htm; Alvarez v Caja Costarricense de Seguro Social, Exp. 5778-V-97, No. 5934-97, Sala Constitucional de la Corte Suprema de Justicia de Costa Rica. See Glenda Lopez v Instituto Venezolano de Seguros Sociales, 487-060401 Supreme Court of Venezuela, Constitutional Chamber 1997 available at www.tsj.gov.ve/decisiones/scon/Abril/487-060401-001343.htm. (This Court found a violation of the right to life on the part of the social security institute by virtue of failing to provide antiretroviral treatment on a regular basis that could lead to an inexorable deterioration of the immune system in addition to viral resistance, leading to opportunistic infections and death.) See also Protection Writ. Judgment of Fabio Moron Diaz, Magistrado Ponente, T-328/98 Corte Constitucional de Colombia 1998, available at http://bib.minjusticia.gov. vo/jurisprudencia/CorteConstitucional/1998/Tutela/T-328-98.htm. See also S. Shah, Illuminating the Possible in the Developing World: Guaranteeing the Human Right to Health in India, 32 VAND. J. TRANSNAT’L L. 435 (1999). 39   Alejandro Moreno Alvarez v Estado Colombiano, SU.819/99, Corte Constitucional de Colombia 1999, available at http://bob.minjusticia.gov.vo/jurisprudencia/Corte Constitucional/1999/Tutela/su819-99.htm. 40   A.E. Yamin (2003) op. cit.; P. Carl (1991) op. cit.; R-J Dupuy (1979) op. cit. 41   General Comment 14 (2000) op. cit. ¶ 35.

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4.3 The right to health and patent law: The fundamental nature of health concerns and the move towards a right to health as an interpretive principle in patent law 4.3.1 The Link Between the Right to Health and Patent Law 4.3.1.1 The effect of patent law on the right to health The patent system may affect health considerations, on the one hand, by leading to reduced access to pharmaceutical products,42 and on the other hand, by restricting access to products or processes that are necessary for downstream innovation or the creation of improvements. The increasing justiciability of the right to health coupled with the implications of the obligation to ‘protect’ highlight increased attention regarding the duties of private entities (namely pharmaceutical companies) as regards the right to health and specifically, in access to essential medications. The obligation to protect the right to health also requires states to ensure that threats by third parties are restricted. This requires the creation of institutions to prevent and monitor the violation of fundamental rights by private actors. The right to health may, therefore, influence the way adjudicative and legislative bodies make decisions relating to health. It creates legal obligations and ac-

42   Generic products may have an impact on drug prices, for example, as shown in the case of HIV drugs. The UNDP Human Development Report 2000 notes that generic production of the HIV treatment fluconazole, a treatment for AIDS-related meningitis in India has remained at $55 for 150 mg compared to $697 in Malaysia, $703 in Indonesia and $817 in the Philippines. According to Medecins Sans Frontiéres, generic drugs are approximately 70–90% cheaper than branded drugs. In some cases, they can be 200–300% cheaper than the branded equivalent made in the West. In Thailand, fluconazole, which treats cryptococcal meningitis—an infection affecting one in five of AIDS sufferers—was supplied exclusively by US company, Pfizer, until 1998. Since local alternatives have become available, the cost of a daily dosage of 400mg has fallen from US$14 to 5% of the price. Thus, it costs only US$0.30 a day in Thailand. However, this same drug costs US$18.00 a day in Kenya where it is patent protected. U. Ally Mwalimu, Implications of WTO/TRIPS in East Africa-With Special Emphasis on Pharmaceutical Patents, Economics and Social Research Foundation, Workshop on Globalization and East Africa, 15–16 April 2002. None the less, access to drugs is conditioned by many factors including price controls, medical insurance, import duties and tariffs, local taxes, limited competition mark-up for wholesale, distribution and dispensing, and hence, not solely on prices and the availability of generics. See WHO, More equitable pricing for essential drugs: What do we mean and what are the issues? Background paper for the WHO-WTO Secretariat Workshop on Differential Pricing and Financing of Essential Drugs, Hosbjor, Norway, 8–11 April 2001, p. 9.



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countability, not only with regard to the organisation of the health system, but also, inter alia, in competition, pricing, licensing and other laws.43 Hence, the right to health provisions may work as an external enforcement mechanism imposing concrete obligations, and also have an internal impact, guiding the interpretation and application of other laws in order to ensure consistency with its provisions.44 4.3.1.2 The effect of the right to health on patent law The impact of the right to health on patent law depends largely on the link between the right to health and intellectual property rights (IPRs). The relationship between fundamental rights and IP, in general, can be viewed in two simplistic ways.45 On the one hand, IP could be seen as a human right and the property character of IPRs could be overemphasised at the expense of other fundamental rights. Accordingly, the appropriate balance should be created by the legislator and, therefore, any interference would not only hinder the dynamics of the system, but would also be undemocratic. At the other extreme there can be the view that IP is merely an institution which infringes on fundamental rights. The reality, it is argued, lies somewhere in between these polarised views. Therefore, in order to establish the potential impact of health concerns and the right to health on patent law, either externally or internally, the following elements need to be established: 1. Is IP a human right and would this make a difference? 2. Is there an inherent conflict between IP and human rights, or more specifically, the right to health (since IP may also be a human right)? 3. How can patent laws be interpreted to fulfil the spirit of the right to health? Does this obligation exist?

43   Therefore, the enforcement of competition rules in cases where patent holders refuse to grant licences and charge excessive prices for their products, or issue a compulsory licence in the interest of public health should be considered to support the right to health objectives. See A.E. Yamin (2003) op. cit. 44   M.G. Bloche, WTO Deference to National Health Policy: Toward an Interpretive Principle, 5(4) Journal of International Economic Law 825 (2002). See also T. Mully, Intellectual Property, Fundamental Rights (and Competition Law): Do They Interoperate? International Conference, Intellectual Property Beyond Rights, 25–26 October 2004, Hanasaari Cultural Centre, Finland. Mully argues that fundamental rights have the greatest impact through interpretation and systematisation. 45   T. Mully (2004) op. cit.

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4.3.2 The Right to Property and IP: IP as a Human Right The right to property and more specifically IP can be found in several European and international human right treaties. Article 1 of Protocol 1 of the European Convention on Human Rights46 provides that: Every natural person or legal person is entitled to the peaceful enjoyment of his possession. No-one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

In line with the above provisions, Art. 17 of the European Charter on Fundamental Rights47 provides for the right to property, however, this is subject to the limitations, deprivations and regulation as required in the public interest and conditions provided for in law, the general interest and subject to fair compensation. At the international level, the UDHR48 recognises the right of authors to the moral and material interests resulting from their scientific, literary and artistic productions.49 Similarly, Art. 15 of the International Covenant on Economic, Social and Cultural Rights (ICESCR)50 provides: ‘The State Parties to the present Covenant recognise the right of everyone: to take part in cultural life; to enjoy the benefits of scientific progress and its applications; to benefit from the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author.’ This provision implies the recognition of the legitimate interest of the public in intellectual productions. IPRs should contribute to the scientific, cultural and economic enrichment of society, however, as an author, the individual also has a right to benefit from these works. While the provisions require states to protect the interests of authors and inventors, they are in vague and general terms in order to leave a broad margin of discretion to states regarding implementation. Therefore, exclusive property 46

  213 UNTS 221 (1953).   C-2000 OJ 2000 364/01. 48   GA Res. 217 A(III), UN Doc. A/810 (1948). 49   See Art. 27(2): ‘Everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author.’ 50   GA Res. 2200, UN GAOR, Supp. No. 16, UN Doc. A/6316 (1966), 999 UNTS 171 (entered into force 23 March 1976). 47



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rights are not the only possible means of protection, nor is the instrument itself transformed into a human right, although the interest itself may constitute a fundamental right. ‘Neither the Universal Declaration nor the ICESCR creates an obligation on the part of the states to establish (and certainly not an individual right to) exclusive rights, as the latter is only one alternative way of safeguarding the individuals’ interests protected … This does not exclude the idea that intellectual property rights may protect individual interests of fundamental rights nature.’51 In addition, there is no minimum level of protection required, therefore, the level of protection found in international IP instruments such as the TRIPS Agreement easily satisfies and exceeds the requirements laid down in the human rights instruments. Against this background of IP protection, the UDHR and ICESCR are of little significance as protective provisions have already been put in place. It is problematic to consider IPRs exclusively as human rights if one considers the nature of human rights. Human rights are inalienable and universal claims belonging to individuals, and in some situations to communities but never to corporations. Human rights are understood to exist independently of recognition or implementation while IPRs are granted by the State according to criteria by national legislation. In contrast with human rights which establish permanent and irrevocable entitlements, IPRs are temporary; they exist for a limited period and can be revoked, licensed or assigned to someone else.52

In addition, the history of the drafting of the international human rights conventions affirms the weakness inherent in the claims of IP as a human right which was only accepted after considerable discussion and controversy.53 In both cases, it was supported mainly because it is instrumental in the realisation of other rights of a stronger moral basis. What the phraseology of intellectual property as a human right does is to convert a question of legislative policy to be addressed with fundamental rights analysis into something changing the analytical premises of this effort: in this metamorphosis intellectual property protection transforms from the object of fundamental rights analysis (legislative policy) into its very subject, namely a fundamental right in itself not to be interfered with even by the legislator, less to the extent required by other funda-

51

  T. Mully (2004) op. cit. p. 10.   Report on Science and Human Rights, AAAS Science and Human Rights Program, Winter 2002 Vol. XXII, No. 1, at http://shr.aaas.org/report/xxii/ip.htm. 53   A.R. Chapman, Approaching IP as a Human Right, Obligations related to Art. 15(1)(c), Copyright Bulleting, Vol. XXXV No. 3, 2001, UNESCO Publishing, E/C.12/ 2000/12. 52

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4.3.2.1 Striking the balance: limitations in the public interest The EU Charter and the European Convention on Human Rights (ECHR) envisage limitations on property rights which are necessary in the public interest. Article 15 of the International Covenant on Economic, Social and Cultural Rights, requires states parties to respect, protect and fulfil individual’s cultural rights, and achieve a balance between the protection of public and private interests in intellectual property.55 This balance refers, on the one hand, to the right of everyone to take part in cultural life and enjoy the benefits of scientific progress, and on the other hand, to the right of authors of scientific, literary or artistic work to benefit from the protection of their moral and material interests. This balance is recognised in IP instruments. A balance of rights and obligations is also an objective of TRIPS,56 and limitations have been put in place to reflect certain public interest concerns.57 This means that IP is subordinated to the general public interest. Exclusive property rights may be overridden if it is required by important concerns such as public health, and this is not incompatible with the right to property even if it is considered to be a human right. Indeed, limitations have even been accepted in the context of other human rights in the interest of public health. Under the International Covenant on Civil and Political Rights, limitations are permitted on the rights to liberty of movement, freedom of religion, freedom of expression and the right to freedom of association, for the protection of public health.58

54

  T. Mully (2004) op. cit. p. 11.   See E/CN.4/Sub.2/2001/27, on the impact of the Agreement on Trade-Related Aspects of Intellectual Property Rights on Human Rights, Report of the High Commissioner, 27 June 2001. 56   See Art. 7 TRIPS. 57   Article 8 TRIPS allows for measures to be taken that are necessary to protect public health and to promote the public interest in sectors of vital importance to their socio-economic and technological development. Patent protection excludes the patenting of inventions that might be contrary to the ordre public or morality, including the protection of human, animal or plant life or health. See Chapter 3. 58   U.N.T.S. No. 14668, vol. 999 (1976), p. 171. e.g. Art. 18(3). 55



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4.3.3 Patenting and the Right to Health 4.3.3.1 Direct effect Patent law impacts most significantly on the right to health as it may lead to higher drug prices in the short term and, hence, it may result in restricted access.59 In addition, patent law encourages a specific type of research that is not always in the public interest.60 Furthermore, patent law may affect the creation of improvements or downstream innovation with potential implications on the development of medical products.61 Although patent law may affect health, it is not incompatible with the right to health. It promotes long-term health interests by encouraging research and also by providing for the balancing of instruments in the short term, such as compulsory licensing or exclusions in the interest of ordre public.62 For this reason, it is unlikely the right to health would have a direct impact on patent law in general, as it would rarely be found to be unconstitutional for infringing the right to health. Patent laws would not be created in such a way as to overly infringe the right to health. Nevertheless, it is possible to envisage that a state might be found to have violated the obligation to protect the right to health, for example by failing to grant a compulsory licence in a case in which

59   There are several other factors which affect access to drugs such as rational selection and the use of drugs, sustainable financing and reliable health and supply systems. Similarly, the price of drugs is affected by factors other than just patents, such as import duties, taxes and local market approval costs. See WHO (2001a) op. cit. p. 9. 60   See, for example, the Orphan Drug Act created to stimulate research into diseases that affect a small number of people, for which pharmaceutical companies would otherwise not invest a significant amount of resources. The US Orphan Drug Regulations (57 FR 62076) 29 Dec. 1992 and CFR Part 316 et seq. In the EU Orphan Medicinal Product Regulation (2000) op. cit. See D.M. Richardson (1987) op. cit.. See also P.J. Kenney (1988) op. cit. S. Boseley, EU loophole sends drug prices soaring, Guardian Weekly, 24 June 2002. See also http://www.cptech.org/ip/health/orphan/. 61   See Chapter 2. 62   op. cit. As already noted, there is a group of advisers in the EU on the ethical implication of biotechnology serving the interests of European society and respecting the fundamental rights of every European citizen. The Group submits reports amongst other on the compatibility of policies including patent policies with fundamental rights such as the dignity of the human person. The Group gives its advisory opinion on ethical aspects of patenting inventions involving, for example, elements of human origin, cloning techniques, health care in the information society and gene therapy. So, for example, in the EU we have a Directive 98/44/EC on the Legal Protection of Biotechnology Inventions OJ 1998 L213/13, excluding the patenting of inventions which would be contrary to public order or morality, and a Directive 98/79/EC, on In-Vitro Diagnostic Medical Devices 1998 OJ No. L 331/1 referring to the protection of the integrity of human persons. See also Chapter 3.

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private commercial pricing practices are ‘shown to be probabilistically related to impaired or reduced access to medication’.63 4.3.3.2 The indirect effect of the right to health The right to health may have indirect effects in such cases through its internal effects on the patent system itself. ‘The obligations to respect, to protect and to fulfil obviously overlap to some extent and indeed, the manner in which a state enforces and interprets its legislation, including competition, patent, and intellectual property legislation, in cases involving access to medicines involves important “administrative … and other measures” needed to fulfil the right to health.’64 Hence the objectives of the right to health may need to be read in the patent provisions so as to guide their interpretation and application. In the case of Odir Miranda v El Salvador,65 the refusal of El Salvador to purchase the triple therapy and other medication to improve the quality of life of people suffering from HIV/AIDS and to prevent deaths, was found to be a violation of the right to life and health. The Inter-American Court of Human Rights (IACHT) concluded that while it did not have the competence to determine violations of Art. 10 of the Protocol of San Salvador, it would take the provisions relating to the right to health into account in analysing the merits of the case.66 Following this reasoning, it should be possible for the provisions relating to the right to health to be taken into account when applying patent law. The Recent WTO Ministerial Declaration on the TRIPS Agreement and Public Health recognised the gravity of health problems and stressed the need for TRIPS to be part of the wider national and international activities to address these problems. In this regard, it was stated that the TRIPS Agreement ‘does not and should not prevent Members from taking measures to protect public

63   A.E. Yamin (2003) op. cit. p. 207; P. Drahos, Biotechnology Patents, Markets and Morality, 21(9) EIPR 441 (1999); B. Cornish, M. Llewelyn, M. Adcock, Intellectual Property Rights and Genetics. A study into the impact and management of intellectual property rights within the healthcare sector, 2003 at http://www.phgu.org.uk/about_ phgu/resources/word/s-ipr1.doc; C. Pekari, Intellectual Property and Human Rights: Where to after the first WSIS? at http://www.eumap.org/journal/features/2004/infohr1/ infohr/ipandhr/. 64   A.E. Yamin (2003) op. cit.; H. Hogerzeil, Access to Essential Medicines as a Human Right, 33 Essential Drugs Monitor 25, 2003 at http://www.who.int/medicines/ library/monitor/33/EDM33_25-26_Access_e.pdf; R-J Dupuy (1979) op. cit; M. Whitehead, The Concepts and Principles of Equity and Health, Copenhagen, WHO Regional Office for Europe (1990). 65   Odir Miranda v El Salvador Case 12.249, Report No. 29/01, Inter-Am. CHR, Annual Report 2000, OEA/Ser./L/V/II.111, Doc. 20 Rev. 2001 available at www.cidh. oas.org/annualrep/2000eng/ChapterIII/Admissible/ElSalvador12.249.htm. 66   Ibid. ¶ 36.



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health’.67 It also affirmed that the TRIPS Agreement should be interpreted and implemented in a manner supportive of WTO Members’ right to protect public health. Furthermore, in 2000 the Sub-Commission on Human Rights affirmed the primacy of human rights obligations over economic policies and agreements.68 Therefore, international human rights law addresses the need to ensure that the TRIPS Agreement, and hence, the Community IP provisions which are consistent with the former, should not be implemented in a way that negatively impacts on the enjoyment of human rights as provided for in international human rights instruments.69 States parties must take action that is conducive to realising the right to health, and as recognised in Doha, the TRIPS Agreement ‘can and should’ be interpreted in a manner that supports their obligations with regard to the right to health.

67   In the main Doha Declaration, it was stated that: ‘We recognize that under WTO rules no country should be prevented from taking measures for the protection of human, animal or plant life or health, or of the environment at the levels it considers appropriate, subject to the requirement that they are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions would prevail, or a disguised restriction on international trade, and are otherwise in accordance with the provisions of the WTO Agreements’ (para 6) Doha Declaration (2001) op. cit. See also R. Elliott, Realizing the right to health: access to HIV/AIDS-related medication, 3 April 2002 at http://www.aidslaw.ca/Maincontent/issues/cts/righttohealth.doc. As clarified by the Doha Declaration, the TRIPS Agreement must be interpreted in accordance with the rules of public international law found in the Vienna Convention on the Law of Treaties, which requires that the interpretation of a Treaty must take subsequent agreements on the interpretation of the Treaty, subsequent practice, and any relevant rules of international law into account. As the Doha Declaration is an example of a ‘subsequent agreement’, the TRIPS Agreement can and should be interpreted and implemented in a manner supportive of the right to protect public health and promote access to medicines for all. Hence, the TRIPS Agreement must be interpreted in this way in order to be consistent with the obligation to protect, respect and fulfil human rights, including the right to health. 68   E/CN.4/SUB.2/RES.2000/7, United Nations High Commissioner for Human Rights, Intellectual Property and Human Rights, Sub-Commission on Human Rights. This was reiterated in the UN Resolution of the Sub-Commission on Human Rights 2001/21. See also E/C.12/2001/15, Human Rights and Intellectual Property Issues, Statement by the Committee on Economic, Social and Cultural Rights, 26 November 2001, Intellectual Property and Human Rights (Geneva: World Intellectual Property Organization and the Office of the United Nations High Commissioner for Human Rights, 1999), WIPO Publication No. 762(E). 69   Ibid.

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4.3.4 The Right to Health as an Interpretive Principle in Patent Law The Report of the High Commissioner on the Impact of the TRIPS Agreement on Human Rights70 stresses the importance of a human rights approach to IP. This approach relies upon striking a balance with the primary objective of promoting and protecting human rights without causing a negative impact on any other rights in the Covenant. ‘Human rights are the first responsibility of Governments.’71 A human rights approach to IP differs in some ways from commercial IP rights. A human rights approach to IP highlights the often implicit balance between the interests of the public and the right holder, and makes it more explicit. ‘The human rights approach is predicated on the centrality of protecting and nurturing human dignity and the common good. The goal is to improve human welfare and not to maximize the economic benefit. From a human rights perspective IP protection is understood more as a social product with a social function and not primarily as an economic relationship.’72 A similar approach has been advocated in the context of trade liberalisation. In 2002, the need for the WTO to endorse a human rights approach to trade and promote and protect human rights was recognised in the Report of the High Commissioner on the liberalisation of trade.73 This approach, amongst other things, involves setting the promotion and protection of human rights among the objectives of trade liberalisation, taking the rights of individuals into account in determining the effects of trade liberalisation, and promoting international cooperation for the realisation of human rights and freedoms in the context of trade liberalisation. Hence consideration must be paid to the protection of human rights in negotiating, implementing

70   E/CN.4/Sub.2/2001/27, The Impact of the Agreement on Trade-Related Aspects of Intellectual Property Rights on Human Rights, Report of the High Commissioner, 27 June 2001. 71  Vienna Declaration and Program of Action, World Conference on Human rights, 25 June 1993. The TRIPS agreement envisages human rights as exceptions to the rule rather than as an explicit guiding principle. 72   A.R. Chapman, The Human Rights Implications of Intellectual Property Protection, in 5 Journal of International Economic Law 861 (2002). See also D. Weissbrod and K. Schoff, Human Rights Approach to Intellectual Property Protection: The Genesis and Application of Sub-Commission Resolution 2000/7, 5(1) Minnesota Intellectual Property Review 1-46 (2003); T.A. Lipinski and J.C. Pekari, J Britz, Rethinking the ownership of information in the twenty first century: Ethical implications, 2 Ethics and Information Technology 49–71 (2000). 73   E/CN.4/Sub.2/2002/9, Report of the High Commissioner, Economic, Social and Cultural Rights, Liberalization of trade in services and human rights, 25 June 2002.



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and interpreting the scope of GATS and in assessing the limitations of trade practices. In addition to this interpretive requirement, GATS also includes general exceptions to protect public morals as well as human, animal and plant life and the protection of certain aspects of individual privacy.74 The report lists some types of action to promote a human rights approach to the liberalisation of trade in services, including: the guarantee of equal access for basic services; the preservation of states parties’ right and duty to regulate; encouraging compatibility with human rights in the interpretation of GATS; undertaking human rights assessments of trade policies; the provision of international cooperation and assistance and increasing dialogue between human rights and trade. 4.3.4.1 Effect on specific patent provisions It would therefore seem that a human rights approach to IP would require that the limitation provisions and those relating to compulsory licensing (CL) should be given a broader interpretation, and that health issues should be considered in the application of standards relating to patentability.75 This would require a more explicit consideration of the public’s interests to the detriment of the economic interests of individual right holders.76 A human rights (or at least a right to health) approach would differ from the approach of IP law, as it would place greater emphasis on the interests of the public in the short term, as well as in the long term. For example, if the application of a law could potentially impact on the right to health, a right to health standard should be applied as a guiding principle. This could be seen in the case of patent law, subverting issues such as compulsory licensing to address health concerns and exceptions to patentability to the right to health body of law. In this way, patent law could incorporate the right to health standards in its decision-making process. The use of human rights as an interpretive principle in the patent CL provisions would not only require that the provision referring to ‘extreme urgency’ including public health, would be judged from a human rights perspective, but

74

  Ibid.   See, for example, the interpretation of ordre public as involving something ‘abhorrent to the overwhelming majority of the public or a contravention of the totality of accepted norms’ op. cit. 76   See, for example, A.R. Chapman (2002) op. cit. who contends that many factors indicate that IP rights are inconsistent with the human rights approach, and perhaps even human rights law in general. These include: the fact that IP does not necessarily protect the rights of the inventors, especially in the case of employment; the lack of democratic control and participation; and the often inadequate protection of the human interest or ethical concerns. 75

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Patent scope Public health, including the right to health as determined by human rights law and public policy; not IP law. Figure 4.1 What the CL provisions show in relation to IP and public health

it would also potentially affect the interpretation of the CL provisions relating to significant technological advances. In such cases, it might lead to a more lenient application of the provisions and, also, to a lower threshold for CL. If the impact of the improvement on public health is deemed to be significant, it will be easier to prove that a technological advance has taken place.77 In addition, 77   Apart from the interpretive principle to be used in cases of CL or to exclude specific cases from patentability, it might also be possible for the principle to become a defence to patent infringement. Cases of a similar nature have been brought in the USA, in which the question has been posed in terms of the First Amendment guarantee of freedom of speech, and the extent to which it may be used as a defence to copyright infringement. See Howard Hughes case 366 F.2d 303 (2nd Cir. 1966). See Time Inc. v Bernard Geis Associates NYLR, 21 January, 1994, p. 5 (CD Cal. June 11, 1993). In Germany see LG Berlin (Photographs of Ulrike Meinhof) [1978] GRUR 108 and BGH, 7 March 1985 (Lili Marleen) [1987] GRUR 34. See also Pinto, The Influence of the European Convention on Human Rights [2002] EIPR 217; P. Loughlan, Looking at the Matrix: Intellectual Property and Expressive Freedom [2002] EIPR 30; Dutch Scientology decision [2003] Mediaforum 337, note Visser; (2003) 6 AMI 217, note Hugenholtz; (2003) 6 IER 352, note Grosheide. An appeal to the Supreme Court is pending. In this case, while an infringement of the copyright was found, it was argued that it was disproportional in comparison to the general interest in freedom of information of Art. 10, para. 1 of the ECHR and therefore the publication was allowed. It should also be noted that the Dutch Civil Code provides for cases of abuse of copyright including cases where there is a disproportionate balance between the interest protected and those harmed by the exclusive right. ((Civil Code Art. 3:13): ‘Instances of abuse of right are (1) the exercise of a right with the sole intention of harming another or (2) for a purpose other than that for which it was granted or (3) the exercise of a right where its holder could not reasonably have decided to exercise it, given the disproportion between the interest to exercise the right and the harm caused thereby.’) See also H.C. Jehoram, Copyright and



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in considering exclusions on the grounds of ordre public, the right to health would also need to be considered. 4.3.4.2 Case-law on public health Health emergencies provide sufficient ground for derogating from the rules laid down in TRIPS, which on the one hand reflects the potential supremacy of human right concerns such as the right to health, and on the other hand, it demonstrates the flexibility granted by the TRIPS Agreement allowing for the consideration and implementation of fundamental concerns, such as those relating to the right to health.78 The experience of both Brazil and South Africa reflect these considerations. In South Africa, the debate centred on the 1997 Medicines and Related Substances Control Amendment Act, which represented a response to the HIV/AIDS crisis and the lack of access to affordable drugs. This Act authorises the government to determine the extent to which a specific drug patent may apply, and to authorise parallel imports from other countries where the same medicine is also manufactured.79 The pharmaceutical companies challenged the first provision of this Act, alleging that it was unconstitutional in granting too much discretion to the government in determining the circumstances in which patents could be curtailed. The upholding of the right to curtail patent rights would appear to confirm the supremacy of health concerns. The Act could either be seen as compatible with the limitations provided for in the patent system itself and thereby constitutional, or it could be found that the right to property did not allow for such interventions in the exclusivity and was unaffected by the right to health, and therefore be found to be unconstitutional. The petition was abandoned in April 2001 in the face of strong public opposition. While we can only speculate on the outcome of the case, the abandoning

Freedom of Expression, Abuse of Rights and Standard Chicanery: American and Dutch Approaches, 26(7) EIPR 275, 2004. In such instances, use of the defence is rare, although IP statutes are increasingly being openly read and narrowly construed in order to take the requirements of freedom of expression into consideration. Hence, it might be that one could legitimately raise the defence of the right to health in a patent infringement case, although it is more likely that the latter would work as a ground for the granting of a CL rather than a right to infringe it. Otherwise, this would lead to private companies being found to have infringed the right to health by restricting access to drugs, despite acting in line with patent law. However, it is difficult to imagine that the right to health would ever be entrenched to such a degree. 78   Cullet (2001) op. cit. 79   Section 15C of the Medicines and Related Substances Control Amendment Act 1997 (Republic of South Africa, Government Gazette, 12 December 1997).

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of the case could be interpreted as support for the predominance of health concerns. The Brazilian experience could also be seen as a reflection of the flexibility envisaged in TRIPS in order to give effect to human rights. In this case, the government made a decision to facilitate access to drugs in the face of the HIV/AIDS crisis by implementing a strong CL regime. It was stipulated that unless it was economically unfeasible, inventors had a duty to manufacture the products in Brazil. The US government objected to this requirement and initiated WTO complaint proceedings, on the grounds that the ‘local working’ requirement constituted a protective industrial policy measure inconsistent with the provisions of the TRIPS Agreement. Following some bilateral negotiations, the case was withdrawn after a few months. Brazil has gone further than TRIPS in recognising the possibility for CL for national emergencies and public interest, as well as establishing the rules for the granting of these licences and defining the public interest to include public health, nutrition, the protection of the environment, and elements of primordial importance for technological, social or economic development.80 The fact that the case was dropped could be read as the acceptance of the subordination of patent policy to the public interest or at least it could be interpreted as reflecting the flexibility of patent protection in addressing health emergencies. In line with the TRIPS Agreement, the parties are permitted to address national emergencies and public health issues without infringing patent laws, by interpreting the flexibility in a manner that is conducive to the public interest and health. This would be consistent with the right to health as an interpretive principle in patent protection.81 4.3.4.3 European cases on IP and fundamental rights analysis Within the EU framework, the ECJ has handed down two judgments on IPRs involving fundamental rights, although it should be noted that neither of these cases involved the right to health. In Netherlands v Council and Parliament, the ECJ analysed the Biotechnology Directive.82 In this case, the ECJ stated that the granting of a patent does not preclude legal limitations from applying to research into or the exploitation of patented products. It further held that the purpose of the Directive was not to

80   See WTO, WTO Agreements and Public Health, A Joint Study by WHO and the WTO Secretariat, 2002, pp. 104–6. 81   M.G. Bloche (2002) op. cit. 82   Case C-377/98 Netherlands v Council, Judgment of the Court of 9 October 2001, ECR I-07079.



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place restrictive provisions guaranteeing compliance with certain ethical rules outside the scope of the Directive.83 The ECJ adopted a narrow reading of fundamental rights by finding that they are ‘misplaced as against a directive which concerns only the grant of patents’.84 The ECJ thereby insulated ethical and fundamental rights considerations from the granting of the patent and, in this way, it could be argued that its approach differs significantly from the idea of a human rights interpretive principle. ‘The potential existence of restrictive provisions outside patent law does not exclude the need to take fundamental rights into account also within patent law. When the exclusion from patentability is related to the protection of a fundamental right, the patent law principle of narrow interpretation of exclusions from patentability becomes very problematic.’85 In Metronome Music v Music Point Hokamp the ECJ considered whether the Directive on rental and lending rights was consistent with the freedom to pursue a trade or a profession and also with the right to property.86 The Advocate General Tesauro had contended that Art. 27(2) recognises copyright as a human right and the Court found that the granting of an exclusive right ‘certainly constitutes the most effective form of protection …’. 87 The Court also found that the freedom to pursue trade or profession cannot be interpreted in isolation from the general principles relating to IPRs. Insofar as the Court omitted any reference to the ‘collective good’ provided for in the human rights treaties and in the public interest, the reasoning is insufficient. In addition, the view that the exclusive property regime is the least restrictive and most effective regime, can be criticised as the right to IP does not precipitate exclusive rights and a liability system could also be put in place to safeguard these interests.88 In both cases, the ECJ did not attribute any particular importance to the fundamental rights in interpreting IP and, to this extent, it appeared to be in favour of stronger IP protection.89 This is regrettable as it is set against the background

83   Ibid. para. 79–80. See also M. MacLaren, Patently Unsatisfactory?: Community Legislative Competence and the ECJ Biotech Decision, 2 German Law Journal 18 (2002). 84   Ibid. para. 79. 85   T. Mully (2004) op. cit. 86   Case C-200/96, Metronome Music v Music Camp, Judgement of the Court of 28 April 1998, ECR I-01953. 87   Ibid, para. 24. 88   See Chapter 5 at 5.3.1.2. However, the Court also referred to the right to property (in addition to the freedom to pursue trade or profession) as not being absolute but rather should be viewed ‘in relation to their [its] social function’ which could be used in future cases in such way as to support the public interest. 89   T. Mully (2004) op. cit.

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of the proliferation of IPRs and the increasing concerns in the biopharmaceutical industry,90 although arguably, if the right to health had been at stake, the ECJ might have ruled otherwise. To the extent fundamental rights analysis does not form part of the balancing instruments within IP laws, a right to health interpretive principle should be endorsed where applicable.

4.4 Conclusions In this chapter it was shown that the right to health constitutes a central concern and continues to be one of the primary obligations of governments. It assumes a particular significance in relation to the biopharmaceutical industry, as goods are used to enhance the quality of life. The right to health has become increasingly justiciable, particularly in countries where access to medication has become a national emergency. In this context, the relationship between the right to health and patent law has become critical. In general, the right to health and the right to IP (whether this is regarded as a human right or not) are not incompatible.91 It is, therefore, unlikely that the right to health would have a direct impact on patent law in the sense of finding the latter unconstitutional. None the less, the subordination of the analysis of IP rights to the public interest plays a pivotal role, and in light of these conditions the right to health could be decisive as an interpretive principle to patent law. The Doha Declaration clarified that TRIPS should not prevent members from taking action to protect public health and that the flexibility provided for in TRIPS could be used for this purpose. It also highlights that the TRIPS Agreement should be interpreted and implemented in line with the right to protect health and promote access to medicine for all and highlights the importance of the reference to the ‘balance’ of interests within the objectives and principles of TRIPS. The right to health as an interpretive principle would most likely have the greatest impact in the interpretation of the CL provisions and the provisions relating to exclusions in the interest of the ordre public. In the case of CL, it would direct the determination of ‘extreme urgency’, ‘public health’ and 90

  See Chapter 2.   Patent law deals with long-term health considerations by providing the incentive for the development of pharmaceutical products. In addition, patent law contains a provision allowing for CL in cases that are warranted by public health and other similar provisions such as the interest of ordre public. 91



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‘public interest’ to the health provisions and related considerations. It could also serve to lower the threshold of CL in cases involving secondary dependent patents of significant economic advantage. In such cases, an invention would be more likely to warrant a licence if it has clear relevance to public health concerns. The international trends demonstrate a wider application of fundamental rights analysis and the increased justiciability of the right to health. On the other hand, the ECJ has considered fundamental rights in relation to IP on two occasions, and in both cases that analysis worked to strengthen IP protection, making no reference to the ‘public interest’. While it is true that there has not been a case in which the right to health has been explicitly violated in the EU, the health interpretive principle to patent law, where applicable, would appear to be consistent with its obligations and with the international trends in this domain. None the less, the health interpretive principle does not resolve the problematic issues in the biopharmaceutical industry. The principle is directed more to end product accessibility and dissemination rather than access to research inputs, therefore, in the absence of a patent mechanism, a right to health interpretation would not be helpful. Imposing a direct obligation in cases involving access to inputs to carry out downstream research to ensure consistency with the right to health would be too far-fetched, as it involves potential innovation with only potential effects on health.92 In the absence of more general IP provisions, competition may have a role to play in this instance of restricted access to necessary inputs to downstream innovation.93 This would also be consistent with the obligations of states to protect the right to health, and ensure compliance in their interpretation of competition laws.94 In a situation of alleged conflict between patent law and the potential health and right to health implications, the human rights approach could require more flexibility in analysing competition law provisions.95 Indeed

92   See also the attempt of families of children afflicted with Canavan disease, a rare genetic disorder of the brain, to sue the research scientists who had patented the gene in an effort to ensure broader and improved licensing terms. P. Gorner, Parents Suing Over Patenting of Genetic Test, Chi. Trib., 19 November 2000, p. 1. 93   See Chapter 7. 94   ‘Strong enforcement of anti-competition rules where patent holders refuse to grant licenses to generic producers and excessively price their products is therefore a measure that can and should be taken ‘to reduce the inequitable distribution of health facilities, goods and services’ in contemplation of the ESCR Committee’s General Comment No. 14.’ Statement by consumer project on technology, concerning an alleged prohibited practice in terms of section 49B(2)(a) of the Competition Act 89 of 1998, Feb. 2003 at http://www.cptech.org/ip/health/cl-cases/rsa-tac/cptech-statement-3feb2003.doc, p. 12. 95   H. Hogerzeil (2003) op. cit.; B. Cornish et al. (2003) op. cit.

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the recent South African judgment which found an abuse of a dominant position by virtue of excessive pricing could be seen as a move in this direction.96

96   In The Matter Between Mpho Makhathnini, Nelislwe Mthethwa, Musa Msomi, Elijah Paul Musoke, Tom Myers, AIDS Healthcare Foundation Limited, and GlaxoSmithKline (Pty) Ltd, Glaxo Group Limited, Case Number 34/CR/Apr04, in which the South African courts found GlaxoSmithKlyne to have abused its dominant position by virtue of the excessive price of drugs. See also the South African Competition Tribunal’s decision and order in Pharmaceutical Wholesalers and Glaxo Wellcome, Case 68/IR/Jun00, 18 June 2003 at www.comptrib.co.za/decidedcases/pdf/68IRJUN00kinesis.pdf, and Case No. 15/CAC/Feb02. See Chapter 7.

PART III

Antitrust as a complement to the patent system

5. Unilateral conduct, intellectual property rights and competition law: a systems’ interaction 5.1 Introduction The relationship between intellectual property (IP) and competition is a controversial subject. Whilst both share a common objective, namely, the enhancement of consumer welfare and promoting innovation, some problems arise as they operate in different ways. Antitrust seeks to achieve the object of maximising allocative and productive efficiency by preventing monopolistic output reduction and unlawful restrictions on competition, whilst intellectual property rights (IPRs) endeavour to achieve the same result by providing a legal monopoly as an incentive for innovation and for the manufacture of new and cheaper products. ‘In the short run consumers are supplied with an additional choice, albeit at a monopoly price; and in the long run when the patent expires, the industry as a whole can produce more and at lower cost.’ Hence, while the relationship between IP and competition is no longer perceived as inherently conflictual, and the possible pro-competitive role of IPRs has been recognised, at least for long-term competition, there are still cases where EC competition law will intervene if it is perceived that the shortterm impact on competition outweighs the long-term efficiencies. This is usually the case where the patent holder is able to extend his legal monopoly beyond the statutory grant, often to overlap with an economic monopoly, or to pursue aims against the letter and the spirit of the EU competition provisions.

    Allocative efficiency presupposes that the price mechanism will ensure that producers produce what the consumers want, and productive efficiency presupposes that competition from other producers will produce at near optimum costs. See S. Anderman, EC Competition Law and IPRs: The Regulation of Innovation, Oxford University Press (1998), p. 17.     R. Merkin, The Interface between Antitrust and Intellectual Property [1985] ECLR 377.



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Table 5.1 EC Treaty relevant provisions EC Treaty Wording Provisions Art. 3

For the purposes set out in Art. 2, the activities of the Community shall include… (c) an internal market characterised by the abolition, as between Member States, of obstacles to the free movement of goods, persons, services and capital… (g) a system ensuring that competition in the internal market is not distorted…

Art. 28

Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States.

Art. 29

Quantitative restrictions on exports and all measures having equivalent effect shall be prohibited between Member States.

Art. 30

The provisions of Arts 28 and 29 shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of … the protection of industrial and commercial property. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States.

Art. 82

Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States. Such abuse may, in particular consist of: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.



Art. 295

This Treaty shall in no way prejudice the rules in Member States governing the system of property ownership.



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Whilst it has been repeatedly recognised that the grant and scope of IPRs is a matter for national law, in the absence of harmonisation, the ECJ and the Commission have also repeatedly confirmed that the exercise of IPRs can be subject to competition control and, in certain cases, the unilateral refusal of an IP holder may even be found to constitute an abuse. This chapter examines the relationship between the two bodies of law as applied to unilateral conduct. The approach of the European Courts is examined against the economic theory and the conclusions are drawn in the final section.

5.2 The practice of the courts Article 82 of the EC Treaty prohibits the abuse of a position by dominant undertakings. However, the precise content of an abuse in the case of IPRs is a contentious issue. The Commission and Courts have struggled to draw a clear distinction between a lawful exercise of exclusivity and an unlawful one, under Art. 82. The whole debate on how competition should deal with IPRs and whether it is able to trump national IP laws, can be traced back to Art. 295, which provides that the Treaty ‘shall in no way prejudice the rules in Member States governing the system of property ownership’. In an attempt to uphold Art. 295, the Courts and Commission came up with several doctrines seeking to balance the national character and independent status of property rights with the Community laws and policy objectives. In general, the Courts and Commission have followed an approach that distinguishes IP from other cases, thus, a more favourable stance is taken whereby the exercise of exclusivity will only constitute an abuse in exceptional cases. 5.2.1 The Existence/Exercise Distinction The tensions that have been traditionally perceived between national IPRs and EC competition law has led the Commission and Courts to try to achieve a balance between the two bodies of law, most significantly, distinguishing between

 

  Case 89/205 Magill [1995] ECR I-743.   See case-law analysed in 5.2.     A-G Jacobs in Oscar Bronner (Case C-7/97 [1998] ECR I-7791) referred to the essential facilities doctrine in relation to IPRs: ‘Where such exclusive rights are granted for a limited period, that in itself involves a balancing of the interest in free competition with that of providing an incentive for R&D and for creativity. It is therefore with good reason that the Court has held that the refusal to license does not of itself, in the absence of other factors, constitute an abuse.’  

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the existence and exercise of IPRs. According to this doctrine, the existence of an IPR would be unaffected by competition law, while competition law could control the way these rights were exercised in certain cases. The origin of this distinction can be found in the competition law case of Consten and Grundig, in which the Court stated that the Commission’s decision did not affect the grant of the rights but only limited their exercise in order to avoid a presumed violation of Art. 222 of the Treaty of Rome (now Art. 295) (providing that the ‘Treaty shall in no way prejudice the rules in Member States governing the system of property ownership’). Following this judgment, the doctrine was criticised as being incoherent and unnecessary. ‘The existence/exercise distinction appears to have arisen from a hasty response by the Court to Consten’s and Grundig’s argument regarding Art. 222 (now Art. 295).’ Marenco and Banks note that ‘the Court could have given a wholly different answer by pointing out that Art. 222 (now Art. 295) is not a guarantee of property (as is Art. 36) (now Art. 30) but a provision ensuring that the Treaty does not detract from the freedom of Member States (MS) to determine the private or public ownership of enterprises’. In the context of the free movement (specifically Arts 30 and 36) (now Arts 28 and 30) the doctrine was believed to be necessary at a time when IP laws were only national in nature. It was felt that a balance had to be struck between the need to respect national IP laws while also ensuring that they were not used in a way to impede the free movement within the Community. In this way, the doctrine was used to justify a de facto harmonisation of IPRs. In an attempt to distinguish between the existence and exercise of IPRs in line with the principle of free movement, the court then developed the specific subject matter concept (SSM),10 referred to elsewhere also as the ‘essential function’.11 ‘The exercise of IPRs in a manner inconsistent with Art. 30 is only permitted under Art. 36 if such exercise is in the course of protecting the SSM.’ 12

    Case 56 and 58/64 Etablissements Consten SA and Grundig-Verkaufs-GmbH v Commission [1966] ECR 299.     T.C. Vinje, Magill: Its Impact on the IT industry [1992] EIPR 397.     Marenco and Bancs, IP and the Community Rules on Free Movement: Discrimination Unearthed, 15 ELR 224 (1990).     When IPRs are reviewed under Art. 36, the Court ‘strikes out one part of national IP law’. IPRs are ‘interpreted’ and applied in order to ensure compatibility with Community law. See Myrick, Will IP on Technology still be Viable in a Unitary Market [1992] EIPR 9. 10   Case 78/70 Deutsche Grammophon [1974] ECR 1147. 11   See Commission Decision DSD and others, OJ 2001 L 319/1, in which it was stated that the crucial question concerns the essential function. 12   S. Smith, The Changing Approach of the European Court to Intellectual Property, at www.solent.ac.uk/law/ssmith2.html, p 8. See also M. Van Der Wal, Art 86: The Limits



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In the competition law context, however, it is questionable whether these concepts are applicable.13 Control is not directed to state measures but rather individual entities. Article 36 requires that the restrictions on imports should be ‘justified’ by the protection of IPRs. Article 295, which is applicable to the competition rules, does not include this requirement. ‘Arts 85 and 86 (now Arts 81 and 82) should not be invoked to limit the substance of IPRs under national laws. The ECJ, at least in competition cases, will not attempt to second guess the national legislature’s wisdom in granting an author or inventor a particular right.’14 In addition, the existence/exercise distinction is not particularly helpful in distinguishing a permissible use from an abuse of IPRs. ‘An obligation upon the proprietor of a protected design to grant third parties, even in return for a reasonable royalty, a licence for the supply of products incorporating the design would lead to the proprietor thereof being deprived of the substance of his exclusive right.’15 In cases where national law grants an IPR, its existence cannot generally be divorced from its availability in each particular case. The SSM doctrine did not assist in clarifying the demarcation of unlawful conduct.16 ‘Abusive exercise requires certain additional features over and above the mere refusal to allow others to use the protected rights.’17 Similarly, in Magill, it was stated that the aims of Art. 86 should be respected, thus rendering the attempt to make this distinction largely redundant.18 The abusive element of Compulsory Licensing [1994] ECLR 231; Reindl, The Magic of Magill: TV Program Guides as a Limit of Copyright Law? [1993] IIC 60; A. Robertson, Compulsory Licensing Under EC Law? [1992] LQR 39. 13   S. Smith op. cit. p 8. ‘The distinction between the inviolability of the exercise of IPRs (per Art. 222, now 295) and the vulnerability of their exercise under Treaty provisions is illogical, since a prohibition on the exercise of rights means that an essential part of the relevant law is unenforceable, and thus is an attack on the very existence of such laws.’ Beier, Industrial Property and Internal Market, 2 IIC 131, 1990. 14   Myrick (1992) op. cit. 15   Case 238/87 Volvo v Veng (UK) Ltd [1988] ECR 6211. 16   See Case C-241 and 242/91P Magill [1995] ECR I-743. In this case the CFI stated that ‘while it is plain that the exercise of the exclusive right to reproduce a protected work is not in itself an abuse, that does not apply where in the light of the details of each individual case, it is apparent that that right is exercised in such ways as in fact to pursue an aim manifestly contrary to the objectives of Art. 86. In that event, the copyright is no longer exercised in a manner which corresponds to its essential function which is … while respecting the aims of, in particular, Art 86.’ While the Court made reference to the essential function, it also stated that the objectives of Art. 86 should be taken into account in determining this function. 17   Ibid. 18   See also C.G. Miller, Magill: Time to Abandon the Specific Subject-Matter Concept [1994] EIPR 415, who argues for the abandonment of the SSM because it is ‘illogical, causes confusion, leads to inconsistent results and is wrong’. He describes the

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related to the provisions of Art. 82 and it was the objectives that were subject to control, rather than an exercise beyond the SSM. Since the Magill case, the ECJ has not made reference to the existence/exercise doctrine and it is hoped that it is silently pronouncing its death.19 Instead, the ‘circumstance-based’ approach was upheld as a means of determining whether a particular conduct constitutes an abuse. While the ‘circumstance’ approach represents a positive step as it is not reliant on an all-encompassing rule, and allows each case to be judged according to the circumstances, it is believed that the ECJ should have provided more details on what constitutes exceptional circumstances, and IP differs from other cases.20 Economic theory supports the view that there is no reason to treat IP differently from other property rights.

distinction between the exercise of IPRs and the abusive exercise of market dominance as the source of the confusion. He draws the distinction between the copyright itself, and the ancillary freedoms stemming from this right. He explains that abuses are exercises of ancillary freedoms and not of copyright, which are possible because of its dominance. It is thus unnecessary to identify the core rights as they are already set out in legislation. Further, he argues that abuses of dominance involving IPRs are committed without the exercise of an IPR. The author makes an analogy with real property: ‘an undertaking that has become dominant, in part because it has built up the largest, or one of the few largest, and most efficient manufacturing facilities in Europe. Any exercise of its rights of property ownership over the land, buildings and machinery, to prevent competitors coming on to his property to use his facility to compete, could prevent or restrict competition. However, such an exercise can never be an abuse of market dominance. It is plainly and simply and obviously an exercise of property rights conferred by law. This is not an exercise of market power in order to prevent others competing. The SSM and essential function of such rights are simply not an issue.’ 19   However, see also the Commission Decision in DSD (2001) op. cit. in which it is stated that the crucial question concerns the essential function. Some have argued that this does not mean that IPRs have no special status, as they do not constitute per se an abuse or require exceptional circumstances. S. Anderman, The Aftermath of Magill [1996] Yearbook of Media and Entertainment Law 235. However, do the other refusal to license cases constitute an abuse per se? The response would appear to be negative according to the latest trends. And as to exceptional circumstances, it is also not clear if this alludes to a different threshold than the general situations of a duty to deal. 20   T. Vinje, The final word on Magill [1995] EIPR 297.



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5.3 IPRs and competition: A systems’ interaction 5.3.1 IPRs – Public Goods, Exclusivity and Information Goods 5.3.1.1 Public goods and market failure IPRs are an instrument used to further public policy objectives. In an information-based economy, policy objectives broadly refer to the desire to maximise the net social benefits arising from new information assets, and to ensure the equal social net rate of return on investments. More specifically, the aim is to ensure the optimal flow of improvements and development of scientific and technological knowledge in order to ensure that the information created is used efficiently for the maximum social benefit of producers and consumers and that knowledge is diffused to a desirable extent, and to ensure that the creative conditions are such that the social costs of productions are minimised with regard to the social costs of producing new knowledge and the use of existing knowledge.21 Knowledge is an unusual commodity with many distinct characteristics arising from its intangible nature. It is difficult to define knowledge precisely or to clearly demarcate its boundaries or specific attributes and measurements. It can function both as a pure consumption good and as a capital good having an intrinsic value when combined with another asset. Therefore, for example, information relating to a cost-reducing process has value of itself. As with classical public goods, knowledge is indivisible and durable. This means that once it has been obtained, it can last forever, and can be used repeatedly with no need to recreate it. Its multiple and simultaneous use will not deplete it, therefore, in terms of consumption, it is a non-rival good.22 While someone might be impoverished by sharing a fish that he has caught with someone, he does not lose anything if he teaches him how to fish, except to the extent that too many are educated in such a way as to depend on the same embodiments of the intangible knowledge, namely here, the fish. As with traditional public goods, information is also non-excludable. In addition, while the cost of producing information is

21   P.A. David, IP Institutions and Panda’s Thumb: Patents, Copyrights, and Trade Secrets in Economic Theory and History, in Global Dimensions of IPRs in Science and Technology, Washington, National Academy Press (1993), pp. 24–45. 22   However, knowledge can often be a positional good in the sense that its value may depend on how many other people possess it. Hence in many cases the value of information depends on whether it is also available to other people and to how many people. It works similar to the case of information about a shortcut to a place, that is not crowded with cars. This might be very valuable information to a taxi driver, but if too many people know about it then its value would be diminished.

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high, the cost of transmitting knowledge is negligible in most cases. Hence, had it not been for the incentives to create it, it should in most cases have been left free.23 Due to these characteristics, information resembles traditional public goods like a lighthouse, in that it can be used to the benefit of many without any depletion in use, and it is non-excludable in nature. Its utility is based on its exchange and propagation. However, contrary to other public goods, knowledge has two additional characteristics. First, the attributes, characteristics and value of the commodity are not known beforehand, therefore there is some asymmetry in the distribution of information. The complete contents of information are not known beforehand, often even by the interested parties. This renders the conclusion of contracts for the production and use of new information particularly difficult.24 Secondly, knowledge is cumulative, therefore it builds on prior knowledge, interacts with other knowledge and involves a recombinant process. The problem with public goods is that because they are indivisible, not easilyappropriable and non-rival by nature, the competitive market fails to give sufficient incentives to induce the optimal amount of innovation. This is because the competitive market leads prices near the marginal cost of production and thereby even fails to cover the high fixed production costs. Every consumer is a potential producer, supplying only at the cost of copying. This implies that in order to protect oneself against imitation, whether by means of secrecy or otherwise, the inventor will have to incur high transaction costs, thus rendering the production and sale of the products inefficient.25 In addition, a single unit may satisfy an infinite number of users at zero or almost zero marginal cost.26 Hence, without intervention, as in the case of other public goods, a market failure would result, as witnessed in the form of under-investment in information goods.27

23   For a more extensive discussion of public goods, see H. Perritt, Property and Innovation in the Global Information Infrastructure, 1996 U. Chi. Legal Forum 261; P.A. David (1993) op. cit. pp. 24–45; J. Boyle, Law and Economic of IPRs: Cruel, Mean, or Lavish? Economic Analysis, Price Discrimination and Digital Intellectual Property, 53 Vand. L. Rev. 2007, 2000; Europe Economics, Global Public Goods in Health, May 2001, at www.europe-economics.com/. The costs are not only high for production, but also to ensure that information is assimilated that learning takes place. 24   P.A. David (1993) op. cit. pp. 24–45, 28. 25   H. Perritt (1996) op. cit. 26   J. Boyle (2000) op. cit. 27   This proposition, however, is subject to the qualification that it may be time-consuming or impossible to copy information in certain cases, therefore, property rights may not be required to overcome under-investment. This is apparently the case with Coca Cola which has not been copied in the past 100 years even though it is not subject to patent protection. See S. Shavell, Economic Analysis of Property Law, Harvard Law and



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While the fact that there will otherwise be a market failure does not precipitate the creation of private rights, due to certain characteristics of information, that are analysed below, it would seem that it is the most desirable. 5.3.1.2 Patronage, procurement and property There are three solutions traditionally associated with the problem of public goods: patronage/subsidies, procurement/direct government production and property/regulated monopoly.28 The first solution, patronage, refers to publicly financed subsidies, while the second, procurement, refers to state taxes to finance contracting with private parties. Both schemes involve the supply of information without charge, although patronage is more conducive to the speedy disclosure of information based on reputation.29 The major drawback of both schemes is that it is almost impossible to lay down efficient terms for the contract due to the uncertainty surrounding the nature of the information as well as its value, due to the problem of asymmetry. Hence, there would be very high transaction costs coupled with a huge administrative burden, which would only lead to imperfect agreements.30 The third option, property, refers to a publicly regulated private monopoly, which operates for a normal rate of profit, however this is not guaranteed. This consists of granting exclusive property rights which allow for the formation of a market, which will, in turn, provide an opportunity for the right holder to benefit from the profits. The advantage of this approach lies in the fact that there is no need to predetermine the economic benefits as these are left to the market. It is the only system that allows for individuals to respond to market opportunities and in this way it also grants economic freedom to the individuals concerned.31 Property rights are devised to allow for the efficient exploitation of scarce resources. Right holders must choose the most efficient type of conduct, avoiding problems relating to the overuse of common property, also known as the

Economics Discussion Paper No. 399, Dec. 2002, chapter 12. Indeed, without some form of protection for information, there would be some degree of creation, reflected also in the fact that some highly industrialised countries, such as Switzerland, did not adopt patent legislation until recently, however, it is thought the level of creation would fall short of the optimal. 28   P.A. David (1993) op. cit. pp. 24–45, 29. 29   Ibid. pp. 29–31. 30   See, however, S. Shavell (2002) op. cit. chapter 12, who discusses the reward system and concludes that ‘For a variety of reasons, apparently more political than based on consensus about the intellectual appeal of the patent system, the latter system won out’. p. 20. 31   It is clear that not all individuals will be able to make choices to respond to the market, as many will be excluded.

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‘tragedy of the commons’.32 With regard to information, while not scarce of itself, its specialisation is, in the sense that its creation requires special incentives to ensure that the creator devotes time to this task. The exclusive right turns a public good into a private one. As a means of managing scarcity, property rights assign the responsibility of working with the scarce resource to one individual, as well as the benefits and losses of that decision. If property rights are transferable, a market may operate and a price can be set. However, the viability of these rights rests on the need to ensure a sufficient level of exclusivity.33 Different information goods have different public and private good characteristics so that in certain cases there are sources of excludability and rivalness negating the need for a property right. Lead time, costly copying, less than perfect copies, inability to use copies without the assistance of the inventor and reputational advantages may be present in such a way in certain types of information, that the public goods justification is obviated.34 The intellectual property system has to strike a balance between the free knowledge, the knowledge that is appropriable but not transferable, and the transferable exclusive rights – namely the cases where protection is granted.35 Hence, the two basic questions that IP protection faces are, first, when information deserves protection under property rights, and secondly, the length and breadth of those rights. Like in all systems, trade-offs are involved in the production of knowledge and in the grant of property rights. The priority system, for example, on which the patent system is built, allows for the speedy disclosure of inventions. This reflects the objective of constant innovation, and rapid development. However,

32   R. Hardin, Valuing Intellectual Property, 68 Chi. Kent L. Rev. 659 (1993); M.A. Heller, The Tragedy of the Anti-commons: Property in the Transition from Marx to Markets, 111 Harv. L. Rev. 621 (1998). 33   E. Mackaay, Economic View of Information Law in E.J. Dommering, P.B. Hugenholtz, J.J. Kabel, Information Law towards the 21st century, Deventer/Boston: Kluwer Law and Taxation Publishers (1992). See also H. Perritt (1996) op. cit. Perritt justifies the grant of property rights based on the transaction costs of public goods stemming from their characteristics of non-rivalness and non-excludability. Every consumer is a potential source of supply at only the cost of copying and that increases transaction costs. Property rights mitigate free riding by increasing the pirate’s costs so that he not only incurs the marginal cost of copying, but also the legal costs of expected liability. As with all property rights, they are limited in some way by the needs of the public. See also R. Merges, IPRs and Bargaining Breakdown: The Case of Blocking Patents, 62 Tenn. L. Rev. 75 (1994), where the property basis of IPRs is defended as it grants the remedy of an injunction that is desirable in view of the difficulty of calculating the losses resulting from copying. 34   H. Perritt (1996) op. cit. p. 269. 35   This is also reflected in the different forms of protection for information according to its perceived merit. Some information may be protected by trade secret law and tort and contract law, while other might warrant strong property rights.



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it also leads to a rush to innovate and rivalries amongst inventors based on a winner-take-all solution. Too many inventors in the race to innovate and to be the first to discover or file a particular invention are likely to lead to common pool problems associated with the fact that people will be individually minded without consideration of their effects on other competitors.36 It may also lead to allocative inefficiencies. In addition, as the IP systems like the patent system, being built on the race-to-innovate, make coordination impossible, they might lead to wasteful duplication that may be an even larger problem than the common pool problem. Problems, however, associated with excess or under-investment are sought to be resolved by the adjustment of the patent length and breadth, so as to induce optimal innovation.37 However, another disadvantage of the property system relates to the withholding of access to the new knowledge, hindering the creation of similar knowledge of a superior quality at a possible lower price. This can be witnessed both by reduced dissemination of the invention in question, and also in the reduced development of improvements or dependent products or services which depend on the initial invention. The difference between the benefit offered by the information under property rights and the benefit that would accrue if exploitation had been made on a competitive basis, is the ‘deadweight burden’ of the patent monopoly.38 As mentioned above, the implications of the trade-off between the incentives for new knowledge and its efficient dissemination and exploitation may change by varying the length and breadth of the endowed property rights. In this way, it has been shown, for example, that weak and narrow patents may encourage cross-licences and hence allow for dissemination and improvements, while strong broad patents may encourage more fundamental, initial breakthrough inventions.39 The optimal length and breadth, however, is far from clear due to all of these uncertain and competing interests that need to be addressed in the patent system. The problems are aggravated by the fact the desirable level and type of innovation is also unclear.

36

  P.A. David (1993) op. cit. pp. 24–45.   Awarding the property rights early, namely, as soon as it is known that a party has worked out the essentials of an invention, may mitigate this wasteful effect, but may also lead to the control of a whole market, or to the suppression of improvements on technology. It is difficult to achieve this balance. 38   P.A. David (1993) op. cit. p. 34. 39   R. Merges and R.R. Nelson, On the Complex Economics of Patent Scope, 90 Colum. L. Rev. 839 (1990). The scope of protection includes different aspects, such as the type of behaviour which constitutes an infringement. It is generally believed that conduct will be judged to be an infringement if it produces benefits to the right holder at a low social cost, and vice versa. See S. Shavell (2002) op. cit. chapter 12. 37

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In conclusion, IP is viewed as an effort to cure a form of market failure arising in the case of public goods. While it is not the only means of overcoming the problem of public goods, it is the most desirable solution due to the asymmetry of information, and the difficulty of placing a value on knowledge prior to its creation. The advantage of property rights is that they are granted at a time when the desirability of an invention is not known.40 IP itself, however, involves tradeoffs usually addressed through changes in the length and breadth of the patent. The trade-offs involved in IP have broadly been described as the vertical and the horizontal dilemma. The latter involves a compromise between the right to exclude as an incentive for new technology, and competition for the optimal exploitation and dissemination of the new technology. The former addresses the clash between the interests of new technology as an output, and its use as an input for further research and development of a dependent or similar technology. Hence, in the definition and demarcation of IPRs it is endeavoured to achieve the optimal balance between incentives and use and accessibility, and pioneering works and improvement. These competing considerations reflect the difficulty and the clashing interests involved in IP as a system. 5.3.2 Implications for competition 5.3.2.1 IP like other property rights for the purposes of competition IP statutes allow for a market to operate in four ways: they create property rights, lower transaction costs, provide valuable information, and contain a mechanism for enforcement.41 Hence, IPRs are devised to create a market for information goods that would not be established otherwise, or at least not at an optimal level: ‘IP is conceived to bring informational subject-matter into the realm of market rules to optimize their creation’.42 Private parties are left to internalise the decision of whether to create a type of knowledge whose value is not known beforehand, and are given the opportunity to respond to the market created, that will in turn set the price of the information created. The rationale is similar to the rationale behind real property: ‘There appears then to be some truth in the conservative dictum that everybody’s property is nobody’s property. Wealth that is free for all is valued by no one because he that is fool enough to wait for its

40   N. Siebrasse, A Property Rights Theory and the Limits of Copyright, 51 U. of Toronto L. J. 1 (2001). 41   H. Ullrich, Intellectual Property, Access to Information and Antitrust: Harmony, Disharmony and International Harmonization, in Expanding the Boundaries of Intellectual Property: Innovation Policy for the Knowledge Society, Oxford University Press (2001); H. Ullrich, Legal Protection of Innovative Technologies: Property or Policy? (2001) in O. Grandstrand, The Swedish Intellectual Property Symposium. 42   Ibid.



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proper time of use will only find that it has been taken by another … The fish in the sea are valueless to the fisherman, because there is no assurance that they will be there for him tomorrow if they are left behind today’.43 Efficient exploitation is therefore attained by privatisation. Hence, IPRs are not exemptions from the competition provisions, but rather, the IP system depends on the proper functioning of competition, and has only been devised to allow for the response to the opportunities and conditions of the market.44 Hence, the IP system is not conceived as protection from competition, but rather protection for competition in the market of intangible products, whose tangible embodiments are set against and valued according to the competitive market conditions which competition protects. IP does not guarantee a reward, and as with any other property right, it merely grants the opportunity for a reward on the market. Therefore, IP can only require equal treatment by virtue of the competition provisions. In a similar way to other property rights, the exclusivity allows for the autonomous determination of conduct and does not modify antitrust rules.45 IP sets out the regulatory framework, under which it provides for the grant of individual property. The exclusivity of rights turns the public good into an economic good, for which competition alone can determine the value, providing incentives and rewards in line with demand.46 In such cases, it depends on the proper functioning of competition within the market. As a piece of individual property, however, it provides for the autonomy of decision-making and freedom of contracting, as with any other property, which must conform with competition rules.47 In this case, IP does not constitute a justification for the infringement of competition, nor does it grant the right to restrain or impair residual competition. ‘The exclusivity is granted to allow to respond to the opportunities in the market not to control it.’48 It is the competition provisions which determine when it controls the market, whether an IP or any other case is concerned, in the same way. Therefore, there is no economic justification for treating IP differently.

43   H.S. Gordon, The Economic Theory of a Common-Property Research: The Fishery, 62 Journal of Political Economy 124 (1954). 44   The IP system, indeed, is a constitutive element of the market. 45   H. Ullrich, Legal Protection of Innovative Technologies: Property or Policy? in O. Grandstand, The Swedish Intellectual Property Symposium (2001). 46   As the price is set by the market, this was the basic reason underlying the preference of property rights over the other schemes. 47   Related to this issue is the question of whether IPRs are a right to do something suboptimal but useful, or merely a basic right to optimise that can be overridden. The analysis of this issue is beyond the scope of the present inquiry. 48   H. Ullrich, Legal Protection of Innovative Technologies (2001).

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5.3.2.2 Competition embedded in the IP system IP, however, is not neutral to the competition rules. By changing a non-market into a market place, the terms and conditions for autonomy of exploitation are provided, along with a framework regulation of the market. It modifies the conditions of competition and thereby creates new markets. While in one sense it excludes competitors from the technology market, this does not mean that it is also exempted from competition liability arising from anti-competitive conduct. The paradox only seems to arise in cases where the exclusion (as such) becomes the reason for anti-trust liability, such as in the refusal to deal cases. It is feared that imposing competition law liability for conduct consisting solely of a refusal to deal negates the grant of property rights whose essence is the right to exclude. However, even here, liability does not arise solely by virtue of the exclusion, but as set against the market conditions and structure. It is no more different than the case with real property and the right to exclude, only that in the case of intangible goods the exclusivity might be less efficient and may entail a far larger amount of monopoly power.49 In addition, as IP addresses competing objectives, and seeks to achieve a balance between incentives and dissemination and exploitation, competition considerations are built-in in the IP provisions. This is reflected in the limitations in the length and the breadth of the property rights, and in exceptions, such as CL for non-use of patents, and the fair use and experimental use doctrine. However, it is not clear what kind of competition system should be embedded in the IP system in order for it to achieve its objectives. None the less IP is a ‘constitutive element’ of competition allowing for a market to operate, and not a restriction of it.50 5.3.2.3 The transition from separate to unified fields The traditional confusion with regard to IP and its consideration as exempt from or requiring a different threshold from competition, springs from the assumption that there must be complete exclusivity, which allows the IP, inter alia, holder to charge any price, and so IP is allowed to exclude competition in the short term, as it will enhance dynamic competition in the long term. The problem with this approach is that, by an equation of the protected intangible subject-matter with its tangible embodiments, it creates a confusion between the

49   E. Mackaay (1992) op. cit. Although, there may be other problems in the case of real property also, mostly associated with physical and economic constraints preventing duplication, and also with capacity to supply, that are, in most cases, not an issue with regard to information. 50   H. Ullrich, Legal Protection of Innovative Technologies (2001).



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reasons justifying the exclusivity (on the technology market) and an alleged right to restrain competition (on the product market). Therefore it assumes an antagonism where there is none. … The reason for protecting technologies … is that by their very nature, they cannot be exposed to competition, unless they are protected against imitation, in one way or the other.51

Hence, the traditional approach viewed antitrust and IP as two competing and separate fields, where IP granted a monopoly within which the property rights were absolute. In viewing these fields as separate spheres involving an inherent tension required the determination of the precise scope of the property rights, so that anything within was lawful whereas anything beyond, constituted an antitrust violation. It is in this context that the European Courts and Commission resorted to the doctrines of existence/exercise, the specific subject matter and the essential function. These doctrines attempted to determine what was in the scope of the property right in question, and to set the boundaries for anti-competitiveness. The result was an artificial and incoherent demarcation of the scope of property rights. While such a formalistic approach may have the advantage of creating clear rules that are predictable and transparent, and can be efficiently administered, it is undesirable as it shifts the emphasis in the determination on the precise scope envisioned in IP statutes, which may lead, as indeed did, to artificial results and distinctions and effects that may prevent certain types of transactions that foster innovation, or lead to a false determination of illegality.52 The transition from the perception of antitrust and IP as two separate and competing fields, to a unified field, in the sense of working towards the common goal of maximising wealth by producing what consumers want at the lowest cost, introduces the benefits of treating IP in the same way as any other property right. While this might impose a burden of analysis of the market conditions, and might result in a slow, resource-intensive and less predictable system, consideration of the effects allows for a more accurate determination of what constitutes pro- and anti-competitive activity, without resorting to artificial doctrines. IP and competition policy address the same dilemma through different means, namely, the balance of the ‘monopoly privilege’, and its dissemination—the vertical and horizontal dilemma. IP addresses these questions through the definition of exclusivity and outlining its limitations. Competition addresses these questions by maintaining competition in the face of exclusivity as defined by IP. This is also reflected in the fact that claims of patent infringement and the abuse

51

  Ibid. p. 7.   W.K. Tom and J.A. Newberg, Antitrust and IP: From Separate Fields to a Unified Field, 66 Antitrust L. J. 167 (1997). 52

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of a dominant position based on refusal to grant access address the same problem: the definition of degree of exclusivity permitted and patent breadth. While both respond to a series of social, economic and political considerations, and therefore may point to different conclusions depending on their different policies, IP and competition policy are interdependent and mutually determining. In conclusion, IP and competition law are interdependent and inter-determining. IP changes a non-market to a market, sets out a regulatory framework embodying competition concerns, and by granting exclusive rights it limits competitors in certain respects, as with any other type of property. However, as a piece of individual property, it is open to abuse, both exploitatively or structurally as any other case, as provided for in competition law. It is in this sense that IP can be said to be a constitutive element of competition, and indeed a protection for competition, but is not a restriction or exemption from competition law.53 5.3.2.4 How antitrust control affects incentives to innovate The idea that antitrust law would hamper incentives to innovate is the most common and strong argument against using antitrust law as a means to control conduct that is condoned under IP laws, and in favour of immunising it from liability. While there is very little empirical evidence on the effects of this control in general, and compulsory licensing in particular,54 it is none the less argued that such a concern is based on a series of erroneous assumptions.55 First, it assumes that IP laws grant holders an economic monopoly. Secondly, it assumes that the

53   Hence, economically there is no reason for treating IP differently from other property. IP confers a property right as in the case of tangible property, however, that is not unlimited and unqualified. Restrictions may be built into the system granting these rights, but they may also come externally from other sources, such as competition laws. While IPR legislation can change the market conditions and has built-in safeguards to restrict the scope of the exclusivity granted, it cannot be expected to assume the responsibilities of competition law and ensure the proper functioning of market forces. See Anderman (1998) op. cit. Hence, for example, just as a port owner might be required to grant access to competing ferry services, in a similar situation the IP owner might be required to grant access to products or services covered by the IPR, especially where a monopolisation of derivative markets might otherwise have been permitted. With regard to competition, IP grants a legal monopoly that does not necessarily coincide with the economic monopoly, therefore, if the latter is present, competition law assumes its usual role. While IP restricts competitors and affects the competitive market, competition controls the IP-holder and the way in which he uses his property rights as in any other case. It is the exclusivity as exercised against the market conditions that is controlled and not exclusively by virtue of the exclusivity. 54   F.M. Scherer (1977) op. cit. 55   S. Genevaz (2004) op. cit.



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acquisition of monopoly power is the only way to appropriate revenues from inventions, and thirdly, it assumes that antitrust liability would necessarily have overall adverse effects on incentives to innovate. IP rights in general, and patents in particular, do not necessarily and automatically confer monopoly power on their owners.56 ‘The intellectual property laws do not purport to confer any monopoly, however, but only the right to exclude others from producing the good, expression or symbol covered by the intellectual property interest. This right is a property right that is not different in principle from other property rights.’57 The law encourages the creation of substitutes, of inventing around inventions and therefore substitutes may exist in the market. Hence, the legal monopoly granted by a patent does not coincide with an economic monopoly in the marketplace in most cases. As regards the appropriation of revenues which provides an incentive to innovate, it is clear that IPRs are not the most significant factor in most cases in ensuring returns in most industries. Factors such as lead time, reputation and costly copying may present greater sources of excludability and profit.58 While it is true that patents are the most significant factors in appropriating returns in the pharmaceutical industry, in this specific case, ‘economic analyses dispute the idea that the concentration of market power is the best way to ensure an optimal appropriation’.59 Kenneth Arrow suggests that a monopolist has less incentive to innovate than a firm in a competitive industry, as the latter has a higher incentive to reduce the cost of its product.60 Hence, anti-trust liability does not necessarily lead to an overall reduction in incentives to innovate in the relevant industry. In addition, as antitrust control is limited to exceptional cases, it would only rarely impose a constraint on the courses of action available to IP owners.61 Ayres and Klemperer suggest that the loss of incentive is negligible in comparison to the increase in social welfare stemming from limited restrictions on the patentees’ market power.62 However, the latter’s suggestion applies only in cases

56

  Ibid.   H. Hovenkamp et al. (2003) op. cit. 58   See H. Perritt (1996) op. cit. 59   S. Genevaz (2004) op. cit. p. 750. 60   Ibid. See also K.J. Arrow, Economic Welfare and the Allocation of Resources for Invention, in Essays in the Theory of Risk-Bearing, Chicago, Markham Publishing Co. (1971). 61   Ibid. p. 10. 62   I. Ayres and P. Klemperer, Limiting Patentees’ Market Power Without Reducing Innovation Incentives: The Perverse Benefits of Uncertainty and Non-Injunctive Remedies, 97 Mich. L. Rev. 985, (1999), p. 990: ‘Because the last bit of monopoly overcharging is so disproportionately damaging, restricting the patentee’s monopoly power a small amount is likely to increase social welfare. The benefit of reducing the deadweight loss 57

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where there is high price elasticity in the market so that every price reduction results in an increase in demand.63 In industries such as the biopharmaceutical industry, where demand for the end product is not elastic as consumers need access to medicine (as opposed to luxury products), a reduction in the monopoly price may have few consequences on the deadweight loss and can greatly diminish incentives to innovate. Nevertheless, this may not be the case in the pre-commercial stage of research where demand for research tools by competing firms takes place on different levels of the market, as distinct from end product situations. In addition, Scherer concluded that CL had little effect on incentives to innovate in industries in which the parties had to maintain a high level of R&D to remain competitive or where the ability of competitors to invent around patents reduced the value of patent protection.64 Even testimonies of industry operators themselves seem to take for granted that antitrust liability might arise as in any other case, and this is not perceived to impact negatively on incentives.65 Finally, it would also make little sense, in practice, to have different rules for immunity for refusals to deal by patent holders as that would encourage the arbitrary incorporation of protected components in designs simply to escape

of supra-competitive pricing is likely to outweigh the costs of a slightly lower incentive to innovate.’ See also S. Semerano, The Efficiency and Fairness of Enforced Sharing: An Examination of the Essence of Antitrust, 52 Kansas Law Rev. 57 (2003), p. 25: ‘All things being equal, forced sharing may discourage both the innovator and the sharer from investing in improvements. But all things are not equal. Shared property may enable more vigorous competition than would otherwise occur, and that competition may stimulate investment to a greater extent than forced sharing may reduce it. A firm not faced with competition will only consider innovation’s demand-expanding and entry-delaying effects. A firm faced with competition, however, will have an incentive to innovate not only to expand the existing market and deter entry, but also because of the fear of losing market share to, and the desire to gain it from, a competitor.’ 63   S. Genevaz (2004) op. cit. p. 752. 64   F.M. Scherer (1977) op. cit.; F.M. Scherer and D. Ross, Industrial Market Structure and Economic Performance, 3rd edn, Boston, Houghton Mifflin Co. (1990): ‘all in all the substantial amount of evidence now available suggest that compulsory patent licensing, judiciously confined to cases in which patent-based monopoly power has been abused … would have little or no adverse impact on the rate of technological progress …’, pp. 456–7 See also C.V. Chien (2003) who compares inventive activity with compulsory licenses to conclude that no decline in innovation can be seen. Hence the author argues against a blanket exclusion to CL, although also stresses the importance of two factors, ‘predictability’ and ‘importance’ that may be decisive in the impact of CL. 65   FTC/DOJ Proceedings on Competition and IPRS: A. Diverse perspectives on patents. B. Business perspectives on patents. Biotechnology and Pharmaceuticals, 19th March 2002.



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liability. Hence, it is submitted that the solution cannot be found in immunising IP, but rather in determining the cases in which antitrust liability should be imposed for a refusal to deal. 5.3.3 Recent Recognition of Antitrust Control This approach has come to be recognised in recent IP legislation, in which it is stipulated that an abuse of the property rights conferred is possible, and thus IPRs are not unlimited rights. Furthermore, no provision is made for a different threshold.66 Article 8 of TRIPS provides that ‘appropriate measures … may be needed to prevent the abuses of intellectual property rights …’ This reflects the fact that IPRs are not immune from the competition provisions and that it is possible for patent holders to abuse their position. The EC Database Directive 96/9/EC also envisages the possibility of abuse by a copyright holder: ‘protection by the sui generis right must not be afforded in such a way as to facilitate abuses of a dominant position. … Whereas the provisions of this Directive are without prejudice to the application of Community or national competition rules’. The Directive can be interpreted as reflecting the idea that IP is not exempt and that it is subject to the application of competition rules, just as with any other property rights. Hence, in accordance with TRIPS, the patent system could provide for the compulsory licensing of patents if it would be judged anti-competitive by competition law and not IP.67 This could be seen as a reflection of the fact that, in

66   In the USA, this is explicitly recognised in the US FTC/DOJ Antitrust Guidelines for the Licensing of Intellectual Property (6th April 1995), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13, 132, available at http://www.usdoj.gov/atr/public/guidelines/ipguide. htm#back1 which provide that liability IP will be treated like any other kind of property for the purposes of antitrust, that there should be no presumption of market power, and that licensing may allow complementary factors of production and hence be pro-competitive. See also UK Patent Act s. 51 on powers exercisable following the report of the Competition Commission, in which action may be taken in situations that are likely to operate against the public interest either because of a refusal to license or of the licensing conditions. See also Berne Convention for the Protection of Literary and Artistic Works of 9 September 1886, as last amended on 28 September 1979, and by Council Directive 91/250/EEC of 14 May 1991, on the legal protection of computer programs, OJ 1991 L 122/ 42. In the 27th recital, that Directive states that its provisions are without prejudice to the application of the competition rules under Art. 82 EC ‘if a dominant supplier refuses to make information available which is necessary for interoperability as defined in this Directive’. 67   See the Draft Proposal for a Council Regulation on the Community Patent (2000) op. cit. and the explanatory Memorandum.

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accordance with economic theory, the patent is the same as any other property right for the purposes of competition law, and that the incentives and need for innovation do not justify an immunity, first, because it is not clear how much incentive is required, and therefore it may not be sensitive to these limited instances of control, and secondly, because there may be static distortions outweighing the dynamic benefits or other concerns regarding follow-on inventions. Patents grant a legal monopoly that cannot necessarily be equated with an economic monopoly. For example, in the pharmaceutical industry, patents do not award a legal monopoly over the treatment of a specific disease, but only over a specific product or process. Hence, there is often some potential for strong competition between products in a therapeutic class. The fact that a legal monopoly does not coincide with an economic monopoly operates on two levels. On the one hand, it should not be assumed that patents create market power.68 Equally, however, when the legal monopoly that patents confer, coincide with an economic monopoly, they will not be exempt from competition control. Competition control operates ex post according to the market conditions, while patent protection operates ex ante irrespective of the market conditions. The provisions of TRIPS are important in recognising that IP and competition are no longer understood as separate spheres, so that the metes and bounds must be sought within which IP is absolute, but IP remains subject to competition law liability as provided for by the latter for any case according to its effects. Indeed TRIPS may be read as the legitimation (on the part of IP instruments) of such competition control. With regard to competition law, it is clear that IP is subject to competition law rules as shown in the practice of the EC Commission and Courts. While the Courts and Commission have abandoned the insistence on defining the scope of IP protection under the existence/exercise and specific subject matter doctrines, in their latest decisions they still nevertheless continue to reflect a theoretical understanding that IP warrants a different threshold of general immunity except in ‘exceptional circumstances’.69 As has been shown, this difference cannot be justified. The circumstances should be regarded as more exceptional than in other cases. There is no defining-line in IP determining when an act will be deemed anticompetitive. Rather, the latter will be determined according to the impact of specific practice under a rule of reason analysis. The scope of a patent is not something concrete that exists in isolation, but is also dependent on external

68

  This is recognised in the US FTC/DOJ IP Licensing Guidelines (1995) op. cit.   I insist on theoretical understanding, as in practice, it would seem that the circumstances are not any different from the other cases. 69



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factors such as antitrust control. In this way, antitrust law should be seen as simply another factor in determining patent scope.

5.4 Conclusions In this chapter, a case has been made for the lack of economic justification in treating IP differently from other property rights for the purposes of competition law. Whilst different doctrines were created by the EC Courts to distinguish IPRs in theory, this control has been applied in practice as exceptionally as in other cases, thus according to the facts of the case. The EU Commission seems to be more willing recently to recognise this approach, and indeed in its recent Microsoft decision, it resorted to the Magill case to argue that ‘intellectual property rights are not in a different category to property rights as such’.70 The next chapter addresses the antitrust duty to deal under Art. 82 and its application in the biopharmaceutical industry.

70   See C-3/37 Microsoft Case 792, 2004, para. 550: ‘The Court of Justice stated that “the refusal by the owner of an exclusive right [copyright] to grant a license, even if it is the act of an undertaking holding a dominant position, cannot in itself constitute abuse of a dominant position”. It pointed out, however, that “the exercise of an exclusive right by the proprietor may, in exceptional circumstances, involve abusive conduct” thereby clarifying that intellectual property rights are not in a different category to property rights as such.’

6. The duty to deal under Art. 82 EC 6.1 Introduction This chapter considers the duty of a dominant firm to deal with competitors/ customers and the cases in which it is lawful under Art. 82 EC to refuse or cease to deal. The chapter does not address the general objections and rationale behind compulsory licensing as these have already been addressed. Furthermore, it does not consider the role of contract law as this is beyond the scope of enquiry for the purposes of this chapter. In contrast, this chapter undertakes a pragmatic examination of the case law and seeks to propose a specific interpretation of the state of the law. There is no consistent rationale behind the case law in this area and therefore the state of the law is far from clear. Many questions remain unanswered, nevertheless, as will be shown in the next chapter, it is still possible to use Art. 82 in its current form to address concerns relating to access in the biopharmaceutical industry. The chapter proceeds on the basis of the categorisation of the Advocate General in Oscar Bronner, which identifies the three main factors leading to a duty to deal under EC competition law. These involve the ‘dependence’ cases, the leverage cases and/or the essential facilities cases. Based on these factors, it examines the rationale behind the duty to deal, and what each of these circumstances involves. 6.1.1 What is a Refusal to Deal and What is the Rationale Behind its Prohibition? Clear guidance on the refusal to deal is difficult to find as the existing case law is scarce and rather inconsistent. While it is clear that there is no general obligation under EC competition law to deal with somebody (whether a competitor or a customer), none the less in certain ‘exceptional circumstances’, a duty to

  

  Case C-7/97 [1998] ECR I-7791.



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deal will be imposed. The duty is exceptional regardless of whether an intellectual or other property right is involved. In this context, a refusal to deal refers to a situation in which the licensor refuses to give a licence, leaving potential licensees with no option but to seek a compulsory licence. However, a refusal to license is not limited to cases of outright refusal but may also include situations in which there is a delay in negotiations or cases in which the acceptance of the licensing terms proves to be so difficult that they amount to an effective refusal to deal. In general, even dominant undertakings have the right to refuse to license and to unilaterally decide which third party they wish to deal with. In the absence of other special circumstances, Art. 82(c), which requires the application of similar conditions to equivalent transactions, cannot be invoked to challenge a refusal to license or to order a licence on the same terms. However, if a certain ‘abusive conduct’ or ‘exceptional circumstances’ are deemed to exist, a duty will be imposed. 6.1.2 Concerns Relating to a Refusal to Deal: Potential Harm to Competition The main economic consideration behind the striking down of certain refusals to deal relates to the potential of harm to competition, as opposed to individual competitors.

     ECJ, Cases C-241/91 P and C-242/91 P, Radio Telefis Eireann (RTE) and Independent Television Publications (ITP) v Commission (‘Magill’), [1995] ECR I-743, para 50.      See Chapter 5.      Delays in negotiations are only abusive if there is a duty to deal. Hence, when negotiations are delayed it should first be examined whether there is a duty to negotiate and reach an agreement in the first place.      With regard to the licensing terms, while they may in themselves on many occasions amount to an abuse of a dominant position (e.g. tying, non-compete obligations etc) there may also be cases where this is not the case, such as high royalty rates. Where the terms are such that any licensee is prevented from making an economically viable use of the license, then the offer to deal may amount to a refusal.      Once access is given to one licensee, there should not be an automatic obligation to grant identical access to everybody else, as this would inhibit the first license, and may not be reasonable.      Case 238/87 Volvo v Veng [1988] ECR 6211 (para 9).      D. W. Carlton, Antitrust at the millennium: A general analysis of exclusionary conduct and refusal to deal, 68 Antitrust L J 659, (2001). See also the ECJ in Case C 418/01, IMS, judgement of 29 April 2004, para. 145 referring to the requirement that it should be ‘impossible or at least unreasonably difficult for any undertaking seeking to operate in the market to create’ an alternative, confirming that harm to competition should not be equated with harm to a particular competitor.

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The refusal to license will not in itself constitute an abuse in all cases. Hence, the refusal to license can be seen as the means, and harm to competition as the end, prohibited in Art. 82. Accordingly, in GlaxoSmithKline the AdvocateGeneral made a distinction between the negative consequences for competition of a refusal to supply that may be abusive, and the refusal to supply with the object/effect of restricting parallel trade, which was found on the facts to be non-abusive.10 A refusal which seriously disrupts competition on a market may constitute an abuse. On the other hand, a refusal that merely restricts the supply and distribution of an end product so as to restrain parallel trade is not abusive if there is no harm to competition.11 The concerns relating to the potential harm to competition consider the direct impact on end consumers, who may have to pay higher costs, with a more restricted choice or lower product quality by virtue of the refusal, resulting in a loss in consumer welfare.12 In essence, four categories of refusals have been identified in the literature:13 1. A refusal to take part in a joint venture: in such a situation, it is found that if the parties do not wish to take part in such a venture there is no harm to competition as it means that the joint venture would not have been efficient for them. 2. Where an enterprise in a dominant position refuses to deal with any customer who deals with his competitor. This echoes the situation in United Brands14 in so far as United Brand’s (UB’s) refusal was based on Olesen’s promotion of a competing firm. In such a case, economic theory provides that exclusive dealing may be pro-competitive insofar as it creates incentives for UB to incur expenses that might otherwise have been avoided due to the possibility of free riding by the competitors. This case may, however, also raise competitive concerns as if economies of scale are present, exclu-

     Case C-53/03 Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v Glaxosmithkline AEVE, Opinion of the AG Jacobs, 28 October 2004.   10   Ibid para. 104. As stated by AG Jacobs, ‘I would note that the above analysis does not preclude the possibility that a restriction of supply by a dominant pharmaceutical undertaking might fall foul of the Court’s established case-law on refusal to supply if it had negative consequences for competition arising other than as a consequence of its restriction of parallel trade.’   11   Ibid para. 104. This was, however, based on the particularities of the pharmaceutical industry.   12   J.K. Mackie-Mason, What about Unilateral Refusal to Deal? In FTC/DOJ Hearings on IP and Competition Policy 2002.   13   D. W. Carlton (2001) op. cit.   14   Case 27/76 United Brands [1978] ECR 207.



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sive dealing might inhibit the second firm (Olesen) from achieving efficiency. Hence, a rule of reason is required, in order to inquire into the possibility of economies of scale and offsetting efficiencies. 3. Where there are two markets, in which firm one (F1) is present, and the product of market A is a necessary input for market B, in which firm two (F2) is also present, and F1 refuses to license F2. Economic theory suggests that F1 will only refuse F2 if the latter does not allow him to price discriminate, as in other cases, F1 will wish to keep F2 in the market if he is more efficient as he can receive profits from his supply of product A. This is not the case, however, if products A and B are not complements for some consumers and economies of scale are present. In such a case, F1 may refuse to deal in order to preserve its power on market B. If F1 refuses to supply product A to any customer consuming B from F2, F2’s scales will drop, forcing him to leave the market. In this case, customers only want product B and will be faced with a monopoly and thereby suffer as a result of the reduced competition. 4. Finally, the dynamic model, in which F1 is present on market A and both firms are present on market B, but there is a possibility of competition in A and economies of scale in B. In this case, F1 will seek to limit the power of F2 in market B so that it preserves its power in market A. By keeping F2 small in market B so that it is not an effective supplier of market B to competitors, F1 protects its position in market A. This will also allow F1 to transfer his monopoly over time from one product to another. Economics clearly cautions us about the possible net harm to competition if there is a significant foreclosure of the distribution system, thus preventing a competitor from achieving economies of scale, or if the monopolist excludes a competitor by depriving it of customers who also need the first product of the monopolist.15 In economics, the optimal balance is empirical, however, this is complicated due to the potential global effects and the fact that the decision should not only take ex post rewards for investments into account, but also, how the latter will affect ex ante future decisions to invest. The optimal balance will depend on the static allocative inefficiency resulting across firms, industries, time, the amount of additional innovative effort it is likely to induce and the amount of future consumer welfare induced by the incremental investment.16

  15   It should also be remembered that economics takes not only the local effects of the case at issue into account, but also its global effects, as this affects the expected returns from innovation.   16   J.K. Mackie-Mason (2002) op. cit.

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The risk of harm to competition is also dependent on the type of market structure put in place and the extent to which it is conducive to innovation.17 To some extent, this is reflected in the clash between the monopolist18 and competition theorists.19 The conclusions in this regard are ambiguous: ‘Permitting greater consolidation of market power in a market may increase or decrease innovative activity in that market’.20 A clear economic formula which would differentiate between desirable and undesirable refusals to deal has not yet been devised.21

6.2 The State of the law A duty to deal has been imposed in the following EC competition law cases:22 1. Cases involving two markets: (a) Refusal to supply an input to downstream competitors in vertically related markets to preserve market power in market B: Commercial Solvents,23 Magill,24 Ladbroke.25 (b) Denial of access to a facility necessary to compete with a downstream competitor, to preserve market power in market B: Sabena,26 Decca Navigation Systems,27 Sea Containers,28 IMS.29

  17

  See ABA (2002) op. cit. See also chapter 7.   F. Parisi, B. Depoorter, The Market for Intellectual Property: The Case for Complementary Oligopoly, in The Economics of Copyright: Developments in Research and Analysis, W. Gordon and R. Watt, eds., Cheltenham, UK and Northampton, MA, USA, Edward Elgar (2003); J. Schumpeter, Capitalism, Socialism and Democracy, New York, NY, Harper (1942).   19   S. Yi, Market Structure and Incentives to Innovate: The Case of Cournot Oligopoly, 65 Economics Letters 379–388 (1999). J. Boone, Intensity of Competition and Incentives to Innovate, 19 Inter’l J. Ind. Org’n 705, (2001).   20   J.K. Mackie-Mason (2002) op. cit.   21   See also the Commission discussion paper on possible principles for the application of Article 82 to exclusionary abuses, published on the Commission website for consultation in December 2005.   22   See end of chapter for a closer analysis of the cases.   23   Case 7/73 Commercial Solvents [1974] ECR 223.   24   Case C-241 & 242/91P Magill [1995] ECR I-743.   25   Case T-504/93 Tierce Ladrbroke [1997] ECR 927.   26   Commission Decision London European-Sabena, OJ 1988 L 317/47.   27   Commission Decision Decca Navigator System, OJ 1989 L 43/27.   28   Commission Decision Sea Containers v Stena Sealink, OJ 1994 L15/08.   29   Case C-418/01 IMS [2004] ECR I-05039.   18



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(c) Refusal to grant access to the distribution system to an upstream competitor or a refusal to share methods in reaching customers to preserve market power in market A: Bronner.30 (d) Essential facilities: Sabena, Decca Navigation, Sea Containers, Magill, Ladbroke, Bronner, IMS. (e) Refusal to share spare parts with independent providers of aftermarket support/complementary markets: Volvo.31 2. Cases involving one market: (a) Refusal to deal with distributors promoting a competing brand to preserve market power in market A: United Brands.32 (b) Refusal to deal with suppliers dealing with competitors to preserve market power in market B: Telemarketing.33 (c) Refusal to join or continue a joint venture with competitors/ (disproportional sanction?) Aer Lingus.34 (d) No competitive relationship between parties in any market: Ladbroke. The relationship between these categories, however, is unclear and some may indeed overlap to some degree. There are three common denominators in the cases in the sense that they may involve the cutting off of previous relationships as a response to the conduct of the dependent firm, the possibility of using power on one market to create or preserve market power on another market, and the indispensable nature of facilities for the operation of a firm on another market. These main considerations are also reflected in the categorisation of the Advocate-General in Oscar Bronner,35 who outlined the situations in which a duty to deal will arise under EC competition law:

l

Cases involving the cutting off of supplies to existing customers: Commercial Solvent, United Brands. l Cases in which an undertaking holding a dominant position on a particular market reserves to itself an ancillary activity without objective necessity which might be carried out by another undertaking as part of its activities on a neighbouring but separate market, with the possibility of eliminating all competition from such undertakings: Telemarketing.

  30

  Case C-7/97 Oscar Bronner [1998] ECR I-7791.   Case 238/87 Volvo v Veng [1988] ECR 6211.   32   Case 27/76 United Brands [1978] ECR 207.   33   Case 311/84 Centre Belge d’Etudes du Marché-Télémarketing SA (CBEM) v Companie Luxembourgeoise de Télédiffusion [1985] ECR 3261.   34   Commission Decision British Midland/ Aer Lingus, OJ 1992 L 96/34.   35   Case C-7/97 [1998] ECR I-7791 para 33-53.   31

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Cases in which the refusal concerned a product or service that was either essential to the exercise of the activity in question, in the sense that there was no actual or potential substitute, or a new product whose entry might have been prevented despite the constant, specific and regular potential demand by consumers: Volvo, Magill, Tierce Ladbroke.36

Any obligation to deal, however, will only be imposed after ‘close scrutiny of the factual and economic context’ and even then within narrow limits.37 6.2.1 Cutting Off Existing Customers: The Dependence Cases The case-law demonstrates that an obligation to deal has been imposed in situations where a dominant firm cuts off supplies to existing customers. In Commercial Solvents38 the party was compelled to continue supplying Zoja with the raw materials necessary for the production of a derivative, despite its decision to vertically integrate and also become operative on the downstream market for the supply of the derivative. The Court held that a refusal to license in such cases constitutes an abuse of a dominant position where it thereby ‘risks eliminating all competition on the part of this customer’.39 Similarly, in the United Brands case40 the Court considered that an undertaking in a dominant position ‘cannot stop supplying a long standing customer who abides by regular commercial practice, if the orders placed by that customer are in no way out of the ordinary’.41 Such conduct would be incompatible with Art. 82 as it would ‘limit markets to the prejudice of consumers and would amount to discrimination which might in the end eliminate a trading party from the relevant market’.42 The Court also held that a dominant undertaking has the right   36   He concludes that ‘a dominant undertaking commits an abuse where without justification it cuts off supplies of goods and services to an existing customer or eliminates competition in a related market by tying separate goods and services. However, it also seems that an abuse may consist in mere refusal to license where that prevents a new product from coming on a neighbouring market in competition with the dominant undertaking’s own product on that market’ para. 43. It seems that the Advocate-General is looking for an additional element to find an abuse, such as tying sales, or discriminating vis-à-vis independent competitors.   37   Case C-53/03 Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v Glaxosmithkline AEVE, Opinion of the AG Jacobs, 28 October 2004 at para. 53.   38   Case 6/73 Istituto Chemioterapico Italiano and Commercial Solvents v Commission [1974] ECR 223.   39   Para. 25 of the judgment.   40   Case 27/76 [1978] ECR 207.   41   Para. 182 of the judgment.   42   Para. 183 of the judgment.



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to take reasonable steps to protect its commercial interests, provided its behaviour is proportionate to the threat and not aimed at strengthening or abusing a dominant position.43 Hence, in the BP case, the restriction of supply by a dominant petroleum company during an oil shortage in a manner which was reasonable to the particularities of the commercial situation and relations between different customers, was not found to constitute an abuse of a dominant position.44 There is a three-fold rationale behind the relevance of previous dealing.45 First, previous dealing proves that dealing is feasible and consistent with investment and creation. Secondly, it is possible to use the previous terms as a benchmark, and thirdly, people may have relied on the expectation of a deal.46 However, flexibility should also be preserved, as the conditions of the licence may have changed, or the party may reasonably seek to change the terms and cost of the licence.47 An obligation to deal can, thus, be imposed in circumstances where the retaliation to a behaviour of the customer/competitor is not proportional to the behaviour that it aims to sanction.48 This may be seen as an extension of the abuse of market power to cases of relational market power. Furthermore, in Germany for example, the concept of economic dependence has been introduced.49 Nacke also contemplates that a partenaire obligatoire may also be found in the Community law, under which ‘a company may be

  43

  Paras. 189 and 190 of the judgment.   Case 77/77 BP [1978] ECR 1513 paras. 28, 29, 30, 32, 33, and 42 of the judgement.   45   C. Shapiro, Competition and IP Law and Policy in the Knowledge-Based Society: Is there a Cause for Concern about Unilateral refusals to Deal? in DOJ/FTC Hearing on IP and Competition Law, May 1 2002.   46   The latter argument echoes the estoppel argument present in UK common law. The rationale for estoppel is based on the idea that if somebody makes a representation on which the other party relies to his detriment, then he should be held to the representation that he made.   47   Courts must be careful not to penalise people for making bad licensing choices which cannot be reviewed or altered as this might create an incentive to refrain from licensing in the future. J. Glenken, Competition and IP Law and Policy in the Knowledge-Based Society: Is there a Cause for Concern about Unilateral refusals to Deal? in DOJ/FTC Hearings on IP and Competition Law, 1 May 2002. See also C. Shapiro (2002) op. cit.; who states ‘shouldn’t private parties if they are going to make reliance on investments seek their own assurances that a standard will be open or something will be licensed on an ongoing basis, rather than some sort of broad antitrust regime that would require ongoing dealing?’   48   See also analysis of S. Anderman (1998) op. cit. Chapter 14.   49   See s 26(2) of German Act Against Restraints of Competition: ‘relative dominance’ for dependent customers/competitors.   44

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found guilty of an abuse if those dependent on it cannot substitute, if the abuse is unlikely to encourage new competitors and if the company is not constrained in its behaviour by competition in wider “downstream” markets’.50 These dependence considerations are also consistent with the proportionality principle contained in Art. 82, which requires that the action taken by the dominant firm to attain a legitimate objective should take the form of the least restrictive means available.51 While one may question the extent to which the concept of ‘dependence’ makes sense from a competition law perspective, as it seems to be more similar to a contractual notion, none the less, it could be considered to be legitimate if it is limited according to the proportionality principle of EC law since the leverage and/or essential facilities rationale is also present in most cases.52 Indeed, one could even argue that following the Telemarketing case,53 claimants will also have to establish the presence of the other considerations. In this case, despite the existence of previous dealing, the Court focused on the essential nature of the facility and the leverage possibility. The Court held that where an undertaking holding a dominant position ‘reserves to itself or its subsidiary another activity’ on a neighbouring but separate market, without any objective necessity, with the possibility of eliminating all competition from such undertaking, it constitutes an abuse of its dominance. It also noted that the input withheld should be indispensable for the activities.54 6.2.2 ‘Reservation of an Ancillary Activity’ and Leverage Economics In line with the Telemarketing case, in Magill the Court considered the fact that the broadcasters, by their conduct, ‘reserved themselves the secondary market of weekly television guides by excluding all competition on that market’, was relevant in determining an abuse of a dominant position.55

  50   T. Nacke, Abuse of Dominant Positions, 1995 at http://europa.eu.int/comm/competition/speeches/text/sp1995_025_en.html, p. 6.   51   Ibid.   52   In Commercial Solvents (1974) op. cit. for example consideration was also paid to the possibility of leverage by virtue of vertical integration, and there might even have been a case for arguing that the raw materials were essential facilities. Similarly, in Telemarketing (1985) op. cit. the focus was on the essentiality of access for the secondary market to operate, and on the possibility of leverage. On the other hand, in United Brands (1978) op. cit. and British Midland/ Aer Lingus (1993) op. cit. these considerations were present, but the focus was on the hardship suffered by the customer/competitor.   53   Case 311/84 [1985] ECR 3261.   54   Ibid. para. 25 to 27.   55   Magill (1995) op. cit. para. 56 of the judgment.



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This was based on the concern that the dominant firm would limit access to the upstream product to gain power in the downstream market.56 The rationale behind this can be found in the idea of the economics of leverage which claims that a firm with market power on one market may use that market power to gain additional power in a related but independent market. This theory has been criticised as it is argued that a firm cannot obtain two monopoly rents, and that there is no gain from leveraging as one can extract all monopoly rents on the first market.57 The Chicago school has argued that if product A is used as an input, the monopolist could simply charge a high price for it.58 If it is used on a stand-alone basis, the monopolist would welcome competition in the complementary segment as this would increase the value of the good and the consumer could still be charged the monopoly price.59 The ‘chain link’ model thus concludes that refusals are generally efficient as monopolists do not need to refuse to deal in order to extract monopoly profits.60 It cannot be assumed that efficiency can be found in cases in which the monopolist is unable to make monopoly profits.61 If the monopolist is unable to obtain monopoly rents, then it might refuse to deal in order to eliminate competition on lower levels and receive a monopoly price.62 This would arise in the following cases: if the nature of the product and business relationship renders the transaction costs of metering prohibitive; if a variable fee for use would lead

  56   In the case that the firm is present in the downstream market (hence, vertically integrated) it can do this by refusing to deal, charging high wholesale prices or by making the upstream product incompatible with the downstream ones, amongst other. If such vertical integration is not present, he may do so by favouring a particular downstream competitor by exclusive dealing or by discriminatory treatment.   57   M. Whitener, Competition and IP Law and Policy in the Knowledge-Based Society: Is there a Cause for Concern about Unilateral refusals to Deal? in DOJ/FTC Hearings on IP and Competition Law, May 1 2002. The theory has also been criticised for failing to capture the essence of patents, which are capable of having more than one end use and therefore it is believed that the number of markets that the patent can be divided into, should be irrelevant for antitrust purposes.   58   D.G. Gerber, Rethinking the Monopolist’s Duty to Deal: A Legal and Economic Critique of the Doctrine of Essential Facilities, 74 VA L Rev 1069 (1988).   59   See for example D.G. Gerber (1988) op. cit. pp. 1069–1085. ‘The presumption that vertically integrated plaintiffs seek to decrease competition in downstream markets contradicts the widely held view that vertical arrangements generally cannot augment monopoly power.’ See also D.W. Carlton, (2001) op. cit.   60   Ibid. This is because the profits of the licensee firm can be extracted through the pricing of the product on the upstream market, to which access is required in order to produce in the downstream market.   61   Ibid.   62   Ibid.

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to resource under-utilisation and thereby sub-optimal profits for the competitor; or where the monopolist seeks to eliminate risk sharing.63 An anti-competitive refusal to deal therefore arises either in situations involving a regulated industry in which the monopolist vertically integrates in order to avoid regulation, or in cases where the link between charging user fees on market A and creating a monopoly price on market B has been disrupted – as in the public goods case.64 In order for a leveraging claim to be valid, however, there must be a monopoly in the primary market (as there is nothing to leverage otherwise), and the secondary market must be concentrated and protected by barriers to entry. Hence, certain structural preconditions must exist before vertical integration can become harmful competition, and, in fact, it can also lead to efficiencies.65 It becomes clear that vertical integration is not necessarily a negative development and must be reviewed through a rule of reason approach in order to establish if the structural preconditions exist for a possible harm to competition and whether other offsetting efficiencies are also present. Even in such cases, leverage will only be profitable if the monopolist controls an input that can be used in variable proportions with other inputs so that the monopolist induces

  63   Ibid. If the upstream and downstream products are not complementary for some consumers, and there are economies of scale in the production of the downstream product, there may be a risk to competition arising from the refusal to supply, In addition, there may be instances of dynamic models in which there will be the possibility of competition for the upstream product in the future periods and scale economies for the downstream product, in which case the dominant firm will wish to ensure that the dependant firm remains limited in its production of the downstream product so that it does not become an effective supplier of competitors in the upstream product.   64   Ibid.   65   Ibid. Efficiencies can result from the elimination of the double marginalisation problem associated with successive monopolies. The latter relates to the fact that all parties wish to maximise profit by increasing prices. By vertically integrating, there are no longer several companies seeking to make a profit but rather one and this may lead to lower prices. Vertical integration can also lead to efficiencies arising from the reduction of transaction costs. This is because it reduces the friction in the organisation of the enterprises, internalizes certain transactions and avoids the necessity of having to protect oneself against opportunistic behaviour such as hold up and free riding. See however N.W. Hawker, Open Windows: The Essential Facilities Doctrine and Microsoft, 25 Ohio NUL Rev. 115 (1999); P. Rey, Competition and IP Law and Policy in the KnowledgeBased Society: Is there a Cause for Concern about Unilateral Refusals to Deal? in DOJ/FTC Hearings on IP and Competition Law, 1 May 2002, which suggests that vertical integration by a monopolist may also increase the difficulty of entering either market, by requiring competitors to enter both markets simultaneously.



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customers to deviate from the most efficient input mix, or where the monopolist is subject to rate regulation and integrates in order to avoid it.66 In this way, the economic theories on leveraging and foreclosure have hence largely been discredited and, even if they still have some support, they depend on structural preconditions underlying the exceptional nature of a duty to deal. In Magill the Court reasoned that the reservation of the secondary market of weekly TV guides was abusive as it excluded competition from the market by denying access to the ‘basic information which was the raw material indispensable for the compilation of such a guide’.67 6.2.3 The Indispensability Requirement and the Essential Facilities Doctrine (EFD) In Oscar Bronner68 the Court, in line with Magill, observed that in order to find an abuse, it is necessary to establish not only that the refusal of the service would most probably lead to the elimination of all competition in the market and that such a refusal would be incapable of being objectively justified, but also that the service itself must be indispensable for the running of the individual’s business, as ‘there is no actual or potential substitute’ for this scheme.69 The indispensability requirement alludes to the essential facilities doctrine (EFD). The EFD has its origins in US antitrust cases and it describes instances in which access to something is mandated for those who would not have access otherwise.70 It specifies the situations in which the owner of an essential facility (EF) is required to provide access to this facility to competitors at a reasonable price. It traditionally requires the existence of two markets, the upstream market

  66   C.S. Yoo, Vertical Integration and Media Regulation in the New Economy, 19 Yale Journal on Regulation 171 (2002).   67   Case C-241 & 242/91P [1995] ECR I-743, para. 56.   68   Case 7/97 [1998] ECR I-7791.   69   Ibid. para. 38, 41, 42 and 44.   70   See United States v Terminal Railroad Ass’n of St. Louis, 224 U.S. 383 (1912); United States v Griffith 334 U.S. 100 (1948). Aspen Highlands Skiing Corp. v Aspen Skiing Co., 738 F.2d 1509 (10th Cir. 1984) aff’d on other grounds, 472 U.S. 585 (1985); Fishman v Wirtz, 807 F.2d 520 (7th Cir. 1986); Hecht v Pro-Football, Inc., 570 F.2d 982 (D.C. Cir. 1977), cert. denied, 436 U.S. 956 (1978); Consolidated Gas Co. of Florida v City Gas Co. of Florida , 880 F.2d 297 (11th Cir. 1989); BellSouth Advertising & Publishing Corp. v Donnelly Information Publishing, Inc., 933 F.2d 952 (11th Cir. 1991) , vacated, 977 F.2d 1435 (11th Cir. 1992), and reversed en banc on other grounds, 999 F.2d 1436 (11th Cir. 1993), cert. denied, 114 S. Ct. 943 (1994). MCI Communications Group and MCI Telecommunications Corp v American Telephone & Telegraph 708 F.2d 1-81 (7th Cir. 1983).

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and the downstream market.71 The dominant firm will usually be active on both markets, and the other firm will be active or wish to become active in the downstream market. The latter normally seeks access to an input of the integrated firm that has been denied.72 The usual elements quoted as necessary for the establishment of mandatory access are found in the US case MCI.73 They include: the control of an essential facility by a monopolist; the competitors’ inability to practically or reasonably duplicate the EF (requiring more than being more economical than alternatives, or mere inconvenience or economic loss); the denial of the facility to the competitor (including the charging of unreasonable prices); and the ability to provide the facility.74

  71   Whether the existence of two markets is a prerequisite is a matter of debate, and this is evident from the conflicting arguments of the parties in IMS.   72   While the EFD may arise in purely private circumstances, it is often raised in situations involving regulation or involving some state-related or state-owned facility. This explains why it is often a public policy choice. OECD, Essential Facilities Doctrine, Paris (1996).   73   P. Areeda, Essential Facilities: An Epithet In Need of Limiting Principles, 58 Antitrust Law Jnl 841, (1989).   74   However, there are significant variations in the definitions of the doctrine. It has even been described as follows: ‘It is less a doctrine than an epithet, indicating some exception to the right to keep one’s creations to oneself, but not telling us what those exceptions are.’ Ibid. A. Kezsborn and A.V. Goldman, No Shortcut to Antitrust Analysis: The Twisted Journey of the Essential Facilities Doctrine, 1996 Colum Bus L Rev 1. See, for example, the issue of whether the doctrine should be limited to natural monopolies. This is based on the argument that as these markets are particularly vulnerable to tipping, the tendency will be for a monopoly. In such cases, the key to maintaining a monopoly the key is to create a large installed base, as it tends to become self-perpetuating afterwards as users will become locked-in because of high switching costs. A monopolist can use the monopoly base to tip the downstream market creating a ‘bandwagon effect’, by creating technological links between the two products. M.H. Harz, Dominance and Duty in the EU: A Look through Microsoft Windows at the Essential Facilities Doctrine, 11 Emory Int’l Rev 189 (1997). Harz explains that, in natural monopolies, free market forces do not gravitate toward an equilibrium point, the maximum production and most efficient resource allocation, and there are many equilibrium points. Tipping may move the market off its equilibrium point towards a new point that favours a competitor or a particular product. J.S. Venit, J.J. Kallaugher, Essential Facilities: A Comparative Law Approach, in Hawk ed, 1994 Fordham Corp. L. Institute, pp. 245-344. Others argue that as antitrust cannot change the structural characteristics of natural monopolies, its applicability in these industries will depend on the specific costs and benefits of an EFD and whether it is likely to do more good than harm. See A. B. Lipsky and J.G. Sidak, Essential Facilities, 51 Stan Law Rev 1187, (1999); See also C.O. Robinson, On Refusing to Deal with Rivals, 87 Cornell L. Rev. 1177 (2002); Troy, Unclogging the Bottleneck: A New Essential Facilities Doctrine, 83 Colum L Rev 441 (1983).



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The essential facilities doctrine requires that the facility should at least be indispensable to viably compete on the market and that there should be clear anti-competitive effects in the product or technology market. This, in effect, requires that there would not be any workable alternative technology available, and that there would be a potential effect to eliminate competition by the requesting party or from any third party.75 The facility, whether physical or technological, must be indispensable to enter or stay on the market. Once a facility is deemed essential and unless there is a legitimate justification, the denial of access will amount to an abuse of dominance. The application of the indispensability requirement (similar to essentiality in the EFD) raises three fundamental questions on its application: first, what constitutes indispensable/essential, secondly, whether there is a need for two markets, and thirdly, what classifies as an objective justification. 6.2.3.1 Indispensability Different definitions have been proposed as regards the issue of essentiality/indispensability.76 In Sealink,77 the Court defined an essential facility as ‘a facility or infrastructure, without access to which one cannot provide services to their customers’.

  75

  Commercial Solvents (1974), Telemarketing (1985), Bronner (1998) op. cit.   Areeda understands that to meet the threshold of essential the following requirements must be met: the competitor must be essential to competition in the market place; it must be essential to the individual competitor, (in the sense of being critical to its competitive vitality); and that duplication of the facility and practical alternatives must not be available. P. Areeda (1989) op. cit.; see also D.E. Troy (1983) op. cit., who proposes that a facility should not be deemed essential unless the facility is necessary for entry into the market, duplication of the facility is beyond the standard cost of entry into the foreclosed market and the plaintiff cannot commercially exist without access to this. The test advocated by the author is objective, focusing solely on the effects of the monopolist’s decision. Other commentators claim that a facility is essential only when ‘public necessity justifies treating the facility as essential’, so that consumer preferences, analysis of the market and the needs of competitors are irrelevant in a determination of essentiality. C.M. Seelen, The Essential Facilities Doctrine: What does it mean to be Essential?, 8 Marq L Rev 117 (1997). Others have defined essentiality according to whether it is required by a competitor in order to compete effectively. N. W. Hawker (1999) op. cit. See D. J. Gerber (1988) op. cit. who offers a legal and economic definition of essentiality. Economically, it involves facilities that can impede the users’ production or access to a market. It requires the presence of four characteristics: a. the facility must be unique in that there are no similar and competing facilities and duplication is precluded; b. preservation of uniqueness; c. the facility must be centrally located, and the flow of production and distribution must flow from there; and d. the monopolist must be able to regulate his facility- functional control. The legal definition as established in Hecht v Pro-Football No. 2815-66, US Dist, Ct for Dist. Of Columbia, 312 F. Supp. 472; 1970   76

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77

It would seem difficult to justify a test of essentiality or practicability of duplication that was in any way less stringent than the tests of market power.78 It would also be wrong to have a test that focuses on the survival of a particular competitor as opposed to whether it was generally economically viable for any competitor to survive without access to the ‘facility’. The test can only be objective.79 Accordingly, as clarified in Bronner,80 any alternative technology must be assessed on the assumption that comparable assets would be invested for its development, even if they are less advantageous for competitors.81 In addition, certain factors may be taken into account in the determination of essentiality. For example, whether the facility has become an industry standard,82 U.S. Dist. LEXIS 12049; 1970 Trade Cas. (CCH) P73,170, 16th April, 1970, would seem to be that duplication of the facility would be economically infeasible and the denial of use inflicts severe handicap on potential entrants in the market. See also A.B. Lipsky, J.G. Sidak, (1999) op. cit. who believe that inherent in the notion of essentiality lies the premise that the owner of the facility possesses monopoly power. They identify three requirements: a. some uniqueness and market control; b. the lack of feasible alternative or ability to reproduce; and c. the ‘facility connotes an integrated physical structure or large capital asset with the unique character that usually confers monopoly power and control by virtue of the superiority of its intended purpose.’ They also believe that the EFD is inappropriate in the following situations: where there is no monopoly power; the facility is not an indivisible unit; an IPR is involved; and it is necessary to expand the capacity of the facility to accommodate for the new user. See M.A. Bergman, The Bronner Case – A Turning Point for the Essential Facilities Doctrine? [2000] 2 ECLR 59, who believes that the requirement of a market share equivalent to the dominant firm in Oscar Bronner is too strict. However, the EFD should not be applied simply if a firm finds it impossible to establish an EF. Ideally, it is argued, that the criterion should be ‘able to distinguish between situations in which investments and other desirable behaviour might be jeopardised by its application, and situations in which such significant risk is at hand and the application of the doctrine can potentially result in substantial efficiency gains.’   77   Stena Sealink (1994) op. cit.   78   Lipsky and Sidak (1999) op. cit.   79   In general, Art. 82 applies an objective concept of abuse. It is only in the context of ‘dependence’ and cases that reflect the estoppel rationale that one may argue that abuse has acquired a subjective character.   80   Case C-7/97 Bronner, [1998] ECR I-7791.   81   Ibid, paras. 43-45.   82   This has influenced the Commission in IMS in deciding that the product was indispensable and in favour of granting a compulsory licensing order. It is believed that once a service or product develops into a standard, then access should be available to all competitors as it is impossible without it to compete. The Commission reasoned that as the 1860 brick structure had developed into an industry standard, according to consumer preferences, the dominant undertaking was not allowed to refuse access to it. Hence, in this sense the industry standard consideration could militate in favour of finding of indispensability.



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or whether the intellectual property (IP) in question does not require or merit any incentive might militate (whether expressly or impliedly) in favour of a ruling of essentiality.83 On the other hand, the threshold of essentiality may be higher, where there are significant sunk costs involved, or if the incentives to innovate are very important. In IMS84 the ECJ confirmed that the test for determining the indispensability of a ‘facility’ or input relates to whether there are ‘products or services which constitute alternative solutions, even if they are less advantageous, and whether there are technical, legal or economic obstacles capable of making it impossible or at least unreasonably difficult for any undertaking seeking to operate in the market to create, possibly in cooperation with other operators, the alternative products or services’.85

  83   This is an unspoken consideration that seems to have influenced the EU Courts and Commission in the Magill and IMS case. It is interesting that both cases involved a national IP law that did not exist in the rest of the EU countries, and was viewed with disbelief as failing to warrant IP protection. The dominant positions in both cases successfully invoked the national copyright law to drive the complainant out or prevent him from entering the business. The perception that the laws in question were of limited value, may have been a consideration that influenced the Courts to find the refusals abusive. Admittedly if an IP of no merit is concerned, this should be remedied in the IP provisions, and competition law should not be seen as correcting perceived IP regulatory failures. If it was controlled by competition law, it would be seen as addressing IP failures and not treating IP like other cases. If competition law did not control it, it would be seen as exempting IP from something, unjustifiably, as argued in Chapter 5. However, if competition law merely controls it, then, because of the effect of these laws on the market as they eliminate downstream competition, there would arguably be no objection. Accordingly, the IP in question is not relevant in determining the effects of exclusion, but may be relevant as a matter of fact in the determination of essentiality/indispensability of the facility. The weaker the rationale for protecting the exclusivity of the facility, stemming from IP or otherwise, the easier it may be for a facility to be deemed indispensable. In this sense, the weak nature of the IP in question may be relevant after all. This would also be consistent with the AG Jacobs’ opinion in Glaxosmithkline on taking the regulatory context and other factors into account in the determination of abuse and objective justification. See below. However see also G. Lunney, Re-examining Copyright’s Incentive/ Access Paradigm, 49 Vanderbuilt L. Rev. 483 (1996), on the ‘incentive/access paradox’, who posits that access is more likely to be precipitated in exactly those cases where the invention involved is important and deserving of the incentives.   84   Case C-418/01 29 April 2004   85   Ibid. para 28. See however, the Commission Decision in Case COMP/C-3/37.792 Microsoft [2004] where a lower standard for indispensability was adopted. While it was recognised that there may be less advantageous alternatives, it was argued that those were not in reality alternatives.

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6.2.3.2 Two-market requirement Opinion is divided with regard to the question of whether there is a need for two markets. Some argue against the need for two markets and focus instead on the competitive relationship between parties,86 while others stress the necessity of the existence of two markets arguing that there is no obligation to create competition in one’s own market.87 It would appear that the effect of the denial of access is the same regardless of whether the firm is vertically integrated or not.88 If a firm is vertically integrated and unable to price discriminate, it would be inclined to deny access as part of a predatory practice. If it is not vertically integrated it would again be inclined to limit downstream competition in order to reap a downstream price. Hence, the denial might be present in both cases, either to increase market power or to maximise profits. The harmful effects on welfare are also present in this case. Thus whether the dominant firm is present on the downstream market also does not seem to be decisive for the purposes of the essential facilities doctrine,

  86   R. Pitofsky, The Essential Facilities Doctrine under US Antitrust Law, Paper submitted to the European Commission in support of National Data Corporation in its essential facilities case against IMS. 2002; ‘The courts require only that the plaintiff prove that the facility is indispensable for competition in a relevant product market, is controlled by a monopolist who could practically make access available, and is not capable of duplication. The policy concern is simply to ensure competition in the market where the two parties could compete but for the refusal to provide access to the essential asset… the vital issue is whether a plaintiff has a competitive relationship with the alleged monopolist in the relevant product – not what the relationship is between the plaintiff and the defendant with regard to the asset alleged to be essential.’ pp. 23–4. R. Pitofsky, D. Patterson, J. Hooks, The Essential Facilities Doctrine under US Antitrust Law, 70 Antitrust L. J. 443 (2002).   87   P. Marquandt, M. Leddy, The Essential Facilities Doctrine and Intellectual Property Rights: A Response to Pitofsky, Patterson and Hooks, 70 Antitrust L. J. 847 (2002).   88   Given that the essential facilities doctrine refers to a situation where the users’ production or access to a market is impeded by the lack of access to the essential facility, it would appear that it refers to a factual situation in which the important relationship is a vertical one between the monopolist and the user, and so emphasis should not be placed on the horizontal relationship. Viewing the doctrine from this perspective directs attention to the situations, irrespective of vertical integration, in which it is either desirable to impose judicial regulation, as the facility concerns an unregulated natural monopoly for which overly high returns are not warranted (as they have not been achieved by merit or skill) and would lead to an inefficient allocation of resources (as it would attract too much investment to the detriment of regulated goods), or the refusal to deal would be anticompetitive from a dynamic point of view. Accordingly, a competitive relationship would not be necessary and the issue of whether two markets are necessary is avoided; the focus is placed on the essentiality of the input. D.J. Gerber (1988) op. cit.



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as it would lead to the same effect if there was another sole downstream supplier.89 The conclusions drawn by the ECJ on the two market requirement in IMS should be seen in light of these considerations. ‘It is determinative that two different stages of production may be identified and that they are interconnected, the upstream is indispensable in as much as for supply of the downstream product.’90 Therefore, it adopted a wider definition which does not require two markets in the traditional antitrust sense: ‘it is sufficient that a potential market or even hypothetical market can be identified. Such is the case where the products or services are indispensable in order to carry on a particular activity…’.91 If the criterion of a secondary market is the hypothetical one then effectively the threshold has been significantly lowered and it will be met in all or almost all cases.92 6.2.3.3 Objective justification The third contentious issue relates to the scope of an objective justification. A legitimate justification generally includes situations such as: the lack of capacity to supply or grant access; inability to pay (the foreclosed party is unable or unwilling to bear the monopolists’ costs of doing business that include not only the actual expenses, but also a reasonable return for the investment); and cases where access would interfere with the service of other customers.93 Furthermore, the analysis undertaken in the previous chapter supports the conclusion that IP, in itself, would not constitute an objective justification as this would amount to the exemption of IP from antitrust control.94   89   J. Ratner, Should there be an Essential Facilities Doctrine, 21 UC DAVIS L. REV. 327 (1988) p. 382. In addition, it is sometimes impossible to characterise some markets as separate markets in an antitrust sense, but nonetheless there is a dependence situation as in the case of IMS, and also in the case for research tools.   90   IMS Case (2004) op. cit. para 45.   91   Ibid. para 44.   92   See J. Killick (2004) op. cit.   93   D.E. Troy (1983) op. cit.   94   See Chapter 5. As it was contended earlier, the existence of unwarranted IPRs that lead to unreasonable monopolisations of the market may constitute an unspoken consideration in the determination of essentiality. In cases where weak IP laws are involved which grant an extra advantage in the market without justification, the essentiality benchmark may effectively be lowered. This should not be seen as competition law adopting a different threshold for IP, but rather as similar to the case in which an industry standard is involved as it will affect the application of the essentiality/ indispensability requirement. This effectively involves taking the specific regulatory and other contexts into account in determining indispensability. See also Dutch Telegraaf case (Decision of director-general Dutch Competition Authority 10 September 1998,

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The recent opinion of Advocate-General Jacobs in GlaxoSmithKline95 sheds some light on the objective justification. First, he stated that the question of abuse and justification should be dealt with together as a single issue.96 Secondly, and most importantly, he considered that the specific and regulatory context can be taken into account in the determination of abuse and objective justification.97 In this case, the Advocate-General took the pervasive regulation of price and distribution in the pharmaceutical industry into account, as well as the likely impact of unmoderated parallel trade upon pharmaceutical undertakings, and the effect of such trade upon consumers and purchasers of pharmaceutical products.98 Based on the particularities of these factors in the pharmaceutical industry, he concluded that a refusal to license which was intended to restrict parallel trade, did not constitute an abuse and was capable of ‘justification as a reasonable and proportionate measure in defence of that undertaking’s commercial interests’.99 The Advocate-General’s opinion is illuminating insofar as it takes consideration of the broader context and specificities involved in line with the characteristics of the industry. In addition, insofar as he considers abuse and objective justification one question, consideration of the economic and regula-

1/501.o119 (Telegraaf v NOS/HMG); Trade and Industry Appeals Tribunal, 15th July, 2004, www.rechtspraak.nl, LJN-number: AQ1727) in which the Rotterdam District Court decided that the existence of IPRs could not be used to establish an objective justification. See also Commission Decision in Case COMP/C-3/37.792 Microsoft [2004] ‘Microsoft’s refusal cannot be objectively justified merely by the fact that it constitutes a refusal to license intellectual property’ (recital 712).   95   AG Opinion in Glaxosmithkline (2004) op. cit.   96   Ibid. para. 72.   97   Ibid. para. 68.   98   Ibid. para. 76.   99   Ibid. para. 100. The AG considered that this was the case due to the particularities of the industry as well as the fact that the case dealt with: a. the pervasive and diverse measures of State intervention in the pricing of pharmaceutical products, which is responsible for price differentials between the Member States; b. the regulation of the distribution of products which establishes nationally demarcated obligations upon pharmaceutical undertakings and wholesalers to ensure the availability of adequate stocks of those products; c. the potentially negative consequences of parallel trade for competition, the common market and incentives to innovate, given the economic characteristics of the pharmaceutical industry; d. the fact that end consumers of pharmaceutical products may not benefit in all cases from parallel trade and that public authorities in Member States, as the main purchasers of such products, cannot be assumed to benefit from lower prices, given that they are themselves responsible for fixing prices within their territories (para. 105).



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tory context should also be taken into account in determining abuse and its individual elements, including indispensability.100 6.2.4 New Product Innovation In the IMS case, the Court further referred to the circumstances in which a refusal by a dominant undertaking to grant a licence (to use its IP) might constitute an abuse under Art. 82 EC. Following Magill, the Court stated that in order for the refusal to give access to an indispensable product or service to be treated as abusive three cumulative conditions must be satisfied: the refusal prevents the emergence of a new product for which there is potential consumer demand; it is unjustified; and it amounts to the exclusion of any competition on a secondary market.101

100   In the case of IP, this again does not amount to an exemption but rather to a consideration of the regulatory context that may include IPRs. This is likely to be crucial in finding in favour of a duty to deal where a weak IP is concerned. 101   IMS (2004) op. cit. para. 38 of judgment. See also Magill op. cit. This differs from the Magill case, as although the product was not yet in existence there was certitude as to its development and what it would involve. On the other hand, it is only required here that there should be an ‘intention to produce a new product’ which one may also argue negates the very requirement itself. In biotechnology and specifically in the case of research tools, as it will be shown in Chapter 7 this is important in view of the fact that access is sought at a stage where it is not known whether a new product will be developed. Other cases however have not made reference to the new product rule or found it not to be decisive. The Bronner case made no reference to the new product rule in its interpretation of the duty to deal. See Bronner (1998) op. cit. para 41:

Therefore even if that case-law on the exercise of an intellectual property right were applicable to the exercise of any property right whatever, it would still be necessary, for the Magill judgment to be effectively relied upon in order to plead the existence of an abuse within the meaning of Article 86 of the Treaty in a situation such as that which forms the subject-matter of the first question, not only that the refusal of the service comprised in home delivery be likely to eliminate all competition in the daily newspaper market on the part of the person requesting the service and that such refusal be incapable of being objectively justified, but also that the service in itself be indispensable to carrying on that person’s business, inasmuch as there is no actual or potential substitute in existence for that home-delivery scheme. Hence, while Magill identified the new product requirement, Bronner did not perceive it as an essential element of the test. Similarly, the Commission Decision in Microsoft (2004) op. cit. did not make any reference to the new product rule. See also, however, Ladbroke (1997) op. cit. para. 131. The Court in Ladbroke interpreted the prohibition on the refusal to deal as applying either in cases where the product or service is essential or in cases where a new product might be prevented despite ‘spe-

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This new product rule alludes to both consumer preferences and also to innovation and the need to promote new and efficient products. Therefore, the refusal by an undertaking in a dominant position to allow access to a product protected by copyright, where that product is indispensable for operating on a secondary market, may be regarded as abusive only where the undertaking which requested the licence does not intend to limit itself essentially to duplicating the goods or services already offered on the secondary market by the owner of the copyright, but intends to produce new goods or services not offered by the owner of the right and for which there is a potential consumer demand.102

There are two fundamental issues which should be noted with regard to the new product rule. First, this may be seen as the departure from the essential facilities doctrine as this emphasis is not only placed on ‘indispensability’ but also on the ‘new’ product. The EFD did not contain a requirement relating to the new product. Hence, strict adherence to the requirement would imply that the EFD is insufficient to capture the essence of the duty to deal under Art. 82; the emphasis should not only be on the indispensability of the facility but also on the creation of a new product. Secondly, it should be noted that the ECJ adopted a liberal definition of the new product, as it refers to ‘intention to produce new goods’ as distinct from their actual production. There may be significant implications arising from this broad definition, particularly in the biopharmaceutical industry, as there may be a duty to deal where access to an input is required as a basis for further research and development, to ‘enable’ further innovation, even if it is as yet impossible to identify the new products that would be developed, or even to state with certainty that new products would be developed.103 Taking this argument to the extreme, one could also argue that the reference to an intention to produce actually negates the very requirement of a new product.

cific, constant and regular potential demand’ on the part of consumers. The new product rule would accordingly be a sufficient ground for liability, but not a necessary one. 102   IMS (2004) op. cit. para. 51. 103   Unfortunately, the Commission did not address the issue of this requirement in its Microsoft decision. See Commission Decision in Microsoft (2004) op. cit. para. 693–701, in which the Commission briefly discusses whether the refusal ‘limits technical development to the prejudice of consumer’, without analysing the new product requirement. See however the Dutch Telegraaf case (1998) op. cit. in which the Trade and Industry Appeals Tribunal found that a refusal to license did not amount to an abuse of a dominant position as the television guide which Telegraaf sought to publish did not qualify as a new product as required in EC case law, thus applying the considerations of the ECJ in IMS.



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6.3 Conclusions As recently confirmed in EC case law, the duty to deal under Art. 82 remains exceptional and only sanctioned within narrow limits.104 It is applicable where the refusal to license leads to harm to competition, rather than to a specific competitor105 or to the restriction of parallel trade.106 Determining whether there are exceptional circumstances which amount to a risk of harm to competition requires a ‘comprehensive examination’.107 In addition, the regulatory and economic context needs to be considered.108 This is important, as industry-specific characteristics may be decisive in establishing indispensability and objective justification. The case law clarifies that the duty to deal remains limited to situations in which: 1. the product or service is indispensable for carrying on a particular business; 2. the refusal prevents the emergence of a new product with a potential consumer demand; 3. the refusal is not objectively justified; 4. the refusal effectively excludes all competition on the secondary market.109 The aftermath to the Sealink decision underlines the importance of considering alternatives and avoiding an over-eagerness in finding something ‘essential’.110 It should be recalled that the decision provided that the defendant should make the port available to the rival ferry service, Sea Containers. The events that followed showed that the latter did not avail of this option and instead chose to

104

  AG opinion in Glaxosmithkline (2004) op. cit. para. 53; IMS (2004) op. cit.   See Bronner (1998) op. cit. 106   See Glaxosmithkline (2004) op. cit. 107   Microsoft Commission decision (2004) op. cit. para. 555–558. 108   AG opinion Glaxosmithkline (2004) op. cit. para. 53 ‘any obligation to deal pursuant to Article 82 EC can be established only after a close scrutiny of the factual and economic context.’ 109   IMS case (2004) op. cit. It confirmed that ‘in order for the refusal by an undertaking which owns copyright to give access to a product or service indispensable for carrying on a particular business to be treated as abusive, it is sufficient that three cumulative conditions be satisfied, namely that the refusal is preventing the emergence of a new product for which there is a potential consumer demand, that it is unjustified and such as to exclude any competition on a secondary market.’ 110   N/e/r/a, Competition Brief, Oscar Bronner: Legitimate Refusal to Supply, 1999, at www.nera.com, p. 3. 105

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operate a service to Ireland from Liverpool rather than Holyhead. At the time, the Commission had dismissed this as an alternative, being too readily persuaded by the claimant claims as to the essentiality of the facility.111 It therefore becomes clear that in imposing any obligation to deal, it is important not to dismiss the alternatives too easily. It is likely that the essential nature of a product is overstated and thereby found essential, even though it might not have been more than an inconvenience to the competitor. It is also important not to encourage competitors to rely on the dominant firm’s facilities but rather to encourage them to develop new and innovative services themselves.112 In conclusion, the introduction of the new product rule as a prerequisite for liability113 leads to a reconsideration of the applicability of the EFD in this context and the extent to which it is the appropriate term to capture to the essence of the duty to deal under Art. 82. It would rather seem to be more appropriate in this case to refer to a more generally phrased duty to deal in cases of indispensable ‘facilities/inputs’ which also prevent potential ‘new’ products from entering the market. It should be noted, however, that it is not yet clear whether the conditions laid down by the Court in IMS are necessary or merely sufficient to impose liability for refusal to deal. 114

111

  Ibid. p. 4.   Ibid. 113   IMS Case (2004) op. cit. 114   This debate is reflected in the Order of the President of the CFI 22 December 2004 (1) (Proceedings for interim relief – Article 82 EC) Competition Microsoft v Commission Case T-201/04 para. 206: ‘Clearly, that question cannot be resolved at the interim relief stage. It should be pointed out, however, that the Court of Justice has held, in the words of paragraph 38 of the judgment in IMS Health, that “it is sufficient”, in order for “the refusal by an undertaking which owns a copyright to give access to a product or service indispensable for carrying on a particular business to be treated as abusive”, “that that refusal is preventing the emergence of a new product for which there is a potential consumer demand, that it is unjustified and [that it is] likely to exclude all competition on a secondary market.”’ 112



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Appendix  The Refusal to Deal Cases under Art. 82 Box 6.1 Commercial Solvents: Refusal to supply input to downstream competitor in vertically related market/ to preserve power in market B The first case in which a refusal to supply was found to constitute an abuse of a dominant position contrary to Art. 82 EC was Commercial Solvents.115 The defendant, Commercial Solvents (CS), was the world’s only producer of an industrial scale raw material which was used to produce ethambutol, an important drug in the treatment of tuberculosis, which required a high level of know-how and for which barriers to entry were high. Zoja was one of the three main manufacturers of ethambutol in the common market and had asked to be released from the contract. However, when it became impossible to buy the drug elsewhere, Zoja requested CS to begin supplying the raw materials again. The latter refused to supply Zoja with the raw material and instructed the other companies who received the supplies not to sell it on to Zoja. Finally, CS took the decision to integrate down the market vertically and produce the drug itself. Zoja complained to the Commission, who ordered minimum quantities be supplied, however, it was not clarified whether this order was made to protect the interests of Zoja or the consumer. The ECJ upheld the finding of abuse, as it was particularly concerned about vertical integration. It held that the decision by a dominant firm to vertically integrate did not justify the refusal to supply a long-standing customer, even if he was a competitor, as it would eliminate competition from one of the principal manufacturers in the market. Market A: Raw material

D

Long-standing customer  Vertical Integration

Market B: Ethambutol P

115

D

  Case 7/73 ICI and Commercial Solvents v Commission [1974] ECR 223.

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The ruling in this case thus imposes an obligation to grant a licence to existing customers, if the failure to supply would lead to the elimination of a significant competitor in the market. The ECJ seems to have been particularly wary of vertical integration, fearing that dominant firms in the production of raw material would use their power in an upstream market to gain power in a related downstream market, with the possibility of also monopolising that market. Therefore, it took an interventionist approach, shaping the market in line with its structural objectives, beyond its mandate to protect the interests of customers and competitors.116 The case supports the view that consumer interests are served by having as much competition as possible in the final market.117 The decision, however, makes a clear appeal to the need to protect the interests of consumers so that conduct that may ‘directly or indirectly prejudice’ them by impairing the competitive structure will be found abusive. How would the court have ruled if CS had not chosen to integrate vertically, but had none the less refused to supply Zoja, in response to the latter’s initial preference of another upstream supplier? It is probable that, even in this case, CS would have been forced to supply as it would have been found to have been a disproportionate response to the conduct of Zoja, and an unreasonable means to protect its own interests.118 If the conduct of CS were to be deemed to be proportionate and reasonable, then it could have also qualified as an objective justification for the refusal to supply. However, what constitutes a legitimate objective justification and in what cases is it proportionate?119 The Court did not provide any guidance on the latter questions, as it was believed that CS would have refused to license, even

116   R. Grosvenor, To what Extent can Art 86 be used to compel dominant undertakings to supply competitors? at www.jumper.demon.co.uk/comm8a.htm, p. 3. 117   Ibid. 118   See also Case 27/76 United Brands v Commission [1978] ECR 207, on the issue of proportionality. 119   See BP, Case 77/77, Benzine en Petroleum Handelsmaatschappik BV and others v Commission [1978] ECR 1513, in which the Court held that BP had not abused its dominant position during the 1973 oil crisis, when it reduced supplies significantly more to the complainant than to its regular customers. This conduct was justified as reductions were relative to the oil shortage. See, however, also Boosey & Hawkes OJ [1987] L286/36, where the Commission stated that ‘a dominant undertaking may always take reasonable steps to protect its commercial interests, but such measures must be fair and proportional to the threat’.



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without the initial cancellation of Zoja and stressed that vertical integration cannot be used to justify the elimination of a principal manufacturer.

Box 6.2 United Brands: Refusal to deal with a distributor promoting a competing brand to reserve market power in A The next case that arose involving a refusal to deal was United Brands.120 The defendant had reduced supplies to Olesen, a longstanding customer (distributor/ ripener) of bananas, because he had taken part in an advertising campaign for a rival brand, Dole. United Brands (UB) argued that the complainant was pushing Dole bananas at the expense of Chiquita bananas. The Commission was concerned that if such conduct were permitted, it would discourage other distributors from advertising and promoting other brands. ‘In this manner UBC succeeds in keeping its principle distributor/ripeners within its own marketing network and in preventing competitors from having access to them, thus denying to such competitors the essential facilities which they may require in order to ripen their bananas before sale.’ The ECJ advised that an undertaking in a dominant position ‘cannot stop supplying a long-standing customer who abides by regular commercial practice, if the orders placed by this customer are in no way out of the ordinary’.121 Market A: banana production

D and Competitors

Long-standing customer

Market B: distributors/ripeners P The argument that Olesen was selling a competitor’s product and neglecting the sale of UB’s product did not justify a failure to supply. The reduction of supplies was found to violate Art. 82. The ECJ stressed that a dominant undertaking can only take reasona-

120

  Case 27/76 United Brands v Commission [1978] ECR 207.   Ibid. para. 182.

121

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ble steps to ensure that its produce is properly sold. Hence, the Court seems to be raising proportionality requirements again in this case, as the right to protect one’s own commercial interests is only justified if the action taken is reasonable and appropriate. In considering the proportionality of this type of sanction, the economic strength of the undertakings at stake will be taken into consideration. Any attempt to extend and abuse the dominance of the firm will be found to have violated Art. 82. This is also in line with the requirement that the justification must be objective. It is unclear, however, what steps UB could have taken in this instance to defend its legitimate interests. It is important to distinguish between the requirement of equal treatment in relation to a distributor’s sales policy,122 and the actual restriction of competitors from access to the distributor’s marketing networks—the so-called ‘essential facilities to ripen the bananas’. However, had UB crossed this line? It appears that the Court was also concerned about the independence of SMEs, which allows them to preserve their business interests and determine their own sales policy. A restriction upon a firm’s right to participate in the advertising of a supplier would effectively hamper the actual sales of other brands, as well as the buyer’s freedom to decide its business interests. The arbitrary interference in the management of Olesen’s business had resulted in serious damage, and if the Court had found in favour of the behaviour of UB, it would have strengthened its bargaining position even further and effectively allowed UB to indirectly discourage the promotion of competing brands. However, would this factor not exist in most cases? One might argue that the Court chose to uphold the business interests of Olesen, but denied UB the right to enforce its respective business interests. Nevertheless, as it has been repeatedly recognised, dominant undertakings are under more onerous obligations,123 as they also have more potential for abuse, and more commercial

122   In effect, it could be argued that it was as if the Court was applauding the actions of Dole leading to Olesen treating him favourably, but not those of UB wanting to be treated equally. 123   See Case 322/81 Michelin v Commission [1983] ECR 3461 on special responsibility. See also Case C-333/94 Tetra Pak v Commission [1997] 4 CMLR 602, where the dominance in one market and the close links with another market gave the latter a ‘freedom of independence of conduct compared to the other economic operators such as to impose on it a special responsibility under Art. 82 to maintain genuine and undistorted



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bargaining power. In this light, the Court sought to encourage SMEs to make their own commercial decisions, uninfluenced by threats of large and more powerful companies, and to discourage the latter companies from exerting this type of pressure in the first place. The Commission and Court seem to have paid particular attention to the fact that the market for bananas had many barriers to entry; as UB was vertically integrated to a large degree, from plantation to marketing, it controlled the sources of supply and was able to guarantee regular supplies to competitors. It is also worth noting, moreover, that by providing a requirement to supply long-standing customers, the Court was in effect setting a general rule prohibiting a refusal to supply unless justified, irrespective of the fact that competitors were not an issue and that there was no possibility for leverage as in the Commercial Solvents case.124 Hence, this case seems to provide a more general and broader obligation not to go against a pattern of dealing, by refusing to license a long-standing customer, regardless of the rationale. Hence, in the case of a refusal to supply, an objective justification would seem to be necessary in order to escape liability, and while the Court did not provide guidelines on what constitutes such a justification, it appears that the requirements of reasonableness and proportionality will be strictly applied. It should be remembered, however, that the behaviour of UB was also found abusive, as there was evidence of price discrimination and a restriction on the resale of green bananas, resulting in the segmentation of the market in practice. As integration was an important consideration at stake, the Court was determined not to allow any possibility for discrimination along national boundaries, and therefore its strict ruling against the refusal to supply may have been influenced by its condemnation of price discrimination and its desire to prevent any perceived barriers to integration.125

competition on those markets’. V. Korah, Competition Law of the European Communities, 2nd edn, Lexis Nexis (2001). 124   In this case, the parties only had a vertical relationship, and not a horizontal one of competition as in the ICI and Commercial Solvents v Commission 7/73 [1974] ECR 223. 125   For a critique of the unclear economic rationale of the Court’s condemnation of price discrimination, see L. Zanon di Valgiurate, Price Discrimination Under Art 86 of the EEC Treaty: The United Brands Case [1982] Internat’l and Comparative Law Quar-

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Box 6.3 Hugin: No effect on trade The Hugin126 case involved Hugin’s refusal to supply spare parts to its former exclusive distributor in the UK which were needed to repair and maintain the large numbers of Hugin cash registers that it rented out. The Commission ruled against Hugin, using a similar rationale to the previous case, as it was concerned for the interests of consumers and the preservation and independence of SMEs. The Court, however, did not find any infringement of Art. 82, as the firm only operated locally and therefore there was no effect on trade.

Box 6.4 IGR: Refusal to license an essential facility? IGR Stereo-Television127 involved the refusal of a firm, IGR, the proprietor of patents for stereo receivers which were necessary for providing German television sets with stereo reception, to license non-members (or the plans to license at a later stage along with restrictions on quantity), and the use of the patent rights to prevent a Finnish company, Salora, from supplying stereo TV sets which required a patent licence. The Commission found that the conduct constituted an abuse of a dominant position that could not be justified on the basis of patent rights. Compulsory licensing was not imposed, however, despite the Commission’s willingness to impose it, as IGR agreed to grant a licence to Salora without limitations after the initiation of proceedings. Market A: Patents for stereo receivers

D

New entrant

Market B: TV manufacturing P

terly 37. The author states that that ‘the judgment appears more akin to those laws aiming at the protection of existing competitors rather than of competition itself.’ p. 53. 126   Hugin v Commission Case 22/78 [1979] ECR 1869. 127   IGR Stereo Television EC, Comm XIth Competition Policy Report, 1982, p. 63.



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In this case, the Commission was concerned with the control by a firm in an upstream market of a downstream market, regardless of the rationale behind this control, or whether it was due to an IPR or otherwise. This case is similar to the previous cases, and again, it concerned a vertical relationship. It differs, however, from the previous cases as there was no previous relationship between the parties, and therefore there was no consideration of the long-standing relationship or the pattern of behaviour. The refusal to license the Finnish company effectively prevented a new entrant into the German market of TV manufacturing. The obligation to license or supply was hence extended by the Commission, to situations beyond those involving existing dealers, requiring dominant firms to take affirmative action to ensure that competition is allowed to take place in all markets on which they have an influence.128

Box 6.5 Telemarketing: Tying/ Refusal to deal with suppliers dealing with competitors/ to preserve market power in B In the Telemarketing case,129 a subsidiary of Radio and TV Luxembourg refused to accept advertisements from advertisers who had not used the telemarketing services of its associated phone-in marketing company when it sought to enter the field. The Commission treated this as a case of tying, and held that ‘there is an abuse of a dominant position where an undertaking which occupies a DP on a market and which is thus able to control the activities of other undertakings on a neighbouring market decides to establish itself on the second market and for no good reason refuses to supply the product or service in question on the market where it already occupies a DP to the undertakings whose activities are centred on the market which it is penetrating’. The ECJ treated the case as a refusal to supply and found that Art. 82 applies even where dominance is due to some legal provi-

128   R. Subbiotto, The Right to Deal with Whom One Pleases Under EC Competition Law: A Small Contribution to a Necessary Debate, 9 ECLR 234 (1992). 129   Case 311/84 Centre Belge d’Etudes du Marché-Télémarketing SA (CBEM) v Companie Luxembourgeoise de Télédiffusion [1985] ECR 3261.

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sions providing for limited or no competition, as it refers to a factual situation. An abuse is committed where an undertaking holding a dominant position on a particular market reserves an ancillary activity without objective necessity to itself or to an undertaking belonging in the same group which might be carried out by another undertaking as part of its activities on a neighbouring but separate market, with the possibility of eliminating all competition from such undertaking. It also stated that the same applies where an undertaking has a dominant position on the market for a service that is indispensable for another undertaking on another market. The case might also be seen as a refusal to deal with suppliers (for example advertising as in this case) which dealt with competitors on a secondary market (such as answering services) to preserve market power in the latter market. Market A: TV D Vertical integration Market B: Answering services

D Competitors

Market C: Telemarketing P The judgment is significant for several reasons. First, it held that Art. 82 applies even where dominance arises from provisions enshrined in law. While the case the Court referred to liberalised companies by virtue of Art. 90(2), in the present case, this also implies the same attitude for IPRs, which are also granted by law. Secondly, it appears that in the present case, the Court and Commission were particularly concerned about the existence of related markets, and the possibility of extending market power from an upstream to a downstream market with the possibility of eliminating competition. The requirements for an abuse would hence, thus far, seem to include: (a) the existence of a dominant position; (b) the reservation of an ancillary activity; (c) with the possibility of eliminating all competition from such undertaking; and (d) with no objective necessity.



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Box 6.6 Volvo: Refusal to share spare parts with independent providers of aftermarket support Another case which involved a refusal to supply was Volvo v Veng.130 Volvo had used its design rights in the UK to restrain Veng from importing wing panels of Volvo cars from another Member State. It alleged that there had been an infringement of its registered design. Veng, in its defence, argued that Volvo’s refusal to license spare parts for Volvo motor carts constituted an abuse of a dominant position. The ECJ refused to rule against the injunction imposed on Veng. Advocate-General Mischo concluded that the right to restrain third parties from exploiting the design constitutes the very subject matter of the exclusive right. Consequently, the ECJ held that an order for the granting of a licence would deprive the right of the substance of its exclusivity and that a refusal to license did not constitute an abuse of that right. Nevertheless, it added that the exercise of a holder’s exclusive right might be prohibited by Art. 82 if it involved ‘certain abusive conduct such as the arbitrary refusal to supply spare parts to independent repairers, the fixing of prices for spare parts at an unfair level or a decision no longer to produce spare parts for a consumer model even though many cars of that model are still in circulation’ provided that such conduct may affect trade between Member States. Whilst the Court emphasised that, in the absence of harmonisation ‘the determination of the conditions and procedures under which protection of designs is granted is a matter for national law’, it also clarified that their exercise could be limited by Art. 82 in certain cases. Market A: Car manufacturer and spare parts

D

Registered design rights on replacement body panels

Market B: Repair of car/replacement parts P The case highlighted that a dominant position does not arise only by virtue of the existence of exclusive rights; rather, this would also

130

  Volvo v Veng (UK) Ltd Case 238/87 [1988] ECR 6211.

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depend on the absence of substitutes, clarifying that the existence of an IPR is not concomitant with dominance. However, the Court’s reference to ‘arbitrary refusal to supply spare parts’ does not address the question of when such a refusal will be deemed arbitrary.

Box 6.7 Sabena:  Denial of access to a facility to downstream competitors which is necessary to compete/ to preserve market power in market B In London European/Sabena,131 Sabena, as the dominant firm in the market for computer reservation services (CRS) in Belgium, refused access to its CRS to London European, as it sought to enter the London–Brussels route, competing with it on the fare rates. The refusal prevented London European from covering this route, and it was therefore treated by the Commission as an abuse, which consisted of refusing access to an essential service. Market A: Computer reservation services

D

Market B: Flights/London-Brussels route

D P

The Commission was paving the way for the essential facilities doctrine. It also took consideration of the fact that the refusal to grant access was not based on a lack of capacity, but on a desire to prevent the competitor from entering the market. Sabena’s operations on both markets opened the possibility for leverage, in particular as the CRS was essential for operating in the market and its access would have to be granted on the basis of objective criteria and of the competitive (or anti-competitive for this matter) strategies of the controlling company.

131

  Commission Decision London European-Sabena, OJ 1988 L 317/47.



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Box 6.8 Decca: Essential Facilities? Denial of access to a facility to downstream competitors that is necessary to compete/to preserve market power in market B In Decca Navigation Systems,132 Decca refused to grant access to its navigation signals that were protected by copyright to users of non-Decca receivers. The Commission found that this constituted an abuse of a dominant position, as navigation signals were essential to all receivers, and hence Decca was under a positive duty to grant access to other receivers. As in the case of IGR TV, the emphasis seems to be on the exclusionary behaviour on a secondary market, regardless of whether dominance was due to or associated with the IPR. The recurring pattern seems to involve a firm which is dominant on the upstream market and is also present on the downstream market in which another firm seeks to enter or continue to operate; access to the upstream product or service is necessary to compete in the downstream market. Market A: Navigation signals

D©

Essential for operation on downstream market

Market B: Receivers

D P

In this case, other considerations might also have influenced the Commission, as Racal had entered into an agreement with competitors to partition the market for commercial and pleasure boat receivers. There was no potential competition on the market for the signals, whereas with the agreement and the change of frequencies in the signals, DNS-compatible receivers for commercial use enjoyed a de facto monopoly. The Commission believed that such action would lead to a negative impact on consumers as it would limit their freedom of choice. Abuse was therefore found on the basis of use of power on the market for signals to foreclose and limit the access of third parties

132

  Commission Decision Decca Navigator System, OJ 1989 L 43/27.

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to the market for receivers, thereby also affecting consumer interest. The Commission also found that Racal (DNS) did not have any legitimate property interests, as its patents on the receivers had lapsed and there was no ‘legal property in the transmission of signals, which is the service supplied but only in the equipment (chains)’.133 It seems that the Commission was also concerned about the possibility of extending the legal monopoly (of the patents) after they had lapsed. Regarding the copyright in question which aimed to partition the market, it was not found to justify ‘farreaching restrictions on competition’. It also clarified that IPR do not enjoy immunity from the competition provisions: ‘The Community system of competition does not allow the improper use of rights under national copyright laws which frustrate Community competition law’.134 Hence, in its finding of abuse, the Commission seems to have been influenced by the following factors: (a) there was an agreement between competitors allocating the markets; (b) it impeded competing receivers resulting in a de facto monopoly; (c) it was acting against the interests of the consumers; and (d) there was no justification for this conduct as it eliminated innovative competition and limited technological and economic progress, rather than fostering innovation.

Box 6.9 Aer Lingus: Refusal to continue joint venture with competitor. A disproportionate sanction? In British Midland/Aer Lingus,135 the two companies had an interlining agreement, which involved issuing tickets reciprocally on behalf of the other airlines. When BM began to compete on a specific route with AL (the Dublin–London route), the latter decided to end the interlining agreement, which rendered BM flights less attractive. The Commission found that such a withdrawal constituted an abuse

133

  Ibid. para. 104.   Ibid. para. 104. 135   Commission Decision British Midland/ Aer Lingus, OJ 1992 L 96/34. 134



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and fined AL.136 It stated that ‘refusing to interline is not normal competition on the merits … the argument that interlining would result in a loss of revenue would not of itself make the refusal legitimate. Both the refusal to grant new interline facilities and the withdrawal of existing interline facilities may, depending on the circumstances, hinder the maintenance of competition’. The Commission also referred to ‘… objectively likely to have a significant impact on the other airline’s ability to start a new service or sustain an existing service in account of its effects on the other airline’s costs and revenue…’. The Commission, however, recognised that new entrants should not be allowed to operate on their competitor’s networks forever, but instead should be encouraged to develop their own and therefore only imposed the interlining agreement for a period of two years.137 It has been suggested that it might be more ‘helpful to characterize Aer Lingus, Boosey & Hawkes and United Brands as cases of dependence rather than essential facilities. They were all cases of retaliation by dominant firms against customers who either entered into, or joined with competitors to enter into competition with their “supplier”. In such a situation Art. 86 can apply even if the degree of dominance is such that there are some alternative sources of supply and the legal test is one of objective justification and proportionality for the dominant undertaking’s use of the sanction of refusal to supply as a punishment’.138

136   See Commission Speeches on short-term benefits, in http://europa.eu.int/comm/ competition/speeches/text/sp1996_0542_en.html which refers to cooperation between competitors that might be essential to carry out certain operations, specifically referring to airlines’ interlining, where more participants is considered better as there is usually only scope for one system. ‘Network externalities magnify disadvantages of exclusion, and reduce the viability of otherwise essential competitors. Exclusion would be hard to justify, as it would create a category of second-class competitors, unless admission would reduce the efficiency of the network.’ p. 17. 137   R. Grosvenor, To what extent can Art 86 be used to compel dominant undertakings to supply competitors? at www.jumper.demon.co.uk/comm8a.htm, pp. 4–5. 138   Anderman, EC Competition Law and IPRs: The Regulation of Innovation, 1998, p. 202. See also T. Nacke Abuse of Dominant Positions, 1995 at http://europa.eu.int/ comm/competition/speeches/text/sp1995_025_en.html. He refers to the notion of economic dependence of some Member States, in which a company has market power but is not dominant. The author proposes that we should develop a concept of partenaire obligatoire so that there is an abuse if the dependent company cannot substitute, if it is likely to deter new competitors and if the company’s behaviour is not constrained by competition in the wider downstream market.

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Box 6.10 Sea Containers: Essential facilities? Refusal to grant access to a facility to a competitor/to preserve market power in B Sea Containers v Stena Sealink139 also seems to follow the same pattern of the previous cases. This involved a port owner who refused to give access to a new ferry service, as it competed with its own ferry service from Holyhead to Ireland. For the first time, the Commission explicitly referred to the essential facilities doctrine, holding that the port constituted an essential facility, and that the denial of access was not based on an objective justification, and that the owner had to offer access to competitors and customers on a non-discriminatory basis. Market A: Port owner

D

Market B: Ferry service

D P

In the present case, it appears that here the requirements for an obligation to grant access on a non-discriminatory basis would include: (a) an essential facility controlled by a dominant undertaking; (b) denial of it to a competitor or access on less favourable terms; (c) no objective justification. It would seem again that the rationale was the fear of extending power from an upstream market in which the defendant is dominant to the downstream market. The Commission imposed a strict duty of non-discrimination as the owner of the facility had to satisfy the dual role as administrator and operator of the facility. The Commission therefore imposed more onerous obligations on the owner of the facility who had to negotiate as an independent standard operator, and not just on reasonable grounds.140

139

  Commission Decision Sea Containers v Stena Sealink, OJ 1994 L15/08.   It should be noted, however, that the standard of an independent operator was perhaps imposed here as the case involved a natural monopoly. There was indeed a double monopoly as both the upstream and the downstream market were monopolised by the defendant and not through his skill and merit, J.S. Venit and J.J. Kallaugher, Essential 140



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Box 6.11 Magill: Essential facilities/ Refusal to supply input to downstream competitor/to preserve market power in market B The next case that led to significant debate on the dominant firm’s obligations to deal with competitors and the compulsory licensing of IPRs was the Magill case.141 The case involved the monopolisation of the weekly TV programme magazines. Three channels, RTE, BBC and ITP, each published their respective weekly listings for their TV programmes. These were sent to newspapers and magazines free of charge who were allowed to publish daily TV programmes one day in advance during the week and two days in advance at weekends. The TV listings were protected by copyright law. There was no comprehensive weekly guide published for all channels and injunctions restrained Magill from publishing a comprehensive weekly TV magazine. As a result, a complaint was made to the Commission. In this case, the ECJ stated that although mere ownership of an IPR cannot confer a dominant position, the broadcasters had a factual monopoly over the basic information that was required by a third party; they had complete control over the raw material for weekly TV guides. Therefore, they were deemed to be in a dominant position. The ECJ also held that the exclusive rights of reproduction form part of the rights of a copyright holder and that a refusal to grant a

Facilities: A Comparative Law Approach, in Hawk ed., 1994, Fordham Corp. L. Inst. 315 (1995). Hence, it might reflect concerns about liberalised industries and the possibility for leverage and extension of power on secondary markets, with the possibility of eliminating competition on such markets, or to evade regulation in the upstream market by extending power in other unregulated markets. ‘In Europe important sectors of industry are being deregulated or at least liberalized by the EU. These measures would be of little value if the companies concerned, most of which are dominant in their own areas, were free to integrate forward and to discriminate in favour of their own downstream operations. Regulated or state-owned companies often own facilities that are essential for all or most of their downstream competitors. The essential facilities principle is in effect the follow-up of Art 90 of the EEC Treaty.’ J.T. Lang, Defining Legitimate Competition: Companies’ Duties to Supply Competitors and Access to Essential Services, 1994, Fordham Law Inst. 245. 141   Case C-241 and 242/91P Magill [1995] ECR I-743.

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licence cannot in itself constitute an abuse. However, the exercise of exclusive rights may amount to an abuse in exceptional circumstances. It was relevant that the refusal to supply the raw information prevented the emergence of a new product for which there was substantial demand. Secondly, the refusal was not justified and, thirdly, through their conduct, the broadcasters had reserved to themselves a secondary market excluding all competition on that market, as they had denied access to the basic information to the public, the raw material that was indispensable for the creation of such a guide. The Court also highlighted that the case was not concerned by the differences in granting IPRs by Member States, but at the same time it emphasised that it was wrong to assume that conduct consisting of the exercise of copyright which is legitimate under national law cannot be reviewed under Art. 82. It confirmed that the Commission had the power to impose compulsory licensing (as it was the only way to bring an end to infringement), and that for effect on trade potential effect is enough. Market A: TV listings/ programme information ©

D

Market B: Weekly programme listings and weekly D P TV publications (including non-listings material) The impact of Magill largely depends on its interpretation. Two interpretations may be made of the ECJ’s requirement of exceptional circumstances. The narrow requires both the prevention of a new product for which there is significant demand, and that IPRs are linked to essential inputs for a secondary market. The broad interpretation states that the essential input in a secondary market is sufficient, thus placing positive duties on IPR holders.142 Thus, on the position regarding a refusal to license, the impact of Magill depends on whether one views the exceptional circumstances as consisting of two separate rules (the new product rule and the essential facility rule) or as one cumulative one. Evidence of the fact that it constitutes one rule can be found in para. 57 of the judgment

142   S. Anderman, EC Competition Law and IPRs: The Regulation of Innovation, Oxford University Press (1998).



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in which the Court found that ‘in the light of all those circumstances the Court of First Instance (CFI) did not err in law in finding that the appellant’s conduct was an abuse of a dominant position within the meaning of Art. 86 of the Treaty’.143

Box 6.12 Ladbroke: The absence of a competitive relationship/ Refusal to license input/ Essential facilities In the case of Tierce Ladbroke v Commission,144 the CFI held that the judgment in Magill did not apply to the refusal by the copyright holders of French horse racing to grant Ladbroke a licence to show the races in its Belgian betting shops. The relevant market was defined as the sound and picture of horse racing in general in Belgium. Ladbroke argued that the conduct of the copyright holders was discriminatory as it had licensed the French horse racing to other countries. The CFI rejected this argument, however, as the refusal could not have been discriminatory in the absence of competition in the relevant market, notably Belgium. It also believed that this did not result in the partitioning of the common market as the pattern of demand showed that the markets were divided along national lines and not as a result of the right holders’ licensing policy. Furthermore, the latter did not operate nor had they granted a licence to other operators in Belgium. Market A: Broadcasting coverage of horse racing ©

D

Market B: Operation of betting shops P The Court also strictly distinguished the case from Magill, as in the present case, Ladbroke was not even present on the market let alone enjoyed a monopoly. The CFI explained that for a duty to deal to arise the product must either be essential or it must involve a new product. While the broadcasting was ‘an additional and suitable

143

  Magill case, op. cit., Judgment of the Court, para. 57.   Case T-504/93 Tierce Ladbroke v Commission [1997] ECR II 923.

144

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service for bettors’, it was not indispensable to the main activity, in other words, to the taking of bets, nor did it constitute a new product. Ladbroke showed other races on screen, and its betting activity was very strong even without a licence to the French horse races. The case is important as it offered a broad interpretation of Magill in the wider way, holding that the new product rule and the leverage rule were separate, rather than cumulative. However, it should be noted that this is not an authoritative interpretation of Magill, as it was discussed obiter dicta. The case also reflects how market definition is crucial in deciding whether an IPR holder has abused its dominant position by refusing to license a product.145

Box 6.13 Bronner: Refusal to grant access to a distribution system to an upstream competitor/ Refusal to share methods to reach customers/Essential facilities?/To preserve market power in market A Oscar Bronner v Mediaprint146 involved the obligations of a dominant newspaper firm to grant access to its nation-wide home-delivery service of daily newspapers to Mediaprint, a newspaper of smaller circulation. It was held that the access to the home-delivery system was not indispensable and, therefore, it was found that no abuse had occurred. The case displays a narrow interpretation of the doctrine of a refusal by a firm that was not in the public sector to grant access to an essential facility.147 Market A: Newspapers

D P

Market B: Home delivery service

D

145   The CFI spoke in terms of ancillary markets that were not independent of the main market and not of sub-markets as in Magill, but it is not clear what the term signifies. See Fitzgerald, Magill Revisited EIPR 154, 1998. 146   Case C-7/97 [1998] ECR I-7791. 147  V. Korah, Competition Law of the European Communities, 2nd edn, Lexis Nexis (2001).



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The Advocate-General explained the doctrine applied in cases where a dominant firm in the provision of facilities for the supply of goods or services on another market abuses its dominant position by refusing access to those facilities without objective justification. This involves cases in which a dominant firm is obliged not merely to refrain from anti-competitive activity, but also must actively promote competition by allowing potential competitors to have access to the facilities that it has developed. He also acknowledged the importance of the right to choose one’s trading partners, the need to preserve the incentive for a dominant position to invest, and that the primary purpose of Art. 82 is to prevent distortion of competition and to safeguard the interests of the consumers rather than protect the position of particular competitors. He observed that reserving oneself to the downstream market ‘will not have an adverse impact on consumers unless the dominant position is sufficiently insulated from competition to give it market power’.148 With regard to IPRs, the Advocate-General stated that in the absence of other factors, the refusal to license does not in itself constitute an abuse, and recognised that a wide duty to provide access would have a harmful effect on the incentive to make the original investment, particularly bearing in mind that duplication of the facility was possible and the difficulty of the courts in establishing the amount of compensation. There should be a real stranglehold on a related market before a duty to license is imposed, for example if ‘duplication of the facility is impossible or extremely difficult owing to physical, geographical or legal constraints or is highly undesirable for reasons of public policy. It is not sufficient that the undertaking’s control over a facility gives it a competitive advantage.’149 He also noted that the test must be objective: ‘it must be extremely difficult not merely for the undertaking demanding access, but for any other undertaking to compete’.150 The Court upheld the Advocate-General’s decision in the sense that the refusal must be likely to eliminate all competition in the market, it must be incapable of being objectively justified, and the service in question must be indispensable to carrying on that person’s business, inasmuch as there is no actual or potential substitute in existence for that home-delivery scheme. ‘For such

148

  C 7/97 Oscar Bronner, A-G Jacobs Opinion, ECR [1998] I-07791, para. 58.   Ibid. para. 65. 150   Ibid. para. 66. 149

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access to be capable of being regarded as indispensable it would be necessary at the very least that it is not economically viable to create a second home-delivery scheme for the distribution of daily newspapers with a circulation comparable to that of the daily newspapers distributed by the existing scheme’.151 In this way, the facility should not only be desirable, it must also be necessary. On the facts of the case, the ECJ found that the home-delivery system was not essential and access was not indispensable, even if an alternative system would not be economically viable due its small circulation. It viewed Magill as an exceptional case, in which the information was indispensable to the publication as: Magill could not publish a magazine for which there was consumer demand at all without it; there was no objective justification for refusal; and the refusal would result in the elimination of all competition in the secondary market of TV guides. In the present case, however, the facility was not indispensable, as the question of whether it could be expected to establish a second such system was not judged from the position of Bronner but that of an undertaking of comparable position to Mediaprint.152

151

  Oscar Bronner op. cit., Judgment of the Court, para. 46.   R. Whish, Recent Developments in Community Competition Law, 2000 E.L. Rev.

152

219. For a criticism of this see M. Bergman, The Bronner Case—A turning point for the Essential Facilities Doctrine? 21 ECLR 59 (2000) who believes that if such a high standard is applied without consideration of the specific circumstances, only natural/inevitable monopolies will qualify as EF. The author also believes that although the strict criterion encourages strong firms to take risks and invest, it hampers competition (at least in the short run) and reduces incentives for small firms to invest. He also believes that the ECJ replaced the ‘circumstance approach’ of economic analysis for legal certainty, thus undermining the flexibility of the notion of abuse which is perceived by many commentators to be its virtue. This case has also been criticised for confusing the issues of dominance and abuse. See Stothers, Refusal to Supply as Abuse of a Dominant Position: Essential Facilities in the EU, 7 ECLR 256 (2001). The author shows that two out of the three requirements laid down by the Court for abuse involve dominance. He concludes that in the end the traditional test of Commercial Solvents and the modern approach of Magill and Oscar Bronner are the same. This test involved the question of whether there was a dominant position on the market, and if there was, whether it had been abused. The author further argues that the essential facilities doctrine involves the importation of an unnecessary concept in EC law and that refusal to supply cases may be sufficiently and better dealt with under Art. 82. Regarding the need to preserve incentives for investment, refusal to supply will only constitute abuse if it is determined that there is no sufficient possibility of substitutes to prevent dominance. It is unnecessary to show dominance in a downstream market as, if this is not the case, the dominant firm will not be able to take monopoly rent at that level in any case. Finally, the author believes that



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Therefore, the requirements for liability in this case appear to include: (a) refusal to license; (b) likely to eliminate all competition in market; (c) no objective justification; (d) service indispensable to carrying business/no substitutes. The ECJ treated the obligation to license as much narrower than in previous cases such as United Brands and Commercial Solvents, as the service should be indispensable, and a real stranglehold must exist before compulsory licensing is imposed.

Box 6.14 IMS: Refusal to license input (format) to competitors/ Essential facilities/To preserve market power in market A In the IMS case153 NDC complained to the Commission that IMS had refused to license its ‘1860 brick structure’ for reporting German sales data in the pharmaceutical industry. Within this structure, Germany was divided into the maximum number of geographical the transaction costs of enforcing this aspect of competition law would outweigh its benefits. Hence the solution he proposes involves the use of Art. 82, but without readily finding dominance. Once dominance is established, refusal to supply should be seen as abusive unless an objective justification is given. IP should be considered as an objective justification for all cases, apart from the most exceptional ones. Hence, it directs criticism to the definition of dominance rather than abuse. It is submitted that such an approach would then redirect attention in IP cases of which exceptional circumstances negate the justification. Indeed the essential facilities doctrine may not be necessary to analyse refusal to supply cases. It may, however, none the less be desirable, as limiting the situations in which a dominant firm will be under a duty to supply/license. Furthermore, this assumption of an obligation on dominant firms to license, at the very least imposes an obligation on IPR holders, and any dominant firm in general, to give reasons for their refusal to supply to avoid interference on the grounds that the refusal was arbitrary, and therefore abusive. ‘Although jurisdictional requirements remain, any IP owner in more than one EC Member State will be capable of satisfying them.’ See Robertson, Compulsory Licensing Under EC Law? 1992 LQR 39. See also Case T-374/94 European Night Services [1998] ECR II-3141 in which the Court took the view that train crews could not constitute an EF; and Info-Lab/Ricoh (Competition Policy Newsletter (1999)) in which the Commission referred to the restrictive approach of Oscar Bronner and rejected a claim that Ricoh was under an obligation to supply the complainant with new empty toner cartridges to enable him to compete with Ricoh’s filled cartridges. 153   IMS Health Inc v Commission, 10 August 2001, Order of President of CFI, 26 October 2001, Order of President of CFI, 11 April 2002, Order of President of Court.

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units permitting data collection, while not enabling users to match the data to a specific pharmacy, as that would contravene German data protection rules.154 IMS which collects and sells regional data services for sales data collection and analysis, used its copyright on the brick structure to prevent competitors from marketing data services using the same or similar reporting formats. NDC argued that the refusal to license the structure prevented it from effectively competing, as an alternative structure would not serve the customers’ needs and would be unmarketable. In this instance, their complaint was effectively based on the essential facilities doctrine. Market?

Brick structure standard?

Market A: Selling regional data services

D (brick structure) P

Market B: Sales data collection and analysis Wholesalers using input data of Service Provider

Service provider (IMS, NDC…) check and format using   brick structure Regional Sales Report The Commission found that the relevant market was the German regional sales data service, and that there were exceptional circumstances in this instance, as it became clear that the brick structure had developed into a de facto industry standard and that an alternative standard would not be economically viable. It hence ordered interim measures, consisting of a licence on a non-discriminatory basis in return for a reasonable royalty. In its decision, the Commission greatly expanded the ambit of third party rights of access.155 It effectively did away with the requirement of a new product, based on its reading of Ladbroke, and it also neglected the requirement of a secondary market. It is also argued that while access to the information was vital in Magill as

154   D. Hull, J. Atwood, J. Perrine, Intellectual Property Compulsory Licensing, 2002 European Antitrust Review 36, at www.Global-Competition.com. 155   Ibid.



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there was no alternative and Magill could not invent or develop the listings, nor could it publish the non-listings material without this information. In the IMS case, access to medical data was not at issue, but the ‘use of the format developed to present this information to the pharmaceutical companies’.156 In reaching its conclusion on the indispensability of the structure particular attention was paid to whether customers would buy data formatted in other structures. This might be criticised, as although consumers’ interests are an important consideration, it is only natural that they prefer a higher product developed with a significant level of skill and merit. However, the Commission based its decision on the fact that the brick structure had been developed by a working group, and pharmaceutical companies had participated in this process; the brick structure was therefore built to suit their interests over a long period of time and there were many disincentives in switching. It therefore found that it had evolved into a de facto industry standard. The fact that the pharmaceutical companies were economically dependent on the brick structure was also relevant in this decision, as switching would be an unviable economic option in light of the comparability and compatibility of data, the change of sales territories and the costs of modifying the software applications. In reaching its conclusion on the indispensability of the brick structure, the Commission was also concerned that it would not be likely for competitors to create an alternative structure due to technological and legal constraints.157 These included administrative boundaries, data protection constraints and uncertainty surrounding the sale of data and whether it would infringe the copyright of the 1860 brick structure. The Commission’s willingness to impose compulsory licensing and to find that the brick structure constituted an essential facility raises many questions regarding the need for two markets, along with whether IP is treated or should be treated differently from other cases. The decision of the Commission was suspended by Order of the President of the CFI on 10 August 2001, as IMS argued that the 156

  Ibid. p. 37.   It might also have been relevant that there was a low margin of creativity in the brick structure of 3–5%, which means that any alternative is bound to be similar and, therefore, likely to lead to an infringement of the data. This was also confirmed by the practice in other countries that showed that the brick structures were either similar, or identical. 157

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competitive advantage was the essence of copyright, and that compulsory licensing was incompatible with Art. 295. On 26 October 2001, the President referred to the question at issue: whether the application of German copyright law may be affected by Art. 82 EC. The arguments of the parties are important, as they illuminate, first, when there is an obligation to deal is uncertain, and secondly, that the position regarding IP is also a matter of debate. IMS argued that a refusal to license an IPR can only constitute an abuse if there is some additional behaviour that is in itself abusive, or when an essential facility is at stake, which presupposes the existence of two markets.158 The applicants further argued that Magill was exceptional, as there was leverage from the upstream to the downstream market and the copyright from broadcasting was used to extend dominance in the weekly TV guides. In the present case, IMS was not seeking to exploit market power in a separate market. On the other hand, the Commission argued there was no separate product in Magill either, and that in both cases the supply of service was indispensable. While there was no new product in IMS, there was no such requirement, adopting the broad interpretation of Magill. Hence, it argued that there is no precondition for two markets. In accordance with Magill, it found that there were exceptional circumstances (such as that it had been developed in cooperation with pharmaceutical companies and constituted an industry standard with no likelihood of alternative), and in accordance with Oscar Bronner, the refusal was likely to eliminate all competition, access to it was necessary to compete and there was no justification for such refusal. The President of the CFI interpreted Magill as highlighting the exceptional circumstances in which the exercise of exclusive rights would constitute an abuse; when it is exercised in such ways and circumstances as ‘in fact to pursue an aim manifestly contrary to Art. 82’. He found, however, that the balance of interests weighed in favour of the preservation of copyright and therefore suspended the Commission decision until the CFI judgment had been given. The ECJ gave its Art. 234 reference opinion relatively recently in the IMS case.159 It adopted a cumulative reading of the Magill

158   IMS Health Inc v Commission, 10 August 2001, Order of President of CFI, 26 Oct 2001, Order of President of CFI, 11 April 2002, Order of President of Court. p. 15. 159   Case C-418/01, not yet reported, 29 April 2004.



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requirements by stating that the refusal must prevent the emergence of a new product. It adopted a broad definition of a ‘new product’, however, as it referred to the ‘intention to produce new goods’ as distinct from the actual production. As regards the presence of two markets in an antitrust sense, the Court concluded that ‘it is determinative that two different stages of production may be identified and that they are interconnected, the upstream is indispensable in as much as for supply of the downstream product’.160 It hence adopted an expanded definition that did not require two markets in the traditional antitrust sense: ‘it is sufficient that a potential market or even hypothetical market can be identified. Such is the case where the products or services are indispensable in order to carry on a particular activity…’.161

Box 6.15 Microsoft162 – refusing to provide interoperating information In March 2004 the Commission adopted a decision finding that Microsoft had abused its quasi-monopoly in desktop operating systems by, inter alia, refusing to provide interface information necessary for competitors to create their own desktop operating systems that could interoperate with Microsoft. The Commission amongst other things imposed an obligation on Microsoft to license the interface information to competitors on reasonable and nondiscriminatory terms and to provide an unbundled version of Windows without the media player.

160

  Ibid. para. 45.   Ibid. para. 44. 162   Commission Decision in Case COMP/C-3/37.792 Microsoft [2004], not yet reported. 161

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Box 6.16 GlaxoSmithKline, Syfait – refusal to fully meet supply requests to prevent parallel imports163 The Greek Competition Commission made a preliminary reference under Art. 234 EC in relation to the extent to which a dominant company may refuse to fully meet orders placed by pharmaceutical wholesalers with the intention of limiting parallel trade. The ECJ found that it could not rule on the case as the Greek authority is not a court or tribunal for the purposes of Art. 234, however, Advocate-General Jacobs gave his opinion on the matters. The Advocate-General found that due to the particular features of the pharmaceutical sector, mostly relating to the high level of regulation and sunk costs of R&D, pharmaceutical companies may be objectively justified in refusing to fully supply wholesalers with the intention of limiting parallel trade. He suggested that Courts should take a flexible, economics-based approach in applying Art. 82 to the pharmaceutical sector, taking into account the whole context (economic, regulatory and otherwise) and the particularities of the industry. In 2006 the Greek Competition Commission followed the Advocate-General’s Opinion allowing GlaxoSmithKline to implement its strategy to combat parallel imports.

163   Case C-53/03 Synetairismos Farmakopoion Aitolias and Akarnanias (Syfait) and Others v Glaxosmithkline AEVE, Opinion of the A-G Jacobs, 28 October 2004.



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Table 6.1 An overview of the main case law Cases

Principles

Considerations

Commercial Solvents:

1. existence of a longstanding customer 2. elimination of important competitor in market

Leverage. Vertical integration (VI) proportionate sanction

United Brands:

1. long-standing customer 2. regular commercial practice

SMEs, dependence proportional sanction – Price discrimination and market segmentation

Hugin:

No effect on trade

IGR Stereo-TV:* COM

1. new entrant 2. essential for downstream research

Leverage. Vertical integration Essential Facilities Doctrine (EFD)? same standard for IP

Telemarketing:

1. reservation of ancillary activity 2. possibility of eliminating all competition from such undertaking 3. no objective necessity

Leverage. Vertical integration long-standing customer

1. indispensable 2. for another market 3. no objective justification

EFD

Volvo v Veng:*

additional abusive conduct

same for non IP cases also?

London European: COM

1. essential service New entrant

Vertical integration, Leverage EFD?

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Table 6.1 concluded Cases

Principles

Considerations

Decca Navigation:* COM

1. essential New entrant

Leverage. Vertical integration, EFD? same for IP and non-IP

British Midland: COM

1. long standing 2. Significant impact on firm even if new entrant No indispensability—no EF

No leverage dependence? Proportionality of sanction

Sea Containers: COM

1. essential facility 2. denial 3. no objective justification

Leverage, EFD New entrant

Magill:*

1. new product 2. no objective justification 3. indispensable for secondary market IPRs exceptional circumstances

New entrant Leverage EF In practice same for non-IP?

Tierce Ladbroke:

not essential nor betting shop new

Oscar Bronner:

1. indispensable 2. likely to eliminate all competition 3. no objective justification

No leverage? Not EF IP same as non-IP?

IMS:

2 markets or one? EF?

– indispensable – no alternatives – industry standard dependence of customers

Note:  * and Italics for IP cases and considerations.



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Table 6.2 The outcome of the main case law Abuse

No Abuse

IP

Non IP

IP

Non IP

Decca Navigation

Commercial Solvents

Volvo (on facts/in theory can be abuse)

Ladbroke

Magill

United Brands

IMS

Telemarketing

Microsoft

Sabena

AstraZeneca

Sea Containers

GlaxoSmith Kline

Bronner

PART IV

A more innovation sensitive approach to the interface of competition law and patents?

7. The duty to deal as applied to address technology access problems in the biopharmaceutical industry Compulsory licensing is not an absence of patent protection but merely a lessening of that protection. While compulsory licensing may weaken the incentives to invest in pharmaceutical research the trend of rapid and significant increases in investment in pharmaceutical research demonstrates that the present incentives to invest are so strong that they would have to be weakened considerably before there would be any reduction in the amount of pharmaceutical research.

7.1 Conclusions on the patent system in the case of research tools 7.1.1 The Particularity of Research Tools: Pre-commercial Stage Patents The nature of biopharmaceutical research and of the industry in general is such as to potentially give rise to concerns related to refusals to deal or lack access in certain cases. The specific case of research tools was examined in this context.     T.C. Bailey, Innovation and Access: The Role of Compulsory Licensing in the Development and Distribution of HIV/AIDS Drugs, 2001 U. Ill. J. L. Tech. & Pol’y 193, p. 207.     The latter consists of the full range of resources that scientists use in laboratories, recognising that one institution’s research tool may be another’s end product. NIH Report on Research Tools (1998) op. cit.. They are used to find, refine or design and identify something else that is sold in the marketplace. R. Blackburn in DOJ/FTC Proceedings on the Pharmaceutical Industry: Business Perspectives on the Use and the Role of Patents in the Biotechnology Industry, 26 February 2002. Many research tools are expensive to develop and have significant competitive value to the companies that own them. If institutions wish to gain a competitive advantage from their exploitation, they are likely to limit access and restrict their use and disclosure. This trend is also accompanied by the increasing use of the patent system to obtain proprietary rights for the research tools. There may be competing interests among those who control the tools depending on whether they are scientists, university technology transfer



177

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While concerns relating to access are not new in the area of antitrust law, research tools are more complicated as they are not only end products whose dissemination/distribution effects can readily be measured or witnessed, but they are also tools for research, which are important in the pre-commercial stage when the impact of the restricted access cannot be easily determined. The problem in the case of research tools does not relate to the restriction of a product or technology market, but rather the hindering of the ‘innovation process’. The concern is that the lack of access may lead to reduced research which would, in turn, lead to less innovation. Therefore, we are not concerned with something that may already crystallise in a product or technology market, but rather with something in even earlier stages of research and development.

professionals or private firms, and whether they are importers or exporters. See Chapters 2 and 3. However, research tools are merely an example of what might be a general problem. For example there may be similar exclusionary concerns in cases involving Pharmacy Benefits Management (PBM) networks. See R. Levy, The Pharmaceutical Industry: A Discussion of Competition and Antitrust Issues in an Environment of Change, Bureau of Economic Staff Report, FTC March 1999. While until recently the doctors’ prescriptions were the most crucial factor in determining which drugs would be dispensed by pharmacists, today pharmacies are usually part of PBM networks that administer the drug benefits as part of health insurance plans to employers and others. This could give rise to some concerns as drug companies now may acquire PBMs and the exchange of information may allow for the monitoring of deviations of coordination in the prescription drug markets. In addition, this could ‘raise the marginal costs of unintegrated drug companies and lead to higher prices and lower level in prescription drug markets’. A refusal to deal scenario may exist where C, an unintegrated pharmaceutical manufacturer, has no substitutes for the marketing services of A and B’s downstream PBMs and A and B have the incentive to coordinate to limit a company’s ability to undermine collusion. Foreclosure effects might also occur with regard to the exclusion of unintegrated PBMs from the market, depending on the availability of ways for the unintegrated company to avoid the exclusion.     For more information on pre-commercial stage patents see R.A. Epstein, Steady the Course: Property Rights in Genetic Material, The Law School of Uni of Chicago, working paper no 152, 2003 at http://ssrn.com/abstract_id=317101. See In The Matter Between Mpho Makhathnini, Nelislwe Mthethwa, Musa Msomi, Elijah Paul Musoke, Tom Myers, AIDS Healthcare Foundation Limited, and GlaxoSmithKline (Pty) Ltd, Glaxo Group Limited, Case Number 34/CR/Apr04, where the South African courts found GlaxoSmithKlyne to have abused its dominant position by virtue of excessive prices of drugs. See also South African Competition Tribunal’s decision and order in Pharmaceutical Wholesalers and Glaxo Wellcome, case 68/IR/Jun00, 18 June 2003 at www.comptrib.co.za/decidedcases/pdf/68IRJUN00kinesis.pdf, and Case No. 15/CAC/Feb02.



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7.1.2 A Gap in the Patent System? As shown in Chapter 3, the patent laws do not adequately provide for this possibility. While there are provisions on compulsory licensing and other limitations on the breadth of the patent permitting use, such as the experimental use exemption, these are rarely used and usually address other concerns. Compulsory licensing provisions, for example, as it was demonstrated, are drafted to deal with more developed stages of research that have already led to the development of products or technology which already warrant a patent. The experimental use exemption is again usually concerned with experimenting on an invention in the sense of improvements, as opposed to experimenting with. In addition, while the right to health does have implications for patent law as it affects access to drugs, it is unlikely that the right to health would be helpful in the context of the innovation process as it is too far removed from the actual results and overly speculative about the innovation process. 7.1.3 The More the Better? Optimal Market Structure for Innovation It should also be noted that the desire to have broader access to fundamental research tools is also based to some extent on the assumption that the more research paths undertaken the better. While the economics of innovation and whether concentration or competition is more conducive to innovation is far from clear, it is assumed that access would be more desirable in some cases where it has been refused. ‘When more risky investment is required until there is a useful product, it may be socially desirable to have many firms engaging in the next innovative step. Because this approach involves some duplication of effort, it is not necessarily cost effective. However, there may well be situations in which the patent owner would like to be the sole

 

  See Chapter 3.   See Chapter 4.     See Commission Decision in Microsoft (2004) op. cit. para. 782 in which the Commission stated that a refusal to supply would ‘have the consequence of stifling innovation in the impacted market and of diminishing consumer’s choices by locking them into a homogeneous Microsoft solution. As such it is particularly inconsistent with the provisions of Art. 82(b) of the Treaty’, hence, effectively endorsing a ‘view of innovation which suggests that technical development in the IT industry is best promoted by a number of different firms innovating rather than one.’ S. Anderman, Does the Microsoft Case offer a New Paradigm for the ‘Exceptional Circumstances’ Test and Compulsory Copyright Licenses under EC Competition Law? Presented at the Clasf Conference on 9 September 2004.  

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developer of the final product but society would be better off if this were not the case.’ A significant amount of economic research has focused on the issue of whether competition and potential competition are capable of increasing innovative activity. The findings are ambiguous in this regard. Some commentators have argued that firms which are insulated from competition may choose a quiet life. Yi has found that in the case of process innovations, as long as they are not drastic, their benefit decreases in line with the number of firms under certain conditions.10 Boone has concluded that if competition is intense and innovations lead to major technological changes then small increases in competition may quicken innovation as they force the leading firm to innovate in order to refrain from losing its competitive advantage.11 On the other hand, other economic studies seem to support innovation by large firms in concentrated markets. Schumpeter found that large firms are more innovative than smaller firms, which could mean that in concentrated markets there was more innovation taking place. This may be due to two factors.12 First, innovative activity may be less costly for large firms as there are significant economies of scale in innovation. Large firms may have more specialised resources undertaking many R&D projects which reduce the marginal costs of innovation. As innovation involves significant fixed costs, these companies are able to incur less average total costs, and they may have larger portfolios of R&D, increasing the likelihood of success. Secondly, it might be the case that firms obtain higher benefits from innovative effort as they diversify products,

    R. Aoki and J. Small, Compulsory licensing of technology and the essential facilities doctrine, 16 Information Economics and Policy 23 (2004).     W.M. Cohen and R.C. Levin, Empirical Studies on Innovation and Market Structure, in R. Schmalensee and R.D. Willig (eds), Handbook of Industrial Organization, North-Holland, Amsterdam (1989), p. 1078; J. Lerner, An Empirical Exploration of a Technology Rate, 28(2) Rand J. Econ’cs 228 (1997).     See K. Arrow, Economic Welfare and the Allocation of Resources for Innovation, in pp. 609–26, R.R. Nelson (ed.), The Rate and Direction of Inventive Activity, New York: New York, Princeton University Press (1962); S. De Santi and W. Cohen, Competition to Innovate: Strategies for Proper Antitrust Assessments, in R. Dreyfuss et al. ed., Expanding the Boundaries of Intellectual Property, Oxford, Oxford University Press (2001); ABA (2002) op. cit. 10   S. Yi (1999) op. cit. 11   J. Boone (2001) op. cit. 12   Ibid. See also F. Parisi, B. Depoorter (2002) op. cit. on oligopoly in complementary as opposed to substitutable products. See also R.A. Epstein, Steady the Course: Property Rights in Genetic Material, The Law School of Uni. of Chicago, Working Paper No. 152 (2003) on the marginal cost and double marginalisation problem. R.C. Dreyfuss, Varying the Course in Patenting Genetic Material: A Counter-Proposal to Richard Epstein’s Steady Course, NYU Law School, Public Law Research Paper No. 59 (2003).



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thus increasing the likelihood of discovery, and even the more effective marketing of new products. Empirical evidence shows that large firms have developed a significant share of innovation but in recent years small firms have also done so.13 Early studies showed that R&D rose more than proportionately with firm size, however, Scherer14 has shown that was up to some size level. Recent studies suggest that large firms may actually be generating less innovation per dollar of R&D than small firms.

7.2 Two possible avenues for increased access to essential research tools Increasing access to patented research tools could either be achieved through patent law or through antitrust law. 7.2.1 Patent Law Several proposals have been made as to how the patent system itself could be changed to account for the problem of research tools.15 Professor Eisenberg had

13

  ABA (2002) op. cit.   F.M. Scherer, Firm Size, Market Structure, Opportunity and the Output of Patented Inventions, 55 American Economic Review 1097 (1965). 15   On open source proposals see R.X. Cringely, The True Believer: Can Mike Doyle do to Microsoft what the rest of the computer industry and the Department of Justice couldn’t do? The Pulpit, 7 November, 2002; D. Burk, Open Source Genomics, 8 Boston University Journal of Science and Technology Law 254 (Symposium on Bioinformatics and Intellectual Property Law, 27 April, 2001, Boston, Mass. (Winter 2002)). S. Maurer, Promoting and disseminating knowledge: the public/private interface, Washington DC, National Research Council (2002). See specifically in the case of agricultural biotechnology: J.L. Kind, Concentration and Technology in Agricultural Input Industries, 2001, US Department of Agriculture Economic Research Serve; Benkler, Coase’s Penguin, or, Linux and The Nature of the Firm. 112 Yale L. J., Winter 2002–3; S. Maurer, New Institutions for Doing Science: From Databases to Open Source Biology, conference paper, European Policy for Intellectual Property, University of Maastricht, November 2003, available at http://ist-socrates.berkeley.edu/~scotch/maurer.htm. On the interpretation of the term ‘relating to’ in the experimental use exemption see the European Commission’s proposed Council Regulation on the Community Patent, 1 August 2000 (exempting acts ‘done privately and for non-commercial purposes’ and ‘acts done for experimental purposes relating to the subject-matter of the patented invention’); J.M. Mueller (2001) op. cit. p. 38 refers to the possibility of interpreting the term ‘relating to’ broadly to include the ordinary use of patented research tools to research downstream. 14

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The interface of competition law and patents

proposed the expansion of the experimental use doctrine based on a distinction between three types of cases.16 First, in cases involving use of a patented invention to verify that the requirement of enabling disclosure has been satisfied, the use should be exempt. This situation is the least contentious and most countries allow such use.17 This type of use, however, is unrelated to the problem of access to essential research tools. Secondly, in cases involving use of an invention having a ‘primary or significant market’ among research users who are ‘ordinary consumers’ of the invention, the exemption should be inapplicable. In such cases, it was felt that there should be a licence prior to use, as there should not normally be any access problems.18 Finally, in cases where an improvement in the technological field of the patent is concerned, there should not be a need for any licence in order to encourage designing around patents. While the users would be infringers, there would be limitations in the remedies available against them. The patent holder would not be able to prevent use in such cases but would be entitled to a reasonable royalty in some instances. This situation is a variation of the compulsory licensing provisions as applicable to improvements and secondary dependent patents, although there is usually no need for a licence or to petition for a compulsory licence in the first place in the case of the experimental use exemption. From the start, the remedies of the patentee are limited to a liability rather than a property rule.19 This interpretation of the experimental use exemption, however, would still not cover cases where access is needed to the research tool for research on

Others contend, however, that research tools should be excluded entirely from patenting. See public comments received from USPTO in response to its first round of Interim Written Description Guidelines, published in June 1998 asserting that ‘ESTs are genomic research tools that should be available for unencumbered research to advance the public good’. Department of Commerce, Patent and Trademark Office, Revised Utility Examination Guidelines, 64 Fed. Reg. 71 (1999) 440. 16   R.S. Eisenberg, Patents and the Progress of Science: Exclusive Rights and Experimental Use, 56 U. Chi. L. Rev. 1017 (1989), pp. 1074–78. 17   See Chapter 3. 18   It was believed that these tools could be readily licensed or bought on the open market. The patentee ‘will want to sell to these users – they fall squarely within the market for the patented invention’. Ibid. p. 1085. 19   On this distinction see G. Calabresi and D. Melamed, Property Rules, Liability Rules and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972); I. Ayres, E. Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 Yale L. J. 1027, (1995).



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downstream products. They would fall into the second category of Professor Eisenberg’s model of the ‘ordinary consumers’. The extension of the doctrine was also considered by the NIH Working Group, who concluded that: It is difficult to imagine how a broader research exemption could be formulated without effectively eviscerating the value of patents on research tools. Researchers are ordinary consumers of patented research tools, and if these consumers were exempt from patent infringement liability, the patent holder would have nowhere else to turn to collect patent royalties. An excessively broad research exemption could eliminate incentives for private firms to develop and disseminate new research tools which could on the balance do more harm than good to the research enterprise.20

The difficulty with such a view, however, is that the assumption that such workers are truly ‘ordinary consumers’ of the tool is called into question. When it becomes increasingly difficult for these ‘consumers’ of the tool to obtain access, then to the extent the experimental use doctrine is based on that distinction, it becomes questionable. ‘When research tool transaction costs are severe enough to impede or stop the development of new biomedical products, line drawing between “experimenting on” and “experimenting with” is no longer justified. In such cases access to the experimental use doctrine should not turn on the relatively fine distinction between experimenting on or experimenting with the patented invention.’21 The arguments against an expanded experimental use exemption mirror to a large extent the general arguments against a reduced patent scope. In this context, it is felt that any reduction in patent protection would lead to a reduction in innovation.22 As argued in Chapter 5, however, the optimal balance between initial and follow-on innovation is not known to any degree of precision. Although there may be some reduction in the development of new research tools by forcing wider access, there may equally be more products developed by virtue of the broader access to those tools. The trade-off ultimately is an empirical one.23 20

  NIH Report on Research Tools (1998) op. cit. App. D-8.   J.M. Mueller, No Dilettante Affair: Rethinking the Experimental Use Exception to Patent Infringement for Biomedical Research Tools, 76 Wash. L. Rev. 1 (2001), p. 40. 22   See, for example, J.P. Karp, Experimental Use as Patent Infringement: The Impropriety of a Broad Exception, 100 Yale L. J. 2169 (1991), p. 2181. The author contends that ‘an expansive experimental use exception, which threatens the patentee’s potential for economic returns, would reduce inventive activity, particularly in those industries that rely on patent protection’. 23   See R.S. Eisenberg (1989) op. cit. pp. 1030–31 who states that it is difficult to determine the impact of a reduction in the breadth of patents on the incentives for investment, either through the research exemption or other limitations. 21

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In response, Mueller proposes the endorsement of a development use rule which makes no distinction as to the type of use that is contemplated for the tool.24 The only limitation would be that it must relate to the use of the patented research tool, rather than the sale of which products physically incorporate the patented invention.25 In such cases, he suggests that a reach-through royalty scheme should be applied whereby the user would be allowed to infringe the patents but then would have to pay a royalty according to the ultimate commercial value of the products developed. ‘The research tool patent owner would acquire the right to a potentially commercially significant future royalty stream, while the tool user would avoid the burdens of pre-use license negotiations, up-front payments and blocked access to the proprietary research tools’.26 According to Mueller, royalties should be paid for no longer than the total period of the effective patent life, beginning on the first date of the sale of the product developed.27 In addition, in cases where no product is developed, he argues that a standardised schedule of royalty fees could be drawn up, similar to the musical works model.28 He contends that calculating the royalty rate may be more of a problem in theory than in practice.29 Similarly, Gilat claims that the experimental use doctrine may not be sufficient in the area of biotechnology industry, and for this reason a liability rule might be required. Indeed the fact that patents are granted on biotech basic research inventions seems to require a more liberal experimental use exemption than that provided by traditional patent law, as the effect of enforcing a patent right against research competitors might be detrimental to progress, and it therefore appears that, in addition to the exemption from infringement liability provided by the experiment exception, a specific liability rule in respect of research use of patented inventions may be appropriate.30

24

  J.M. Mueller (2001) op. cit. pp. 58–64.   Ibid. p. 58. The author distinguishes between use and selling as the latter is not exempted from liability. 26   Ibid. p. 58. 27   Ibid. p. 62. 28   See 17 USC § 115 (Supp. IV 1998) (‘Scope of exclusive rights in non-dramatic musical works: Compulsory License for making and distributing phonorecords’). Once the owner of a copyright for a non-dramatic musical work has sold the work to the public, any other person has a compulsory license to record and sell the phonorecords of the same work. See M. Leaffer, Understanding Copyright Law, New York, Bender, § 8.7 (2nd edn, 1995) 4th edn (2004). A monthly statutory ceiling price must be paid for each record distributed under the licence. 29   J.M. Mueller (2001) op. cit. p. 65. 30   D. Gilat (1995) op. cit. p. 81. 25



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In this context, antitrust may be a desirable safety net. It imposes a liability rule in certain cases, while not requiring any change of the law. 7.2.2 A Role for Art. 82? As a policy matter, ‘antitrust limitations should be desirable unless they result in a net decrease in innovation’.31 The problem lies in the fact that there is no clear formula to decide how much innovation is due to patent law and how much can be attributed to antitrust law. In some ways, antitrust law addresses the same concerns as the patent system, namely the breadth of the exclusivity only, in light of the market conditions. In the case of a controlling upstream innovation that impairs the progress of the downstream innovation by virtue of limited licensing practices or a refusal to deal, it would seem that it is possible to use antitrust law to judge when access to such upstream innovation should be granted, and to compel it.32 A blanket antitrust exemption for all unilateral refusals to license IP, including refusals used to prevent competition in complementary markets, may discourage innovation, not only in the unprotected complementary markets, but also in the patented market. This is because it would require entry at two levels if there is no viable competition in the complementary market.33

As shown in Chapter 3, the TRIPS Agreement provides that compulsory licensing (CL) may be used to remedy cases in which a practice has been determined anti-competitive in a court of law. In accordance with economic theory, this was interpreted to mean that there is no justification for applying a different antitrust threshold for cases involving IPRs, and that the application of the competition law provisions remains intact.34

31   M. Lao, Unilateral Refusals to Sell or License IP and the Antitrust Duty to Deal, 9 Cornell J. L. & Pub. Policy 193 (1999). 32   While it is true that antitrust law presumes that the market will fix failures, it is contemplated here that antitrust should work as a safety valve if the market fails to fix an imperfection and in the absence of a patent mechanism to correct it. 33   M. Lao (1999) op. cit. p. 201. 34   Whether one chooses to interpret this as the use of antitrust to address patent regulatory failures or merely to be a co-determinant of patent scope, makes little difference in practice. See D.S. Karjala, Copyright Protection of Operating Software, Copyright Misuse ad Antitrust, 9 Cornell J. L. & Pub. Pol’y 161 (1999), who states in the context of copyright and the relation with antitrust: ‘Although the copyright courts have correctly concluded that an antitrust violation is not a predicate of copyright misuse, there is no reason in principle why the courts could not treat copyright misuse by someone with market power as an antitrust violation … the courts tailor the scope of copyright protection all the time in an effort to further the underlying copyright policies. This is not

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Article 82 has been used to condemn unilateral refusals to deal in several cases, some even involving IPRs. There has not yet been any case before the ECJ, however, regarding early pre-commercial biopharmaceutical patents. Nevertheless, this provision may still be helpful. In Chapter 6, the duty to deal under Art. 82 was analysed. CL was analysed in terms of four factors: indispensability, the introduction of a new product, the elimination of competition on a downstream market, and the absence of objective justification. 7.2.2.1 Indispensability It was shown that the Court has placed particular emphasis on whether access to the product or process is indispensable to carry on business.35 The test is whether there are ‘products or services which constitute alternative solutions, even if they are less advantageous, and whether there are technical, legal or economic obstacles capable of making it impossible or at least unreasonably difficult for any undertaking seeking to operate in the market to create, possibly in cooperation with other operators, the alternative products or services’.36 In the specific case of research tools, the test will focus on whether access to the former is truly indispensable/essential to conduct research on the downstream market.37 In addition, the high threshold should be preserved if the duty to deal is to remain exceptional. The threshold should be set high enough to ensure that the ‘resulting static gains are large enough to outweigh such dynamic losses’.38 While indispensability ultimately is to be judged on the facts of the case, there may be certain factors, as seen in Chapter 6, which will militate in favour or against such a finding. The existence of high sunk costs and/or incentives to innovate may be two such factors.39 Furthermore, the good in question must really be unique, central to the operation on the market and without any feasible alternative.

necessarily easy but the only fundamentally new aspect suggested here is that antitrust rather than copyright supplies the hook for devising remedies’ p. 189. 35   See Chapter 6. 36   Case C-418/01 IMS, 29 April 2004, para. 28. 37   There may be many instances in which IP products or technologies could be regarded as indispensable as traditionally judged under the essential facilities doctrine. This is because it may not make economic sense to duplicate them and they may be of national economic significance, similar in some ways to land facilities. R. Aoki and J. Small (2004) op. cit. p. 27. 38   Ibid. p. 28. 39   See Chapter 6.



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7.2.2.2 Preventing the emergence of a new product for which there is potential consumer demand In IMS, the liberal position adopted by the Court can be seen from the following statement: Therefore, the refusal by an undertaking in a dominant position to allow access to a product protected by copyright, where that is indispensable for operating on a secondary market, may be regarded as abusive only where the undertaking which requested the license does not intend to limit itself essentially to duplicating the goods or services already offered on the secondary market by the owner of the copyright, but intends to produce new goods or services not offered by the owner of the right and for which there is a potential consumer demand.40

Following the broad interpretation of IMS, the new product requirement would easily be met in cases where access to research tools is required to research on the downstream market in an attempt to develop technology further. The reference to the intention to produce new goods or services, as distinct from their actual production, may hence be of particular significance to the biopharmaceutical industry, where it is felt that access may be warranted in the pre-commercial stage in some cases even if the research is in its early stages and possibly even still in the pipeline. This would allow for a CL to be ordered for certain indispensable research tools while taking into account that a more extensive use would most likely lead to more products but not necessarily so. Hence this will provide access to research tools to be used for further research irrespective of what that later leads to. This effectively involves endorsing a wider definition of ‘new product’ to include potential innovation,41 and indispensability, which would be viewed from the perspective of enabling further innovation. In addition, as clarified by the Commission in Microsoft, demand for that potential new product also only needs to be potential.42 7.2.2.3 Elimination of competition on a downstream or neighbouring market/two-market requirement As regards the two-market requirement, as shown in Chapter 6, the Court adopted a wide interpretation: ‘it is sufficient that a potential market or even

40

  IMS Case (2004) op. cit. para. 49.   This rests on the assumption that more research lines may be more conducive to innovation. See section 7.1.3 on the relationship between market structure and innovation. 42   See Commission reference to Ladbroke and the essential facilities doctrine in para. 552 where reference is made to ‘specific, constant and regular potential demand’. 41

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hypothetical market can be identified. Such is the case where the products or services are indispensable in order to carry on a particular activity …’.43 Hence, it would seem that this case can be used as a precedent that two markets in an antitrust sense are not required, and an obligation to deal will be based on the essentiality of an input for the operation of a market. Therefore, it effectively extended harm to competition to potential or hypothetical markets. In the example of research tools which require access to potentially develop some downstream product, the doctrine remains applicable, and if truly indispensable the research tools could be the object of a CL. In IMS, the Court stated that it is ‘determinative’ that ‘two different stages of production may be identified and that they are interconnected, the upstream product is indispensable in as much as for supply of the downstream product’. This is also consistent with the innovation markets approach, in the sense that the court extended its interpretation of the elimination of competition not only to existing or potential product or technology markets, but also to innovation markets not yet in existence.44 7.2.2.4 The absence of an objective justification In the Microsoft case, the Commission confirmed that ‘intellectual property rights are not in a different category to property rights as such’45 and, therefore, they could not amount to an objective justification. Hence, the fact that research tools are protected by patents of itself would not negate the duty to deal if it arose. This is in line with recent competition findings, whereby the fact that something involves IPRs does not exempt conduct from competition control.46

43

  IMS (2004) op. cit. para. 44.   See IMA at section 7.2.3.2. See also J.T. Lang, European Community Antitrust Law: Innovation Markets and High Technology Industries, 20 Fordham International L. J. 717 (1997). 45   Microsoft (2004) op. cit. para. 550. 46   See, for example, the recent Commission decision fining AstraZeneca (Commission press release IP/05/737) for abusing its dominance by misusing the patent system. Patent misuse is a known defence in the USA according to which a patent holder might be prevented from asserting its patent if such have been obtained by breaching antitrust laws or illegally extending the term of the patent. AstraZeneca in this instance abused its dominance by making misrepresentations to certain national patent offices with a view to obtaining supplementary protection certificates, as well as strategically misusing procedures to block the entry of generic products or parallel traders. Similarly, a UK court judge stated that the enforcement of patent rights could constitute abusive conduct in certain cases, where a dominant undertaking brings action which: cannot reasonably be considered as an attempt to establish its rights and can only serve to harass the opposite party, and is conceived to eliminate competition: Sandisk Corporation v Koninklijke Phillips Electronics NV and Others [2007] EWHC 332 Ch. 44



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7.2.3.1 The impact of Art. 82 duty to deal with case-law on the patent system Article 82 can effectively be used to grant access to an indispensable input for further research where this has been refused. In this way, it can address problems associated with the hindrance of potential technology and potentially restricted access to necessary inputs. It involves recognition of the importance of potential innovation, and bases the remedy on treating IP just as any other case, while adopting a broader definition of a new product and of secondary markets. Although the economics of cumulative innovation fail to provide a clear formula, none the less, they affirm that concentration may not necessarily lead to more innovation; the granting therefore of an unqualified exclusive right (and thereby immunising IP) may not actually be conducive to innovation.47 In the same way as the patent system attempts to balance initial innovation with follow-on innovation through the patent length and breadth, competition law may also be used to achieve this objective. In this way, antitrust can be seen as interchangeable as a remedy with patent CL provisions, only with a difference in threshold; one requiring a patent of significant technological advance of considerable economic interest, and the other requiring the existence and abuse of a dominant position by virtue of a refusal to grant access to an indispensable/essential input as set against the market conditions, respectively. Noticeably, the new product rule imports in Art. 82 also the consideration of ensuring some advantage from access. None the less, the definition of the new product is much broader than the one in patent law, as it is not limited to patented products or processes constituting a significant technological advance, and it can even relate to potential goods. It is not restricted to dependent patents, but may be applied to downstream innovation as distinct from improvements.48 It should be noted, however, that market definition will preserve its centrality as it will in turn determine the availability of substitutes, the risk of elimination of competition and hence also the indispensability of the product or process in question. The application of antitrust control would be limited to cases in which the monopoly is effectively over a variety of product lines and in which there is a series of dependent inventions, without a real alternative in the market. The advantage of the antitrust application of a duty to deal is that it is set against the market conditions in order to ascertain: the extent to which access to the input is indeed necessary in view of the alternatives and substitutes; the

47   See also the endorsement of this view with the introduction of the innovation markets approach in the USA discussed below, at section 7.2.2.2. 48   See above at section 7.2.2 on the new product requirement and the IMS definition. See also Chapter 3 on patent CL provisions.

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extent to which the consumers will benefit by virtue of access; and the extent to which the market has proven that the patent controls not only a specific product or process but indeed a whole area of endeavour. This approach effectively advocates a more explicit consideration of followon innovation in the application of antitrust analysis and this may apply not only for the application of the duty to deal provisions, but also for investigations of cross-licences and patent pools, and potentially for mergers.49 Indeed, in the EU, unilateral restraints on innovation have been condemned on several occasions,50 either because they involved the acquisition of control over potentially competitive innovations,51 the prevention of downstream innovation,52 or the foreclosure of innovation by raising barriers to entry.53 In brief, the issue of research tools introduces a new element into the analysis of refusals to deal or to grant access. The new element centres on the fact that it is not concerned with the restriction of a downstream existing product or technology market, either by virtue of distribution or otherwise, but rather it is concerned with downstream research which may or may not lead to new products which could either be seen as future product markets or, in some cases, as new innovation markets. In the case of research tools, access is mandated for potential innovation and this, similar to the traditional cases where access is mandated to a facility, contains assumptions about the type of structure that is more conducive to market developments (whether product, technological or innovation).54

49   See, for example, innovation markets approach in merger review and the consideration paid to potential competition. J.H. Barton, Patents and Antitrust: A rethinking in light of patent breadth and sequential innovation, 65 Antitrust L. J. 44 (1997), who proposes that attention should also be paid to technology lines and not only product market or technology or innovation markets. ‘Clearly there are antitrust issues when a license or merger concentrates control over product lines or combines into one management several patents covering complementary ways of manufacturing a specific product.’ 50   See M. Dolmans, Antitrust and the Suppression of Technology in the US and Europe: Is there a Remedy? Restrictions on Innovation: An EU Antitrust Approach, 66 Antitrust L. J. 455 (1998). 51   Case 88/501 Tetra Pak I (BTG license) [1988] OJ I.272/27. 52   Magill (1995) op. cit. 53   Microsoft decision (2004) op. cit. 54   In conventional antitrust enforcement there is a broad consensus on the relationship between market structure and market performance. In contrast, this is seen as more contentious in innovation market enforcement and, for this reason, these structural assumptions are seen as being more dangerous. In view of the role of technological change, however, in today’s economy conventional enforcement may even ‘require judges to predict the inherently unpredictable course of future technology’ and so the differences between the two approaches should not be exaggerated. R.W. Davis, Innovation Markets and Merger Enforcement: Current Practice in Perspective, 71 Ant. L. J. 677 (2003),



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7.2.3.2 An innovation sensitive approach: innovation markets in Art. 82? A similar approach considering innovation and the type of structure that is more conducive to it can be seen in the application of other antitrust provisions, specifically in the application of the Technology Transfer Block Exemption Regulation (TTBER) and in merger analysis.55

p. 681. See also J. Kattan, Antitrust Considerations in Innovation-Driven Markets, 21 Can.-US L. J. 115 (1995), p. 117; D. McGowan, Innovation, Uncertainty, and the Stability in Antitrust Law, 16 Berkeley Tech. L. J. 729 (2001); I. Knable Gotts and J.G. Kraus, Antitrust Review of New Economy Acquisitions, Antitrust, Fall 2000, p. 59. 55   The innovation markets approach has been discussed most extensively in the USA where it was formally recognised as an enforcement tool for the first time in the IP Licensing Guidelines (1995) op. cit. This was then extended to a broader variety of competitor collaborations by the FTC/DOJ, Antitrust Guidelines for Collaborations Among Competitors (2000), reprinted in 4 Trade Reg. Rep (CCH). Since then it has been the subject of many enforcement actions of the Antitrust Division in conjunction with the conventional potential competition analysis such as US v General Motors Corp. No. 93-530 (D. Del. Filed 23 March 1998), US v Lockheed Martin and Northrop Grumman (D.D.C. filed 23 March, 1998). In addition, the innovation effects have been the key factor of the decisions in several FTC enforcement records, especially concerning the pharmaceutical industry in view of the FDA collaboration in assessing the likely effect of each innovation effort. See J. Kattan, After the IP Guidelines: Trends in Intellectual Property Antitrust Enforcement, Antitrust, Summer 1997, p. 26. See, for example, FTC innovation markets enforcement actions Roche/Genentech, Roche Holding Ltd, 113 FTC 1086 (1990); American Home Products/American Cyanamid, American Home Prods. Corp. FTC Docket No. C-3557 (1995); Sensormatic/Knogo, Sensormatic Elec. Corp., FTC Docket No. C- 3572 (1995); Glaxo/Burroughs Wellcome, Glaxo Inc., 119 FTC 815 (1995); Upjohn/Pharmacia, The Upjohn Co. 121 FTC 44 (1996); Ciba-Geigy/Sandoz, Ciba-Geigy Ltd, 123 FTC 842 (1997); Baxter/Immuno, Baxter Int’l, Inc., 123 FTC 904 (1997); Pfizer/Warner-Lambert, Pfizer Inc., FTC Docket No. C-3957 (2000); Hoechst/ Rhone-Poulenc, Hoechst AG, FTC Docket No. C-3929 (2000). In the EU, the European Commission has two main concerns in the area of innovation: first, patents may pose considerable entry barriers to competitors on future markets; and secondly, mergers between firms that are active in similar R&D projects must not become dominant actors that are capable of eliminating future competition in related markets, and thus slowing the innovation process itself. J. Pons, Innovation and Competition, A View from the European Commission, speech for the 50th anniversary of the Japan Trade Commission in Tokyo – 1st December 1997, published in the EC Competition Policy / DGIV/speech/eight/en/sp980xx.htm February 1998. Hence, Commission Regulation 772/2004, on the application of article 81(3) of the Treaty to categories of technology transfer agreements, 2004 OJ L213/11, allows the Commission to withdraw the benefit of block exemption where the licensed products are not exposed to effective competition in the licensed territory. This principle was applied in Case 88/501 Tetra Pak I (BTG license) [1988] OJ I.272/27 where the licensee was found to have abused its dominant position and was forced to give up the exclusive rights attached to its licence.

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In the context of mergers, the innovation markets approach aims to assess the effects of a merger on the incentive for R&D and innovation. It assesses the extent to which an output in the upstream R&D market may be restrained and whether the latter may lead to adverse competitive effects on the downstream product market at a later stage. The approach is based on two factors: First that antitrust ought to be concerned about agreements and transactions that are likely to result in a reduction in resources devoted to research and development in definable lines of research, or in the elimination of one or more parallel research tracks, when such a reduction of resources, or elimination of a line of research, is likely to have an adverse effect on price or non-price competition in a product market at some time in the future (whether or not the product market in question exists or does not exist at the time when enforcement action is taken); and second, that the doctrine of potential competition does not suffice to address the adverse competitive effects of many agreements and transactions that reduce competition in innovation.56

The concerns of the innovation markets approach are similar to those found in CL as it seeks to encourage multiple research paths by ensuring that essential innovation tools remain de-concentrated even if this is only to protect innovation on a research/pipeline level as distinct from commercialisable products. This approach is contentious,57 as unlike traditional oligopoly theory applied to markets for existing products, there is no firm basis in economics to support the presumption that an anti-competitive reduction in innovation would result from a reduction in the number of competitors attempting to innovate.58 Similarly, there have been several cases where mergers have raised concerns in the field of R&D and innovation. Commission Decisions Shell-Montedison, OJ 1994 L. 332/49, M.555 Glaxo-Wellcome and others, OJ 1995 L. 2985, Crown Cork OJ 1995 L 75/39, Ciba-GeigySandoz OJ 1996 C.102/737, M.984 DuPont-ICI, OJ 1997 L. 2985, M.468 MSG-Media Services OJ 1994 L. 364/01, M.877 Boeing-McDonnell-Douglas OJ 1997 C.59/877. In all of these cases, a divestiture or licence remedy was imposed. However, the Commission has also allowed collaborations where the agreements contained some efficiencies, such as Konsortium OJ 1990 L. 228/31. 56   R.W. Davis, Innovation Markets and Merger Enforcement: Current Practice in Perspective, 71 Ant. L. J. 677 (2003) pp. 677–8 57   Criticism and more extensive analysis of the use of the approach is beyond the scope for present purposes. For alternative views on the approach see T.N. Dahdoud and J.F. Mongoven, The Shape of Things to Come: Innovation Market Analysis in Merger Cases, 64 Antitrust L. J. 405, 1996; M.H. Morse, The Limits of Innovation Markets, at www.dbr.com; E. Kwoka, Non-Incumbent Competition: Mergers Involving Constraining and Prospective Competitors, 52 Case W. Res. L. Rev. 173 (2001). 58   D.L. Wald and D. L. Feinstein, Merger Enforcement in Innovation Markets: The Latest Chapter – Genzyme/Novazyme, The Antitrust Source, July 2004, p. 4. On a debate between the optimal market structure for innovation see section 7.1.3. above. See also



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The novelty of the approach, as confirmed in the recent Genzyme/Novazyme59 merger, lies in the fact that there may be an antitrust violation despite the absence of an ‘existing’ goods market and the lack of clarity on the link between market structure and innovation. In theory, it is possible that a merger may not injure actual or potential competition in any relevant product market but nevertheless it harms consumers by reducing competition in innovation.60 For example, this may occur if the parties in the merger are among the few or only likely potential entrants into a product market that does not exist at the time of the merger.61 However, the innovation markets approach should be subject to a strict factual analysis to establish whether innovation is likely to be adversely affected or R. Gilbert and W. Tom, Is Innovation King at the Antitrust Agencies? The Intellectual Property Guidelines Five Years Later, 69 Antitrust L. J. 43 (2001), p. 83, who concludes that there is only anecdotal evidence to support the view that competition enhances R&D efforts. See also D. Carlton and R. Gertner, Intellectual Property, Antitrust and Strategic Behaviour, University of Chicago, National Bureau of Economic Research, Working Paper No. W8976, May 2002, p. 10 , reprinted in A. Jaffe and J. Lerner, Innovation Policy and the Economy, Vol. 3, MIT Press (2003); ‘neither theory nor empirical work provides any general justification for an antitrust merger policy aimed at preserving competition in R&D markets’. R. Rapp, The Misapplication of the Innovation Market Approach to Merger Analysis, 64 Antitrust L. J. 19 (1995); R.J. Gilbert and S.C. Sunshine, The Use of Innovation Markets: A Reply to Hay, Rapp and Hoerner, 64 Antitrust L. J. 75 (1994); who argue that the lack of clarity regarding the link between market structure and innovation is not as important as Rapp contends; D. Mc Gowan, Innovation, Uncertainty, and Stability in Antitrust Law, 16 Berkeley Tech. L. J. 729, (2001). 59   See FTC 13 January 2004 closing the investigation of Genzyme Corporation’s acquisition of Novazyme Pharmaceuticals in 2001. FTC Press Release, FTC Closes its Investigation of Genzyme Corporation’s 2001 Acquisition of Novazyme Pharmaceuticals, Inc., at www.ftc.gov/opa/2004/01/genzyme.htm; Statement of Chairman T.J. Muris, in the Matter of Genzyme Corporation/Novazyme Pharmaceuticals, Inc., at www.ftc.gov/ os/2004/01/murisgenzymestmt.pdf; Dissenting Statement of Commissioner M.W. Thompson, Genzyme Corporation’s Acquisition of Novazyme Pharmaceuticals, at www. ftc.gov/os/2004/01/thompsongenzymestmt.pdf; Commissioner P.J. Harbour Statement available at www.ftc.gov/os/2004/01/harbourgenzymestmt.pdf. For an analysis, see D. L. Wald and D.L. Feinstein, Merger Enforcement in Innovation Markets: The Latest chapter – Genzyme/Novazyme, The Antitrust Source, July 2004; P. Balto and S. Sher, Refining the Innovation Focus: The FTC’s Genzyme Decision, Antitrust magazine, 2004, p. 28. 60   R.J. Gilbert and S.C. Sunshine, Incorporating Dynamic Efficiency Concerns in Merger Analysis: The Use of Innovation Markets, 63 Antitrust L. J. 567 (1995); G.A. Hay, Innovations in Antitrust Enforcement, 64 Antitrust L. J. 7 (1995). 61   This corresponds to the case of Genzyme/Novazyme, FTC Press Release, FTC Closes its Investigation of Genzyme Corporation’s 2001 Acquisition of Novazyme Pharmaceuticals, Inc., at www.ftc.gov/opa/2004/01/genzyme.htm. See also R.W. Davis (2003) op. cit. For further examples, see also R. Gilbert, Should Antitrust Enforcers Rely on Potential Analysis or the Concept of Innovation Markets? at www.ftc.gov/opp/global/gilbert1.htm.

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enhanced by consolidation. This involves recognising that collaborations are often pro-competitive and that it is paramount in determining whether independent R&D efforts are close substitutes. In making this determination, attention should be paid to ‘the nature, scope and magnitude of their R&D efforts; their access to financial support; their access to intellectual property, skilled personnel, or other specialized assets; their timing; and their ability, either acting alone or through others, to successfully commercialize innovations’.62 Merger control, in this case, is used as means to ensure that R&D is not overly concentrated so that downstream potential markets may develop, and remedies such as divestiture and CL are used to achieve this result. In a similar way, Art. 82 duty to deal case-law could be used to ensure that R&D is not suppressed by the control of essential inputs in the R&D process by a few dominant firms with the discretion and possible motive to deny or reduce access to such inputs. Antitrust law aims to promote not only price competition and output maximisation of existing products, but also ‘industrial progress’, therefore, practices which limit such progress pose problems for antitrust, either in the application of Arts 81 and 82 or in merger analysis.63 As in the case of mergers, the use of innovation markets analysis assesses the likelihood of delay in or elimination or reduction in quality or diversity of innovation as a result of decreased levels of competition in innovation. A corollary of this is that unilateral practices with the same effect will also be reviewed under Art. 82.64 In addition, this approach is particularly appealing in biopharmaceutical industry in view of the tight regulatory requirements. These permit competition authorities in cooperation with the regulatory authorities, to forecast the effects of exclusion or consolidation. For example in the USA the cooperation between the FDA and the FTC provides extensive information on ‘the status, approach and likely effect of each innovation effort … that might have been difficult to obtain otherwise’.65 Therefore, it may be more feasible to determine on a factual basis which research tools are truly ‘indispensable’. 62   FTC/DOJ Guidelines for Collaboration Among Competitors (2000) op. cit. § 4.3 These may also be the relative considerations in determining indispensability under Art. 82. 63   R.W. Davis (2003) op. cit., p. 682. 64   In the same way that a merger may lead to increased consolidation, similarly a refusal to deal may lead to the elimination of all competition as prohibited in certain cases by Art. 82. This application of Art. 82 may also be seen as the other side of the TTBER (2004) op. cit., which exempts certain types of agreements between competitors under Art. 81. 65   FTC, Office of Policy Planning, Anticipating the 21st Century: Competition Policy in the New High-Tech Global Marketplace, 1996, available at www.ftc.fov/opp/hitech/ global.htm.



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7.2.3.3 Conclusions on compulsory licensing as a safety net While it would seem that much uncertainty surrounds fundamental questions in this area, the importance of CL as a means of addressing follow-on innovation considerations should not be underestimated. ‘To the extent that neither statutory nor case law establishes clearly the legal scope of an IP grant, one should also look to policy concerns in determining whether a unilateral refusal to license should ever be considered an antirust violation.’66 As it is questionable whether innovation incentives are sensitive to the narrow refusal to deal liability, the benefits may far outweigh the cost.67 The recognition of the existence of CL under antitrust law to remedy a situation of blocked follow-on innovation as a last resort safety net (whether this is seen as remedying a perceived patent failure or simply balancing the system as initially contemplated) would seem to be a more feasible and indeed more desirable option. While competition law is not the only instrument to improve the balance, it does provide a means of enhancing the innovation/access balance.68 A major disadvantage of this approach is the fact that it relies on courts to determine what constitutes a ‘reasonable royalty’. None the less, it would seem that this is more problematic in theory, rather than in practice, as the courts are

66   ‘…There is no definitive test for dividing the optimal level of protection for IP. Logically the law should not place antitrust constraints on a monopolist’s right to refuse to license if such constraints would undermine the IP laws. Conversely, the law should not give IP holders the carte blanche to refuse to license if that would result in frustrating the very objectives that IP laws seek to achieve.’ M. Lao (1999) op. cit. p. 210. 67   See Chapter 5 on alleged harm to incentives to innovate. See also C. Springman, Competition and IP Law and Policy in the Knowledge-Based Society: Is there a Cause for Concern about Unilateral refusals to Deal? 1 May 2002, DOJ/FTC Hearings on IP and Competition Law. The author questions whether innovation incentives are sensitive to narrow refusal to deal liability, leading to a significant reduction in incentives across industries. He also refers to Klemperer’s model (P. Klemperer, How Broad Should the Scope of Patent Protection Be? 21 Rand J. Econ’cs 113 (1990)) that suggests that a small reduction in the patent holder’s right to profit may reduce deadweight loss even more. Hence, the assumption that the IP right to exclude is complete may prove to be incorrect. A similar argument is levelled with regard to the commensurability and proportionality of the incentive to innovate and the benefit form immunity. See A. Arora, Competition and IP Law and Policy in the Knowledge-Based Society: Is there a Cause for Concern about Unilateral Refusals to Deal? 1 May, 2002, DOJ/FTC Hearings on IP and Competition Law, and D.J. Gerber (1988) op. cit. See also T.C. Bailey (2001) op. cit. p. 12 ‘Pointing to the fact that compulsory licensing will lead to a less-than-maximum level of research and development is not dispositive because the social cost of providing those additional units of research may outweigh their social utility. … There is no reason to assume that the present level of research activity is in fact the socially optimal level.’ 68   An alternative may be a patent compulsory licensing provision in the case of necessary inputs for follow-on or downstream innovation.

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used to determining infringement damages on a regular basis.69 In general, it is left up to the parties to reach an agreement within a specific period, however, failing this, the royalty fee may be set by an expert.70 A reasonable royalty fee covers costs as well as a reasonable profit taking the market value of the innovation into account amongst other things.71 It is believed that royalty payments, particularly in the case of information goods, ‘allow greater choice [than fixed fees] among profits and consumer welfare in the final good market’72 and permit flexibility so as to prevent as far as possible ‘the potential to cause unreasonable loss of income to the copyright owner’.73 So, for example, in a case involving whether the level of royalties charged for an IP licence were excessive, the Advocate-General indicated that the cost/price analysis would not be appropriate in the context of copyright licensing as the cost of creating a work ‘of the imagination’ is impossible to determine; the ECJ simply compared the rates with those charged by other copyright management societies in other Member States.74 The shortcoming of such an approach may be that the enforcement costs are so high and the procedure so lengthy that it effectively discourages parties from pursuing a compulsory licensing action, and instead diverts research to other areas.75 If this proves to be the case in practice, then the alternative of enacting a specific patent provision for research tools should be considered.76 7.2.4 Conclusion: A Human Rights Approach to Competition Law? In conclusion, it should be noted, that the right to health not only affects patent law but may also increasingly affect the interpretation and application of competition law. For example, in South Africa, the Competition Commission found 69

  J. H. Barton (1997) op. cit.   See Check List for Fast Track Compulsory Licensing, in J. Love, Implementing TRIPS Safeguards with Particular Attention to Administrative Models for Compulsory Licensing of Patents, WHO Meeting in Harare, Zimbabwe, 21 August 2001. 71   However, the royalty may not be at discriminatory rates that would violate Art. 82(c) prohibiting dissimilar conditions for equivalent transactions. None the less, in considering which rates are discriminatory consideration is paid to, amongst other things, the differences in the costs of licensing, lost profits, other business relations, and different end-uses. 72   R. Aoki and J. Small (2004) op. cit. p. 28. 73   WTO, US – Section 110(5) of the US Copyright Act, Panel Report of 15 June 2000, WT/DS160/R, para. 6.229. 74   Case 402/85 Basset v SACEM [1987] ECR 1747. 75   See, for example, in the USA where it is estimated that parties spend more than $1 million to litigate a patent dispute. See J. Love (2001) op. cit. 76   An alternative to this may be the endorsement of a rebuttable presumption in favour of compulsory licensing. 70



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GlaxoSmithKline and Boehringer Ingelheim to have abused their dominant position by virtue of excessive pricing in respect of ritonavir, lamivudine, ritonavir+lamivudine and neviparine.77 More specifically, the parties were found to have violated the provisions of the Competition Act of 1998 which prohibit excessive pricing (s. 8(a)), refusing access to essential facilities (s. 8(b)) and exclusionary acts that have an anti-competitive effect that outweighs technological efficiency or other procompetitive gains (s. 8(c)).78 Hence, the abuse also consisted of refusal to grant licences to generic manufacturers in return for a reasonable royalty. It was found that this would have been feasible and also beneficial to consumers as it would lead to lower prices. The South African case shows that competition law may be interpreted in line with the human rights obligations and, more specifically, with the goal of striving ‘towards the highest attainable standard of health’. Excessive pricing and anti-competitive refusals to deal, amongst other things, should therefore be examined within the context of the health implications at stake. If access to drugs is disproportionately restricted due to pricing measures, private companies may be found to be in violation of the competition provisions.79

77   In The Matter Between Mpho Makhathnini, Nelislwe Mthethwa, Musa Msomi, Elijah Paul Musoke, Tom Myers, AIDS Healthcare Foundation Limited, and GlaxoSmithKline (Pty) Ltd, Glaxo Group Limited, Case Number 34/CR/Apr04, in which the South African courts found GlaxoSmithKlyne to have abused its dominant position by virtue of the excessive pricing of drugs. See also South African Competition Tribunal’s decision and order in Pharmaceutical Wholesalers and Glaxo Wellcome, case 68/IR/Jun00, 18 June 2003 at www.comptrib.co.za/decidedcases/pdf/68IRJUN00kinesis.pdf. See Competition Commission finds pharmaceutical firms in contravention of the Competition Act, 16 October 2003, available at http://www.cptech.org/ip/health/sa/ cc10162003.html and Competition Commission concludes an agreement with pharmaceutical firms, 10 December 2003, available at http://www.cptech.org/ip/health/sa/ cc12102003.html. 78   Ibid. The terms of the settlement included: (1) extend the voluntary licence granted to Aspen Pharmacare in October 2001 in respect of the public sector to include the private sector; (2) grant up to three more voluntary licences on terms no less favourable than those granted to Aspen Pharmacare, based on reasonable criteria which include registration with the Medicines Control Council and the meeting of safety and efficacy obligations; (3) permit the licensees to export the relevant antiretroviral drugs to subSaharan African countries; (4) where the licensee does not have manufacturing capability in South Africa, GSK will permit the importation of the drugs for distribution in South Africa; (5) permit licensees to combine the relevant ARV with other antiretroviral medicines; and (6) charge royalties of no more than 5 per cent of the net sales of the relevant ARVs 79   See Statement by Consumer Project on Technology Concerning an alleged prohibited practice in terms of section 49B(2)(a) of the Competition Act 89 of 1998, at www. cptech/ip/health/cl/recent-examples.html.

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The interface of competition law and patents

In this way, specific health concerns associated with the effect of patents in the biopharmaceutical industry may be ‘mitigated’ by competition law and the obligations relating to the right to health. This interpretation of competition law, however, is more likely in cases involving dissemination concerns where the effect on health would be apparent,80 rather than in cases such as research tools where the effects on health are more indirect and can only be speculated.81 None the less, they may affect the compulsory licensing provisions in the sense of lowering the indispensability threshold and may lead more easily to a finding that access to certain research tools should be mandated. In the IMS case, the interpretation of the new product requirement as extending to ‘intention to produce new goods’, and the interpretation of a market as including a ‘potential or even hypothetical market’ could be seen as a step in this direction. Adopting a more innovation sensitive approach to competition law and the particularities of certain innovation-based industries such as biopharmaceuticals could in this sense also be seen as in line with the obligation of states to strive ‘towards the highest attainable standard of health’. Consistent with the above, in the Discussion Paper on the application of Art. 82 to exclusionary abuses it is stated that when it comes to refusal to deal with IPR: a ‘refusal to licence an IPR protected technology which is indispensable as a basis for follow-on innovation by competitors may be abusive even if the 80   See, for example, in 1973 when the Monopolies Commission in the UK required Roche to lower the price of its patented Librium and Valium to the NHS. Chlordiazepoxide and Diazepam (H.C. 197, 1973). The Monopolies and Mergers Commission was the forerunner of the present Competition Commission. 81   As explained above, the crucial element in the case of research tools is the indispensability of the input for downstream innovation. Classical antitrust cases in the biopharmaceutical industry, however, have rather been concerned with products which were present on the market. In this context, the Commission has distinguished between the markets for the production and sale of approved products, R&D into new therapeutic compounds and wholesale distribution of medicines. Drug markets usually correspond to the therapeutic classes, although reimbursement policies are also relevant. In the case of research tools however, the novel element of the analysis is the future potential innovation element. In addition, unlike traditional antitrust cases where markets are still quite fragmented along national lines in this industry, with prices differing according to the pricing policies of each Member State, in the case of research tools, the market may consist of the global innovation market. See J. Gatti, Mergers, Mergers, Joint Ventures and the Pharmaceutical Industry, 1996 EU Pharmaceutical Forum 1996 at http://europa. eu.int. See also S.A. Singham, Competition Policy and the Stimulation of Innovation: TRIPS and the Interface Between Competition and Patent Protection in the Pharmaceutical Industry, 26 Brooklyn J. Inte’l L 363, 2000; K. Maskus, Parallel Important in Pharmaceuticals: Implications for Competition and Prices in Developing Countries, Report to WIPO 2001, at http://www.wipo.org/about-ip/en/studies/pdf/ssa_maskus_pi. pdf.



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licence is not sought to directly incorporate the technology in clearly identifiable new goods and services.’82

82   Commission Discussion Paper on the Application of Art. 82 to Exclusionary Abuses, December 2005, para. 240.

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Index AAAS (American Academy of Arts and Sciences) 85 ABA (American Bar Association) 21, 22, 26, 126, 181 Abbott, F.M. 32, 58, 64 abuse of dominance compulsory licensing and 150, 159–61 essential facilities doctrine and 167–8 proportionality and 147–8, 156–7 refusal of access to essential services and 154–6, 158, 162–5 refusal to license and 150–51, 153–4, 163, 169 refusal to supply and 147–9, 151–4 requirements for 152, 153–4, 156, 165 Treaty of Rome and 103 vertical integration and 145–7, 149, 151 acceptability right to health and 78 access essential services, to, refusal of 154–6, 158, 162–5 see also technology access accessibility right to health and 78 ACIP (Advisory Council on Intellectual Property) 47, 51, 52, 53, 54 Adcock, M. 88 agreement see MTA; TRIPS Aguilera, M.C. 9 ancillary activity reservation of, leverage cases and duty to deal 130–33 Anderman, S. 101, 106, 116, 129, 157, 160, 179 anti-commons property rights and 109–10 research fragmentation and 5, 6 anti-competitive conduct remedy for, compulsory licensing as 63

antitrust aims 101 compulsory licensing as interchangeable remedy with 189 control effect on incentives to innovate, IPRs and competition law 116–19 recent recognition of, IPRs and competition law 119–21 essential facilities doctrine and 133–4 intellectual property and, transition from separate to unified fields 115 law see competition law; duty to deal technology access problems and 185–6 Aoki, R. 180, 186, 196 Areeda, P. 134, 135 Arora, A. 195 Arrow, K.J. 49, 117, 180 Attwood, J. 166 Austin, D. 22 Australia compulsory licensing 64 experimental use exemption 47 Australian Department of Health and Ageing 47 Austria compulsory licensing and experimental use exemption provisions 66 see also EU availability right to health and 78 Ayres, I. 117, 182 Bailey, T.C. 55, 56, 177, 195 Baily, M. 28 Balto, P. 193 Banks, K. 104 Barinaga, M. 9 Barton, J.H. 32, 190, 196

239

240

Index

Battcock, R. 65 Belgium duty to deal 154, 161–2 see also EU Bendekgey, L. 10 Benkler, Y. 23, 181 Bergman, M.A. 135, 164 Bhatnager, 59 Biotechnology Industry Organization 4 Birdsall, N. 71 Blackburn, R. 8, 177 Bloche, M.G. 83, 94 blocking patents doctrine patent protection and 37, 49 see also patent Boone, J. 126, 180 Boyle, J. 108 Brazil compulsory licensing 59 right to health 94 Britain see UK Britz, J. 90 Calabresi, G. 182 Campbell, E.G. 6 Carl, P. 78, 81 Carlson, S.C. 34 Carlton, D.W. 123, 124, 131, 193 case law essential facilities doctrine cases, duty to deal 122 intellectual property 94–6 patent system, technology access problems impact on 189–90 public health 93–4 refusal to deal under Art 82 EC 147–9, 151–2, 171–3 denial of access 154–6, 158, 162–5 no effect on trade 150 refusal to continue joint venture with competitor 156–7 refusal to fully meet supply requests to prevent parallel imports 170 refusal to license 150–51, 161–2, 165–9 refusal to provide interoperating information 169 refusal to share spare parts with independent provider of aftermarket support 153–4

refusal to supply input to preserve power in market B 145–7, 159–61 see also courts; dependence cases; essential facilities doctrine; leverage cases Chambers, S.A. 8 Chapman, A.R. 85, 90, 91 Chetley, A. 73 Chien, C.V. 56–7, 118 Cho, M.K. 10 CL (compulsory licensing) abuse of dominance and 150, 159–61 antitrust as interchangeable remedy with 189 blocking patents doctrine and 49 incentives to innovate and 118 new product for which potential consumer demand and, preventing emergence of 187 patent protection and 37, 63–5 definition and history 54 EU Member State provisions for 66–9 grounds for 57–8 role of 58–63 support and opposition for 54–6 public health case law and 94 research tools and, access through patent law 182, 184 right to health and 70, 87, 91–3, 96–7 safety net, as, technology access problems and 177, 195–6 two-market requirement and 188 see also licensing Clark, J. 51, 52, 53 Cohen, C. 3 Cohen, J. 6, 17 Cohen, W.M. 180 Cohen-Boyer Patents research tool, as 8 Colombia right to health 80 commensurability compulsory licensing role in balancing 58 competition IPRs and see IPRs, competition law and potential harm to, refusal to deal and 123–6



Index

Competition Commission (South Africa) 63, 196–7 competition law human rights approach to, technology access problems and 196–9 see also duty to deal; IPRs, competition law and Conigliaro, M.J. 34 Connor, S.S. 72 Cornish, B. 88, 97 Cornish, W.R. 39 Correa, C. 32 courts practice, IPRs and competition law 103–6 see also case law Cringely, R.X. 181 Cullem, G. 7 Cullet, P. 93 cumulative innovation biopharmaceutical see R&D patent breadth and 24 see also invention; patent Dahdoud, T.N. 192 Dalpé, R. 4 David, P.A. 21–2, 24, 107, 108, 109, 111 Davis, R.W. 190, 192, 194 De Santi, S. 180 deadweight loss compulsory licensing desirability and 55–6 property rights and 111 demand see product, demand Denmark compulsory licensing and experimental use exemption provisions 66 see also EU Department of Commerce, Patent and Trademark Office (USA) 182 dependence cases characterization unhelpful 157 duty to deal 122, 128–30 see also case law Depoorter, B. 126, 180 direct effect patenting and right to health 87–8 Directives Biotechnology 12, 37, 60, 94–5

241

Community Code Relating to Medicinal Products for Human Use, amending 40 Database 119 In-Vitro Diagnostic Medical Devices 37 Legal Protection of Biotechnology Inventions 27 Legal Protection of Computer Programs 119 Rational Use of Medicines 27 Rental and Lending Rights 95 see also EU; legislation DNA sequences biomedical research tools and 9–12 patent trends effect on patent balance for 13, 14 see also genetic diagnostics Dolmans, M. 190 Domeij, B. 34, 41, 48 Drahos, P. 88 Dreyfuss, R.C. 180 Drlica, K. 9 Ducor, P. 42 Dupuy, R.-J. 73, 76, 79, 81 Dutfield, G. 31, 33 duties right to health, under 79 duty to deal (Art 82 EC) refusal to deal under 122–3, 143–4 cases see case law, refusal to deal under Art 82 EC competition and, potential harm to 123–6 state of law on 126–8 dependence cases 128–30 essential facilities doctrine (EFD) cases, indispensability requirement and 133–41 new product innovation 141–2 leverage cases, ‘reservation of ancillary activity’ 130–33 technology access problems and 185–6 impact on patent system case-law 189–90 indispensability 186 innovation markets in 191–4 new product for which potential consumer demand, preventing emergence of 187

242

Index

objective justification, absence of 188 two-market requirement 187–8 EC Treaty see Treaty of Rome EFD (essential facilities doctrine) abuse of dominance and 167–8 access refused to essential services and 154, 158 antitrust and competition and 115 cases, duty to deal 122 exceptional circumstances and 166 indispensability requirement and 133–5 indispensability 135–7 objective justification 139–41 two-market requirement 138–9 refusal to license and 165–9 Eisenberg, R. S. experimental use exemption and 45, 46, 47 research fragmentation and 5–6 research tools and 8, 13, 14, 15 technology access problems and 16, 181–2, 183 El Salvador right to health 88 Elliott, R. 89 EMEA (European Medicines Evaluation Agency) 26–7 EPO (European Patent Office) 36–7 Epstein, R.A. 178, 180 ESCRC (Committee on Economic Social and Cultural Rights) 73 ESTs (expressed sequence tags) research tool, as 8, 182 EU (European Union) competition law 101, 103, 119, 121 compulsory licensing 60, 66–9 experimental use exemption provisions 66–9 intellectual property cases 94–6 patent protection provisions 38 patent systems and sources 25 reverse doctrine of equivalents 48, 49 right to health 74–5, 94, 97 right to health as human right, status in law 71–4 right to property and IP 84, 86 Supplementary Protection Certificate 30

see also individually named Member States EUE (experimental use exemption) patent protection and 37, 39–43, 46–7 EU Member State provisions for 66–9 US experience 44–6 ‘relating to’ in, interpretation of 181 research tools and, access through patent law 181–3, 184 European Commission antitrust and IP and 115 antitrust control recognition and 120 duty to deal and 144, 157 existence/exercise distinction and 104 experimental use exemption and 181 innovation markets and 191 IPRs and competition law and 103, 121 technology access problems and 198–9 European Group on Ethics in Science and New Technologies 37, 70, 87 exceptional circumstances essential facilities doctrine and 166 exclusive rights exercise and, interpretation 160–61, 166 exclusivity patronage, procurement and property and, IPRs and competition law 109–12 existence/exercise distinction antitrust and competition and 115 IPRs and competition law and 103–6 Fauver, C.M. 55 Feinstein, D.L. 192, 193 Feit, I.N. 12 Finland compulsory licensing and experimental use exemption provisions 66 duty to deal 150–51 see also EU Fitzgerald, D. 162 follow-on innovation compulsory licensing desirability and 55 patent protection and 36–7 blocking patents doctrine 37, 49 compulsory licensing see CL



Index

experimental use exemption see EUE patent pools 37, 51–3 reverse doctrine of equivalents 37, 48–9, 50 see also invention; patent France compulsory licensing and experimental use exemption provisions 66 patents’ importance, overstating 33 see also EU FTC (Federal Trade Commission) (USA) 32, 193, 194 FTC/DOJ Antitrust Guidelines for Collaboration Among Competitors 191, 194 Antitrust Guidelines for the Licensing of Intellectual Property 119, 120 Hearings on IP and Competition Law 195 Proceedings on Competition and IPRs 29, 118 Proceedings on the Pharmaceutical Industry 29 Fuenzalida-Puelma, H.L. 72 Fysh, M. 43 Gambardella, A. 26, 27 Gwrg, R. 33 Gatti, J. 198 Gelijns, A.C. 26 genetic diagnostics biopharmaceutical R&D and cumulative innovation 4–5, 6 research tools and 8, 9 patent pools and 52 see also DNA sequences Genevaz, S. 116 Gerber, D.G. 131 Gerber D.J. 135, 138 Germany compulsory licensing 61, 64–5, 67 duty to deal 129, 150–51, 165–9 experimental use exemption 40, 42, 67 patent pools 53 research tools, patent trends effect on patent balance for 14 see also EU Gertner, R. 193 Gilat, D. 39, 40, 41, 42, 46, 184

243

Gilbert, R.J. 24, 193 Gitter, D. 12 Glenken, J. 129 Glover, G. 28, 29 Goldman, A.V. 134 Goldstein, J.A. 15 goods see information goods; public goods Gordon, H.S. 113 Gorner, P. 97 Gostin, L. 78 Grabowski, H. 23, 27, 28, 29 Greece compulsory licensing and experimental use exemption provisions 67 duty to deal 170 see also EU Green, J. 24 Greenberg, A.C. 34 Grosvenor, R. 146, 157 Hahn, E.A. 26 Hamlet-Cox, D. 10 Handley, L.A. 48 Hantman, R.D. 41 Hardin, R. 110 Harhoff, D. 26, 29 Harvard ‘oncomouse’ research tool, as 8 Harz, M.H. 134 Hasenzahl, C. 54, 59 Hawker, N.W. 132, 135 health emergencies, compulsory licensing role in addressing 61–3 see also public health; right to health healthcare implications, biopharmaceutical R&D and 4–5 Heller, M.A. 5 Hogerzeil, H. 97 Holzapfel, J. 6 Hooks, J. 138 horizontal dilemma patent balance and 23 Hovenkamp, H. 56, 58 Hull, D. 166 human rights approach to competition law, technology access problems and 196–9

244

Index

right to life 80 see also right to health; right to property IACHR (Inter-American Commission on Human Rights) 80 ICESCR (International Covenant on Economic, Social and Cultural Rights) property rights and, public interest limitations 86 right to health elements and 78 right to health sources and 75–6 right to health strengthening and 81 right to property and IP as human right and 84, 85 see also legislation incentive reduction compulsory licensing desirability and 56 India generic products and drug prices 82 indirect effect patenting and right to health 88–9 indispensability duty to deal and technology access problems and 186 essential facilities doctrine and 133–7 objective justification 139–41 two-market requirement 138–9 information access see technology access goods, IPRs and competition law 109–12 see also knowledge innovation nature of biopharmaceutical 26–8 new product, duty to deal 141–2 patenting and 28–31 see also cumulative innovation; follow-on innovation; patent innovation incentives antitrust control effect on 116–19 compulsory licensing and 118 innovation markets duty to deal and technology access problems and 191–4 optimal structure 179–81 see also market

invention commercialization, as patent system rationale 22–3 dissemination patent system goals and 23–4 patent system rationale, as 22 motivation, as patent system rationale 21–2 orderly cumulative development of, as patent system rationale 23 see also patent IP (intellectual property) European cases on, fundamental rights analysis and 94–6 human right, as, right to property and 84–6 system, competition embedded in 114 see also property IPRs (intellectual property rights) competition law and 101, 103, 121 antitrust control 116–21 competition embedded in IP system 114 courts’ practice 103–6 EC Treaty provisions 102 exclusivity, patronage, procurement and property and 109–12 information goods, patronage, procurement and property and 109–12 IPRs like other property rights for purposes of competition 112–13 public goods market failure and 107–9 patronage, procurement and property and 109–12 transition from separate to unified fields 114–16 see also rights Ireland duty to deal 156–7, 159–61 see also EU Israelsen, N.A. 41 Italy compulsory licensing and experimental use exemption provisions 67 see also EU

James, E. 71 Japan compulsory licensing 61 Jehoram, H.C. 92–3 Jensen, E. 28 Julian-Arnold, G. 57, 59, 60, 62, 64 Junnarker, S. 8 Kallaugher, J.J. 134, 158–9 Karjala, D.S. 185–6 Karp, J.P. 183 Kass, L.R. 77 Kattan, J. 191 Kelley, D. 72 Kenney, P.J. 87 Kenya generic products and drug prices 82 Kern, M. 39, 60, 64–5 Kezsborn, A. 134 Killick, J. 139 Kind, J.L. 181 Kitchm E.W. 21, 23, 24 Klemperer, P. 24, 117, 195 Knable Gotts, I. 191 knowledge public good, as 107–8 see also information Ko, Y. 11 Korah, V. 56, 148–9, 162 Kraus, J.G. 191 Kubalski, J. 51 Kukies, J. 26, 29 Kwoka, E. 192 Ladas, S.P. 59 Laherty, C. 42 Lang, J.T. 159 Lao, M. 185, 195 Lawson, C. 6 Leaffer, M. 184 Leary, V.A. 72, 73 Leddy, M. 138 legislation Act Against Restraint of Competition (Germany) 129 Affordable Prescription Drugs Act (USA) 62–3 African Charter on Human and People’s Rights (Banjul Charter) 72

Index

245

Berne Convention for the Protection of Literary and Artistic Works 119 Charter of Fundamental Rights of the European Union 74–5, 84, 86 Civil Code (Netherlands) 92 Community Patent Convention (CPC) 39 Community Patent Regulation (CPR) 38, 39, 61 Competition Act (South Africa) 63, 197 Convention on the Elimination of All Forms of Discrimination Against Women 72, 76 Convention on the Rights of the Child 72, 76 Intellectual Property Code (France) 62 Drug Price Competition and Patent Term Restoration Act (USA) 40, 46 European Charter of Patients’ Rights 75 European Convention on Human Rights (ECHR) 84, 86 European Patent Convention (EPC) 15, 35, 36, 38, 39 European Social Charter 72 General Agreement on Trade and Services 91 International Convention on the Elimination of All Forms of Racial Discrimination 72, 76 International Covenant on Civil and Political Rights (ICCPR) 74, 86 Medicines and Related Substances Control Amendment Act (South Africa) 93 Orphan Drugs Act (EU) 30 Orphan Drug Act (USA) 30–31, 87 Paris Convention for the Protection of Industrial Property 54 Patent Act (Germany) 15–16, 39, 62 Patent Law (Switzerland) 60 Patent Law Including Modifications (France) 39 Patents Act (UK) 39, 60, 119 Patents and Plant Variety Rights (Compulsory Licensing) Regulations 60 Public Health Emergencies Act (USA) 62 San Salvador Protocol 88

246

Index

Technology Transfer Block Exemption Regulation (TTBER) 191 Universal Declaration of Human Rights (UDHR) 73–4, 75, 84, 85 Vienna Convention on the Law of Treaties 89 see also Directives; EPC; ICESCR; Treaty of Rome; TRIPS Lemley, M.A. 24, 34, 49, 56, 58 Lerner, J. 180 leverage cases duty to deal 122, 130–33 see also case law Levin, R.C. 180 Levy, R. 178 license stacking patent trends effect on patent balance for research tools and 13–14 technology access and innovation and 5–6 licensing broad, compulsory licensing as mechanism to induce 58–9 compulsory see CL refusal abuse of dominance and 150–51, 153–4, 163, 169 essential facilities doctrine and 165–9 refusal to deal, as 124 Lichtenberg, F. 30 Lie, R.K. 73 Lipinski, T.A. 90 Lipsky, A.B. 134, 135 Llewelyn, M. 88 Loury, G.C. 24 Love, J. 46, 64, 196 Lunney, G. 137 Luxembourg duty to deal 151–2 see also EU Machlup, F. 21, 24 Mackaay, E. 110, 114 Mackie-Mason, J.K. 124, 125, 126 MacLaren, M. 95 Mann, J. 78 Mansfield, E. 29, 30 Marenco, G. 104 Mark, J. 56, 58

market failure, public goods and, IPRs and competition law 107–9 structure, optimal for innovation, technology access problems and 179–81 see also innovation markets; twomarket requirement market-oriented experiments experimental use exception and 40 Marquandt, P. 138 Marshall, E. 13 Maskus, K. 198 Maurer, S. 181 McFetridge, D.G. 56 McGowan, D. 191, 193 McLeod, J.M. 8 Melamed, D. 182 Merges, R. IPRs and competition law and 110, 111 patent balance and 24 patent protection and 48, 49–50, 51, 52, 53 research tools and 8 Merkin, R. 101 Metz, J.F. 10 Miller, C.G. 105–6 Mongoven, J.F. 192 Montgomery, J. 77, 79 Morse, M.H. 192 MTA (material transfer agreement) research tools and 7 Mueller, J.M. duty to deal and technology access problems and 181, 183, 184 patent protection and 36, 47 research tools and 7, 8, 9, 11, 13, 17 Mully, T. 83, 85–6, 95 Mwalimu, U.A. 82 Myrick, M.E. 104, 105 Nacke, T. 129–30, 157 National Institutes of Health (NIH) (USA) 13, 183 Nelson, L. 12–13 Nelson, R.R. 24, 111 Netherlands compulsory licensing and experimental use exemption provisions 69 see also EU

new product innovation, duty to deal 141–2 potential consumer demand existing, preventing emergence of, duty to deal and technology access problems and 187 see also product Newberg, J.A. 115 Nicol, D. 6 Nielsen, J. 6 Nigeria right to health 80 NIH (National Institutes of Health) (USA) 4, 7, 17, 177, 183 non-use compulsory licensing role for 59 Norway compulsory licensing and experimental use exemption provisions 67 Nuffield Institute of Biotechnology 4, 5, 9–10, 11, 13, 14, 17 objective justification absence of, duty to deal and technology access problems 188 abuse of dominance and 148 essential facilities doctrine and indispensability requirement and 139–41 parallel trade restrictions and 170 refusal to supply and 149 obligations see duties OECD (Organisation for Economic Cooperation and Development) 3, 13, 27, 29, 52, 134 Ordover, J. 24 ordre public right to health and 70, 87, 96 Orsengo, L. 26, 27 Oxfam 31 Pammoli, F. 26, 27 Parisi, F. 126, 180 Pate, G.N. 46 patent blocking, doctrine, patent protection and 37, 49 breadth, patent system goals and 24 dependent 49, 65 importance, overstating 31–3

Index

247

length, patent system goals and 24 pools, patent protection and 37, 51–3 pre-commercial stage 4, 177–8 see also innovation; invention patent balance patent system as balancing system and 21, 23–5 research tools, for, patent trends effect on 12–15 right to health implications see right to health patent law right to health and effect of patent law on right to health 82–3 effect of right to health on patent law 83 interpretive principle, as 70–71, 90–93, 96–8 public-health case-law 93–4 technology access problems and 181–5 patent protection compulsory licensing as, technology access problems and 177, 195–6 European law provisions for 38 follow-on innovation and 36–7 blocking patents doctrine 37, 49 compulsory licensing (CL) 37, 63–5 definition and history 54 EU Member State provisions for 66–9 grounds for 57–8 role of 58–63 support and opposition for 54–6 experimental use exemption (EUE) 37, 39–43, 46–7 EU Member State provisions for 66–9 US experience 44–6 patent pools 37, 51–3 reverse doctrine of equivalents 37, 48–9, 50 impeding information access and 14–15 patent system balancing system, as 34–5 biopharmaceutical innovation nature of 26–8 patenting and 28–31 patent balance 21, 23–5

248

Index

patents’ importance, overstating 31–3 biopharmaceutical industry and 25–6 case-law, technology access problems impact on 189–90 EU existing 25 importance of, factors in 29–30 main rationales 21–3 research tools and, technology access problems 177–81 safety nets see patent protection patenting biopharmaceutical innovation and 28–31 increase in, healthcare implications 4–5 privatization and 5 right to health and 87–9 patronage public goods, exclusivity and information goods and, IPRs and competition law 109–12 Patterson, D. 138 PBM (Pharmacy Benefits Management) networks refusal to deal and 178 PCR (polymerase chain reaction) technology biomedical research tools and 9 research tool, as 8 see also technology Pekari, J.C. 90 Perrine, J. 166 Perritt, H. 108, 110 Pitofsky, R. 138 Pons, J. 191 Portugal compulsory licensing and experimental use exemption provisions 68 see also EU privatization biopharmaceutical R&D and 5 procurement public goods, exclusivity and information goods and, IPRs and competition law 109–12 product demand not met, compulsory licensing desirable where 54–5 see also new product

property public goods, exclusivity and information goods and, IPRs and competition law 109–12 see also IP; right to property property rights specific subject matter doctrine and 115 see also IPRs; rights proportionality abuse of dominance and 147–8, 156–7 public goods market failure and, IPRs and competition law 107–9 patronage, procurement and property and, IPRs and competition law 109–12 public health case law, patent law and right to health 93–4 compulsory licensing and 70 see also health public interest IP as human right and right to property 84, 86 quality right to health and 78 R&D (research and development) cumulative innovation and 3–7, 16–18 biomedical research tools 9–12 defining research tools 7–8 patent trends effect on patent balance for research tools 12–15 see also research Rabinow, P. 9 Rai, R.K. 4 Rapp, R. 193 Ratner, J. 139 Reichman, J. 54, 59 remedy anti-competitive conduct, for, compulsory licensing as 63, 185 interchangeable, compulsory licensing and antitrust 189 research fragmentation, biopharmaceutical R&D and 5–7



Index

nature of, recent changes in 3 see also R&D research tools biomedical, cumulative innovation and R&D and 9–12 compulsory licensing usefulness and 58 defining, cumulative innovation and R&D and 7–8 essential, technology access problems and 181–5 experimental use exemption and 40, 46–7 patent pools and 53 patent system and, technology access problems 177–81 patent trends effect on patent balance for, cumulative innovation and R&D and 12–15 reverse doctrine of equivalents and 50 reverse doctrine of equivalents patent protection and 37, 48–9, 50 Rey, P. 132 Richardson, D.M. 87 right to heath elements 77–8 human right, as, status in European law and 71–4 implications 76–7 obligation to respect, protect and fulfil 79 strengthening, international efforts for 80 sources 74–6 IP 84–6, 94–6 patent law and 70–71, 82–3, 90–94, 96–8 patenting and 87–9 right to property IP as human right and 84–6 rights exclusive, exercise of and exceptional circumstances interpretation 160–61, 166 see also IPRs; property rights Robertson, A. 165 Robinson, C.O. 134 Ross, D. 118 Scherer, F.M.

249

duty to deal and technology access problems and 181 IPRs and competition law and 116, 118 patent balance and 24, 26, 32, 33 patent protection and 56, 64 Schoff, K. 90 Schumpeter, J. 24, 180 Scotchmer, S. 23, 24 Seelen, C.M. 135 Seide, R.K. 8 Semerano, S. 118 Shah, S. 81 Shapiro, C. 24, 51, 52, 129 Shavell, S. 108–9, 111 Sher, S. 193 Shibata, Y. 42 Sidak, J.G. 134, 135 Siebrasse, N. 112 Silberston, Z.A. 56 Sing, L. 52 Singham, S.A. 29, 33 Small, J. 180, 186, 196 SMEs (small- and medium-sized enterprises) independence, abuse of dominance and 148–9, 150 Smith, S. 104–5 Snyder, E.A. 30 South Africa compulsory licensing 63 right to health 93–4, 98 technology access problems 196–7 Spain compulsory licensing and experimental use exemption provisions 68 see also EU Springman, C. 195 SSM (specific subject matter) doctrine existence/exercise distinction and 104, 105–6 property rights and 115 see also access Stiglitz, J.E. 3 Stothers, C. 164–5 Strauss, J. 14, 53 Subbiotto, R. 151 Sunshine, S.C. 193 supply refusal to 147–9, 151–4

250

Index

Sweden compulsory licensing and experimental use exemption provisions 68 see also EU Switzerland compulsory licensing 60, 61, 69 experimental use exemption provisions 69 patents’ importance, overstating 33 Talley, E. 182 Tandon, P. 55 Taq (Thermus aquaticus YTI DNA polymerase) research tool, as 9 Taylor, C.T. 56 technology PCR 8, 9 significant advances, CL role in 59–61 technology access competition law, human rights approach to 196–9 compulsory licensing as safety net 177, 195–6 duty to deal (Art 82 EC) and see duty to deal, technology access problems and impeded, patent protection and 14–15 innovation and 16–17 license stacking and 5–6 research tools and patent system, conclusions antitrust law see duty to deal innovation, optimal market structure for 179–81 patent law 181–5 patent system gap 179 research tool particularity 177–8 see also access Thailand generic products and drug prices 82 Toebes, C.A. 71, 73, 74 Tom, W.K. 115, 193 Treaty of Rome (EC Treaty) abuse by dominant undertaking and 103 Art 82 see duty to deal existence/exercise distinction and 104, 105, 106 IPRs and competition law and, relevant provisions 102

see also legislation TRIPS (Trade-Related Aspects of Intellectual Property Rights) Agreement antitrust control and 119, 120 blocking patents doctrine and 49 compulsory licensing and 57, 58, 185 property rights and, public interest limitations 86 right to health as interpretive principle in patent law and 90, 93, 94 right to health indirect effect and 88–9, 96 see also legislation Troy, D.E. 134, 135, 139 two-market requirement duty to deal and technology access problems and 187–8 essential facilities doctrine and indispensability requirement and 138–9 refusal to license and 169 see also market Tuffery, D.E. 41 UK (United Kingdom) compulsory licensing provisions 69 duty to deal 150, 153–4, 159–61 experimental use exemption 43, 69 patents’ importance, overstating 33 see also EU Ullrich, H. 23, 112, 113, 114–15 UN (United Nations) 80, 89, 90 UNDP (United Nations Development Programme) 82 USA (United States of America) antitrust control 119 biopharmaceutical innovation in, nature of 28 Bolar exception 40 compulsory licensing 62–3, 64, 65 essential facilities doctrine 133, 134 experimental use exemption 44–6 innovation markets and 191 research tools, patent trends effect on patent balance for 15 reverse doctrine of equivalents 35, 48, 49 right to health 94

technology access problems 194 two-tier R&D system, cumulative innovation and 3 use see EUE; non-use Van Boven, T.C. 73 Venit, J.S. 134, 158–9 vertical dilemma patent system goals and 23 vertical integration abuse of dominance and 145–7, 149, 151 leverage cases and 131–2 Vinje, T. 104, 106 Voissiues and Partner 12 Walsh, J. 3, 6, 17 Walter, W.G. 61 Weissbrod, D. 90 Weisburst, S. 33 Welch, L.T. 41

Index

251

Whish, R. 164 Whitehead, M. 77, 88 Whitener, M. 131 WHO (World Health Organization) compulsory licensing and health emergencies and 62 Constitution 71, 73, 76 Declaration of Alma-Ata on Primary Health Care 74 innovation and patenting and 31 right to health and 77–8, 79, 82, 87 WIPO (World Intellectual Property Organization) 33 WTO (World Trade Organization) 31–2, 88–9, 89, 90, 94, 96 Yamin, A.E. 77, 78, 79, 81, 83, 88 Yi, S. 126, 180 Yoo, C.S. 133 Zanon di Valgiurate, L. 149–50